Lloyd's two-way traffic: as Lloyd's seeks to plant its flag in more locations worldwide, so new overseas buyers are coming to London for acquisitions.

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"Oh, East is East and West is West, And never the twain shall meet," wrote poet Rudyard Kipling in the late 19th century as the British Empire reached its zenith. Modern day Britain has, perhaps unfairly, given the famous lines an archaic air as society in its big cities grows increasingly multiethnic and multicultural.

Certainly East and West meet frequently at one of its most famous bastions, Lloyd's of London. In June, the historic insurance market announced plans to significantly increase its exposure in Asia and the Middle East, a move that promises to lessen its reliance on North America.

Lloyd's still derives around 40 percent of its business from the United States, with Europe accounting for nearly 25 percent. Asia accounts for only 6 percent, while its market in the Middle East is "tiny," according to its chairman, Lord Peter Levene.

"We are pleased to have so much (U.S.) business, but in absolute terms it's overweight," he said recently. "In five years' time, we will get a significantly greater part in both Asia and the Middle East than we have today, but I wouldn't want to put a number on it."

Levene added that Lloyd's is reviewing a possible onshore platform in the Gulf to develop Middle Eastern business inaccessible from London. Officially it is comparing the merits of Qatar, Dubai and Kuwait as a location, although reports suggest that Abu Dhabi is also in the running.

As its worldwide reach develops, so are the attractions of gaining a presence at Lloyd's for companies with global ambitions. Lloyd's Asia was set up in Singapore at the end of the '90s to provide an underwriting base in the region and business growth has been strong in recent years. At the start of 2006, Lloyd's secured a license to establish an onshore reinsurance operation in China and in April this year it became the first reinsurer to gain a license to operate directly in Brazil.

More recently there has been a setback. In July, Lloyd's withdrew its main representative in India, claiming that the government showed a lack of commitment in opening up the country's market, despite earlier promises to do so.

"We still retain our office in Mumbai, but our representative had little to do," says Rolf Tolle, Lloyd's director of franchise performance. "We still see India as an interesting market and remain confident that the right solution will be found eventually--but it is a very slow process!"

BOOSTED BY BUFFETT

As Lloyd's expands globally, ownership of its syndicates promises to develop a more international tone. A spate of acquisitions over the past two years has seen Bermuda-based reinsurers acquire some of the major names (see story below). But in February this year Japan's largest non-life insurer, Tokio Marine and Nichido Fire, made its biggest-ever overseas deal. It purchased managing agency Kiln, which has operated at Lloyd's for more than 45 years and has four syndicates. Tokio Marine also has ambitions of expanding into Brazil, so Lloyd's recent license win will smooth its path.

"More Asian capital will undoubtedly head toward Europe," predicts Chris Waterman, senior director--insurance group at ratings agency Fitch, who cites rating as another attraction. Fitch raised its Lloyd's rating to A+ soon after the October 2006 deal that saw Warren Buffett's National Indemnity acquire Equitas, the rescue vehicle set up by Lloyd's ten years earlier when heavy pre-1993 claims threatened it with collapse.

The removal of future uncertainties from the Equitas deal has been coupled with an acceleration of the campaign to remove Lloyd's more archaic traditions under CEO Richard Ward. And the costs of doing business at Lloyd's, which have long been a bone of contention, are starting to come down at last, adds Lewis Philips, head of research at broking group Benfield.

James Viekers, chairman of Willis Re International, agrees that more deals can be expected, particularly as--with certain notable exceptions--the credit crunch has had an impact less on insurers than on other financial services sectors. At the same time, insurance company reserves have had the benefit of two relatively benign years for claims in 2006 and 2007. "At the moment, insurance markets are moving downward and rates are softening, so the ratings agencies are placing great emphasis on diversification," he observes. "This means that buying into Lloyd's makes sense." And Lloyd's has always shown itself receptive to new capital "provided that its source is respectable," taking a positive view of foreign operators' wish to buy into the market.

Taking over an existing operator is a more attractive proposition than setting up a brand new syndicate, which demands presenting a convincing business plan at a time when Lloyd's is restricting its capacity.

This year it stands at 15.95 [pounds sterling] billion, down slightly from the record figure of 16.1 billion [pounds sterling] in 2007). Acquisition also has the benefit of immediate access to an experienced workforce that understands the business.

"I'm quite agnostic as to whether new entrants buy an existing operator or set up from scratch," says Tolle. "The important thing is that they can contribute something to the market in the long run." But he underlines the attractions of acquisition by adding that for every successful application to set up a new syndicate "there are seven, eight or nine that don't get through."

There are, however, only a limited number of acquisition opportunities. Although the number of syndicates underwriting at Lloyd's has increased this year, from 66 to 75, the total is still sharply down from the days before the market learned to embrace corporate capital. So there are relatively few remaining independent syndicates that present a suitable target while the bigger players in the market, such as Hiscox and Amlin, have diversified with operations no longer restricted only to Lloyd's.

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"If organic growth isn't possible, sometimes those seeking acquisitions are ready to buy a second-tier company for a first-tier price," says Jeremy Brazil, active underwriter for Markel International's Syndicate 3000 at Lloyd's. "But at the moment, people won't flash the cash unless they're desperate for their business to be seen as growing."

Waterman agrees that any future deals will be very much price-driven. "The acquisition rate has been slowing more recently, reflecting the gap between what investors are ready to pay and what businesses believe they are worth," he observes. "But the flood of capital that has poured into Bermuda, coupled with the island's increasingly strained infrastructure, could see London skim off more of the excess."

Could more foreign ownership ultimately prove negative though, undermining Lloyd's appeal as a unique institution? Waterman believes any such fears are unfounded. "It hasn't meant the end of many of its characteristics--it still offers capital advantages, global licensing and the ability to set up operations speedily," he observes.

Not that all foreign insurers wish to beat a path to London. As Vickers points out, Lloyd's ultimately remains a specialist market--attractive to those companies seeking to diversify, less so for those content to continue focusing on the "bread and butter" classes of business.

And not everyone welcomes the new arrivals, according to Brazil.

"Some wholesale brokers have a bit of an issue with the trend towards globalization," he says. "They see it as cutting them out of the equation and stealing their children's inheritance."

"But the truth is that countries and markets once dependant on both London and the US have used their expertise to develop their own solutions, so you now have robust local markets around the world. Globalization is a natural evolution and there's no point trying to resist it."

Summary

* Cracking Asian and Middle Eastern markets is not a cake walk. Lloyd's recently had to withdraw its chief representative in India due to lukewarm assistance from the government.

* Lloyd's internationalism cuts both ways. In recent years a spate of Bermuda-based reinsurers have reached out to acquire pieces of Lloyd's syndicates.

* The credit crunch, while not leaving insurers unscathed, has left them relatively cash rich and in the mood for further acquisitions.

Sticking with Gentlemen's Agreements but for how Long?

The generous prices paid in 2007 may not return for years, or even decades.

The takeovers of some of Lloyd's largest companies in the past couple of years have been gentlemanly affairs--none of the bid targets has put up a resistance and forced their suitors to go hostile. The tone was set in October 2006, when Catlin unveiled a 591 million [pounds sterling] friendly acquisition of rival Wellington, to create the largest single syndicate.

The Bermudian names moved in shortly afterwards. In May 2007, Validus announced a $395 million takeover of Talbot and two months later Ariel agreed to a $380 million cash purchase of Atrium. Ariel's chief executive, Don Kramer, described the deal as the quickest and most efficient means of securing scale and diversity--in contrast to the time needed to develop a similar operation from scratch.

Tokio Marine and Nichido Fire announced its $875 million acquisition of Lloyd's fourth largest managing agency Kiln last December, marking its largest overseas acquisition to date. The deal took the market by surprise, says Lewis Philips of Benfield. "When Kiln first revealed that it was in talks with a potential buyer it was generally assumed to be a Bermudian company."

In retrospect it seems more obvious. The Japanese insurer has long-standing business ties with Kiln, and aims to boost its revenues from business outside Japan from 13 percent to 20 percent to 25 percent by 2010. It said at the time that it recognized the need "to pursue further strategic options in major insurance markets" to strengthen its international portfolio.

"When Kiln first revealed that it was in talks with a potential buyer it was generally assumed to be a Bermudian company."

--Lewis Philips, Benfield

But the generous prices paid in 2007 may not be repeated for some time. Omega, which announced in February this year that it was in talks with a number of potential buyers, had to go back to the market empty handed after two months. The company, one of several Lloyd's operators that has transferred its head office to Bermuda, admitted that it had been unable to agree to a "right price" with any of the interested parties.

--By Graham Buck

GRAHAM BUCK is a based in England covering European risk management issues. He can be reached at [e-mail].