Why Chaucer has plenty of suitors

Interest in acquiring Chaucer is mounting, with more potential suitors lining up. Today, the Lloyd’s insurer issued a statement confirming that it had received a number of approaches, in addition to the one made by Novae Group two weeks ago.

Chaucer has not confirmed the identity of the interested parties, other than Novae, but there is speculation that Brit may be one of them. Amlin has also been touted as a possible buyer (Amlin attempted to buy Chaucer four years ago), and a Bermuda-based insurer cannot be ruled out.

Why the interest in Chaucer? The group’s share price has plummeted, losing about 60% of its value over the past 12 months. It is currently trading at a 30% discount to its net tangible assets, making it attractively priced for potential buyers.

Chaucer’s problem is that it has been dogged by poor investment returns. An aggressive asset allocation policy has seen its assets moved into equities and hedge funds, which have resulted in significant mark-to-market losses. Chaucer reported an annualised return on investment of -3.7% for the first nine months of the year. Chaucer is still making efforts to de-risk its investment portfolio.

A further issue for Chaucer has been its capital position, which has been weakened to the point where analysts have said its ambitions for 2009 could be hampered. The group has recently announced plans to raise £75m from a share placing, which Chaucer claims will enable it to maintain its current underwriting strategy and take advantage of improving market conditions.

For Novae, the attraction of Chaucer is likely to be based on the capital efficiency that a merger could achieve: Novae’s capital efficiency is lower than that of its peers, so a merger, even with a business that is not overly capitalised like Chaucer, could improve this position.

A merger would also diversify Novae’s book of business: nearly half of Novae’s book is specialist business; property business makes up around a fifth of premiums. Chaucer’s book is weighted towards marine, motor and property.

Novae will also be looking to achieve efficiencies in order to cuts its expense ratio, which is currently very high (in excess of 40%) and which has weakened underwriting margins.

Additionally, Novae is seen as an acquisition target itself so a merger with Chaucer could be a defensive play.

Chaucer could also be an attractive acquisition target for Bermudan insurers that are looking to diversify away from catastrophes exposed lines. Chaucer would offer a purchaser entry to the Lloyd’s market with its global licences, which is attractive to Bermuda-based insurers.