Market Report: Lloyd's block on entrants may spark insurance deals

Toby Green

With 2011 ending up as one of the worst years ever for natural disaster claims, the insurers have had a tough time of it recently. Yesterday, however, investors were being told that – thanks partly to Lloyd's of London becoming an increasingly exclusive club – there could be a rush of deals to keep their spirits up.

Takeover activity has not exactly been quiet around the brokers in the insurance market recently, with Omega (0.75p higher at 54.25p) rejecting the latest in a number of approaches from rival Barbican less than a fortnight ago, while Beazley said at the end of last year that it could make another move for its small-cap peer Hardy Underwriting (up 2p to 205p).

Yet Shore Capital's Eamonn Flanagan suggested yesterday that Beazley – which failed with an approach for Hardy back in 2010 – could turn from hunter to hunted, warning that "a double failure may leave ... itself vulnerable".

Saying the group's "business mix [offers] considerable diversification benefits to many worldwide insurers", the analyst claimed the attraction of Lloyd's members was on the rise thanks partly to a "growing reluctance by Lloyd's to admit new entrants ... [leaving] would-be entrants with acquisition as the only option."

With Mr Flanagan pointing to low valuations as one of a number of other reasons why he believes 2012 may see a jump in takeover deals, his list of possible targets also included Lancashire because of its "strong market positions in key lines [and] surplus capital".

The underwriter, however, could only edge up 0.5p to 688.5p after admitting earlier in the week that it was raising the amount it expected to lose from last year's natural disasters in Thailand and Japan.

Even JP Morgan Cazenove's analysts couldn't push it higher, despite choosing Lancashire as one of their favourite stocks in the sector. They also picked Catlin (0.8p better off at 405.4p) and raised Beazley's target price to 147p, with the latter moving 0.3p higher to 140.2p.

In the wider insurance sector, Mr Flanagan revived bid talk around RSA by saying its current valuation "leaves it vulnerable" as the blue-chip group advanced 0.7p to 106p. However, despite the analyst reiterating his "sell" rating on Admiral and warning its dividend could be under pressure, the car insurer ended up taking the gold medal on the top-tier index by powering up 46.5p to 940.5p.

Overall, the FTSE 100 managed to rebound after a two-day slide in which it lost more than 120 points, although a late retreat meant it only ended up 10.52 points better off at 5,681.61. Still, it resulted in January being the best month for the top-tier index since last October, having gained almost 2 per cent in 2012 already.

Hopes that Greece's debt talks could be nearing an end were helped by the country's prime minister Lucas Papademos saying there had been "significant progress", although Lloyds and Royal Bank of Scotland were pegged back 0.47p to 30.62p and 0.14p to 26.62p anyway.

The latest eurozone developments did support oil prices, as did supply fears thanks to the latest developments in Iran and South Sudan. In response, Tullow Oil shifted 49p higher to 1,390p while Royal Dutch Shell ticked up 11.5p to 2,308.5p ahead of the release of its full-year figures tomorrow.

Down on the FTSE 250, takeover talk was intensifying around Misys. After abandoning an approach last summer, Fidelity National Information Services is free to make another approach for the software group in a matter of days, but the latest vague rumours doing the rounds suggested the US firm could have competition from private equity.

With the speculation suggesting a possible price of up to 500p a pop, Misys touched a high of 353p. Yet, with Merchant Securities' Roger Phillips saying he believed any takeover of the company could be some way off happening, while adding that any approach above 450p a share would be "an incredible exit multiple", by the bell it was just 3.1p better off at 323.1p.

SDL was knocked back 40p to 649p amid concerns over the benefits of the translation software group's plan to buy Alterian. Pointing out that the company had originally suggested the deal for the marketing firm would provide an annualised revenue run of £41m, Collins Stewart's Jonathan Imlah said it was now expecting a contribution of £28m as he cut his rating to "hold".

An extension to its licensing deal with Caesars Entertainment, the owner of the Caesars' Palace hotel and casino, to include the United States, prompted investors to take a punt on 888. The online gaming group spurted up 11.7 per cent to 52.5p on the small-cap index, despite the agreement being unable to persuade Investec to remove its "sell" advice.