Fosh says companies must be bigger to attract investors

Mid-tier Lloyd’s insurers are too small and the market needs consolidating, according to Novae chief executive Matthew Fosh.

Fosh’s company has long been the favourite among analysts for a takeover now that Chaucer has been snapped up by US insurance group Hanover. But, in a further twist this week, Novae confirmed that it is looking over the books of rival insurer Omega.

“These businesses are sub-scale,” Fosh told Global Reinsurance last week. He argued that 10 years ago many of the big names in Lloyd’s were the same size but that some firms pulled away from the pack, leaving the mid tier wanting.

“What you have seen in the past five years is a separation of the bulge-bracket of Amlin, Catlin, Hiscox and Lancashire from the next tier of Novae, Omega, Hardy, Chaucer and Canopius,” said Fosh. “That tier needs to be five times the size.”

The listed companies in particular need to be bigger to make them more appealing to stock market investors, Fosh argued.

“Scale matters in this business,” he said. “Yes, you can be a skilful niche underwriter of certain individual classes but that doesn’t lend itself well to the public market nor the advantages the public markets bring you, such as access to capital and M&A ability.”

Despite Novae’s recent interest in Omega, Fosh’s company may still emerge as a takeover target if no deal materialises.

Some feel that because of Novae’s low stock market valuation – which is currently 0.83 times 2010 net tangible assets a share – Omega is one of the few options Novae has to be predator rather than prey.

Collins Stewart analyst Ben Cohen said: “My sense is that Novae management wants to do something, and you can’t sit around waiting to be bid for.

“I guess they would look at this as one of the few deals that might be doable for them in terms of size and relative ratings, because Omega’s rating is also depressed, with the idea presumably to create a larger, more liquid combined entity.”

Nevertheless, there is some doubt about whether a Novae merger with Omega will materialise. Although Omega’s predominantly short-tail book is potentially attractive to its would-be suitor, Novae has only just got itself back on a firm footing and it may feel that fixing up Omega is too much work.