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In Lloyd's we trust

Dear friend,

Love is in the air!

Atrium is the latest in a long line of Lloyd’s GI brides to be carried off by a dashing young buck from across the Atlantic.

When I was last over in Bermuda I interviewed Don Kramer of Ariel Re and naturally we got talking about his open secret of wanting to either buy into or break into the Lloyd’s market sometime soon.

Don’s original background is as an equity analyst and he was a little shocked at some of rich premium prices potential buyers were expected to pay for Lloyd’s players on the back of an excellent year.

His argument was that it was daft to pay on the basis of 2006’s brilliant one-off earnings, because they were unlikely to be repeatable. He would rather use the long-terms earnings potential of the companies instead.

You see over the other side of the pond, they like to look at insurance company’s price to book ratio as a method of valuation, as opposed to the price/earnings ratio we tend to look at over here.

Actually I think that they’re right — insurance is so cyclical and volatile that there is very little point trying to value a company based on what it earned last year or what you expect it to earn this — best to stick to how much more it is worth than the sum of its parts.

Well, a quick glance at my computer at my screen and I can see Atrium’s net asset value is estimated by analysts at around 260p a share — and Ariel is stumping up 365p — a multiple of 1.4 times.

Okay it’s not cheap, but cheaper than many Lloyd’s rivals — and since Atrium isn’t that big anyway, what’s a few more dollars here or there? And by all accounts Atrium is a classy outfit.

And when the gearing element available to Ariel is taken into account it's probably worth the extra money. Lloyd’s players look expensive, but the unique capital benefits mean your money goes almost twice as far.

You also get to be a licensed surplus lines player in the US (and either a direct or reinsurance player almost anywhere else on the planet) overnight without having to stump up for a shell company (see what Montpelier did the minute it got into Lloyd’s).

So this move ticks all the boxes for Ariel.

As Chris Hitchings, an analyst with Keefe Bruyette and Woods said in an excellent note the other week:

“There is a good economic case for a Bermudan monoline buying a Lloyd's insurer but, with a US focus on price/book as the value metric, the relative capital efficiency of Lloyd's makes them look expensive. Their alternative of building their own may be slow so we do not rule out renewed interest in future.”

Don explains how it all works in the interview in the August magazine.

So you’ll just have to wait until then, won’t you?

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