When Canada's largest pension fund to 's stakein Ascot Underwriting HoldingsLtd., it also gained access to one of the insurance industry's mostcoveted and highest-priced clubs.
The roughly $1.1 billion transaction, set to close by the end of 2016,includes a platform at the U.K.'s Lloyd's of London, where a series of largeinternational players have flocked in search of a new opportunity. would become the ninth company in the last two years tostrike a billion-dollar-plus deal granting access to Lloyd's, in what hasbecome the go-to move for entities with deep pockets and global ambitions.
"This acquisition represents another important step inour strategy to achieve scale," Ryan Selwood, CPPIB's managing directorand head of private equity, said. "We have studied the global property andcasualty insurance sector for several years and specifically identified Ascotas an ideal platform through which CPPIB can access diverse insurance premiumsat scale."
Lloyd's has long ranked among the insurance world'shigher-profile markets, in large part because of its reputation for taking onoutsized or unusual risks. But for insurers mired in a period of ultra-lowinterest rates and softening prices, the appeal is more fundamental. JoiningLloyd's means gaining automatic entry to a range of markets across the globe,analysts and market experts said, each of which may offer new and higher-returnopportunities. While Lloyd's is not immune to the broader industry'sdifficulties, its diversity provides a layer of insulation.
That has made Lloyd's one of the more attractivedestinations for insurers in the last few years, especially among those lookingto build a greater international presence.
Insurers expanding outside their home country wouldtypically need to set up individual operations in each foreign market, aproject that can consume time and resources. Lloyd's offers somewhat of ashortcut, though, allowing companies to plug into its already-establishedglobal distribution network.
"The world comes to you, so to speak," AndrewHolderness, a partner and global head of corporate insurance in Clyde &Co.'s corporate insurance group, said in an interview. "That thereforegives you the ability to grow your business from a single hub here in Lloyd'sto international markets around the world."
It's perhaps no surprise then, Holderness added, that manyof the recent buyers are expansion-minded international players, rather thaninternal consolidators. MS&ADInsurance Group Holdings Inc. and other Japanese insurers, forexample, have used foreign acquisitions to counter the growing macroeconomicdifficulties in their domestic market.
Also unsurprising is that those companies are among thelargest in their respective countries. The Lloyd's market's distinct assets arematched by its exclusivity, a factor that typically disqualifies all but thebiggest insurers from buying into the club. Lloyd's closely monitors who isgranted access, making it difficult for companies to launch their own platformsquickly and without significant investment.
Acquiring an existing platform is the only other way in,tipping the scales in favor of the market's sellers. All the billion-dollar-plusLloyd's deals with measurable valuations in the past couple years came at aprice tag above book value. As the space consolidates, opportunities havebecome increasingly scarce.
Just four publicly traded Lloyd's insurers remain following2015 dealsfor and , and the privately heldmarket has similarly shrunk over the years. AIG's Lloyd's platform becameavailable only because the insurer is in the midst of a substantial downsizing,Sandler O'Neill analyst Paul Newsome said. The company already has a footholdin markets around the world, making Ascot an expendable property.
"Ascot was a piece that could be fairly easily removedfrom the family," Newsome said in an interview. "AIG has licenses inmost countries and probably doesn't need to have a Lloyd's operation specificallyto give it that sort of breadth and exposure."
Those limitations mean that Lloyd's-centric dealmaking isunlikely to jump-start the broader M&A market, which has languishedfollowing record levels of transactions in 2015. While insurers across thespectrum are eager to bulk up in higher-return, specialty niches, those inLloyd's come at too steep a price for much of the industry. Yet for deal-mindedcompanies with vast resources like CPPIB, or expansionary appetites like MitsuiSumitomo, the Lloyd's market has proved a rare and valuable place to goprospecting.
"If you can find a way to get an entrance into theLloyd's market, that immediately gives you a huge leap in opportunities,"Holderness said. "Typically my experience is if someone from a jurisdictionmakes the leap, others will think about it."
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