Why Osmond deal marks a new era for life insurers

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The Independent Online

Hugh Osmond's £1bn foray into the life insurance sector, formally announced yesterday, is not only a radical departure for the pub and pizza entrepreneur but heralds the start of a new era of consolidation in the sector that has been predicted by pundits for the past few years.

Hugh Osmond's £1bn foray into the life insurance sector, formally announced yesterday, is not only a radical departure for the pub and pizza entrepreneur but heralds the start of a new era of consolidation in the sector that has been predicted by pundits for the past few years.

Mr Osmond, better known for his Punch Taverns and PizzaExpress deals, has snapped up the insurance funds of Pearl, NPI, London Life and National Provident, all of which are closed to new business.

Ned Cazalet, the life insurance analyst, believes there will be as many as 20 deals in this area over the next 12 months, as consolidators quicken the pace in their efforts to win control of a slice of the estimated £190bn that sits in closed life funds.

The intentions of insurance rivals such as Britannic, Old Mutual and Swiss Re to establish themselves as buyers of these closed fund assets have been well known for some time but Mr Osmond and his buyout vehicle, Sun Capital, have kept a relatively low profile in the sector.

He insists that his eye has been on these assets for the past four years, and admits he was only narrowly beaten to Royal & SunAlliance's closed life book, which was sold to Resolution Life for £850m in July.

Resolution and Sun Capital, which has teamed up with TDR for its latest deal, have now quickly established themselves as the two main players in this new sector, both sitting on more than £25bn of assets after their recent spending sprees.

But the two companies could not be more different. While Resolution was formed by Clive Cowdery, an old hand of the insurance industry, and is chaired by the City veteran, Sir Brian Williamson, Sun Capital is the vehicle Mr Osmond used in his highly ambitious attempt to takeover the InterContinental hotels group last year.

Mr Osmond is confident, however, that he will make a success of his latest move, arguing that the life insurance industry has long been in need of a breath of fresh air.

He said: "There are those that might say, and there are those that have said, that after the way the industry has performed over the past 10 years, some outside experience might be a good idea.

"Clive likes to paint himself as the man from inside the industry, but I'm not sure the industry has done a very good job over the past few years."

Mr Osmond dismisses suggestions that with a background in leisure, he will have trouble persuading the policyholders of the likes of Pearl and NPI that he is qualified for his latest venture.

He said: "Firstly, I've spent four years looking at this industry, and we've spent a lot of time looking at this particular deal. Secondly, we've recruited some very strong people. Ashok Gupta, for example, used to be Clive [Cowdery]'s boss at Scottish Amicable."

Another allegation levelled at the Sun Capital-TDR bid team is that they have overpaid for the assets. At 79 per cent of embedded value, Mr Osmond's £1.03bn cash offer is at the top end of the range in which other deals in the sector have been done.

Mr Osmond said: "Embedded value is a very crude measure. To my mind, this is a very high quality business compared with some of the others. It's got very few unpleasant liabilities, and I've always preferred to pay more for a good business than less for a bad one."

Mr Osmond confesses that having come from outside the industry, he is likely to be subjected to even greater scrutiny over the next few months, as the deal is poured over by the regulators. Providing cast-iron business plans, and assuring that there will be no asset-stripping or onerous exit penalties for policyholders will all be necessary for Sun Capital and TDR to finalise the deal.

While Mr Osmond insisted he has not ruled out buying any further closed life funds, he said that having completed such a sizeable first deal, he does not feel under any pressure to continue on the acquisition trail. Although he is reluctant to be drawn on his timeframe for investment in the business, he has put a sizeable amount of his own money into the business, and is confident that in a few years, it is likely to still look very attractive to outside investors if he is seeking an exit.

Mr Osmond said: "I believe that a business which has a decent cash flow for the next 30 years will always look attractive to investors. A good business will always have a home, and this is fundamentally a good business."

With Resolution and Sun Capital having tied up the biggest and most attractive assets in the industry, the raft of other consolidators may have to fight it out over the smaller players if they are to rival the big two. Next on the block is believed to be Allianz Cornhill's UK life book, which is set to be sold to Britannic within the next few weeks. After that, if the likes of Mr Cazalet are to be believed, we may be in for a deal a fortnight as the pace picks up.

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