Lloyds to merge insurers

TSB subsidiary heads for Abbey Life as bank steps up rationalisation programme

Lloyds TSB is planning to merge the TSB's insurance business with Lloyds Abbey Life, its majority-owned subsidiary, as part of its continuing rationalisation programme.

Under the proposal, Lloyds TSB would sell the TSB insurance business to Lloyds Abbey Life at a fair market price, thought to be in the region of pounds 600m, in return for shares. This would allow some duplicated costs between the two insurance companies to be eliminated and increase Lloyds TSB's shareholding in Lloyds Abbey Life to over two thirds of the enlarged group.

Sources close to the company indicated that such a move would make more sense in the short term than for Lloyds TSB to buy out the minority shareholders in Lloyds Abbey Life, currently valued at pounds 1.6bn. However, they did not rule out a purchase of the minority interests in the future.

The insurance businesses of the TSB and Lloyds Abbey Life serve very similar markets and have been the subject of intense speculation since the Lloyds TSB merger in December 1995. Lloyds Abbey Life competes directly with TSB in life insurance through its Black Horse financial services arm.

They are also rivals in consumer finance, where TSB subsidiary UDT is in competition with Lloyds Bowmaker. Integration of these businesses is also a possibility.

Shares in Lloyds Abbey Life rose to an all-time high of 605p this week on rumours that Prudential would bid, before falling to close at 595p on Friday after both companies dismissed the speculation. Observers were sceptical about Lloyds TSB's willingness to part with what it has said is a key part of its future strategy, and they believe the merger of the two insurance businesses will scotch bid rumours.

"There is scope for cost savings here and that has to mean mergers," said David Nisbet, an insurance analyst at NatWest Securities. "Merging the insurance selling operations would be at least a partial solution to that, but investors are looking for the issue of the minority stake in Lloyds Abbey Life to be resolved sooner rather than later."

Other insurance industry observers believe Lloyds TSB would prefer to buy the Lloyds Abbey Life stake outright, but that it cannot afford to do this so soon after merging with TSB and paying a special dividend of pounds 1.3bn. Instead, the bank will wait for the share price to drop and use its estimated pounds 1bn of free cash flow in the next two years to fund a buy-back.

The expected merger is in line with the plan outlined by Lloyds chief executive Sir Brian Pitman at the time of the pounds 5bn merger with TSB for the enlarged bank to achieve cost savings of pounds 400m a year. Plans are already in place for the whole group, including Lloyds TSB's mortgage arm Cheltenham & Gloucester, to use the same insurance underwriter for all its business. It is understood that Sir Brian, who turns 65 in December, wants to resolve the insurance situation, as well as the amalgamation of the branch network, before he retires.

Once merged, the administrative components of each business would be combined. The brands would initially stay separate and be sold as now through branches of Lloyds and TSB, but they would be reduced to one brand as soon as the amalgamation of the branch network had cleared the necessary legislative hurdles.