Analysts say Prudential-P&O merger may offer mutual synergies.

Wednesday 4 August 2010. By The StarBizWeek.

Petaling Java: The potential merger between Pacific & Orient Insurance Co Bhd (P&O Insurance) and Prudential Holdings Ltd is likely to result in mutual synergies, analysts said.

While P&O Insurance would be able to leverage on Prudential’s strong name to sell its products, Prudential in turn, may leverage on P&O Insurance’s distribution network and niche client base.

“P&O Insurance has a large client base. No doubt, its client base is from the lower income segment, but there are ways to bundle and cross sell.” said Yeonzon Yeow, who is research head at Kenanga Research.

In a note, Kenanga said P&O Insurance’s client base, good balance sheet and niche customers were a good fit for foreign insurers that were looking for entry into the Malaysian market or to expand their market share.

Besides foreign insures, local banks might also be keen to acquire general insurers as part of their strategy to grow their fee-based income, it said. At this juncture, the deal is at an initial stage with )&) Insurance seeking Bank Negara’s approval to commence talks with Prudential for a stake sale to the latter.

Sources said that Chan Thye Seng, managing director and CEO os Pacific & Orient Bhd (P&O) had been planing to exit the insurance business for some time.

P&O’s main focus is in financial services and information technology. P&O Insurance is a 100% owned subsidiary of P&O, in which Chan holds a 51.4% stake.

P&O Insurance s strong in the general insurance segment where it holdstop position for third party and motorcycle insurance. It has a market share of 19.1% and 41.9% respectively in these two segments.

“Prudential wants to diversify its income stream and is looking to expand into Asia. Earlier this year, they were looking to acquire American International Grou’s Asian unit, AIA, but that plan failed to materialize as they could not get shareholder approval.

“Nonetheless, it is obvious that Prudential is looking to increase its market share and is one an expansion mode”, Said a banking analyst.

On the operational side, P&O has scaled up its premium sales without increasing its management and agency team. Its financial year ended Sept 30, 2009 (FY09) ratio of claims to the corresponding premiums was around 60% but it was paid on a bigger portfolio.

“We expect the claims ratio to drop by 3% to 57% in FY10 to FY11 as its risk management is robust against a larger and more diversified portfolio,: said Kenanga, cautioning that the claims ratio for motorcycles was rather hgh.

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