Daily briefing: Friday – stuck in the middle

The merger between Omega and Novae has fallen through because Novae didn’t feel it could strike a deal that would benefit its shareholders – which in such situations typically means it wanted to pay less than the other party was unwilling to accept.

Nevertheless, Novae chief executive Matthew Fosh deserves credit for being candid about his ambitions for Novae to gain scale by a merger.

Last month, he told Insurance Times: “What you have seen in the past five years is a separation of the bulge-bracket of Amlin, Catlin, Hiscox and Lancashire from the next tier of Novae, Omega, Hardy, Chaucer and Canopius …That tier needs to be five times the size.

“Scale matters in this business. Yes, you can be a skilful niche underwriter of certain individual classes but that doesn’t lend itself well to the public market nor the advantages the public markets bring you, such as access to capital and M&A ability.”

The bigger picture is that many of the brokers and insurers that are desperate to float will find themselves stuggling because they don’t have the scale.

Giles, Hyperion, Oval, Hastings – they’re all business plans that are built on the mentality of 2008, when anything was possible. All these brokers will end up trapped in the market capitalisation – between £200m and £400m – that Novae, Omega, Hardy and Chaucer have struggled to climb out of.

The wannabe broker floaters think they are going to do a JLT and somehow undergo a soaring share price escalation. But JLT, an exceptionally well-run company with a diverse spread of business, was the exception not the rule.

You only have to look at the floated brokers that have struggled with their share price since the credit crunch. Investors just aren’t interested in floated brokers – the share prices of THB, Jelf and Cobra say it all.

As a journalist covering these companies, it’s a real struggle to find analysts who cover the stocks. Basically, nobody really cares about them until they achieve something remarkable.

Towergate has greater scale, and for that reason, will have more liquidity on the stock market, although investors will have big questions about the debt it’s carrying.

If a clutch of insurers from Lloyd’s, which has a global reputation for excellence, can’t get their share prices into second gear, why should we think that a UK broker could do any better?

Towergate reels them in

Talking of Towergate, it was revealed today that they have appointed a big hitter, Truett Tate, to join their board as a non-executive director.

Tate has experience with a range of big corporates, including Lloyds Bank, and on the face of it, he looks like another wise head aboard the Towergate ship.

Previously, Towergate recruited Admiral chairman Alastair Lyons to fulfil a similar role at the consolidator. Former Aviva UK boss Mark Hodges has also joined as chief executive.

A cynic might say that this lot have been lured over by the money, but in reality, they must have faith that the Towergate flotation will be a success.

After all, they wouldn’t want to suffer the reputational damage of a botched listing.

The initial public offering of Towergate and subsequent performance on the stock exchange will certainly be one to watch.