A party for two?

Once perceived to be as grey as the suits that dominated the market, the premium finance world is now experiencing a boom of mergers and acquisitions that is brightening up the industry and raising questions about its future.

The industry, based on lending money, typically through a broker, to policyholders to cover the cost of an annual insurance policy, has traditionally seemed a rather lacklustre and fairly stable market.

Firms such as Close Premium Finance, Premium Credit, Kaupthing Singer & Friedlander’s premium finance arm, Amber Credit and Finsure, have long dominated the playing field.

But in the past year, due to M&A activity, the credit crunch and deals cut by insurers with their clients, the market is shrinking into a duopoly with Close and Premium Credit positioned as the reigning authorities.

The once quiet market is now creating headlines, with Close buying Amber Credit in March and prompting rumours that it has ‘ ‘ now set its sights on Kaupthing’s premium finance portfolio, which was put up for sale in March.

The future is also uncertain for RBS-owned Finsure which is to be sold off along with the bank’s insurance arm.

For Ian Sparshott, insurance partner at Deloitte, the activity is a product of the ongoing credit crunch and is unlikely to settle anytime soon.

He says: “The real trigger has been the situation in the finance market. All the main premium finance providers are owned by banks and building societies. The finance market for them is tightening.

“They are struggling to finance their own banking operations, therefore banks are looking to dispose of non-core assets. These are typically those with regulatory capital requirements. If they were to get rid of these, they would no longer have to hang on to capital to fund and support that business.”

In this unpredictable financial climate, the only banks that seem committed to supporting their premium finance arms are Close Brothers Group and Premium Credit’s parent, Bank of America, adds Sparshott.

And indeed, after purchasing Amber Credit from Skipton Building Society for £2m, Close indicated its interest in Kaupthing following the announcement that the Icelandic bank was looking to free up liquidity in excess of £1bn with the sale of its premium finance arm.

At the time, Bob Golden, chief executive of Close, said: “We hope Amber Credit will not be the last premium finance acquisition we make this year.”

Tim Wilson, sales and marketing director at Close, is tight-lipped about whether an acquisition deal was in the works with Kaupthing, but admits: “We would look at any opportunity in the market.”

Sparshott says it’s likely Close or Premium Credit will ultimately acquire Kaupthing’s premium finance arm, as it would be too difficult for a third-party to dedicate funds to non-core assets in the current climate.

Of course the acquisition by either of the market leaders will make it more difficult for the smaller providers to catch up.

“In the current conditions, it’s difficult for the third or fourth player to come in and have a real impact,” says Sparshott.

Already the playing field has been skewed. Insurers are increasingly offering interest-free deals to policyholders, creating less need for premium finance. There are some signs of that abating – Norwich Union recently decided to curb such deals.

“This is a game of big numbers and small margins. Some of the small companies are not making money and are very dependent on their parents.

Tim Wilson, Close Premium Finance

And the ongoing trend of broker consolidation means the distribution pool from which premium finance providers can form partnerships is dwindling.

Soft premium finance rates – they have dropped over the past two to three years – are also taking their toll, with many providers seeing their commissions slashed in order to make up the margins.

“This is a game of big numbers and small margins,” says Wilson. “To keep up with technology nowadays you have to have a fairly large company. If you look at some of the small companies, they are not making money and are very dependent on their parents.

“With the credit crunch, one or two companies are at risk of running out of money entirely.”

That said, the credit crunch conditions also offer the potential for the more successful premium finance providers to grow business.

Although providers are aware now of the increased risk of lending due to potential solvency concerns, it will still be easier for brokers to borrow from premium finance companies than directly from banks, adds Wilson.

“We have a relationship to maintain with brokers,” he says. “We will always try to do a deal and we’re fairly well-informed of what’s going on in the market.”

Sparshott agrees: “I would expect an uptick in people seeking to finance insurance rather than pay for it upfront. Premium finance providers understand the risk of supplying this finance and so it’s probably easier for policyholders to access money this way than to try to get a loan from a bank.”

But some analysts predict another transformation of the market is lurking on the horizon.

As the credit crunch lifts and capital becomes more readily available, additional premium finance providers will enter the market, Sparshott predicts.

“I see the market building itself up again,” he says.

“The premium finance market will always be run separate from insurers. Insurers are skilled at risk and financiers are skilled at lending. There will always be a need to connect to insurers because they provide the distribution.”

Then again, it’s difficult to predict the future without a crystal ball.

More than a year ago Insurance Times questioned key analysts and members of the premium finance market. They predicted that interest-free deals would be slashed in 2008, with the market getting harder and rates moving upwards as financial uncertainty continued.

Kaupthing Singer & Friedlander was also tipped for the top in 2008, in large part due to the major IT launch it had planned for this year, and it was believed Premium Credit would be sold – with some naming AIG as the potential buyer.

The market is definitely keeping analysts on their toes and with the future of Finsure and Kaupthing Singer & Friedlander shrouded in uncertainty, the world of premium finance has become anything but dull.