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Issue 112 - 30th July 2010
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Deepwater won’t fundamentally change market says Marsh
It may have resulted in the departure of the BP Chief Executive and the oil firm putting aside a multi-billion dollar compensation fund but broker Marsh says the Deepwater Horizon loss will not be a market changing event. While it will have an impact, Andrew George, Leader of Marsh’s Energy Practice in Europe, the Middle East and Africa, said it is not on the scale of the major hurricanes in 2005 in terms of the upstream underwriters’ response. “The dramatic consequences of the Deepwater Horizon explosion, in terms of both loss of life and pollution, has undoubtedly changed sentiment among upstream energy underwriters,” he added. “As a result of the incident, many firms involved in offshore activities are reviewing their current insurance programmes and are seeking to top up their cover. Some insurers have been capitalising on their clients’ concerns and have been hiking up their prices for higher limits and deepwater drilling wells, regardless of where they are located. The Transocean loss is an important event in the history of deepwater drilling and exploration insurance but not a market changer. Following Hurricane Katrina, there was a massive change in the insurance landscape due to a lack of capacity and changes to the way in which wind insurance was sold. Capacity currently isn’t an issue and insurers seem keen to maintain their commitment to the market. This is good news for the industry.” In its own response Marsh said it recommends that firms affected by the Deepwater explosion should “work with their legal counsel as a matter of urgency” to review their potential exposures and identify the claims reporting and notification procedures across relevant insurance policies. This includes casualty, property, directors’ and officers’ and professional liability cover. It also reports that while insurers have been unsettled by the Deepwater Horizon losses, capacity has not constricted and price increases are likely to be modest in other parts of the upstream energy market, unless more major losses occur.
Revised offer moves Apollo potentially closer to landing Brit
The future ownership of Brit Insurance took a new twist this week with a revised offer from Apollo Management VII LP (Apollo) and the announcement that the insurer has allowed Apollo to enter a period of due diligence before it has the option of making the offer a formal one. Private Equity firm Apollo has courted Brit for some months but has upped its offer to acquire the entire issued and to be issued ordinary share capital of the Company at a price of £10.75 per share in cash. In a statement Brit said the indicative proposal is subject to a number of pre-conditions, which may be waived by Apollo, including satisfactory completion of confirmatory due diligence. Apollo’s indicative offer price includes a 30p capital distribution and assumes that the fully diluted ordinary share capital of the company will not exceed 81.6 million ordinary shares. The statement added that Apollo reserves the right to reduce its indicative offer price per ordinary share to the extent that (a) the Board of Brit Insurance agrees or (b) the issued ordinary share capital exceeds 81.6 million ordinary shares or (c) shareholders are or become entitled to receive and retain any dividend or other distribution payable after 15 July 2010 (including the 30p capital distribution)”. Brit added: “On the basis of the revised indicative proposal, the Board has granted Apollo a period during which it will be able to confirm the key assumptions underlying its indicative proposal and also to undertake confirmatory due diligence. The due diligence exercise is expected to take a number of weeks. Whilst this announcement has been issued with the approval of Apollo, there is no certainty that an offer will be made even if the pre-conditions are satisfied or waived.” Rating firm Fitch has said it will take a “wait and see approach” to the deal before making any decisions on the underwriter’s rating. In its statement it said: “Fitch notes the increase of the indicative offer and the granting of time for due diligence by Apollo on Brit Insurance. This is expected by Brit Insurance to require several weeks, and a final offer may or may not be forthcoming. Until a formal offer is made by Apollo and the details of that offer become available, Fitch will not take a related rating action on Brit Insurance. The agency notes that any acquisition of an insurance company by a private equity investor (PE) carries several credit implications for an insurer. Firstly, PE owners typically have high return on equity demands and look to extract what they consider as unrecognised value in an acquisition target. This may result in an insurer adopting a different capital structure, which often carries greater leverage than pre-acquisition. Capital that PE investors consider excess to the core needs of an insurer may be returned to investors, potentially weakening an insurer's key capitalisation measures. PE investors often have a shorter-term investment horizon and look to develop specific exit strategies. This can have an impact on the management of an insurer, emphasising short-term goals and potentially paying less attention to longer term objectives. This management approach could have a negative impact on the credit profile of an insurer.” It added: “Conversely, PE ownership can have some positive credit implications as a change of ownership often results in a full review of strategy, which may lead to the reduction of, or withdrawal from, unprofitable business lines.”
Markel bolsters bloodstock unit with acquisition
Markel International has acquired French-based equine insurance broker and cover holder Le Centaure, as the market continues to be defined by increased competition. The underwriter announced the deal yesterday at this year’s Glorious Goodwood racing festival, 12 months after the official launch of Markel International’s equine division at the festival. Juliet Redfern senior underwriter in Markel’s equine division said: “The acquisition cements our already strong and fruitful relationship with Le Centaure, and is a logical step in developing our global equine business. We look forward to building on this success and expanding our interests in France.” She added that the move will give Markel a strong foothold in the continental European market and the aim was to increase the range of products and the geographical spread of Le Centaure operations. “There is a great deal of capacity and competition in the market,” she added. “The past two years has seen bloodstock values fall significantly in some markets and therefore the capacity is chasing a smaller market. The aim of the acquisition is to establish a real presence in the European markets alongside that we have built up in the UK, Ireland and the United States.” Currently Le Centaure provides coverage for a broad range of equine and livestock risks arising predominantly in France, such as mortality, infertility, and equine-related property and liability. This year to date Le Centaure has insured nearly 3,000 horses for a total sum insured of €250 million ($321 million). In 2009 its gross premium income was approximately $6 million. Ms Redfern was joined at the announcement of the deal by lead flat and national hunt jockeys William Buick and Sam Thomas both of whom are sponsored by the insurer.
COFACE applies to become ratings agency
Trade credit underwriter Coface has filed a request with the European regulatory body to establish itself as a rating agency. The application has been lodged with the CESR (Committee of European Securities Regulators) to be recognised as a rating agency specialising in corporate, for its 10 rating agencies in Europe. In a statement announcing the move which could see it authorised within six months, the firm said: “Coface offers an alternative to the traditional three rating agencies, as well as a response to the issues concerning independence and responsibility which currently place the rating agencies at the heart of the actual debate on ratings”. The CESR, is the single point of entry for the registration and supervision of rating agencies in Europe, and if it allows the request it will be then sent to the relevant local authorities in the countries for which Coface is requesting accreditation. Initially it will apply to operate in France, Germany, United Kingdom, Italy, Spain, Portugal, Belgium, the Netherlands, Poland and the Czech Republic. The accreditation would allow Coface's ratings to be recognised by investors as credit ratings, in terms of the European regulation. Its statement added: “This filing by Coface should not be a surprise: the President of the European Central Bank, Jean-Claude Trichet, has just declared that ‘it is probably the right time to cease having a worldwide oligopoly of three agencies’.” “Coface has been working on this project for nearly 10 years, explained Jérôme Cazes, CEO of Coface. “The expertise of credit insurers in ratings has been recently recognised by the Governor of Banque de France, Christian Noyer. One of the main objectives of the new European regulation for ratings was to increase competition, and facilitate the development of new players, with a different business model.” Xavier Denecker, Managing Director of Coface – UK & Ireland added: "Coface's intention to be licensed as a credit rating agency for its scores on corporate firms is good news for British industries and banks which have risks on big companies in the UK and in nine other EU countries where over 40% of British exports are concentrated. They will be able to access the probability of default calculated by Coface according to an EU compliant methodology."
Jon Guy
Editor
Global Broker & Underwriter
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