My way or the Highway

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Long touted as an acquisition target, Highway has agreed to a takeover by LV. Jonathan Swift looks at the implications of the proposed deal, and why it may succeed where past attempts have failed

LV has stepped up its plans to be a top-five UK motor insurer with a £150m move for perennial takeover target Highway.

The deal was announced on 28 August, a day after Highway was forced to issue a statement to the London Stock Exchange admitting it was in "advanced takeover talks" after its share price rose from just over 49p to more than 64p by close of play on Wednesday. By the end of trading on 1 September the price had settled at 73.5p.

Based on Financial Services Authority returns, LV general insurance managing director John O'Roarke estimated a combined business of LV, currently ranked 10th, and Highway, 12th, would be the sixth largest motor provider. He added this did not include the top-line organic growth of 20% this year alone, and the Nationwide motor deal, which goes live with LV later this year.

Inorganic growth

"At the start of the year we sat down and decided how we should grow inorganically and to look at acquisitions. We examined insurance and distribution companies and concluded that Highway was the right business, in that it was the right size, had the right market position, the right people, had consistently made a profit no matter what the cycle and had the right reputation," continued Mr O'Roarke.

"And that last point was very important because some broker-only companies' reputations have been tarnished by putting on lots of volume and then either withdrawing from certain sections of the market or putting rates up and that does not give the intermediaries the consistency that they require."

Mike Rogers, group chief executive officer of Liverpool Victoria Friendly Society, added: "General insurance is central to LV's growth plans and our stated ambition is to become a top-five insurer in our chosen markets by 2012. This transaction has the potential to accelerate that aim, giving us considerably greater scale in the broker channel."

The deal marks the potential end to a long-running saga that has seen Highway involved in takeover talks with Cox (now know as Equity) in 2004 and Chaucer in 2005, neither of which came to anything (see box) with the parties failing to agree on a price. Under the terms of the latest offer, Highway shareholders will receive, for each Highway share held, 73.35p in cash. Highway shareholders will also receive the interim dividend of 1.65p per share with respect to the six months ended 30 June 2008.

The offer represents a premium of approximately 47% to the closing price of 49.75p per Highway share on 26 August 2008, and a premium of 45% to the average of the closing prices over the 30 business days up to and including 26 August 2008 of 50.63p per Highway share.

Andrew Gibson, group CEO of Highway, said: "This represents an attractive financial result for Highway's shareholders.

Good result

"The board also believes this will be a good overall outcome for Highway's customers and employees. Highway and LV share important values, being strongly relationship driven and committed to technical and service excellence. The combined business will also have greater resources to capitalise on opportunities in the broader general insurance market."

The deal is also likely to help LV in its efforts to become more profitable. In its recent analysis of the 2007 FSA returns, Standard and Poor's director of financial institutions Nigel Bond pointed out that of the top 15 motor insurers, Highway was only one of two that had not relied on reserve releases, bolstering its reserves by 3% and recording a loss ratio of 80.3%. Overall Highway posted an accident year combined ratio of 99.3% compared to the market average of 113.2% (Post, 10 July, pp 24-26).

In stark contrast Mr Bond pointed out LV released reserves to the tune of approximately 30 percentage points and recorded an accident loss ratio of 120%, some way behind the next worse which was 111.2%.

However, Highway is starting to feel the pressure as evidenced by its interim results for the six months ended 30 June 2008 published last week, recording a fall in profit before tax to £1.4m (2007: £11.8m) on gross written premium of £130.7m (2007: £131.2m). On a more positive note the insurer's operating ratio improved to 98.5% (2007: 100.9%), while retail broking revenues were flat at £12m (2007: £12.7m).

Steady as she goes

Highway said gross written premium in the first half was on a par with the first half of 2007, after substantial growth in the first quarter was followed by slower trading in May and June.

Mr Gibson commented: "We continued, however, to see rate reductions from a number of direct players chasing or protecting market share, which has impacted volumes as the year progressed. Having said this, we estimate premium rate strength for the private car market has moved forward by 4% in the half year, and during the same period we have strengthened our own rates by 8%."

Highway chairman Richard Gamble added: "Although the result for the six months ended 30 June 2008 is disappointing when compared to previous years, we are pleased that our investment managers have protected capital during what has been a period of extreme conditions in financial markets in early 2008."

Highway has seven offices and 740 staff, three and 300 respectively of which are dedicated to its broking operation Hero. LV has reported a net head count increase of 500 in the last 18 months, and hopes to add 150 more by the end of the year. The combined business would have more than 2000 staff.

The deal could be concluded by the end of October.

HIGHWAY - A TAKEOVER TIMELINE

April 2004: Planned merger with Cox - announced in March 2004 - aborted with Highway having spent £800,000 in due diligence costs. Cox chairman at the time Peter Owen blames the failure on the two companies differing valuations of one another.

January 2005: Insists it is not for sale despite admitting receiving a number of takeover approaches towards the end of 2004. Fortis and Chaucer linked with the company

February 2005: Confirms merger talks with unnamed party

April 2005: Turns down Chaucer's £85m (36.25p a share) bid for the company after it refuses to budge on the price, with major Highway shareholders such as JO Hambro Capital management believing it below what the business is worth. The estimated cost of the talks is put at £400,000 by Highway

August 2006: Former CEO Andrew Gibson - who quit to join Equity as finance director in June 2005 - announces his plan to return to Highway as CEO again

June 2007: Highway's stockbroker Numis increases its target price for the business to 99p, adding that it believes its broking division Hero is undervalued. Based on prices paid for motor insurers Provident (£170m) and Equity (£570m) in the last six months Numis estimates that Highway could be hypothetically worth between 115p to 125p a share.

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