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BROKER BUYOUTS PROMPT QUESTION: WHO'S NEXT?

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LONDON-The merger and acquisitions frenzy within the London insurance market shows no sign of abating.

In fact, it took a new twist last week when Angerstein Underwriting Trust P.L.C., one of the large Lloyd's of London investment funds, bought Lloyd's members agent Stace Barr Holdings Ltd.

Speculation abounds on who is going to do what next. Most of the speculation surrounds mergers and acquisitions among the brokers. Aon Corp.'s purchase late last year of London-based Bain Hogg Group P.L.C. (BI, Oct. 21, 1996), and Alexander & Alexander Services Inc., which owned London-based Alexander Howden Group Ltd. (BI, Dec. 16, 1996), left the market wondering how competing brokers would react.Two recently proposed mergers-Lloyd Thompson Group P.L.C. with JIB Group P.L.C. and Lowndes Lambert Group P.L.C. with Fenchurch Insurance Brokers Ltd.-answered some of those questions. And U.S. broker Marsh & McLennan Cos. Inc.'s interest in the Minet Group answered others (BI, Jan. 27).

But an even larger question mark is now hanging over the heads of the rest of the brokering community, particularly London's two biggest players, Sedgwick Group P.L.C. and Willis Corroon Group P.L.C. The M&M interest in Minet gives weight to speculation that M&M may have an interest in taking over Sedgwick as well, said one London investment analyst.

Buying Sedgwick would substantially strengthen M&M's position in the London market and potentially create a brokering duopoly between itself and Aon, the analyst said.

Although this may strengthen M&M's position in London and in its world ranking, it wouldn't do Sedgwick any favors, commented another analyst. And "hostile takeovers don't work for brokers," the analyst added. "(M&M) has no synergy with Sedgwick. There is no pressure from a strategic point of view-there is overlap everywhere and there would be a massive rationalization problem. The same is true of Willis, though there is less of an overseas overlap."

Beneath the large London brokers is a group of smaller organizations feeling the pressure of a soft rating environment, massive competition and a weak dollar. "There will be merger activity in the medium-sized brokers before the end of the year," predicted Tony Silverman, an analyst at NatWest Securities Ltd.

Last week's deal between Angerstein and Stace Barr Holdings brought a new dimension to consolidation activity at Lloyd's.

Prior to buying the members agency, Angerstein had already taken over two managing agencies, J.E. Mumford Holdings Ltd. and P.B. Coffey Underwriting Agencies Ltd. Through the latest deal, Angerstein is now managing: the 500 million pounds ($806.5 million) traditional members' capacity; 350 million pounds ($564.6 million) from corporate investors controlled by Stace Barr; and its own 200 million pounds ($322.6 million) spread across a number of syndicates in the market, including its own. In total, Angerstein now controls 940 million pounds ($1.52 billion), or more than 9%, of Lloyd's 1997 capacity.

Having influence over such a large share of Lloyd's capital can only strengthen Angerstein's position, said James Illingsworth, operations director of Angerstein Underwriting Holdings. Spread vehicles-which place their capacity over a wide range of syndicates rather than dedicating greater chunks to in-house syndicates-are beginning to feel the winds of change that have been blowing over the market's traditional members as they face being edged out by dedicated capital providers.

"There is a closer alignment between spread vehicles and (traditional members)," said Mr. Illingsworth.

Dedicated syndicates, with all their capacity coming from one source, are all the rage in Lloyd's at the moment. Of the 10 new syndicates set up to trade in 1997, nine are fully capitalized by the owners of the agency running them, and two new parallel syndicates-syndicates with just one corporate member operating alongside a traditional syndicate-were started. What's more, only a handful of managing agencies are left without a corporate owner providing it with permanent capital.

By buying a members agency, not only has Angerstein established itself as a serious player in the market, but it also is able to build more value for its shareholders, said Mr. Illingsworth. Angerstein is now saving on expenses that it would have paid to Stace Barr, which had acted as its adviser on its Lloyd's participation. What's more, "I am not sure we are doing the best for our shareholders if we allowed the Lloyd's market to be sold off piece by piece to insurers around the world," he said, referring to the mainly U.S. and Bermuda-based ownership of Lloyd's agencies and provision of dedicated capital.

More deals along the lines of Angerstein and Stace Barr's link-up are expected in the fairly near future.

Caroline Chandler, managing director of Lloyd's corporate investor ALIT Underwriting Ltd., and Philip Maidens, research director of members agency Sedgwick Oakwood Lloyd's Underwriting Agents Ltd., both said their organizations would look at any such opportunities.

In the meantime, there will continue to be a lot of activity in the Lloyd's sector, said Clifford Hampton, partner of financial advisory and investment management organization Phoenix Group, which has advised on a number of insurance mergers and acquisitions. Phoenix itself is being acquired, having last week agreed to an offer from U.S. investment bank Donaldson, Lufkin & Jenrette Inc.

"Many investors may be relatively short-term," Mr. Hampton said, and they will likely make a public offering or sell out to insurance companies. "Insurance companies will continue to be the logical buyers," he said. In particular, he cited U.K. companies Commercial Union P.L.C. and Royal & Sun Alliance Group P.L.C., which have yet to dip their toes in Lime Street's waters.

But maybe they have other matters on their minds. Royal & Sun Alliance has a long way to go before it fully integrates the two businesses, and Eagle Star's parent, B.A.T Industries P.L.C., has been very open about its talks with potential merger partners.

"There will be further consolidations among the large insurance companies," predicted Mr. Hampton, "and the international companies will be seeing more growth through acquisition.'