Highway has reinvented itself as a lean and focused insurer turning in a reasonable profit. New suitors are eyeing the business for a prospective takeover, but can it do a deal? Caroline Jordan reports
Last week Highway Insurance confirmed it had received approaches from a number of parties interested in buying the business, which are strongly tipped to be Chaucer and Fortis.
Both Fortis and Chaucer have plenty to gain from the purchase of an insurer that is making good returns with a sensible business strategy.
Highway is the UK's 12th largest motor insurer, with 600,000 policyholders. It writes premiums in the region of £250m. The company employs around 430 people, based in five locations, with its head office in Brentwood.
Analysts say one major selling point is the way in which Highway has ruthlessly honed its business model over the past few years from a loss-making unwieldy company without a clear direction, to one which many see as lean, focused and profit making.
It has shut offices, invested heavily in IT and pulled out of sectors it felt were too risky. It spends minimal amounts - certainly compared to direct writers - on marketing, operates from modest premises and constantly looks at ways of reducing claims costs through tight management of repairs and legal expenses.
In 2002, the company's then chief executive, Lord Poole, left the business; a move that many pundits believe was beneficial.
Eamonn Flanagan, insurance analyst with Shore Capital, says there will be no shortage of buyers, even if Fortis or Chaucer do not succeed. "Highway has a chequered history, but in recent years has shown it can tick a lot of boxes."
Flanagan says that there is also venture capital interest in Highway, which he describes as "a tidy business with some good people".
It remains early days for the new Highway Retail division, headed by the highly experienced Paul Cosh, which is responsible for broker purchases - namely A Quote and Direct Motorline. While this is not expected to turn in a profit in 2005, it does have a target of a £5m profit by 2008.
Although the motor market is softening, John Tacchi, managing director of analysts Equity Development, says Highway takes a prudent approach to managing its resources and is unlikely to start selling cover at cut-throat rates.
He says: "Highway has shown it has a sensible business strategy. It is undervalued and it does not surprise me there are a number of interested parties."
Lloyd's insurer Chaucer is likely to be attracted by the fact that Highway trades as an FSA regulated insurance company.
All Highway's motor business was moved out of Lloyd's through the formation of a new company HighCo, which was set up in 1999. This resulted in substantially lower costs, and Chaucer, which has a motor book comprising around 30% of its portfolio, may well look to take advantage of this.
A senior market source said that Chaucer ownership of an FSA-regulated company would be an attraction. But, since the cost of operating at Lloyd's reduced last year, the advantage had lessened.
The source says: "A purchase would be viewed favourably at the moment by investors. It would improve Chaucer's liquidity and produce cost savings and double the size of Chaucer's motor book. A purchase would also help to reduce competition in the market and hold up rates."
Fortis is a strong contender to buy Highway. And what may help its bid is the role of Chris Hill, Highway's underwriting director. He and Fortis's chief executive Barry Smith will have much in common from their Fortis days together.
Hill worked for Fortis between 1997 and 2001 before joining Highway, and is understood to be "good mates" with his old employer.
According to broker Ian Mantel, principal of Hastings-based Manor Insurance: "Chris has brought Fortis's ways of doing things to Highway - it fits the mould.
"In particular, most of Highway's business is done through EDI, which Fortis strongly supports."
Hill is likely to remain part of the deal, although it is rumoured that current Highway chief executive Andrew Gibson, who was appointed in 2002, could be looking for a fresh challenge if Highway is sold.
Ockham Holdings (Highway Group predecessor) is created from the Sturge Group. It disposes of aviation and non-marine to focus on motor.
Ockham disposes of stockbroker Wise Speke as a non-core operation, raising £7.2m.
Ockham enters FTSE Small Cap Index.
In this year, Ockham begins to transfer capacity to HighCo, an FSA-regulated insurance company. Its first pre-tax profit amounts to £5.8m.
Profits warning and additional reserving of £19.1m is implemented. It restructures underwriting, closing an office in Bristol with decision to close others in Chatham and Stockport. It exits taxis, homeowners and couriers markets. New IT system GIOS is installed.
Ockham name is changed to Highway Insurance Holdings. The Ockham HQ in Bishopsgate, London is closed and main office moved to Brentwood. Edinburgh underwriting office closed. Company also announces it will cease financial support for software company New Millennium Technologies.
Ceases underwriting at Lloyd's in total, which results in lower costs. Management of group's £300m investment portfolio is transferred from UK fund managers to Swiss banks.
Announces possible bid talks with Cox Insurance, which are later "terminated with immediate effect" amid rumours of personality clashes between key players. Company buys
A Quote Insurance Services for £4.6m and later Direct Motorline for undisclosed figure. Forms new Highway Retail division to manage these operations.
Source: Equity Development