Insurance merger is not a popular union

This week’s stock market review

The markets proved their unpredictable nature last week when CGU, the UK’s
biggest composite insurer and Norwich Union, one of the country’s leading life
assurance companies, were wrong-footed by the City following the announcement
that the two companies have agreed to merge. The deal, which was struck in
private and is said to be worth about £20bn, got the thumbs down and their
stock prices were badly hit.

The enlarged group is set to dominate the UK general insurance market, which
includes home, business and motor insurance. But on the life and pensions front
it would still be behind Prudential. The new group would command about 20 per
cent of the general insurance market and about half that of UK life business,
although, with estimated annual premium income of about £26bn, the group would
still be dwarfed on the European stage, ranking behind France’s AXA Group,
Germany’s Allianz, Italy’s Generali and Switzerland’s Zurich.

Apart from the fact that the CGU and Norwich Union deal would threaten jobs,
many City analysts think it represents a bad deal for Norwich Union
shareholders. The company has been the subject of takeover speculations since
it de-mutualised. Many analysts think its shareholders may have lost the
opportunity of receiving a much higher premium had the company been taken over
by a major European player instead.

Dow Jones crash gives investors the jitters

The stock markets exhibited heavy volatility last week when the US Dow Jones
Industrial Average crashed below the psychologically significant 10,000 mark –
its lowest point since October 1999. The cause of the sharp fall was attributed
to investors’ concerns about interest rates and corporate earnings. Many took
flight from shares and pilled into bonds.

But despite the markets’ weakness, the global technology sector remained
strong. During the week the pressure from across the Atlantic had a negative
impact on the UK market. The FTSE went roller coaster, often shedding its gains
and finishing in negative territory.

Centrica has Internet project in the pipeline

British Gas, through its subsidiary Centrica, is seriously contemplating
joining the telecoms gravy train. Centrica, which last year bought the AA, the
roadside breakdown group, has announced plans to develop a mobile Internet
service towards the end of the year. The company is setting aside about £150m
for the project.

The news was well received by the City and the company’s share price rose.
Centrica is also going into financial services and its first product, an
Individual Savings Account scheme, has been developed jointly with Norwich
Union. Centrica last week reported a big rise in its earnings. The jump of
nearly 90 per cent to more than £330m far exceeded analysts’ forecasts.

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