Insurer is still attractive target

CHAUCER’S share price was barely changed after the company reported a smaller-than-expected profit for 2010. For most investors, last year’s results are old news: all anyone cares about is the impending bid.

Chaucer again said it had received a “number of takeover approaches” but was tight-lipped otherwise. But how much would a successful suitor have to pay?

Despite a lower combined ratio – the key measure of profitability for insurance firms – the same fundamentals that made the insurer so attractive to buyers still remain.

Firstly, the diversification of its underwriting exposure is extremely reassuring. In 2011, for example, rate increases of 10 per cent in energy and 14 per cent in UK motoring will offset a reduction of 10 per cent in US?property and a broadly flat picture elsewhere.

Second, its presence in Lloyd’s offers a perfect entrance for a private equity or trade buyer. Thirdly, it is strongly capitalised, with economic capital of £435m, including a buffer of £60m.

For that reason, any buyer will likely have to pay a premium to its 2011 net tangible asset value, forecast at 54p by analysts at Shore Capital. A premium of around 20 per cent would likely be justifiable, meaning the magic number is around 65p. With the shares trading at 58.5p at yesterday’s close, buyers could still make a tidy profit.