Europe's insurers eye UK market

News Analysis: The euro is likely to ignite merger mania among insurance giants
CONSOLIDATION IN the financial sector is back on the agenda, with both banks and insurance companies dusting down the files on their favourite bid targets in the wake of the 25 per cent fall in share prices since September.

The temporary pause in activity which followed the outbreak of global financial crisis came to an end three weeks ago with Norwich Union's pounds 315m bid for London & Edinburgh. Now investors and deal-hungry corporate financiers are itching for more.

Since the Norwich Union deal, two of Ireland's biggest financial services groups, Irish Permanent and Irish Life, have revealed they are in merger talks. In the UK, as far as the really big deals are concerned, talk is still running ahead of action but the interest is clearly there.

After Britain's largest insurer, Prudential, signalled an interest in Halifax a fortnight ago, the focus has shifted to the general insurers where the disappearance of the smaller players has left Guardian Royal Exchange, as the UK's smallest composite insurer, looking dangerously exposed.

Since the purchase of healthcare outfit PPP in a pounds 435m deal earlier this year, John Robins, GRE's chief executive, has made a valiant stab at putting together a strategy for remaining independent. But shareholders are far from convinced.

The 5 per cent jump in GRE's share price yesterday after The Independent reported that AXA/UAP, the world's largest insurer, was considering a bid says it all. Last week when GRE said it was putting pounds 300m into PPP and integrating its life and healthcare businesses, the shares hardly moved.

One City fund manager sitting on a big chunk of GRE stock said yesterday: "It isn't ideally sized for the markets they are addressing. We've always felt a European player was the most likely to bid."

Disappointing third-quarter results from Royal & SunAlliance and CGU, both products of recent UK mega-mergers, show how difficult it is for even the big guys in the industry to make headway in the face of a worsening global economic climate and fierce competition. For a small and largely domestically focused business such as GRE, the prospects are grimmer still. Meanwhile the UK life business, which is supposed to be less susceptible to the vagaries of the general economic climate, has also been unnervingly soft.

On the whole the UK insurance sector has largely been left to its own devices. The 1980s saw French insurers AXA and UAP snap up Equity & Law and Sun Life respectively, and Germany's Allianz buying Cornhill. But more recently continental European insurers have tended to give the UK a wide berth.

This is partly because of the high prices in the sector, but also because of the wave of hostility to European integration which saw Britain turn its face against participation in the European single currency and persuaded the big European players such as Allianz and Generali that mainland Europe was a higher priority.

British insurers returned the compliment and concentrated on expansion either in traditional stomping grounds in Anglo-Saxon markets such as Canada, Australia and the US, or on purely domestic merger deals.

Latterly, though, the ground has been shifting. With the launch of the euro threatening to kick-start the creation of a genuine pan-European market in insurance and savings products, the less insular of the top UK insurance executives have realised that even after mergers such as the Royal and Sun Alliance deal, in global terms British insurers still lag giants such as AXA and Allianz.

Meanwhile, the growing conviction that the Government will take Britain into the euro is reawakening interest in the UK market place among the coterie of big insurers who have made being pan-European their top strategic goal.

Peter Constable at Robert Fleming, the investment bank, who has acted for a number of big continental players in the past, says: "The more positive Britain is on EMU, the more the bigger players are interested in the UK." Claude Bebear, chairman of AXA, has been open in his belief that Sun Life and Provincial, its 72 per cent-owned UK quoted offshoot, needs to grow.

He is not alone. Gianfranco Gutty, chief executive of Generali, the secretive Italian insurer which earlier this month announced it was taking a 5 per cent stake in Commerzbank, Germany's fourth-largest bank, said earlier this week that the firm had been looking actively at opportunities in the UK.

One thing that has changed since August is that deals are becoming harder to finance, particularly for companies trying to pay for acquisitions by issuing shares. Another is that shareholders are looking more critically at deals and asking for more evidence that after initial enthusiasm has faded there is enough meat to keep share prices moving up in the long term.

But for those with good credit ratings, or who can pull of mergers of equals, there are deals to be done. Stephen Dias, insurance analyst at Goldman Sachs, says: "There are a number of big insurers like Allianz, Generali and AXA that see themselves as pan-European and global, and are seeking to expand their presence in markets where they see themselves as lacking size.

"Second, there are the bank insurance deals such as Fortis's acquisition of Kredietbank and ING's purchase of BBL in Belgium.

"Last, you are seeing more realism on the part of those purely domestic firms that do not have either of those strategies but are under pressure to react to those that do. Consolidation is very much alive."