VICTORIA Mutual Insurance Company (VMI) and British Caribbean Insurance Company (BCIC) have entered into a share exchange that will leave VMI with a minor stake in the larger insurer in exchange for its operational assets, which will be merged into BCIC’s operations.

“The transaction was an all-share deal so no cash was involved,” explained Victoria Mutual Building Society (VMBS) president and CEO, Richard Powell. “The transaction was conducted such that the VMBS exchanged its 100 per cent shareholding in the VMI for 31.5 per cent of the issued shares of BCIC.”

At the end of 2009, BCIC’s capital base totalled $1.27 billion while VMIC had $567 million in total equity, which means that the share exchange translated roughly into a dollar-for-dollar trade.

Now, with the two entities having written combined premiums of $2.77 billion, or 12 per cent, of gross premiums written across the ten general insurers in the industry in 2009 — which was marginally higher than the year prior — the merged entity stands fourth behind AGI, JIIC and NEM in terms of insurance risk aggregates, which for the new firm amounts to $150 billion.

The merger, which was effected on June 1 and which was announced last Friday, followed months of negotiation between the two companies but now the focus have shifted towards streamlining the two operations while the number of staff to be retained still remains unknown.

“A project manager has been engaged to help conduct the integration of both companies,” said Powell. “This process will include a review of the operations of both companies to determine the scope for rationalisation and improvements in operational efficiency and effectiveness that will ultimately benefit our customers. We do expect that there will be opportunities to improve efficiency and it is likely that the new organisational arrangements will result in the redundancy of some positions. However, it is too early to say how many or what the costs are likely to be.”

ICD president and CEO, Peter Melhado said the merger will result in better client care, research and development and cost efficiencies that augur well for the customers and the industry in general.

“Anytime you decide to consolidate the operations of two companies the first place we have to start is with the customer, to improve the operations so that we can improve customer satisfaction,” Melhado told the Business Observer. “Your fixed costs are basically the same whether you have 5,000 or 50,000 customers. When you put two top-line businesses together you get a chance to consolidate your costs and improve efficiencies.”

By Powell’s reckoning, insurance companies operating in a post-Jamaica Debt Exchange (JDX) environment will have to focus more on underwriting performance as investment income earned has been “reducing quite significantly”.

“This means that insurance companies will have to focus even more on organisational efficiency and underwriting performance than they have tended to do in the past,” Powell said. “Therefore, we should not be surprised to see other consolidations of this nature taking place. This does not necessarily imply a contraction in the market.”

Currently, both firms rely heavily on investment income.

VMI reported modest underwriting profits in 2008 and 2009 but BCIC incurred a $200-million underwriting loss last year following a $214 million loss the year prior. Even then, BCIC boasted 34 per cent growth in pre-tax profit to $139 million last year, while VMI made $179 million in 2009 after only recording $18 million in underwriting profit.

ICD Group chairman, Joseph Matalon said that combining the operations would positing the merged entity well for investing in “new products and technology for an enhanced customer experience”.

Melhado told the Business Observer that acquisitions are appropriate at this time because the insurance market is currently over served with too many companies serving too few clients.

“Anytime you are in an industry and there is consolidation and you are not involved you do look around and think whether there is something going on,” Melhado said. “A number of the boardrooms are now looking at whether instead of organically growing they should focus on acquisitions.”

He said as a result, BCIC is seeking other opportunities for expansion through acquisition.

“We have nobody across the table now but we have made no secret of the fact that we are going for further consolidation,” added Melhado.

The merger follows the acquisition of Zenith Insurance Brokers by CGM Gallagher, in April this year. The CGM Gallagher group, also a member of ICD, is one of the largest and oldest insurance brokers in the English-speaking Caribbean with premiums managed in excess of US$120 million. ICD now controls 68.5 per cent of the recently merged companies.