FOCUS: Brit Insurance Offer May Usher UK Non-Life Sector M&A

11th Jun 2010 10:51

By Vladimir Guevarra Of DOW JONES NEWSWIRES LONDON (Dow Jones)--An indicative takeover offer for Brit Insurance Holdings NV (BRE.LN) this week, though rejected by the company, could herald the start of merger-and-acquisition activity in the U.K.'s non-life insurance sector. Brit Insurance late Thursday said it rejected the offer, reportedly worth GBP10 a share from U.S. private equity group Apollo Management, saying it "significantly undervalues the group." "It does not represent a basis on which the board is prepared to engage in any further discussions," Brit said. The company's shares rocketed 21% early Friday amid reports that Apollo may return with a better offer. At 0922 GMT, Brit shares were at 879 pence, while the FTSE 350 Non-Life Insurance Index was up 3.1%. With Brit having about 78.5 million shares outstanding, an offer of GBP10-a-share would value the company at GBP785 million. That would be 37% more than it market capitalization of GBP572.2 million Thursday when shares closed at 729 pence. Shore Capital analyst Eamonn Flanagan said: "The fact that an approach was made should encourage investors in the sector, although at current ratings we do not suspect that management was under enormous pressure to accept." "However, with a number of companies in the sector trading at significant discounts to our 2010 forecast net tangible asset values, this approach does highlight the value latent within the sector," said Flanagan, who kept his hold rating on Brit. Analysts from KBC Peel Hunt said that a "best-case-scenario" offer--which gives the buyer a discount on prospective net asset values and the seller a premium above its market capitalization--would be around GBP11 per share, or 51% above the closing price Thursday. "The resumption of predatory interest in the sector should be positive for valuations in the sector, which in our belief have fallen to fundamentally unjustifiable levels, whether or not deals are ultimately consummated. "As we know, personalities remain a key impediment to getting deals done in this sector," KBC Peel Hunt said. Analysts from Oriel Securities said: "We expect M&A to become an increasingly important theme for the sector and could provide a positive catalyst." The range of prospective buyers appears to have also expanded from just the usual insurance players. "We note that the offer did not come from a trade buyer," Oriel said. Last year, Chaucer Holdings PLC (CHU.LN) received offers from Brit and Novae Group PLC (NVA.LN). "Even if no M&A transactions actually complete, this should remind investors of the value in the sector," Oriel said. Despite posting lower first-quarter premiums last month, Brit received praises from analysts for saying it won't sacrifice margins just to get more business. Brit reported a 13% fall in first-quarter gross written premiums to GBP483.5 million, compared with GBP557.6 million a year earlier. Chief Executive Officer Dane Douetil said the company is prepared to walk away from what it considers to be inadequately priced business, and it has increased insurance rates 1.4% on its renewal business. Brit said it is pulling away from sectors with particularly soft rates such as professional indemnity and accident and health, where premium volumes were down 33% and 24%, respectively. KBC Peel Hunt said other non-life insurers--Chaucer, Novae, Hardy Underwriting Bermuda Ltd. (HDU.LN) and Beazley PLC (BEZ.LN)--could be attractive M&A targets due improvements in their businesses as well as the discounts at which they trade relative to their forecast net tangible asset values. These insurers are part of the Lloyd's of London insurance market, which operates as a society of members, which can be insurance companies, specialist investors or individuals. These members underwrite insurance through syndicates, which compete for business in many specialty areas, including marine, aviation, professional indemnity, catastrophe and motor insurance. KBC Peel Hunt estimates Chaucer is trading at a 26% discount, Novae at 32%, Hardy at 22% and Beazley at a 7% discount. "It is perhaps unsurprising that private equity interest in the sector has arisen. "On our forecast, the sector will achieve returns in excess of cost of capital both this year and on a cross cycle basis and indeed that has been the case over the past five years. Consequently, the attractions are appetising if these businesses can be acquired at or around asset value," KBC Peel hunt said. - By Vladimir Guevarra, Dow Jones Newswires. Tel. +44 (0) 2078429486, [email protected] (END) Dow Jones Newswires June 11, 2010 05:51 ET (09:51 GMT)