Norwich Union's open road

' The £1.1bn purchase of the RAC by Aviva is seen as good news by nearly all of those involved. The stock exchange quickly showed its approval with a 7% rise in Aviva's share price, to 684p.

Analysts also welcomed the 925p offer, calling it a 'knock-out blow' to other potential bidders with Aviva using the strength of its general insurance arm, Norwich Union (NU), to implement cost savings that private equity firms could not match. The RAC board of directors warmed to the approach too, advising shareholders to give the offer their vote of approval.

Great news all round then. Well, almost. Two groups that may not be too chuffed with the offer include staff and competition.

One of the key drivers within the bid offer is the plan to cut 1,700 jobs in the UK as NU uses its Indian operating units and size to reduce overheads at both NU and the RAC. The plan involves £50m of cost cuts at the RAC and £30m within NU. Putting this against the one-off cost of £100m in restructuring and redundancy payments means Aviva should see a positive effect on its bottom line by 2006.

Aviva group chief executive Richard Harvey says: "Norwich Union Insurance is an efficient, high return business with significant scale advantages and strong management. The combination of Norwich Union Insurance and the RAC will be a powerful new force in the UK insurance and motoring services industry and has great potential to create significant value for our shareholders through bottom-line delivery of earnings and cash generation. It enhances the strategic position of Norwich Union Insurance and accelerates its growth plans in a changing marketplace."

But the purchase should not be seen purely through the prism of scale. NU's board will be looking to use the RAC's extensive database of members (2.2 million personal and 4.5 million corporate customers) to cross-sell insurance products, while promoting the RAC's breakdown and other services to its own customer base.

Solution for drivers
NU chief executive Patrick Snowball wants to implement a total solution for drivers, locking on to them when they first enter the market, through the RAC driving school BSM and then holding onto the customer through buying, selling, financing, insuring and fixing their cars.

Snowball says: "We are excited about the revenue opportunities from this combination. When it comes to their car we will help our customers learn how to drive it, buy it, insure it, and if things go wrong, get them back on the road fast."

This total approach to motoring services is not the only thing the competition has to fear, as the RAC is the sleeping giant of the motor insurance market. Under differing, and sometimes indifferent, management the RAC insurance portfolio (now including the AXA Direct book) has never managed to perform anywhere near as successfully as its closest peer, the AA. The book has been taken from panel-based to sole provider (Guardian Royal Exchange / AXA), then back to a panel-based solution with no significant increase in policy numbers.

With NU sat behind a brand as strong as the RAC it is likely that the company will finally fulfil its potential. Whether the RAC retains its panel solution to supplying motor insurance will be the question worrying the majority of insurers who sit on the panel - the main composite insurers.

A market source says: "Norwich Union's basic model is to act as a sole supplier, cherry picking the vast majority of business to underwrite in-house and using BDML as an overflow panel to look after the risks it does not want to write.

"There seems no reason to suggest they won't migrate the RAC book across to this model, significantly boosting their underwriting book and cutting costs to policyholders, much as they did with Hill House Hammond."

The change will be a hammer blow to many composite motor insurers already worried about potential changes at the AA, which has also been considering cutting its panel or switching to a sole provider.

But perhaps the biggest challenge for the rest of the insurance market will be NU's association with the RAC brand. Though no one within NU would admit it, the market view is that the Norwich Union Direct brand does not have the clout of major rivals such as Church-ill, Direct Line or the AA.

Brand firepower
However, with the RAC in its stable NU now has the brand firepower to challenge everyone, including the Royal Bank of Scotland Insurance names.

A market source says: "You have to look at this purchase in terms of brand. No matter how much money NU has thrown at its existing direct brand it has not achieved the kind of customer awareness enjoyed by the other leading names. With the purchase of the RAC, NU finally has a name and a potential for growth that should satisfy the most demanding of targets." This view, minus the perceived weakness in the NU Direct brand, is almost mirrored by Snowball.

He says: "This is a transformational acquisition for Norwich Union Insurance, which consolidates our position as the UK's leading general insurer and substantially advances our motoring services to customers. There is significant potential for growth from realising the full power of the exceptionally strong RAC brand, particularly in financial services." IT