Andrew Cave says the track record for insurer M&As is not good, but that doesn't stop the talk
' Mergers and acquisitions among insurance companies are a stock market enigma. The markets love the idea. Insurers, particularly those operating in different territories, should bolt together beautifully. Economies of scale ought to be able to be wrung out of combining and consolidating different operators. The savings should be considerable. So why haven't there been any for ages?
First, the record of the past is not wholly encouraging. For every successful deal like the takeovers that formed Aviva, there was a disaster like Royal & SunAlliance, where the bungling of the integration effectively crippled the company. By the time, it had put right the management mistakes, it had missed out on an insurance boom.
In life insurance, the Lloyds TSB takeover of Scottish Widows was hugely expensive and came just before a stock market crash that weakened insurers' balance sheets.
Neither has the European incursion been a complete success. AXA and Aegon still do not dominate Britain's insurance market, despite their takeovers of Sun Life & Provincial, Guardian Royal Exchange and Scottish Equitable.
In the Lloyd's market, sizeable mergers are almost mythological. Apart from the recent management buy-out of Cox, the largest combinations of quoted Lloyd's underwriters in recent years have been comparative tiddlers.
The complexity of the businesses, the liabilities on the balance sheets and the egos of executives are the classic issues cited, though the key one is of course price.
So why is takeover talk on the agenda again? Recently, bid vehicle Corvus has been linked with Royal & SunAlliance, which is also said to be a possible target for AXA. Or is AXA more interested in Friends Provident, in which it has built a 15% stake?
Royal's shares are depressed by the company's continuing efforts to disentangle itself from US liabilities. Friends looks vulnerable because of the depolarisation changes in the UK life industry, which should see business switch to the top five players.
Will there be more deals? Almost inevitably. AXA has some way to go to meet its ambition of being a leading player in all its markets. Groupama is saying it wants acquisitions after emerging from a long period of restructuring and consolidation. And last week, Eureko and Rabobank decided to merge their insurance operations, Achmea and Interpolis, to create the largest insurance group in The Netherlands.
While stock markets stay buoyant, the portents for major deals look encouraging, though the deal that the markets most want to happen looks unlikely in the short-term.
Consider Aviva: strong in Europe, weak in Asia and lacking an American operation. And then look at Prudential, which has a huge Asian business and an under-sized US business but little of substance in Europe. Company insiders say a deal will never happen because the groups are so different that there is not enough overlap to secure substantial cost savings.
But Prudential has an ambitious new management, while Aviva will at some point have to handle the succession to chief executive Richard Harvey. Insurance takeovers are coming back on the agenda. You can bet your bottom dollar that imaginative investment bankers are already licking their lips. IT
' Andrew Cave is the former associate city editor of The Daily Telegraph