Cox Insurance Services is trying to buy in pounds 100m worth of underwriting capacity on three syndicates as the insurance market becomes increasingly dominated by corporate members with limited liability. The move highlights yet again the type of conflicts of interest that have riddled Lloyd's over the years.
The company's best offer is 40p in the pound of underwriting capacity - the premium income a Name can accept each year - to those on syndicate 1176. Cox, valued at pounds 212m with its shares at an all-time high of 199.5p, is offering the Names cash or shares for what is in effect the rights to participate in existing syndicates. Syndicate 1176 is one of Lloyds most profitable operations, specialising in insuring nuclear power stations across the world. When Cox set up the syndicate it wheeled out the late Lord Marshall of Goring, a formidable advocate of the safety of nuclear power, to attract Names to put up their capital.
On the face of it the offer looks generous. It is the highest price ever offered for underwriting capacity at Lloyd's and gives Names the chance to make a profitable exit. But opponents point out that the syndicate has been hugely successful, turning in annual profits of 40 per cent of premium capacity. So Cox's 40p-in-the-pound bid amounts to just one year's earnings.
"That's true but it's still a fair price," said Richard Brewster, finance director of Cox, citing increased risk and the fact that Names will have to put up more money as Lloyd's introduces new risk-based rules on capital needed to back up underwriting.
That fails to impress John Parkinson, a director of Willis Faber & Dumas Agencies which is the Members Agent for some of the Names. "It's too cheap at one year's profits, whatever they say about the risk," he said.
Sir David Berriman, chairman of the Association of Lloyd's Names, points out that for individual Names who want to stay in the insurance market there are only a limited number of successful syndicates to join. "If you think you can stay in a syndicate and earn a reasonable return why settle for one year's earnings?" said Sir David.
Cox is in the peculiar position of having to please its own shareholders while trying not to antagonise the Names whose commitments have helped it make money. Members agents also face a conflict. If they advise their Names to accept the offer and sell out, they lose fees.
Mr Brewster claims this is a non-problem. "We want to share gains between shareholders and the Names. This is truly a merger of interests where two and two does equal five."
Yet while Cox is offering once times earnings, its own shares, as SBC Warburg analyst Ben Cohen points out, sell for 17 times earnings. "It would be a good deal for shareholders since it would certainly enhance earnings per share. Other things being equal the Names will probably want to hold on and not accept the offer."