Healthcare market update:

The HSA empire continues to grow

Over the last two years, the Andover-based cash plan provider, HSA, has rapidly grown into a substantial force in the industry. HSA, formerly known as the Hospital Savings Association, is an old-fashioned mutual founded in 1922, which is rapidly transforming itself into a broad-based provider of medical insurance products.

On 5 January 2005, HSA announced a merger with Bristol-based private medical insurer, BCWA. This adds to a growing list of acquisitions in recent times: firstly the Leeds Hospital Fund, a mutual cash plan provider, and more recently, Simply Health, a mutual private medical insurer. BCWA is a provident association, which means that the HSA Group has become the third largest not-for-profit player in the market behind BUPA and WPA. With an anticipated turnover of £275m, it will enter the top 40 of UK general insurers, and HSA will hold some 3% of the UK PMI market.

HSA has traditionally sold directly and does not have strong links to the intermediary market, but the BCWA deal will change that, as BCWA has dealt principally through intermediaries. HSA plans to relocate all its PMI operations to Bristol following the acquisition.

City-based medical provider, General Medical Clinics (GMC), has acquired Finsbury Healthcare

GMC signalled its confidence in the market for medical services in the City of London through its acquisition from Capita of Finsbury Healthcare. Prior to this deal, Finsbury had been part of Aon's short-lived foray into the world of medical services. Capita bought Aon Occupational Health and following the divestment of Finsbury, it still retains other occupational health business around the UK.

Finsbury Healthcare would appear to be a good fit for GMC as it offers the same services - private GP, specialist clinics, physiotherapy, health screening and occupational health. In the City, where location is a vital competitive edge, this adds another key presence for GMC and complements its existing centres at Fleet Street, Tower Hill and Broadgate.

QBE - dramatic exit from group PMI market

QBE, the Australian general insurer, announced on 1 February 2005 that it is pulling out of providing medical insurance in the UK market, citing an inability to make the necessary financial returns.

QBE has worldwide operations in Australia, the Asia/Pacific region, America and Europe. Its European operations contribute c28% of the group's revenues, but we understand that QBE Health's income makes up less than 1% of this revenue.

QBE opened its health insurance division in 1998 and has pursued a consistent strategy of targeting the large group market. Its target was to win business of between £200k and £4m in premium. Its distribution strategy was to use a panel of preferred specialist brokers and intermediaries. Nevertheless, like many other commercial insurers, it has failed to make sufficient inroads into the market and we believe that it has probably amassed less than 1% of the PMI market in its seven years. The large corporate market, which it targeted, is notoriously the most difficult segment in which to make underwriting profits and most insurers are there for market share rather than profit.

QBE's operations centre in Bromley, Kent provides claims administration and nurse-led managed care services to its clients, employing around 50 people. It developed one new product concept, the 'Square Mile' plan, which was unique at the time of its launch and combined PMI with membership at GMC clinics, targeting large City-based employers. We believe that take-up of this new product was disappointing.

We understand that QBE Health has closed its doors to new business and will not renew any existing plans; in fact, they are looking to secure early cancellation where this is possible.