On your guard at Guardian

As a prime target for a bid, the insurer's shares are riding high. But will it last?
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The Independent Online
THE stock market is abuzz with takeover talk. The sector most frequently tipped as ripe for a bid flurry is the composite insurance industry. And the insurer most often cited as classic takeover fodder is Guardian Royal Exchange. In any list of targets GRE comes near the top.

The recent speculation has nicely bolstered the share price, which has risen by more than a quarter in a couple of months. The shares normally trade at a 10 per cent discount to the sector. Now they are in line with it, closing the week at 267p, just off their all-time high of 277p.

GRE's 27,500 small shareholders might reasonably ask themselves, after such a good run, is now a good time to sell? The answer depends entirely on whether you believe a bid will actually materialise. A bid would easily lift the shares another 20 per cent; but fading bid hopes could see them fall by at least 10 per cent, possibly more.

Putting fundamentals on one side for a moment, the rational investor should therefore hang on to the shares if the odds of a bid look better than one in three. So how much logic is there in a bid for GRE?

The insurance sector is getting more competitive, spurred into action by such telephone-based rivals as Direct Line. And things could get tougher when building societies are freed to sell general insurance from July.

The pro-takeover lobby believes insurers will have to merge to exploit economies of scale and gain cost savings, if they are to stay competitive. Just as banks and building societies are starting to consolidate, insurers will surely follow.

GRE is the prime bid candidate because (1) it is smallish - at pounds 2.4bn, digestible by one of its larger rivals such as Commercial Union or General Accident, and a mere crumb for other mooted predators such as Allianz of Germany or BAT Industries; (2) its management is considered weak and could not count on much loyalty from shareholders; and (3) it has attractive nuggets in its empire, especially in Germany and Ireland.

However, the scope for cost savings through insurance mergers has been exaggerated. Insurers do not have the huge duplicated branch networks that make bank mergers attractive. Nor would mergers help reduce commission payments to intermediaries - which make up around 35 per cent of total expenses. Nor would there be much scope for savings in the international operations - which in GRE's case make up 60 per cent of income. Nor are there obvious cost savings to be squeezed from the life assurance arm. The greatest synergy from insurance mergers would probably come on the spending side: for example, GRE spends pounds 1bn a year on replacing stolen property, car repairs and the like.

On fundamentals, there are no compelling reasons to hold GRE. Premium rates in the UK peaked 18 months ago, so the insurance sector's profitability - which lags behind premium rates by around two years - is just going into the down-phase. The damage to homes and the increase in car accidents caused by the recent bad weather could cost the industry pounds 500m, according to loss adjusters Balcombe, and GRE will have to shoulder its share.

GRE itself is considered one of the weaker composite insurers, with a poor life franchise and a reputation for lacklustre management. John Robins, the chief executive newly arrived from Willis Corroon, is considered solid but unspectacular. The company has yet to prove it will not repeat the blunders of the past. These include a disastrous foray into Italy in 1989, which cost pounds 72m, and an aggressive move to lift market share as the cycle turned down last time.

James Morley, finance director, denies the company is still accident- prone: "That's a harsh view. The track record since 1990 would contradict it." He points to the success of acquisitions in the US and Ireland and that GRE is the only composite insurer not to have gone to its shareholders for fresh capital in the past five years.

Even so, there is not much evidence that GRE is likely to outclass its rivals. The danger is that if bid speculation fades, its shares will again have that 10 per cent discount to the market rating. If you can bear the agony of missing out should that elusive bid actually materialise, now looks a good time to sell.


All types of insurance, life and general. General includes motor, homeowners', commercial, marine and aviation. Forty per cent of premiums come from the UK, with North America, Germany and Eire also big markets.

1991 1992 1993 1994

Premium income pounds 3.02bn pounds 3.00bn pounds 3.30bn pounds 3.70bn

Pre-tax profit/(loss) pounds 56m pounds 150m pounds 751m (pounds 75m)

Earnings per share 5.6p 13.2p 74.5p (14.0p)

Dividend 7.0p 7.0p 7.6p 8.25p

Net assets pounds 947m pounds 1.13bn pounds 1.68bn pounds 1.49bn