Deals in store for AIM insurers

These are challenging times for non-life insurance companies. Falling premiums and indifferent investment prospects are casting a cloud over the current outlook and most of the smaller AIM-quoted players are trading below recent highs.

However, this provides the right environment for corporate bargain-hunting, and deals, announced or rumoured, abound. A case in point is Omega Insurance, which recently confirmed it was talking to potential bidders. Based, like an increasing number of insurers, in the offshore tax haven of Bermuda, Omega is insulated from the severest cyclical premium rate falls by its concentration on relatively less volatile small US company cover.

Heritage Underwriting, a specialist in non-US liability risks, worldwide property, mostly short-tail and overwhelmingly direct insurance, failed to agree terms from would-be US bidder Ironshore Inc, but said it had received other indications of potential interest. Some, such as Advent Capital, are tight-lipped about whether they expect to participate in this sector consolidation, and several are on the aggressive side of the deals.

Diversified Manchester-based insurance broking and financial advice concern CBG Group recently bought multiple birth and specialist travel insurance arranger Marcus Hearn for up to £2.7 million and is paying up to £1.45 million for niche insurance provider Barclay Brown THB. CBG is mopping up cash shell PENMC (chaired by CBG chairman Laurie Turnbull) and is a ‘regional consolidator’, contends director Lewis Thomas.

He says CBG, which usually pays a mix of shares and cash, has the pick of the small companies as their founders, alarmed at potential changes to capital gains tax, decide to cash in their chips. CBG, whose interim profits last year showed significant growth, reckons its healthcare and financial advice activities insulate it from the worst of the insurance cycle. And having raised a war chest last year, it doesn’t rule out coming back to the market if the right deal comes along.

Cobra Holdings operates Britain’s largest insurance broker network with £400 million annual premiums and says it has several more acquisitions ‘in the pipeline’ after buying Manchester broker UKI Holdings for £4.3 million. The company receives a slice of network brokers’ commissions and payments from ‘sponsoring’ companies for providing this broker distribution network. It recently experienced a modest profits fall, but generates adequate cash to pick out likely broking targets, says chief executive Steve Burrows. He adds that he has set a goal of eight acquisitions this year. Bulls suggest Cobra could itself become a target, from the likes of acquisitive Towergate Partnership.

Broker THB Group covers US wind storms and similar risks and suffered a £1.1 million first-half profits drop to £322,000, reflecting softening premiums and a weak US dollar. It continues to pursue acquisitions to shift the balance, having moved into professional risks with FiSure, UK commercial cover with Carter Gilbrook and risk management with Cardinius, and has now completed the acquisition of international reinsurance broker PWS.

Meanwhile, Lloyd’s-focused Hampden Underwriting, whose Hampden Group agency represents the largest group of capital providers for Lloyd’s underwriting syndicates, is mopping up more capacity at the market’s auctions. Director Jeremy Evans says many of the small ‘Nameco’ corporate syndicate backers are ‘up for grabs’.

When the going gets tough…
All this activity is taking place against a gloomy sector background. Premium rates are now in a continuing slide having soared early this decade after claims on terrorist attacks and US hurricanes drove away underwriting capacity and enabled remaining insurers to toughen their terms. They are now in a continuing slide as new entrants, attracted by recent profits, fight for business and disasters fail to occur.

At the same time, returns on invested premiums are under pressure, with equity markets faltering and the US dollar weak. Richard Brindle, ex- Lloyd’s underwriter and now CEO of successful specialist insurer Lancashire Holdings, another Bermuda denizen, says ‘the market is softening across the board’.

Keith Thompson, chief operating officer of traditionally catastrophe-oriented Advent Capital, says premium renewals in the key month of January showed a further six per cent fall in the absence of any large, expensive disasters to stiffen the market and strengthen the underwriter’s hand. Hampden’s Evans says motor and airline rates have turned up of late, but property, catastrophe and energy rates are still coming off – ‘though a big loss can change everything’.

If the softening goes on, insurers expect pressure to make concessions more damaging than simple premium rate cuts, such as reducing or eliminating the initial deductible element in insurance cover and providing insurance protection for more than one year on the same premium.

Companies are reacting in various ways. Some, like THB, are seeking to reorient themselves.

At Lancashire, whose pre-tax profits more than doubled last year to £200 million, Brindle says the company’s focus on speciality short-tail insurance, with some reinsurance, should ensure a ‘profitable book of business’ in 2008, despite declining premiums.

Omega’s ‘small ticket’ emphasis and profits pipeline should stand it in good stead. Advent, which lost £74 million on catastrophes the year it floated, is making decent profits and has moved into less volatile areas.