Big Banks Have To Move Fast For A Piece Of The Action

Sydney Morning Herald

Friday October 13, 2006

ELIZABETH KNIGHT

AMID all these takeover rumours swirling around the market, we at last have a real deal. Suncorp yesterday confirmed the speculation of an offer for insurance group Promina in what would represent a major piece of consolidation in the industry.

For its part, Suncorp is clearly serious about winning the prize. It is bidding cash and shares to value its target at around $7.50 in a deal that has the attention and clearly the approval of the Promina board.

The price is well pitched, and some would say particularly generous.

But the deal, even with the approval of Promina's board, has a couple of hurdles to overcome. The first and most obvious is the competition regulator, the Australian Competition and Consumer Commission. The merger of these insurance companies would create a large insurance beast with big market shares. How big the market share depends on who you ask. Some insurance experts give the combined entity 46 per cent of the car and compulsory third party market.

Those keen to underplay dominance break it down further and say that in personal insurance lines the merged company would account for 25 per cent of cars and 22 per cent of house insurance and slightly less in commercial insurance.

But it doesn't really matter who is talking, it will be Graeme Samuel at the ACCC that decides whether there is any substantial lessening of competition on product lines or in an overall sense.

It's not a given that he will go for this. And at this stage we don't know whether it be will assessed on a national basis or state by state.

But let's just assume for the moment that the ACCC will give it a green light.

This proposed offer really opens a can of worms - not necessarily in insurance but in banking.

The real issue is that Suncorp is a major independent bank based in Queensland as well as an insurance company - what we like to call a bankassurance company. The mix is the only one of its kind but contains two jewels - the bank and the insurance company.

The big four banks have limited organic growth opportunities and have been sniffing around Suncorp for years registering interest.

If any, in particular Westpac, wants to make a move, now is the time.

Suncorp has been seen as a target for banks and other insurance companies for quite a while. Its move on another insurance company using its own shares as part payment is a clever move. In doing so it has capitalised on the strength of its share price as currency. (And any rumours that Suncorp is itself a target will only increase its share price and help it further.)

In terms of the consolidation of the general insurance industry this merger will leave almost no room for another major move. This is an industry that since the HIH/FAI collapse has had to introduce some rationalism. And it has. Since then it has worked on properly costing its policies, cutting costs and creating underwriting profits.

At the low point in the cycle insurers were competing themselves into a position where premiums were not covering risk and their investment profits were the only thing keeping them above water.

There is no real top line growth in this industry, so keeping premiums at a commercially sensible level and getting costs out of the business has been the strategy the big players have employed.

But over the past year it has become clear that the insurance cycle has peaked. And this is just the time that consolidation takes place. It's when cost syngeries and a bit of pricing power needs to enter the fray to ensure that profits continue to rise.

The 2006 year was a strong year for insurers but it had become clear that the cycle had topped in terms of underwriting profit and investment profits.

Suncorp takes the view that the synergies from this deal will improve its position - but you would also have to think that these would be paid away if the price for Promina was any higher. It really has no further room to move. If a Westpac or an NAB wants to buy some market share in Queensland, then the Promina deal could be at risk. As far as the Promina board goes, chairman Leo Tutt will be playing his cards very carefully. Remember this is the bloke that chaired and gave away MIM to Xstrata. One can only assume that if he learned from his mistakes then he won't be giving value away again.

© 2006 Sydney Morning Herald

Back to News Index | Back to Home