Beazley has fared better over the period and it is thought that the comparative positions of the two groups could make the deal more likely to occur this time around, though Hardy has accepted third party investment from Arig and Tower Group since the last bid failed and it is thought that one of these two groups could be interested in making a bid for the business too.

“Given Beazley’s bid for the company last year, which it valued at [about] 330p per share, maybe it shouldn’t be a surprise that it remains interested with the share price, impacted as it was by the 2011 cats, down [about] 47% since then. However, we were under the impression (clearly mistaken!), that Beazley had ‘moved on’,” stated Eamonn Flanagan, Insurance Analyst at Shore Capital.

“Of course, we cannot fault Beazley for renewing its interest given the quality of the underlying Hardy book (despite the 2011 cat hit, it remains a strong underwriting company, in our view), and the current valuation of the stock. However, given the likely interest in Hardy from, for example non-Lloyd’s players (such as Arig and Tower Group), we believe that Beazley may struggle to match the valuation put on Hardy by the latter, which should view this as an excellent opportunity to gain a foothold in the Lloyd’s market,” he continued.

Joy Ferneyhough, Insurance Analyst at Espirito Santo in London, said that a renewed Beazley bid seemed ‘logical’. “With Hardy having recently effectively been put up for sale after a catalogue of damaging international catastrophe losses which have pressured the capital base, it seems logical that Beazley would be interested in another approach,” she wrote.

Ms Ferneyhough said that the fortunes of both companies have been ‘polar opposites’ since the last bid.

Despite the large cat losses of 2011 she expects Beazley to still turn a profit in 2011. For Hardy she expects total book value erosion of some 25-30% in 2011 year to date with capital now ‘extremely constrained’, despite the recent injection of capital from Arig and Tower Group.

Ms Ferneyhough agrees with Mr Flanagan that Hardy remains a good prospect.

“Whilst Hardy have had a terrible 2010 and 2011 on the cat loss side, the underlying franchise is well regarded in Lloyds and profitable with combined ratios of [less than] 90%. At the time of the last approach by Beazley we noted that the two businesses would be a good fit from a business line perspective as well as geographically given Hardy’s short tail and non-US book vs Beazley’s mid tail, specialty and US platform.

“This would bring Beazley’s syndicate business closer to the sizes of larger peers and we would expect the international cat exposures would be trimmed pretty quickly or reinsurance sought in order to balance the overall cat risk of the group, albeit Beazley’s US focus currently would naturally offset some of this at the outset,” she explained.

Ms Ferneyhough said that she expects that Hardy will now have to engage in discussions with Beazley but stressed that it is ‘far from a done deal’.

This is because the price discussion is likely to be ‘well fought’ from both sides and she also expects there will be other parties interested, including Arig and Tower Group.

“Hardy’s underlying franchise is good and we expect their management will feel this is worth a multiple of book, however we would not expect buyers to be keen to pay much more than is reasonable given the recent losses and questions over risk management. Overall if this deal were to proceed we would view it positively for Beazley from a financial and strategic perspective. Beazley’s scale in Lloyds would increase, the deal would be accretive for earnings and still leave capital flexibility to take advantage of a better rating environment in catastrophe business in 2012,” said Ms Ferneyhough.

Veteran London insurance analyst Chris Hitchings of investment bank KBW said that he is also not surprised that Beazley has confirmed its interest in Hardy.

“We see reasonable strategic sense in a merger and, with 2011's cruel exposure of Hardy's weaknesses, there looks the basis of a deal which is attractive to both sets of shareholders. Beazley's share price may mark time until details are clear but our medium-term enthusiasm remains,” he said.

Mr Hitchings said that Hardy had made it known that ‘it has received several preliminary expressions of interest in its business’.

“In view of this, and in the light of the incidence and size of catastrophe events in 2011, the board has concluded that it should undertake a strategic review; this review will include consideration of whether shareholder value might best be maximised and business opportunity might be enhanced by finding a buyer or strategic partner," he stated.

Mr Hitchings pointed out that Beazley argued last year that Hardy had a high quality and mostly complementary insurance business.

Hardy is strong in marine, aviation and UK and European property and has a largely non-US treaty book. Beazley is strong in casualty, life, A&H and US property.

“The merged group's greater size and diversification, it also argued, would bring cost and investor visibility advantages,” stated Mr Hitchings.

The analyst also pointed out that Solvency II is creating cost pressures for smaller Lloyd's agencies so some cost advantage is likely and investors have expressed qualms at Beazley's size and casualty focus.

“More significant, the complementarity of business does reduce the risk of staff fall-out, which can bedevil many such mergers. With Hardy's board now likely to accept the inevitability of a change in control, an independent Lloyd's business could seem an attractive home, in our view,” concluded Mr Hitchings.

Please sign up here to our full-time mailing list to ensure that you receive our weekly newsletter.

• More Insurance News