A three-way rural insurance tie-up may be on the horizon, with agricultural supply business Ruralco offering to merge with fellow industry player Elders.

Elders sold its insurance underwriting operations to QBE in 2009 for $270 million and QBE is now subsuming Elders’ insurance exposures into its own risk operations.

But the agency side of Elders’ insurance is a 25/75 joint venture with QBE. Elders says its share of insurance earnings was $6.2 million in the 2011 financial year, implying the joint venture earned $24.8 million.

Ruralco’s insurance operations – also effectively an underwriting agency business – are smaller, with a gross profit of $15.9 million last year. CEO John Maher says a merger would yield value “in a range of areas, not just insurance”.

He told insuranceNEWS.com.au Ruralco’s insurance business is “small” because “we’re quite a new company”.

Elders, Ruralco and QBE all say it is too early to comment on how insurance would be dealt with in a merger, but it seems likely economies of scale could be gained by merging the Ruralco operations into the Elders/QBE relationship.

This was emphasised in a letter from Ruralco Chairman Richard England to his Elders counterpart John Ballard last month.

“We would expect strong synergies to exist between the two organisations, which would mean the transaction could meet [Ruralco’s] criteria of being value-accretive for both sets of shareholders,” he said.

Elders says it is waiting for a more detailed proposal from Ruralco before responding.

Ruralco is the largest Elders shareholder, having built a 12.04% stake in recent months.

It has previously ruled out interest in a hostile takeover, but in a statement last Thursday Ruralco said it will “further consider its options over the coming weeks”.