Royal Bank of Scotland, Britain's most acquisitive high street bank, announced yesterday that Churchill, with its nodding dog mascot, had agreed to join the bank's stable for £1.1bn. This will make the group Britain's third largest general insurer.
The deal underlined RBS's onwards march in the UK financial services market and its continued appetite for acquisitions at a time when most rivals are sitting on their hands or acquiring smaller rivals abroad.
It also highlighted the ascendancy of new players as some of the fastest growing constituents in the world of general insurance. Their approach appears to be based on the apparently winning formula of flogging cover over the telephone or internet while keeping the cost base as low as possible.
Sitting in his Edinburgh office yesterday after announcing the deal to the City, Fred Goodwin, chief executive of RBS, observed: "In 1984 people would have been aghast to think that [2003's] No 3 general insurer in the UK hadn't [yet] even opened its doors for business."
RBS funded the creation of Direct Line - the first insurer to cut out insurance brokers - under Peter Wood in 1985 and still owns the business whose iconic red telephone now represents the No 5 player in the general insurance market.
The company also holds a 50 per cent stake in Tesco Personal Finance, a joint venture it set up with the supermarket giant in 1997 and now the fastest growing writer of motor insurance.
The addition of Churchill will give the new entity about 50 per cent of Britain's direct motor insurance market and 16 per cent of the motor market overall. The deal, which will also boost RBS's presence in home, travel and even the fast-growing world of pet insurance, ricochets the bank into third place in the general insurance sector, behind Aviva and Royal & SunAlliance.
The deal will not make much of a dent in RBS's deep pockets but it does bring together some old colleagues. Martin Long, who founded Churchill in 1989, was in at the inception of Direct Line under Mr Wood, who now heads rival E-Sure. Mr Long will come back to the fold when he rejoins the RBS group, as deputy chairman of Direct Line, under Ian Chippendale.
Not known for his generosity when picking up the string of acquisitions which have made the Scottish bank the fifth biggest banking group in the world, Mr Goodwin was thought to have paid a full price for Churchill.
Jon Kirk at Fox-Pitt Kelton, one of the few bearish analysts on RBS, said Mr Goodwin's target of achieving "north of £86m" of synergies from the deal in the next three years was "optimistic".
Mr Goodwin, nicknamed "Fred the Shred" after he took out 18,000 jobs from the acquisition of its rival, NatWest, in 2000, has gained a reputation for delivering, or even bettering, cost cutting and revenue synergy targets. In the case of Churchill, thought generally to be a well-run business, the savings will centre on using only one main IT system and centralising the claims settlement process for Churchill and Direct Line.
Mr Goodwin tried to dampen the fury of Amicus and the financial union Unifi, by saying the job losses from the deal would be in the "hundreds rather than thousands" of the 20,000 people it will take on from Churchill. The bank also pointed out that despite its reputed enthusiasm for slashing costs, it has invested in its business and staff, with the headcount now standing at 111,000 - which is 20,000 more than the combined RBS and NatWest workforce three years ago. While Mr Goodwin may well hit his synergy targets, there was speculation that RBS would inevitably have to compete with itself.
This is not only because both operate in the same markets, though Direct Line has concentrated on motor and Churchill has focused on home insurance.
Insurance analysts believe that Churchill and Direct Line attract similar customers because, while the businesses sell insurance via bank and supermarket branches, they are best known by many for doing business over the telephone or via the internet - a method still not favoured by many consumers.
Churchill should however answer some of the nagging problems Direct Line has. The business has made a success of being Britain's first insurer to cut out the middleman insurance broker and go straight to customers, contributing £355m to RBS's operating profits last year. But it has acknowledged that the direct model has made RBS dependent on advertising-driven insurance sales - not the cheapest method - and seen the need to diversify its proposition. It will be able to do that through Churchill, which owns a reasonably big broker, NIG.
There should also be considerable pricing advantages for RBS. One of the main advantages for bigger general insurers is that they can provide replacements such as household goods more cheaply if they are stolen than their smaller rivals because they can strike a more competitive deal with retailers.
Churchill's bulldog mascot may well be a sharp strategic addition for RBS in the UK, but most in the City agree it is still in the US that the bank is likely to go shopping for more substantial acquisitions to fund its future growth.
One analyst, John-Paul Crutchley at Merrill Lynch, was moved to quote a slightly more famous Churchill is his morning note yesterday. "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning," Mr Crutchley told clients.
ASCENT OF SCOTTISH BANK PUTS ROYAL & SUN FURTHER INTO THE SHADE
The sun has not come out for some time for Royal & SunAlliance, the basket-case business now trying to hive off assets in an attempt to raise capital to shore up its finances.
But back in 1996 RSA was the UK's biggest general insurer, with nearly £7bn in premium income (see table). The company is still Britain's second largest player, but, as it sells off business, it seems only to be a matter of time before the once mighty insurer tumbles further down the ranks.
Many of RSA's problems are undoubtedly specific to its own business. But its demise appears to be part of an industry-wide malaise, primarily caused by savage cutting of insurance premiums in the 1980s and 1990s when most suppliers tried instead to rely on making their money from investment returns.
That undercut profits for many companies and hurried the sale of brands such as Guardian Royal Exchange and Eagle Star, formerly among the top five players in the market, which have now all but disappeared through acquisitions by rivals.
Others - such as Norwich Union - can still boast that they are at the top of the tree, but that is only after a series of major mergers have buffeted their organic growth.
In contrast, the ingenues of the insurance world have so far been attracting organic business hand over fist.
Direct Line was set up by Peter Wood and funded by RBS in 1985 with the then revolutionary business model of cutting out insurance brokers as a way to slash costs and appeal directly to customers.
Last year RBS became the UK's fifth biggest general insurer. Churchill, set up by Mr Wood's protégé Martin Long in 1989, has also had a rapid rate of growth and Tesco Personal Finance, another low-cost operation in which RBS has a 50 per cent stake, has become the fastest growing motor insurer in the UK.Reuse content