Synergy from Colonial deal may take time

By RICHARD BRADDELL

WELLINGTON - The upshot of the Commonwealth Bank of Australia's expected bid for financial services giant Colonial would be to create a local leader in life insurance, but one that would be still undersized in funds management.

The combined entity would comfortably eclipse AMP in life insurance, but would still be a minnow in the important funds management arena, with less than $1.5 billion in assets.

In New Zealand, Commonwealth owns 75 per cent of fifth-ranked ASB Bank, which in turn owns life insurance and funds management group Sovereign.

Colonial's operations centre around life insurance - in which it is the largest player after AMP - funds management and funds administration through its subsidiary, Jacques Martin.

For practical purposes, a Commonwealth Colonial merger should have few implications for ASB Bank itself, which is also owned 25 per cent by the ASB Bank Community Trust.

Under the leadership of managing director Ralph Norris, ASB has developed an independent personality from its Australian controlling shareholder.

It has become well-known for innovation, with internet banking just one example where it has been first to adopt a new technology.

In common with Colonial in Australia, ASB has also set out to become a force in what has become known as "bancassurance," the convergence of insurance, funds management and banking.

At the end of 1998, it paid $235 million for Sovereign, and last year it dived into sharebroking when it took over the retail business of Warburg Dillon Reed and went into online broking.

Colonial New Zealand, however, is heavily indebted for its New Zealand market strength to its parent's 1998 takeover of British insurer Prudential's Australasian businesses in 1998.

As a result, it leapt from nowhere to number two in New Zealand's life insurance market.

That move was one in a rapid chain of consolidations across the local general and life insurance in the last two or three years, and followed Prudential's own acquisition of NZI's life business the year before.

A CommonwealthColonial merger raises some intriguing questions about how it might be effected in New Zealand.

While there is little imperative to change ASB's banking business, some kind of rationalisation of the insurance and funds management activities would make sense.

Whether that would be done under the auspices of Mr Norris or as an entirely separate venture is one issue.

In that context, it is worth noting that ASB has not rushed to integrate Sovereign.

Founders Richard Coon and Ian Hendry remain in charge, although their retirement in the near future would come as no surprise.

Sovereign and ASB also maintain separate fund management operations, even though they are about the same size and with assets of about $500 million each.

Sovereign also has more than $1 billion in mortgage lending in its own right.

Conceivably, long-time Colonial general manager David May could head the non-bank financial services group.

But that would still leave a decision on whether it would be centred on Sovereign or Colonial's Wellington headquarters.

That might depend on how keen the new group was to maintain the entrepreneurial flair that has typified Sovereign.

A local merger is also bound to attract the attention of the Commerce Commission, given that it would probably control close to half the market.

Published figures make comparisons difficult. But Colonial's in-force premium income of $311 million falls short of more than $320 million for both AMP and Sovereign.