The big one is still to come
Philip Macalister looks at why Norwich bailed out of the New Zealand market and why its life and fund management business was so attractive to Royal and Sun Alliance.
Monday, March 9th 1998, 12:00AM
Royal and Sun Alliance's success in picking up the funds management and life business of Norwich Union in New Zealand shows the company is determined to be a major player within the financial services industry.This is the ninth acquisition the company has made in 10 years and it is by no means the last according to managing director Tim Sole.
While rationalisation and demutualisation are two key trends within the financial services industry at present the action is just starting.
Sole's view is that the recent transactions, including the Norwich sale, are merely tinkering at the edge, the real action will come when the big four start rationalising.
He expects that in the next three years one of the top four names (AMP, Prudential, National Mutual and Tower) will disappear, and within five years two will be gone.
Where does that leave Royal and Sun Alliance (RSA), which with the Norwich purchase has passed Sovereign to take up the number five position in terms of market share?
No predictions have been made there, but the company has shown a healthy appetite for acquiring other companies thanks partly to the strength of its London Stock Exchange listed parent company.
Since 1988 RSA's New Zealand business has brought five life and four fire and general businesses, namely; Lombard Insurance, Royal Life Holdings (NZ) Ltd, AMEV Life Assurance, Guardian Royal Exchange, AA Life Assurance, Royal Insurance Fire and General and the insurance bond business of Oceanic Life.
RSA was not invited to tender for the NZI business, which was bought by Prudential last year and it wasn't interested in Metropolitan Life, which Sovereign bought, because of that company's property exposures.
Sole says RSA now has about 8 per cent of the risk market after picking up Norwich's 3 per cent share. As a result the number of policies RSA has in-force will jump from 150,000 to 215,000.
On the funds management side Norwich will add (net) about $770 million to the $800 million RSA already manages. While Norwich had more than $1 billion under management, $300 million of that money was managed on behalf of State and won't go to RSA.
The Norwich purchase is important to RSA on several fronts. Besides the obvious economies of scale which can be gained by rationalising operating costs, particularly in the area of staff, computers and buildings there are gains on the product side.
One of Norwich's attractions was its range of unit trusts, which although small (about $40 million) gives RSA a start in a new product line.
Like many other fund managers which have just superannuation or insurance bond products, RSA have been looking at setting up a range of unit trusts.
Norwich provides a ready made launching pad for such a move, and it is arguably a good one as its strong suits are considered to be cash and fixed interest - the two areas which are favoured when markets are volatile.
Grow or go
Norwich's decision to exit the fund management and risk business in New Zealand illustrates how tough the market is.
According to a February 1997 Standards and Poors report Norwich was keen to improve its market position and "will actively consider suitable acquisitions as opportunities arise."
Chairman David Gascoigne says the company had looked at acquisitions, however never consummated any deals because of differences of opinions in pricing.
"Sometimes our view of price has not been shared by others."
Norwich had a strong balance sheet structure and an excellent solvency and capital position, plus a supportive and respected parent company in the United Kingdom, however its size and lack of critical mass made it vulnerable to competitive pressures.
Its strategy was to build a range of products for a target client-type and use a two-pronged distribution strategy.
The target client was an individual, more than 30 years old with a household income of more than $50,000 who requires risk and investment products, who prefers to deal with an intermediary.
Norwich also chose to embrace the independent advisory community as well as its tied agents, for distribution plus it had a strategy of cross-selling to State Insurance clients.
The success of this strategy is probably best measured by the numbers.
Norwich Union Investments was established in 1994 to sell unit trusts. At the time of sale it had about $40 million under management, and it was not expected to generate a profit until the end of 2000.
On the distribution side Norwich had some major and expensive problems which all impacted directly on the bottom-line.
Commissions paid to the "independent" advisory community ballooned out substantially and they were inflated by the practices of several planners.
Standards and Poors say commission almost tripled to $8 million in 1995 partly due to problems Norwich had with two brokers. As a result Norwich, that year, had a very high ratio of expenses to premiums (70.7 per cent).
Gascoigne was unwilling to comment on how successful Norwich's strategies were. He says the New Zealand market is characterised by the number of small players and that situation is not sustainable in the long term.
While Norwich had tried to grow by acquisition and developing its business at the end of the day it couldn't get to a suitable size quickly enough.
"Because of our position in the market, the decisions has been taken to sell our local life insurance, superannuation, unit trust and fund management interests," he says.
"Norwich ploughed its own furrow and it ploughed it effectively enough," he says.
"It certainly is a tough market," Gascoigne says.
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