The Lloyd’s market has seen considerable levels of acquisition activity in 2011. In September alone, among other transactions: Haverford made an offer to acquire a stake in LSE listed Omega (with Haverford subsequently (at time of writing) becoming shareholder Invesco’s favoured bidder for the company over Canopius, Barbican and others); a consortium led by Tawa agreed to acquire Whittington; Ryan Specialty Group acquired Jubilee; Torus agreed to acquire Broadgate; and ProSight agreed to acquire TSM Agencies.
The Omega, Whittington and Jubilee transactions each include a Lloyd’s managing agent in the target group. TSM Agencies is a Lloyd’s coverholder (MGA) and Broadgate is the owner of two Lloyd’s corporate members. There has also been interest in broker deals, including the announcement by AIM listed THB Group plc, which owns Lloyd’s broker Thompson Heath & Bond, that it remains in discussions with US specialty broker AmWINS over a possible takeover.
With such continued interest in Lloyd’s, it is appropriate to give consideration to the possible reasons driving acquisitions, the alternative methods of participating, the potential impact of recent changes to the City Code on Takeovers and Mergers (the Code) and some of the regulatory considerations in acquiring an existing platform.
SUPPLY AND DEMAND
Lloyd’s has a number of features which may be attractive to investors, including:
- access to some of the best underwriting talent in the world.
- access to international reinsurance business which comes to Lloyd’s as the pre-eminent market for such business.
- access to the Lloyd’s brand name and the ability to offer policies under the Lloyd’s banner.
- the benefit of Lloyd’s A+ (strong) (Standard & Poor’s; Fitch) and A (excellent) (A.M.Best) security ratings.
- access to Lloyd’s overseas licences enabling business to be written in (re) insurance markets across the world.
For existing owners of smaller Lloyd’s carriers, sales may be driven in part by the expectation that their operations will struggle to survive the compliance burden of Solvency II and the increasing sophistication of the industry. Conversely, there is a perception that larger insurers will benefit from Solvency II diversification credit arising from such acquisitions.
METHODS OF PARTICIPATION
There are a number of different ways to participate at Lloyd’s, with varying requirements in terms of time and expense.
Broadly speaking, investment can be passive or active. Passive investors can invest in one of the Lloyd’s groups whose shares are listed with the London Stock Exchange, or by simply providing underwriting capital as a corporate member of Lloyd’s and participating with the help of a Lloyd’s members’ agent on one or a number of syndicates. Passive investment may also be strategic: insurance or reinsurance companies in other countries may participate on syndicates at Lloyd’s to improve their overall mix of business or to obtain exposure to specialised classes of business which they do not have the expertise to write.
For the seller of a group including a Lloyd’s corporate member, a key concern is likely to be the ability of the buyer to post sufficient new collateral to ensure the release by Lloyd’s of the existing collateral. Lloyd’s will usually provide a letter of comfort (but will not guarantee) that it will do so on the receipt of the new collateral.
Active investors can establish or acquire a Lloyd’s managing agent. The establishment of a new managing agent is likely to be a slow and onerous process for a new entrant, as it must prove to the Lloyd’s Franchise Board that it has the required competencies, including in personnel, technology and systems and controls. This may explain the continued interest in acquiring existing Lloyd’s managing agents.
Alternatively, it is possible for an active investor to establish a new syndicate with an existing managing agent (a “turnkey operation”) (or to acquire the corporate member of an existing syndicate run in this way), which can operate the business on behalf of the investor. This has been a popular option in recent years as managing agents can provide the support and experience to enable investors to access the market and begin underwriting in a very short space of time. A new syndicate could write business similar to that already being written in the Lloyd’s market, though it would need to demonstrate that it will be bringing new business to Lloyd’s and is not relying on taking business away from other syndicates.
In September, a number of changes to the Code were brought into force, some of which could deter potential bidders in takeovers of Lloyd’s listed entities.
Under the revised Code, an announcement by the target company which commences an offer period must identify any potential bidder with which the target company is in talks or from which an approach has been received (and not unequivocally rejected). This could put off potential bidders if they risk being named in an announcement made by the target at an early stage of the process because of, for example, an untoward movement in the share price.
Under the new “put up or shut up” rule, a potential bidder must, within 28 days of being named as such in an announcement by the target, either announce a firm intention to make an offer or announce that it does not intend to make an offer (unless the Panel on Takeovers and Mergers (the Panel) consents to an extension or an exemption applies). This could deter a potential bidder from approaching a target unless its preparations are well advanced, to avoid having to finalise the terms of the transaction within the 28 day window.
Offer-related arrangements, includ¬ing break fees and exclusivity and imple¬mentation agreements, are only permitted under the new Code with the consent of the Panel or where an exemption applies. Such arrangements were of benefit to the bidder and had become the norm in recent years.
A number of changes to the Code require additional information to be disclosed in the offer document. Of particular significance is that the bidder must now make certain statements of intention with regard to the target business, including as to the continued employment of employees and management and how its strategic plans may affect employees. If the bidder has no plans to make any such changes, it must make a statement to that effect. The bidder will be regarded as being committed to the course of action set out in such statements for a period of 12 months from the end of the offer period or such other period as is specified in the statement, unless there is a material change of circumstances.
Investors seeking to acquire a Lloyd’s managing agent, corporate member or intermediary will need to obtain regulatory consent to the change of control of such regulated entities. In the case of a managing agent, investors will need to obtain consent from both the Financial Services Authority (FSA) and from the Council of Lloyd’s. Only Lloyd’s consent is required to a change of control of a Lloyd’s corporate member.
The test for change of control applied by both the FSA and Lloyd’s is set out in Part XII of the Financial Services and Markets Act 2000 (FSMA). Broadly, it requires a person proposing to acquire a holding of 10% or more of the shares or voting power of a regulated entity or its parent (20% in the case of an intermediary such as a broker or coverholder), or the ability to exercise significant influence over the management of one of those entities, to obtain prior approval. Where the acquirer would become the parent (which, broadly, means obtain majority control) of the regulated entity, 10% (20% in the case of an intermediary) indirect and direct shareholders of the acquirer will also need to seek approval, whether or not they are actively involved in the management of the acquirer.
The FSA operates a process prescribed by FSMA when considering a change of control. The FSA must make a decision to approve or object to a change of control within a period of 60 working days. The FSA may “stop the clock” and interrupt this period once for a period not exceeding 30 working days to request additional information. Information required by the FSA in relation to a controller includes: its financial position, business activities and group structure; details of any legal or regulatory proceedings, complaints or litigation; details of its directors; and its funding methods, reasons for the acquisition, and plans for the target. Lloyd’s requires similar information to the FSA and the two bodies co-ordinate in deciding whether or not to approve a new controller of a Lloyd’s managing agent.
It should be noted that many Lloyd’s groups contain regulated insurance intermediary subsidiaries such as service companies and coverholders or MGAs, as well as non-UK insurance and reinsurance companies, which may also require change of control approvals from the FSA or overseas regulators (as appropriate).
New directors of regulated entities, as well as new appointees who will be performing key “controlled” functions, will need individual approval by the FSA under the “approved persons” regime and new directors and other senior appointments will also require individual registration by Lloyd’s.
It will be apparent that, even in a simple structure, ten separate regulatory approvals can easily be required and, in a more complex case, dozens may be involved.
Recent acquisition activity suggests that interest in acquiring Lloyd’s platforms remains high. However, whether more deals are seen over the coming months will depend, in part, on the supply of attractive targets and motivated sellers.