As Canopius becomes the latest takeover target for Bermudans looking to get a foothold in Lloyd's, Emma Jones asks, what's in it for the buyers?
When Catlin dished out more than £700m for Wellington in October last year it signalled the start of increased merger and acquisition activity in the Lloyd’s market.
Speculation mounted over whether more Lloyd’s entities would do the same.
To date that has not materialised with any great force, apart from Canopius’s capture of Creechurch.
Cultural and personality disparities have been sited as obstacles to achieving internal market consolidation.
But, as insurance analyst, Chris Hitchings points out: “Almost any Bermudan company could offer the synergies that Catlin can, without any of the personality clash risks and the diversification could benefit them more.”
In recent months the “London to Bermuda flight has become a very crowded place” with Validus Re emerging as the first Bermudan reinsurer to take a significant stake in the market with its acquisition of Talbot Underwriting.
Moves by Montpelier Re and life insurer Sagicor have stirred up increased interest and with Ariel Re also said to be on the look out for potential opportunities, the stream of Bermudans entering the Lloyd’s market is likely to increase.
After losing out to Validus in the race to buy Talbot, Ariel has been touted as a potential candidate to capture Canopius in what has been labelled as a £250m takeover.
“Almost any Bermudan company could offer the synergies that Catlin can, without any of the personality clash risks and the diversification could benefit them more
Insurance analyst, Chris Hitchings
Once a consolidator, now a target, the news of fresh interest in the market in the shape of Canopius has raised the question again about what makes London so appealing to the rival market.
One senior Bermudan reinsurer defines it in clear terms: “The reason we come to Lloyd’s is because of the gearing and the derivative rating.
“Rating agencies have an enormous impact on businesses, for example, when S&P took IPC’s rating down the company had just had a record quarter, it just doesn’t like the way it manages risk.”
Seemingly the perceived pressure from rating agencies to also diversify portfolios has added weight to the argument for acquisition.
Fitch Rating fiercely denies that rating agencies are forcing insurers to diversify, especially diversification for diversification’s sake into lines of business where they have a lack of understanding and insufficient underwriting competency.
But, the need to achieve diversification at a time when Bermudan reinsurers are sitting on record profits on the back of an unexpectedly benign hurricane season is regarded by many as the main driver for Bermudan start-ups looking to set up in the Lloyd’s market.
Lis Gibson, a partner, who leads the general insurance actuarial practice at Deloitte, says: “The most obvious issue for the Bermudans is that they are very concentrated in terms of weather catastrophe business, which means they are subject to really volatile results. When the wind blows they make losses and if it doesn’t they make huge profits.”
By tapping into the Lloyd’s market Bermudan reinsurers are immediately offered with the licence to underwrite business in more than 60 territories, accessing a greater spread of business that may not otherwise make its way to the Bermudan shores.
