Daily briefing: Thursday - Cat losses hit Hardy where it hurts

Lloyd’s M&A news kicked up a gear this morning, with Hardy putting itself up for sale, and Haverford revising its bid for the 25% of Omega it is hoping to buy.

Both announcements have a common cause: the heavy 2011 catastrophe losses. As we showed in our recent analysis of listed Lloyd’s insurers’ third-quarter numbers, Hardy’s catastrophe losses as a percentage of its capital base was the highest of its peer group at 21.1% - not counting today’s Thai flood estimate.

Omega’s was a more respectable 16.6%, but Haverford is not impressed with the $6m (£3.8m) deterioration in first-half losses, which appeared to catch the would-be buyer by surprise.

A different world

Hardy’s decision to seek a buyer for either all or part of the company is a U-turn from its previous position.

The company fiercely defended its independence when approached by fellow Lloyd’s insurer Beazley at the end of last year, then waved two fingers in the faces of any other would-be suitors by buying back stock and attracting third-party capital from Arig. The message seemed to be: “We’re perfectly self-sufficient, thank you very much, and you couldn’t afford us anyway.”

Hardy knocked back Beazley because it felt the £3.30-a-share offer did not reflect its potential future value. Hopefully Hardy’s shareholders are a patient bunch. Shore Capital analyst Eamonn Flanagan forecasts that full-year net tangible asset value will now be £1.87 a share, factoring in the expected £10m-£25m Thailand flood losses, and full-year net tangible asset value at £2.05.

Show me the money

While Hardy is now in a weaker position, potential suitors should not expect to pick up the company for a bargain basement price. The language of this morning’s announcement suggests that it will walk away from any deals that it feels unworthy.

With Omega’s announcement, some shareholders have got what they wanted: a fixed price offer from Haverford. However, the 74p a share that Mark Byrne is proposing is a far cry from the 83p maximum shareholders could have received under the previous offer. It will be interesting to see how this is received.