To M&A, or not to M&A?

Recent acquisitions and M&A rumours swirling around the Lloyd’s market signal a growing recognition of the industry’s unique advantages. Investors are attracted by the combination of strong underwriting profitability and the efficient use of capital. The asset leverage and lower correlation to other parts of the capital markets add to the attraction. This is reflected in the RISX equity index, which is up an impressive 20% year-to-date and 30% over 12 months.

©Insurance Capital Markets Research. Index administrator and calculator: Morningstar Indexes Ltd. Inception date: 2006-06-16, base value: 1000. All performance shown prior to 2021-03-22 was retrospectively calculated by application of the Index Methodology. Data as at 2024-07-11.

What should be of particular interest to investors and their advisors is the closeness of both underwriting performance and returns on capital of this liquid equity index to Lloyd’s pro forma results over time:

Using these two charts, and the underlying RISX index methodology, investors can map publicly available real time company data (such as Price to trailing book value multiples) against Lloyd’s as a whole. This suggests a P/b multiple of around 1.8x book for the pro-forma Lloyd’s market.

Furthermore, modelling the distribution of all the individual company’s Price to trailing book (P/B) multiples over time enables investors to develop an “outside-in” view of individual syndicate P/Bs.

When applying this concept to Lloyd’s syndicates in real-time, we can see the range of implied P/Bs by syndicate across the Lloyd’s market (NB - most syndicates’ capital numbers are not in the public domain, so assumptions/extrapolations have to be made which reconcile with Lloyd’s publicly stated aggregate capital over time).

This valuation work is predicated on the link between consistent relative performance and relative valuations, which is well-established regardless of where we are in the insurance cycle. Companies with a history of delivering superior returns on capital typically command higher P/B multiples than those that do not. These consistent performance trends are a key factor driving capital allocation decisions in both underwriting and reinsurance purchasing, and typically when it comes to M&A.

Keeping up to date with this information may come in handy the next time some investment bankers invite themselves round for coffee.

This article was also published as a Viewpoint by The Insurer.