QBE withdraws names buyout proposal

QBE confirmed today that it had withdrawn a proposed offer to buyout the remaining Names that participate on its specialist liability Syndicate 386, managed at Lloyd's under the Limit brand within QBE European Operations.

The external minority comprises 30.4% of 386, equating to £103.4 million of capacity for the 2007 year.

The initial proposal comprised two alternatives: an immediate cash payment of £1.10 per £ of capacity or a reduced immediate cash payment of £0.85 per £ coupled with the right for Names to remain on the syndicate for the 2008 and 2009 underwriting years. Names would also in any event continue to receive the profits anticipated from the open 2005 to 2007 underwriting years.

The proposal was subsequently increased to a cash payment of £1.25 per £ of capacity or £1.05 per £ with the right to participate in 2008 and 2009 underwriting years. The original and increased proposals were both rejected by the members' agents on behalf of their Names. The last proposal was close to 50% above the high end of an independent valuation prepared for QBE.

The offer would have been conditional upon acceptances of 67.1% of the 30.4% minority being received, thus taking QBE's share of the total 386 capacity to the 90% threshold at which (subject to Lloyd's consent) the remaining minority share could be compulsorily acquired on the same terms. Lloyd's offer timetable would have required that the offer be despatched by 27 July.

The offer price would have been by far the highest ever offered within a Lloyd's capacity offer and represented approximately three times the price QBE has been previously prepared to pay for smaller capacity transactions in the 2006 capacity auctions. This premium attempted to reflect the benefits of 100% alignment for QBE, as well as compensating Names for relinquishing their investment in one of the market's leading syndicates.

“The Lloyd's agency and annual venture system is archaic and in our view in need of urgent reform.

Frank O'Halloran, CEO of QBE Group

The proposed offer has been withdrawn following confirmations from the members' agents representing the Names that they did not believe the offer to be sufficiently valued and that they would not therefore be prepared to make a positive recommendation in support. Under the Lloyd's system, QBE has not been allowed to communicate directly with the Names to ascertain their perception of value, nor have the members' agents been required to formally consult their Names before reaching a view on value.

In the absence of a positive recommendation and, in view of the fact that the members agents themselves directly control the vote of almost a quarter of the 30.4% minority which is held under pooling arrangements, QBE does not perceive that there are sufficient prospects for the offer to succeed to merit it being put to Names for their own consideration.

Steven Burns, CEO of QBE's European Operations commented: "QBE's proposed offer reflected a price substantially in excess of the high end of the range indicated by the independent valuation that we commissioned. This attempted to recognise the exceptional attributes of 386 and the special value that Names attach to the syndicate within their portfolios. The members' agents, however, clearly perceive a far greater value beyond that which QBE is prepared to consider. We believe this is not based in reality and certainly could not be justified under QBE's acquisition criteria in the current softening liability market. In these circumstances, we had no alternative but to withdraw the proposed offer".

Frank O'Halloran, CEO of QBE Group added: "The Lloyd's agency and annual venture system is archaic and in our view in need of urgent reform. I urge Lloyd's to address this with the same vigour that it has applied to modernisation of the market's business practices. We operate in 45 countries around the world, in many of which we have minority investors. There is no other market where the established custom allows intermediaries to exercise such influence, including actual decision making in respect of the pooled capacity, without reference to their principals. The system in our view also lacks proper transparency and contains far too many potential conflicts of interests."

O'Halloran concluded: "We are disappointed that Names will not have the option of considering the offer for themselves. In our opinion, QBE's interests are now best served by accepting that the external Names should remain as ongoing investors in 386, with liquidity in their participations continuing at what are likely to be much lower values within the auctions. In the absence of any sensible reforms, we will refrain from consideration of any further capacity offers for the foreseeable future."

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