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Tuesday, August 1, 2000
Counter strike

It was over a hundred years ago that an expert was commenting on the use of horses in London. He said that at the current rate of traffic the accumulation of manure would close Regent Street completely within four years.

Of course, this didn’t happen: such projections to a finite point never do work out. Nevertheless one is tempted to predict that at the current rate of mergers and acquisitions in the short-term industry there will only be one insurance company left in South Africa within two years. Such exaggerated projections would be inappropriate if the merging companies were relatively small. But it is the huge companies that are now disappearing too.
The latest on the execution block is CGU, the third biggest insurer in South Africa with a net premium of R1,4 billion, as at last year. Its new owner is expected to be Mutual & Federal.
CGU, you will remember, was previously known as Commercial Union, a company that was originally a ‘composite insurer’; that is, it had both a short-term insurance and a life assurance operation. CU Insurance took over General Accident in 1998, and a few years before that it had acquired Sentrasure.
CU Life took over the long-term business of Protea, before itself being swallowed up by Metropolitan Life. There are also merger talks currently underway involving Metropolitan, Nail and Sanlam. Sanlam, of course, controls Santam, which acquired Guardian National recently and this is one reason put forward for M&F’s counter-move on CGU.
Ironically, it was Mutual & Federal that got the short-term business of Protea when that company was separated and disposed of in 1997. Protea had previously bought Phoenix and had acquired the short-term business of the Prudential. Along the way M&F has acquired other businesses including NEG and the short-term business of AA Mutual.
Bruce Campbell, MD of Mutual & Federal recently confirmed the company’s intention to acquire CGU Holdings. This follows successful negotiations with CGNU plc (UK), which owns 51% of CGU, and Metropolitan Life, which holds 28% — a combined 79% of the issued share capital. The deal is now subject to a satisfactory due diligence exercise and will also require the approval of the regulatory authorities.
“CGU is a reputable insurer with a good book of business,” says Mr Campbell. “Integration of the company into M&F will bring about definite synergies and will expand the overall operational base. In addition CGU has exposure to some lines of business where M&F has not been active in the past, and these will undoubtedly enhance our product range.”
The combined company will have annual premiums of approximately R4,5 billion which represents a market share in the region of 20%. “Whilst size in terms of premium income is not a prime objective for us, there are definite benefits arising from economies of scale. The increased buying power will enable M&F to exercise greater control over suppliers’ costs and hence the cost of claims - all of which is designed to contain the price of insurance products.
“Underpinning our vision is the importance of providing financial stability for our policyholders, and a continued high solvency ratio signifies a superior claims paying ability.
“As South Africa becomes more involved in global markets it is vital that we position ourselves to challenge foreign competition. The critical mass that we will gain as a result of this merger will enhance the benefits of the existing e-business strategies, and will bring about greater business efficiencies.
“By expanding our intermediary and customer bases we are more able to spread risk, which is the very essence of insurance business. I have no doubt that the enlarged group will be able to realise meaningful cost savings and deliver a more cost effective product to the insuring public.”
Meanwhile, M&F says that the acquisition will have no effect on its e-business model that it is developing (see accompanying story). By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:13.7 1st August, 2000
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