View from City Road: CU well placed for expansion

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The Independent Online
COMMERCIAL UNION'S second-quarter profit of pounds 2.5m made for two pleasant surprises from insurance companies in as many days. Much more of this and they will get themselves a reputation for making money. Still, this morning's results and likely dividend cut from Royal Insurance should restore a sense of perspective.

CU's result looks even better when one remembers that it has provided pounds 15m for the bomb that destroyed its City of London head office. The company is still showing an interim pre-tax loss of pounds 18.1m - an improvement on last year's pounds 26.3m - but looks likely to break even over the year.

All the big composite insurers are feeling the benefit of large increases in premium rates. The difference with CU is that it is expanding strongly at the same time. Premium income from UK general insurance in the first half was 19 per cent higher at pounds 709.9m. Much of the advance came from personal motor insurance, where premium income continued to grow at more than 50 per cent to reach pounds 102m.

CU insists it is maintaining its underwriting standards and denies that it is aggressively undercutting its competitors to build market share. It says it is simply building its portfolio in an area where it has previously been underweight. So far one cannot quibble with the results - CU's private motor account produced a small yet admirable underwriting profit in the first half.

The precedents are not favourable, however. Paribas Capital Markets points out that when Guardian Royal Exchange and General Accident made a burst for growth in motor insurance they subsequently produced the worst results in the sector. CU's expansion in the US in the early 1980s proved disastrous. The key difference is that CU is expanding into a strengthening market. If CU has it right, the result could be considerable. The additional market share could be worth an extra pounds 80m a year in profits.

With its large life insurance business contributing a pounds 50.7m profit in the first half and only limited exposure to mortgage guarantee insurance, CU is well placed. The chief executive, Tony Brend, and his team still look the smartest crew on the block. The shares at 443p have come back far enough to be worth buying.