Beazley eyeing deals as Lloyd's gets set for an M&A boom

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The Independent Online

Beazley, the Lloyd's of London insurer, said yesterday it was on the hunt for deals as bankers eye a boom in mergers and acquisitions among companies that do business at the 320-year-old insurance market.

It follows Monday's announcement by another Lloyd's insurer, Chaucer, that it was talking to rivals and financial bidders about a possible takeover. One of the suitors is understood to be Terra Firma, the buyout vehicle of high-profile financier Guy Hands.

Beazley tried and failed to buy rival Hardy Underwriting last year and its chief executive, Andrew Horton, said he would still be interested in buying Hardy company "at the right price". But he said he expected to see further opportunities as premium levels continue to ease, making it harder for less efficient firms to make money.

"Hardy had a great underwriting record and would have allowed us to diversify lines of business" Mr Horton said. "We would be interested in buying them but their shareholders did not want to sell. Generally, we look for companies with talented underwriters who are going to want to stay around with us, and good lines of business. We think there could be opportunities in the current climate."

His comments came as Beazley reported a sharp rise in pre-tax profits to $250.8m (£155.6m) from $158.1m the previous year, well ahead of forecasts. It also reported a combined ratio of 88 per cent, meaning that it makes £12 in profit for every £100 in premiums taken, after accounting for costs and claims.

It will pay a second dividend of 5.1p and a special dividend of 2.5p, taking the total for the year to 10.0p against 7p last year. Mr Horton said despite this return to shareholders, Beazley still had enough capital to be able to take advantage of opportunities.

Beazley also estimated that the cost in claims from last year's Chilean earthquake remained in the range of $55m to $75m already forecast. In the case of the later New Zealand earthquake, however, its initial estimate of losses of $15m to $30m, based on a market loss of $2bn to $4bn, has been raised to $35m, based on an updated view of the total loss to $3bn to $5bn. The cost of the Australian floods, by contrast, are not expected to be material to Beazley.

Mr Horton said premium rates were falling despite recent disasters, with rates across all business classes "likely to fall by between 2 and 3 per cent". "There could easily be a further fall of that magnitude in 2012, which we think will make it hard for some companies to make money. That presents opportunities for us," said Mr Horton.

However, he will probably face competition for deals from private equity firms which seem increasingly keen on Lloyd's insurers. Analysts said that while it was true that premium levels were falling, investment returns for insurers were currently low. But interest rates are forecast to rise over the next few years as central banks are forced to tighten monetary policy in response to inflation. This will allow insurers to make more from investing premiums they take in.

Nick Johnson, an analyst at Numis Securities, said: "Valuations in insurance stocks are still pretty low. And even if premiums are falling at 2 or 3 per cent a year, that still leaves plenty of margin and scope for significant future investment earnings if we see a rise in interest rates."

This is what has sparked the private equity interest in a sector which has long been seen as ripe for consolidation because there are still a relatively large number of smallish players listed on the London Stock Exchange.