Trust in Lloyd’s drives AXIS into Novae acquisition

Bermuda-based AXIS is set to acquire Lloyd's insurer Novae Group for £468 million ($604 million) in an all-cash deal.

Novae operates through Lloyd’s Syndicate 2007, and wrote approximately £900 million of gross written premium in 2016.

Lloyd’s has been criticized in recent years as an overly expensive location for transactions, particularly at times when the insurance market is feeling the pain of a soft market pressuring prices.

But AXIS CEO Albert Benchimol disagrees.

“We are all experiencing challenging market conditions in all markets and all countries,” he says in a July 6 investor call set up to discuss the deal. “Lloyd’s is no different,” he admits.

“However, we remain convinced that Lloyd’s is the preeminent international market for specialty risk. The concentration of talent here in London and the number of companies and markets and brokers is such that we really don’t see that changing in a material way in the near term.”

The London Market has been losing out to other re/insurance hubs lately. London’s share of global reinsurance premiums has declined to 12.3 percent in 2015 from 13.4 percent in 2013, according to the London Matters 2017 report, continuing a trend reported in the 2014 London Matters report which showed a 15 percent share in 2010.

The decline is being driven by increased competition from emerging market reinsurers, markets with lower cost of capital and expense, and jurisdictions that have actively supported the growth of alternative capital, the 2017 report noted.

The soft market, driven by overcapacity as investors seek higher returns in a historically low interest rate environment, has taken its toll at Lloyd’s.

Without prior-year reserve releases, Lloyd’s produced underwriting losses in all classes of business in the 2016 accident year. The performance was particularly bad in motor, which recorded a combined ratio of 109.3 percent in 2016, impacted by a severe  reduction of the Ogden personal injury discount rate in the UK. A severe cut to the Ogden rate inflicted a substantial one-off increase in prior year reserves on UK motor re/insurers and is set to also affect the 2017 accounting year.

The marine business did not perform much better than motor with a combined ratio of 108.4 percent, followed closely by aviation, property and energy. Reinsurance was among the better performing classes with a combined ratio of 102.3 percent, as well as casualty with 102.9 percent.

Lloyd’s has decided to take action and is conducting a portfolio review, focusing on the poorly performing classes, and is talking to syndicates about potential action.

In addition, the London Market Target Operating Model (TOM) has been created as a set of initiatives to modernise the London Market. It aims to assist face-to-face negotiations, supported and facilitated by electronic data capture for all steps in the process including placing, signing, closing, claims and renewals. TOM also wants to introduce a ‘one touch’ data capture and it is set to provide enhanced shared central services.

“We’ve been impressed by the increasing conviction by Lloyd’s and by the various markets within Lloyd’s to change,” Benchimol says. “We actually believe that Lloyd’s is doing the right things.”

Novae underwrites around 30 specialty lines and is the 9th largest syndicate at Lloyd’s as of 2016-end. Property represented 49 percent of gross premium written, marine, aviation and political risk contributed 29 percent and casualty 22 percent.

Novae pre-tax profits shrank to £23.7 million in 2016 from £52.4 million in the previous year. At the same time, the combined ratio jumped to 103.6 percent from 91.3 percent.

But Novae has been reorganising its portfolio to improve profitability. The company has cut back or exited units where it does not have a leading position or where rates are under persistent pressure.

It has also identified classes it perceives as attractive and has invested in them. These classes include property facilities in the US, UK and the EU as well as marine liability, cyber, political risk and credit insurance.

The lines Novae selected to maintain and to invest have had an average combined ratio of 80 percent over the last five years.

“Matthew (Novae CEO Matthew Fosh) and his team have already done a lot of the hard work of focusing that book of business,” Benchimol adds.

“They are in many lines of business that we are not in and that we would like to be in,” Benchimol notes.

Among new classes being added to AXIS' portfolio through the acquisition are marine hull, crisis management, UK liability and bloodstock lines. Complementary classes include international binders, political violence, cyber, credit insurance and marine war, according to the presentation.

Novae is expected to be merged with AXIS’ own syndicate 1686 at Lloyd’s.

Together with Novae, AXIS becomes the eighth biggest player in the Lloyd’s market with around $2 billion gross premium written based on 2016 data.

“We are something of a rare beast,” says Novae CEO Matthew Fosh. “We are the only pure Lloyd’s single platform business there is of any scale. We are the only quoted pure Lloyd’s player,” he adds.

AXIS’ management sees the combination of the two businesses as an opportunity to accelerate the breadth and depth of talent, lines of business, and leadership positions in the London market for specialty risks, according to the presentation.

AXIS believes that it will be able to sell more products through Novae’s distribution relationships using AXIS’ company platform in addition to Lloyd’s. The company also expects benefits from offering Novae’s products over a broader AXIS platform (e.g., Singapore for Asian risks, Miami for Latin American risks, Brussels for Continental European risks).

Other benefits include a larger capital base and increased bargaining power with brokers and reinsurers.

The combination of the businesses is expected to deliver around $50 million in pre-tax synergies within 2 years, primarily derived from support functions and corporate expenses.

“We have the high level of confidence that this is a perfect fit with our book of business. There is complementarity, the talent within Novae is outstanding,” Benchimol says.