February 19, 2018 / 6:49 AM / 3 months ago

Australia's HCF, HBF in talks to become third-largest insurer

* Not-for-profits HCF and HBF in merger talks

* If approved, new group to rank behind Medibank, Bupa

* Likely first in a string of deals in industry -analyst

By Paulina Duran

SYDNEY, Feb 19 (Reuters) - Australia’s largest not-for-profit health insurer HCF on Monday said it is in talks to merge with Western Australia-based peer HBF to create the country’s third-largest health insurer, in what analysts said was the first sign of industry consolidation.

The cash-less merger of the not-for-profit health funds would create a group with almost a fifth of the national market, the two said on Monday.

With an expected 18.4 percent market share, the new group would rank behind Medibank Private Ltd and British private healthcare group Bupa, which for years have held over half of the Australian market, according to analysts.

“Strategically, this merger would create a truly national player with combined strength to grow both brands and better compete in what is a challenging industry,” said HCF Chief Executive Sheena Jack.

Many small providers are likely to consolidate to remain profitable, analysts said, as high compliance costs and increased regulatory scrutiny weighs on margins.

“The whole idea of consolidation in this industry is long overdue,” said John Hester, insurance analyst at Bell Potter.

“I expect this to be the first of a series of mergers or acquisitions in this industry,” Hester said.

The national market counts over 30 health insurance providers, with the top five accounting for over 80 percent of market share, according to Deutsche Bank analysts. Not-for-profit health funds account for almost a third of the industry.

If approved by the competition watchdog and the country’s prudential regulator, the merger would create a combined entity with A$4 billion in assets and higher bargaining power, HCF said in a statement.

Shares in competitor Medibank were 1.9 percent lower on Monday while the broader market was 0.6 percent higher.

The merger would not require cash outlays from either party and the new entity will have a board comprised of equal numbers of directors from each entity, the insurers said. (Reporting by Paulina Duran)

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