Investment column: CU and GA are caught in a storm

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WHEN Commercial Union and General Accident announced their pounds 14bn merger three months ago it was clear that one of the main reasons for the deal was to counter problems caused by the dire insurance market. Since then things have gone from bad to worse and the deal could not have come a moment too soon.

Severe weather claims have taken a heavy toll on both companies. The worst ice storm in living memory hit Canada, costing GA pounds 72m and dragging profits down from pounds 114m to pounds 63m. Bad weather also cost CU pounds 35m, throwing its general insurance wing into a loss of pounds 4m. Overall, first-quarter profits fell from pounds 102m to pounds 40m.

Both companies have still to absorb the cost of floods in April, which is likely to do similar damage to second-quarter earnings. In recent weeks CU and GA have been two of the worst performing stocks in the FTSE 100, as analysts have downgraded the stock.

And executives at both companies admit extremely competitive conditions in general insurance, especially in commercial risks, have squeezed rates to a level where it is very difficult to hang on to business, let alone make a profit.

But the combined insurer is planning to raise premiums. The two groups believe they can happily boost premiums on personal lines without losing too much custom. But the big commercial business - the sort underwritten at Lloyd's of London - may remain unprofitable for quite a while. In that context, losing market share is a blessing and not a curse. And large cost savings from the merger will help profits.

CU shares firmed 14p to 1,090p while GA rose 10p to 1,077p yesterday, valuing the combined group at pounds 14.22bn. Analysts forecast full-year earnings of 770p per share, putting the group on a multiple of 28. That sounds high. But formal earnings figures fail to take account of capital gains from investments, which would pull that multiple down to around 15. Hold.