Suncorp expands in New Zealand

Suncorp has announced that its New Zealand subsidiary, Vero Insurance, has purchased just over 11% of the stock in Tower Limited, a local competitor. The company has also proposed to the board of Tower that Suncorp acquire the remaining 89% of the company at a price of NZ$1.30 per share, or around NZ$219m.

That's ahead of a deal already on the table – and supported by the board – to sell the company to Canada-based insurer Fairfax Financial for NZ$1.17 per share.

Suncorp's New Zealand insurance division had a rough six months to December, as we outlined at its interim result. Net profit more than halved to $36m due to the Kaikoura earthquake last November and residual reinsurance costs from the 2011 Canterbury earthquake. Premiums grew 5% thanks to growth in Home and Motor lines, though the underlying insurance margin was a pitiful 3.8%.

‘The proposed acquisition would consolidate Suncorp's position in the New Zealand general insurance market, creating a business with gross written premiums of NZ$1.6 billion. The combined business would generate significant shareholder value through cost efficiencies, as well as reinsurance and technology synergies,' said Suncorp New Zealand chief executive Paul Smeaton.

Tower has roughly a 5% share of the New Zealand general insurance market, making it the fourth largest insurer – behind Suncorp, IAG and QBE – and we expect a business combination would lead to margin improvement through a reduction in duplicate costs.

It's early days; the board of Tower could reject the bid or Fairfax Financial could raise its offer price. We'll keep you posted as things play out. Suncorp's stock trades on a price-earnings ratio of 16 and a fully franked dividend yield of 5.4% and we continue to recommend that you HOLD.