Premium finance - Acquisitions on the cards? - Opportunity knocks, says Golden

While the rest of the insurance market may have been subject to the sort of merger fervour that has kept the investment bankers happy and the corporate lawyers in comfort in recent years, the same can hardly be said of the premium finance market.

True, there have been rumours galore in recent times that mergers and acquisitions were in the offing, especially relating to the big two cats of the jungle, Close Premium Finance and Premium Credit. However, speculation never materialised into fact and the market plodded on, quietly making money and keeping brokers happy. Yet now, given Close Premium Finance's £2m purchase of Amber Credit, it seems that conditions could finally be right for a dramatic shake up of this most conservative of sectors.

According to Bob Golden, chief executive of Close Premium Finance, the takeover of Amber Credit from Skipton Building Society - which included a refinancing of Amber's loan book to the value of £65m - makes sense because of the synergies between the two - Close deals predominately with commercial lines and Amber personal. Besides, Golden claims, there are the obvious advantages of the cost savings that can be made when two companies are merged, as well as the potential for Close to bring long-term investment to its new company.

Yet it seems that there could be bigger fish to fry with the wider market now in a state of flux, in no small part as a result of the credit crisis which has led to severe financing problems for many of the companies out there. Premium Credit has itself been linked to a takeover by Towergate in recent months, while Kaupthing Singer & Friedlander has conceded openly that it is touting its premium credit arm around. As Richard Pyman, managing director and head at Asset Finance, said following the decision in February to put the division up for sale, "a high level of interest has already been shown and the group's preference is to find a single buyer for the entire division on a going-concern basis". So far, however, nobody has stepped forward into the public realm.

Golden refuses to be drawn on whether or not Singer & Friedlander is in its sights, though he does concede that "there are other premium finance companies that have put information memoranda around the market relating to a sale and we have looked at those", adding that Close hopes to finalise other sector acquisitions this year.

"Premium finance seems very staid from the public relations point of view, though for a broker it can be highly remunerative," Golden comments, suggesting why the current conditions are so propitious for takeover activity as a result of a poor financial environment: "In the past few years, the premium finance sector has struggled because there has been a soft market, which is bad news in itself. Alongside the soft market has been strong competition from insurers offering interest-free loans while the consolidators have been squeezing margins ever more. The environment for the premium finance companies has been very tough and those companies without critical mass have struggled."

Crucial to the current unstable environment has been the US-led credit crunch, which it now transpires is having a severe knock-on effect for the UK premium finance sector, according to Golden: "If premium finance providers haven't got secure lines of credit then they will struggle to supply credit to customers. Close Brothers has no exposure to mortgages whatsoever. We have long lines of credit that are deep and long term." Whether or not this will be enough to fend off any interest from others keen to make rich pickings in an obviously weakened part of the insurance market remains to be seen. What is clear is that, after years of inertia, we could finally witness some interesting corporate activity in the world of premium finance.