Royal & SunAlliance catches a fast-moving train
Philip Macalister explains why Guardian Assurance was a good buy for Royal & SunAlliance.
Sunday, November 22nd 1998, 12:00AM
Royal & SunAlliance picked up one of the better kept secrets in the New Zealand financial services industry last week when it announced it had bought Guardian Assurance for $182.5 million.
While the perception of Guardian is an old-fashioned, staid, English-owned life insurance company that still used a tied agency force, the reality is quite different.
Guardian successfully used some innovative management, it had strong financial and investment performance, and it was one of the few firms that could successfully use tied agents.
In the year ending December 31, Guardian reported a tax-paid profit of $18.9 million compared to $22.1 million the previous year. It paid its shareholders a dividend of $16 million this year, and $8.2 million in 1996.
This year's dividend was bolstered by the inclusion of part of the staff super fund surplus (which was shared with staff).
"It's been going like a train," Royal & SunAlliance chief executive Alan Bradley says. "It's a smallish well-run business with nice people that feels comfortable."
He says it is "an excellent business and cultural fit" with Royal Sun. "They employ the same sort of people as us."
Ratings agency Standards and Poors also praises Guardian saying it has excellent capital and reserving positions, a "superior balance-sheet structure" and a conservative risk profile.
Guardian's competitive advantages include a focussed product range, continued strong investment performance and superior balance sheet strength. It says that balance sheet enables it to differentiate itself from its customers by offering innovative products that are more capital intensive than competitors' balance sheets will allow.
Another of its real strengths is the growth of single premium business. For instance in the three months to June 30 Guardian was ranked fifth for new business, behind Sovereign, AMP, BNZ Life, and Tower.
One of its main weaknesses was that it was a medium-sized player in a highly competitive market, thus was vulnerable to takeover.
This said, though, Guardian had tried to grow by acquisition (ironically it kept coming second in the bidding stakes to Royal Sun) and it had been growing organically.
S&P says the company had the resources to fund strong organic growth or a moderate acquisition internally.
Attractiveness
Two of the key assets Royal Sun is getting are Guardian's investment team and its distribution network.
Many people consider Royal Sun's investment performance over the years has been poor. However, it has been boosted by the purchase, nearly a year ago of Norwich Union that was strong in the fixed interest and cash areas.
With the integration of Norwich into Royal Sun, Norwich's Tim McGuinness has taken over the role of chief investment officer and Fergus McDonald (ex-Norwich) runs the fixed interest portfolios.
Guardian brings to the equation strong management in domestic and international equities. Its New Zealand equity manager, Ross Weavers (pictured), has a low public profile, however achieves high returns.
It outsources the research for Australasian equities and overseas equities are managed by parent company Guardian Royal Exchange investment managers in the United Kingdom.
Equities are actively managed to a growth style.
Not much is heard about Guardian's investment performance as it does not (although was planning to) offer unit trusts.
On the distribution side Guardian uses its 136-strong tied agency force and the independent financial planner market. The tied agents account for about 70 per cent of new annual premium business and 40 per cent of lump sum business.
S&P says the tied agency force, "has proven itself to be a stable and loyal source of business".
Tied agents may be a thing of the past for the rest of the industry, however that might start changing soon.
Bradley acknowledges Guardian has been successful with its tied agents, "they are the exception...they do make it work."
He says there are no plans at this stage to disband the group.
He also notes that Guardian have built up a "good rapport with financial planners."
"That is," he says, "an area we starting to go into."
Guardian is Royal Sun's 10th acquisition in as many years, however it is unlikely to be the last.
Bradley says the company drew up, a number of years ago, a list of potential targets and currently it is only two-thirds of the way down that list.
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