View from City Road: Canny control in the CU camp

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The Independent Online
'OUR AIM is controlled expansion and expansion with quality control. We have no intention anywhere of going for breakneck expansion.' So said Tony Brend, Commercial Union's chief executive, as he explained the reasons behind the insurer's heavily trailed pounds 428m cash call.

They have sturdy necks at CU. The group's premium income grew by almost pounds 1.5bn last year to pounds 5.6bn. As CU itself pointed out, this is equivalent to acquiring a medium-sized insurance company.

Better still, the timing of CU's dash for growth looks impeccable. Rising premium rates have presented 'an unprecedented opportunity' to write extremely profitable business, the company believes. Thus far, there is no evidence of any weakening of quality control. In the last quarter of 1992, CU made underwriting profits on its domestic property, private motor and industrial fire accounts. This contributed to better-than-expected 1992 profits of pounds 31.4m, a pounds 100m improvement on 1991.

The money raised from the one-for-five rights issue will enable CU to keep setting the pace. Besides the UK general insurance market, a key priority is the development of its substantial life insurance business, which last year contributed pounds 118m of profits and represented 36 per cent of group premium income. The life business is valued at more than pounds 2bn, though only a third of this is included in the balance sheet.

CU's reliable earnings from life insurance and its neat side-stepping of the mortgage indemnity fiasco remain key strengths. Although an element of good fortune must have played its part, Mr Brend and his colleagues continue to give the impression of having a better idea of what they are up to than most of their composite-insurance rivals.

Even the timing of the rights issue looks canny. By getting their cash call in early, CU will receive a better reception than other big companies in the rights issue queue. (It has, of course, a better story to tell than many of those currently polishing their begging bowls). By putting an end to the uncertainty, and with the aid of a 5 per cent increase in its final dividend (lifting the total by 3 per cent to 24.35p a share), CU was able to prompt a 12p rise in its share price to 610p. Not bad for a company issuing another 89 million shares at 490p each.

Attention must turn to who's next. General Accident and Royal Insurance are the leading candidates in the insurance sector. In contrast to CU, General Accident's shares fell by a hefty 26p yesterday.

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