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Insider in Full: Argo Syndicate 1200 sale: The harbinger of a new Lloyd’s M&A cycle?

On Thursday, this publication revealed that Argo is in advanced talks with US carrier Westfield Specialty over the sale of its Lloyd’s arm...

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If consummated, it would conclude a drawn-out journey to dispose of Syndicate 1200 and its accompanying managing agent, which would be a significant step for the Argo group in its own strategic process.

It would also end a roughly three-year hiatus for significant strategic balance sheet M&A at Lloyd’s.

While we saw a flurry of PE activity around Lloyd’s towards the end of 2020, you have to go back as far as 2019 to the last full takeover of a functioning balance sheet business by a trade buyer (Pembroke, by Hamilton).

The deal is not signed and details are yet to come to light, but on the surface, this has the potential to be a good deal for Westfield.

Argo Syndicate 1200 has had a difficult few years at Lloyd’s as volatility and reserve deterioration made it a consistent underperformer in the market.

It has however been a business in transition, with extensive remedial work to strip out cat exposure and reposition the portfolio. It returned to underwriting profitability last year.

A pair of legacy transactions with RiverStone has also effectively cauterised the reserve deterioration on the back book, meaning any new buyer would now effectively take on the 2020 underwriting year and onwards.

There is also potentially the opportunity for Westfield to strike a “clean” deal for the syndicate – leaving all prior liabilities behind – which Argo has shown willingness to do in its sale of Ariel to Pelican and JC Flowers in 2020.

Argo got relatively far down the road with a potential sale of Syndicate 1200 to a private equity bid spearheaded by former Ascot and Neon CEO Martin Reith last spring, but at around 0.8x book, there was ultimately a mismatch on pricing.

A subsequent attempt to convene a sales process for the roughly £600mn-GWP business in September 2021 was rapidly abandoned.

If Argo has conceded on price this time round, then Westfield has effectively sealed a Lloyd’s entry with a better-performing business, with lower capital requirements, with a smaller cheque.

And in addition, Lloyd’s as a market finds itself in a much better position than it has done for some time.

Buy the turn

In June, I argued how this year could be the opportune moment to “buy the Lloyd’s turn”.

Investor sentiment more widely has been at a low ebb for Lloyd’s businesses, following a four-year string of loss-making years.

However, the gruelling years of the performance drive turned the tide on underwriting unprofitability, and more widely created a far more robust marketplace which, in 2021, outperformed peers for the first time in years.

Rating agency pressure has also pushed a de-risking on cat, while market expenses have come down almost 4 points since 2018.

Meanwhile, the Lloyd's market has been and continues to be perfectly positioned to benefit from the Golden Age in specialty, which is entering its final phases but still offering good returns.

We previously argued that there is currently a unique window of opportunity for those investors who understand and know the Lloyd’s space and can see past broader investor malaise.

This is particularly true for financial investors, which could look to ride the current upswing in profitability and make a decent return with a five-year investment horizon, exiting before market conditions truly soften.

For strategic or trade buyers, there are additional considerations for a long-term play – although it’s worth noting that we have seen trade buyers enter and successfully exit with multiple expansion within a shorter timeframe, The Hanover’s seven-year investment in Chaucer being a prime example.

Longer-term investors in Lloyd’s will need to buy into the idea that the Corporation has sufficiently addressed the root cause of past mistakes – that, via its remedial work and a more robust performance management division, it has installed a market-wide mentality of good risk selection and underwriting discipline, which will continue to stand up even when the cycle turns.

Similarly, you also need to believe that the modernisation actions the Corporation is pushing through under Blueprint Two and beyond are sufficient to safeguard the market from the structural challenge of expenses – which threaten to undermine both London’s competitive position and its relevance longer term.

This year is a crucial one for execution on that front, and as yet we have not seen any major transformative strides made, although work is slowly making progress.

There are currently two other Lloyd’s M&A processes which are yet to be concluded: Ascot and Probitas. And arguably there are other Lloyd’s businesses out there which could prove to be the foundation for a value-accretive “upcycle” deal, for the right investor.

After a prolonged quiet period at 1 Lime Street, a signed and sealed deal between Argo and Westfield Specialty could prove to be a shrewd trade – and potentially an example of early-cycle Lloyd’s M&A.

 

Insurance Insider delivers global wholesale, specialty, and (re)insurance intelligence that enables you to act first. Redeem your complimentary 14-day trial for more premium content from Insurance Insider.

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