Beazley and Hiscox both screen as classic cases of a very serious ailment that we’ll call Londonitis.
The malady’s hallmarks include muted investor interest, long-term share price underperformance, frustrated management teams, and vulnerability to take-out by foreign competitors that see the value London Stock Exchange (LSE) investors are missing.
Boards that believe their companies are suffering from Londonitis have a number of treatment options.
The medicine will depend on whether they view the LSE’s current challenges as an acute but short-term episode that it can get past, or if they think it is chronic, and potentially even terminal.
If they believe the former, boards can simply focus on delivering strong performance on the assumption that this will ultimately be reflected in their company’s valuation.
More bearish boards can take matters into their own hands in one of two ways. First, they could find a foreign suitor willing to value the shares more appropriately by buying the company. Or second, they could go and find a different pool of investors and a more favourable marketplace by relisting on another exchange.
Of course, other companies could also act without any invitation and make unsolicited offers to take them private – something which has been happening frequently this year outside insurance.
For businesses with long track records of independence and strong connections to London, such as Beazley and Hiscox, this is not an attractive decision set.
Nevertheless, the boards of both companies should take the opportunity to carefully scrutinise the sustainability of their London listings.
Engineering a sale seems unlikely for either company, although arguably each would be better off than at present if they could find a hands-off Tokio Marine- or Fairfax-style owner to buy and leave them alone.
In deciding on whether to relist, the bar will obviously be set high.
Inertia effects are powerful. The process of relisting is expensive. And there is an opportunity cost to allocating so much of finite management bandwidth to what is effectively a second IPO.
Regardless, the potential valuation upside for the businesses from securing a listing in a more congenial environment such as New York could be substantial.
The short-term disruption and distraction may be justified by the long-term benefits of trading on a vibrant exchange with a deeper pool of capital and higher liquidity.
Sitting tight in the hope that eventually markets will behave rationally is dangerous because it leaves them exposed to takeover interest at a point when a waning pricing cycle could portend the arrival of a new M&A cycle.
Weak shareholder returns and substantial de-rating
The challenges that Beazley, Hiscox, and smaller competitor Lancashire have faced in their trading performance over recent years are stark.
Despite a strong start to the year with Beazley and Hiscox up ~25%, none of the trio have delivered attractive total shareholder returns over the last five years.
The businesses have significantly de-rated over that period of time, with Beazley and Hiscox down around 1x book from their levels in January 2019.
This performance contrasts with a cohort of New York-listed US specialty and Bermuda businesses, all but one of which are trading at higher multiples than they were five years ago.
The micro story cannot be ignored here. Beazley, Hiscox and Lancashire broadly speaking underperformed on underwriting between 2017 and 2021, reflecting soft market conditions and increased frequency of cat losses.
They also suffered from their strong association with the Lloyd’s market where underwriting results were even worse, and sentiment persistently negative for much of this period.
It remains, however, that businesses generating 25%-30% RoEs – albeit in a low cat year for excess and reinsurance writers – are valued at 1.5x book or below.
Londonitis is clearly responsible for some of the underperformance. Businesses with the same financial profile and leadership teams in New York would be more richly valued.
It should be noted on the counter that both Beazley and Hiscox successfully tapped LSE investors for additional capital to support growth in recent years, and found strong support.
The macro challenges of the LSE
The challenges of the LSE have been amply documented elsewhere in the general financial press.
But, in brief, London-listed stocks are suffering from a shallow pool of available capital with pension funds and insurers extremely light on UK equities. Liquidity – frequently cited as a challenge – is lower than New York, but it’s not as dramatic a contrast as is typically believed.
The stock exchange – with its bias to value businesses such as energy companies and miners – is also struggling to attract interest after a long period of underperformance that partly reflects the success of tech firms that are mostly listed in the US.
The companies themselves feel stifled by stiff requirements around transparency and overly stringent regulation, and are concerned the regime lacks stability. The obligation for firms with US operations to juggle the new IRFS 17 accounting standard and US GAAP is another motivator to avoid a UK listing, it is understood.
Management teams are also increasingly restless about the huge compensation delta between London and New York (although closing this gap scarcely seems like a fix for broader issues.)
The underlying causes are more open to debate. But Britain’s stock exchange was clearly hit hard by the Global Financial Crisis, with issues potentially exacerbated by Brexit. Sclerotic government and the halving of the UK’s trend productivity are also likely aggravating factors.
The issues are playing out through a succession of take-outs of UK listed firms, as well as some re-listings overseas, and rumblings of discontent about further re-listings that could include Shell, the FTSE’s most highly valued company.
A dearth of new listings, along with these two dynamics, are eroding the number of firms listed in London, which are down ~20% since 2015.
IPO candidates in insurance are choosing New York
London has not seen recent take-outs of public specialty insurers, or re-listings, although RSA was acquired in a break-up deal in 2021.
However, it has lost out on IPOs to other exchanges, with nothing else listing in recent years besides Conduit, which was taken public by Neil Eckert, who is a maestro at listing firms in London.
Last year, Fidelis Insurance Group opted to go public in New York despite the centre of gravity of legacy Fidelis being the London insurance market.
Aspen, another insurer with close ties to the UK and the London market, and a CEO with a UK public company background, also dropped plans to list in London after a careful study. Instead, it directed its efforts towards New York before shelving its plans, as revealed yesterday.
“In the battle of exchanges for listing, New York has crushed London and everywhere else,” one source said.
Canopius, Ascot, and – potentially – Inigo are also perceived as businesses with major London presences that could list over the next one to two years. IQUW and Convex are businesses being followed by public market investors.
The market will watch closely if these names press forward for their choice of exchange, but some will likely be tempted to seek the deeper, more liquid, and more stable market in the US.
Beazley and Hiscox look increasingly American
The LSE is suffering a string of defections to other exchanges. These include drug-maker Indivior, which announced this week it was seeking shareholder approval to move to New York. Others include Flutter and CRH – both of which are moving to New York – as well as mining firm BHP, which moved its main listing to Sydney.
These constitute a small proportion of the LSE’s ~1,000 firms, but show that it is a real-world option for businesses, not a fantasy sitting in bankers’ deal books.
Most of these firms have substantial connections to the marketplaces that they moved to. While Beazley and Hiscox have historically been London-centric businesses, each clearly satisfies this condition for a re-listing to New York.
Beazley reports in dollars and discloses that 62% of its $5.6bn of premiums in 2023 came from US-domiciled clients. This US business is also increasingly written and held onshore, with Beazley recently moving $1.6bn of E&S business out of its Lloyd’s syndicate to onshore balance sheets.
The group has also started to split its executive leadership positions between the UK and the US, with the group CUO, head of claims, head of broker relations, head of specialty risks, and head of property all based in the US.
Hiscox also has substantial involvement in the US market. Its largest retail market is the US where it wrote around $900mn in 2023 including $500mn through its direct and partnership unit. Just under half of total revenues come from US clients, according to its geographical segment disclosure, with only around 20% coming from the UK.
There are, of course, obstacles to re-listing. The cost in advisory and legal fees is substantial (although as one-time costs investors are likely to look past these).
Management distraction would be real, with significant time and attention required over roughly a six-to-12-month period to secure shareholder approval, execute the change, and market to a new set of investors. The London-based leadership team would also have the personal disruption of having to spend much more time in the US, or in some cases potentially to relocate.
Last of all, there would be the emotional element of uprooting the listing and walking away from the LSE for businesses that have traded there for 20-30 years. And this is not purely a sentimental issue. The sense that the centre of gravity of the business is shifting to the US could demoralise a UK workforce, and make it difficult to compete for talent with businesses that remain UK-centric.
Boards would also have to believe that their management teams could tell the story of their businesses in a way that is compelling to US investors, and that they would not be written off as quirky and confusing Lloyd’s relics.
That is a lot to get past, but – with US businesses with similar results trading at much higher multiples – the valuation dividend could be significant even in the near term. The businesses could also cap their long-term downside should the decay of UK PLC progress.
Vulnerable to being taken out
Holding on and hoping for London to convalesce is dangerous, not just because it risks a long-term drag on the share prices.
It also leaves these firms – both with proud independent traditions – vulnerable to take-out. (This is even more true of Lancashire, which trades at just 1.1x book, and is a more manageable mouthful for an acquirer.)
For a long time while they traded at well in excess of 2x book, both Beazley and Hiscox looked prohibitively expensive, even for large acquirers.
That isn’t true anymore.
Tokio Marine has made clear it is on the hunt for new acquisitions, and its wish list of characteristics for targets sounds a lot like Beazley. Travelers has started to get more interested in London with its Fidelis Partnership investment, and its backing of Ki. Allianz too is said to be more interested in the London market than it has been.
And we are late in the pricing cycle when M&A on a large scale can start to kick off. Buying businesses putting up RoEs of 25%-30% for potentially under 2x book could tempt someone to make the first move.
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