Lancashire to acquire Cathedral Capital, add Lloyd’s access to platform

Lancashire Holdings, global provider of specialty insurance and reinsurance products and a third-party reinsurance capital management firm through its new Kinesis Capital Management division, is now seeking to add access to the Lloyd’s of London re/insurance market to its platform with an acquisition of Cathedral Capital.

The board of Lancashire has announced this morning that it has entered into a conditional agreement to acquire Cathedral Capital Limited, a privately owned Lloyd’s insurer. The acquisition will see Lancashire pay £266m for the entire issued, and to be issued, share capital of Cathedral together with loan notes issued by Cathedral’s subsidiary, Cathedral Capital (Investments) Limited, which represents a multiple of 1.6x the net tangible assets of Cathedral as at 31 March 2013.

Lancashire will acquire Cathedral from Alchemy Partners and the other Cathedral shareholders, using both its available cash and the proceeds of a share placement of 16,843,382 new common shares in Lancashire, representing approximately 9.99% of its existing share capital.

Through the acquisition Lancashire will gain two Lloyd’s syndicates, Cathedral Syndicates 2010 and 3010, and access to a platform focused on short-tail lines of business, an area Lancashire has said it intends to focus both in underwriting with its own capital and third-party capital.

The Lancashire board sees Cathedral as a strong complementary fit to its platform and expects the acquisition to bring the firm material benefits through the enlarged group and new underwriting opportunities. It’s a rare opportunity to acquire a Lloyd’s platform with a short-tail focus and the addition to Lancashire will help it benefit from direct access to the Lloyd’s market and give it increased flexibility to respond to re/insurance market conditions with enhanced distribution capabilities.

The acquisition gives Lancashire scale in its existing lines of business, new sources of capital (including third-party via Lloyd’s Names that participate in the Syndicates) and will help it to create organic growth opportunities.

Through the direct access to Lloyd’s Lancashire hopes to find growth opportunities through the global nature of the market and a chance to expand into new markets using Lloyd’s licenses. Additionally, the access to Lloyd’s infrastructure, support services and strong rating will help Lancashire expand.

It gives Lancashire even more access to specialty lines, with Cathedral’s core business finding little crossover with Lancashire’s existing book and where it does it will help it to build scale instead.

The acquisition will also give Lancashire a new source of third-party capital through Lloyd’s Names participation in Syndicate 2010, which will give Lancashire an additional source of fee income and more underwriting capital. Lancashire believes its business model will give it a more sustainable business model in the event of a soft market. Perhaps the acquisition is partially a response to recent trends with third-party capital inflows and sees Lancashire finding new business avenues which are more insulated from that due to their specialist nature.

Cathedral writes insurance and reinsurance business in property, direct and facultative property, aviation, satellite, marine cargo and contingency classes within the Lloyd’s market framework. It owns 57.8% of the capacity on Syndicate 2010 and 100% of the capacity on Syndicate 3010. The rest of the 2010 capacity is from Lloyd’s Names and Cathedral receives fee and profit income from this. For the 2012 underwriting year, Syndicate 2010 had £350m of capacity while Syndicate 3010 had £30m.

The share placing, of around £130m in value, to help fund the acquisition is expected to settle on the 12th August. The placing is not conditional on the acquisition.

Lancashire CEO Richard Brindle commented;

“Subject to shareholder and regulatory approval, I am delighted to announce that Lancashire has acquired Cathedral Capital which owns two top-performing syndicates in Lloyd’s. We’ve spent a good deal of time with the management team looking at the Cathedral business and we’ve been impressed with their record and their approach.

The deal will broaden our business line exposure, and strengthens and diversifies our core underwriting. In addition it will allow us to continue our track record of financial flexibility and efficient capital management.

As you know we’ve been talking a lot this year about how important it is to remain relevant in such a rapidly changing marketplace. With LICL2 and LUK3 operating nimbly in the London and Bermuda company markets, Kinesis developing our capital markets presence, and now Cathedral with an established and successful Lloyd’s business, we have excellent distribution channels for all our classes and clients.

My colleagues and I extend a warm welcome to Peter and the whole Cathedral team. We’re enthusiastic about the opportunities to develop both the Lancashire and Cathedral business and to serve our clients and brokers even better.”

Cathedral’s Chief Executive Officer, Peter Scales said:

“I am delighted that we have successfully reached the conclusion of our sale process and will be taking our business forward within the Lancashire Group.

The aim of our process was to put Cathedral in a position where it could develop and build out the business within a wider capital base, with a shared underwriting and customer philosophy that is commensurate with the changing market place in which we find ourselves.
Whilst it will continue to be very much business as usual at Cathedral from a day to day trading perspective, I am excited by the additional value that we can bring to the existing Lancashire underwriting and third party capital business and the value they will bring to building out the Cathedral platform.

I believe that our business is not only going to thrive in its new home, but it is now part of a group where the shared experience and values of the teams, coupled with the flexibility of the wider platform, gives us a highly effective structure that is suited to take on the challenges of a changing market place.

On a personal note I would like to thank Richard and his team for the honest, direct and enthusiastic approach they exhibited through the process, which not only made the choice of new home easier but bodes very well for moving forward together.”

John Hamblin, Active Underwriter of Cathedral Syndicates 2010 and 3010 said;

“This brings two strong underwriting cultures together and gives the enlarged group platforms in London, Lloyd’s, Bermuda and in the Capital Markets. Cathedral will continue to serve its customers, brokers and Names in the same consistent way it has since it was founded in 2001, but with a wider set of options for all of our stakeholders.

We are all looking forward to working with Lancashire to bring the best in the two businesses together in such a way that in the years ahead we can continue to deliver, and to enhance, the high level of service, reputation and profitability we have both delivered in the past.”

This acquisition is extremely interesting as now only does it help Lancashire grow organically in its own short-tail business lines, with new underwriting capacity and avenues for sourcing risk. It also brings a new capital source to the firm from external capital investors and a platform into which it could give its existing third-party investors access to Lloyd’s.

Lancashire is taking a sensible route by combining the traditional with the alternative forms of re/insurance capital and broadening its reach at the same time. It will be interesting to watch how Lancashire leverages the Cathedral access to Lloyd’s and whether it increases the participation of third-party capital in the two Lloyd’s syndicates.

More details can be found via Lancashire’s press release on the acquisition.

Other recent articles on Lancashire Holdings:

– Lancashire targets up to $500m initial funding for Kinesis Capital Management

– Focus insulates Lancashire from pricing pressure, announces Kinesis Capital Management