Acquisition will double insurer's market share

Tower Group has bought Australian life insurance business PrefSure from South Africa's Liberty Group for A$145 million ($159.4 million), doubling its market share over the Tasman and propelling the former minnow into the sector's top five players.

Tower chief executive Jim Minto said the acquisition of PrefSure - which has annual in-force premiums of A$270 million, about the same as Tower - would give his company an 11.2 per cent share of the Australian life insurance market and annual premium income of more than A$540 million. That makes the combined group the number five life insurer in Australia.

"If we keep growing at the present rate we could quite quickly go to number three," said Minto.

Between them, the two businesses captured 15.8 per cent of new business in the year to September, a share exceeded only by market leader Commonwealth/Colonial Group.

The booming Australian life insurance industry has been good to Tower as it continues to fight back from the string of disastrous writedowns and poor results it suffered at the beginning of the decade and more recently lacklustre showings from its New Zealand life business.

Minto said PrefSure's strong business in providing life insurance products to master trusts complemented Tower's robust position in the individual life insurance market.

Master trusts are consolidated investment accounts which back Australia's superannuation funds. Life cover is bundled with superannuation products in Australia.

However, Sydney-based PrefSure also has a respectable individual life insurance book mainly distributed through independent financial advisers.

Minto said PrefSure's group business, although not as profitable dollar for dollar, was growing at about 15 per cent a year compared with the 10 per cent annual growth in individual life insurance sales.

The deal would increase shareholder value through combined business growth and operational synergies, he said.

Tower is to fund the purchase through a combination of A$45 million in existing cash resources and A$100 million in debt. The purchase will increase the company's gearing level from 27 per cent to 36 per cent.

Tower said the acquisition did not preclude the payment of a dividend. "Dividend payments will be considered later in the year with other factors also to be taken into account."

The transaction is expected to be completed by March 31 and Tower hopes to complete integration of PrefSure by July.

Minto said Tower would continue to look for acquisition opportunities in Australia and New Zealand.

ABN Amro analyst Nick Caley said the purchase looked like a good one for Tower. "This is probably the best acquisition in terms of quality they've come across so far."

With PrefSure's strength in the fast-growing group or master trust segment, and much better fundamentals in Australia than New Zealand, "it does do something for them".

"The ball-park price doesn't look too bad but with any acquisition it comes back to execution; they've had a patchy track record on that front."

Tower shares closed up 4c at $2.12.