How pros view Promina

Insurance company floats have not had a stellar track record in recent years. When one thinks of insurers that have been listed on the Australian Stock Exchange, one tends to think of the failures HIH Insurance, in particular.

Reinsurance companies (companies that sell insurance to insurers) have fared little better. Remember NewCap and ReAC?

And, on the life insurance side, there's AMP, of course.

Add to that the general state of the sharemarket at the moment, and one is left to wonder why anyone would try to float an insurance company right now.

But that's exactly what Royal & SunAlliance Insurance Group or, more specifically, RSA Overseas Holdings is trying to do. The UK-based insurance group is offering shares in its Australian and New Zealand subsidiary, which has changed its name from Royal & SunAlliance to Promina.

It wants to sell between 900 million and 1.057 billion shares to the public and institutions, at a price likely to be between $1.40 and $2 a share. The exact price will be determined early next month.

Promina's prospectus is available now. It's different from other recent insurance company floats, such as NRMA, because shares are not automatically being issued to existing policyholders and customers.

It's not a demutualisation if you want shares, you'll have to apply for them. If you don't want shares, you won't get them.

Working out whether you want to buy shares in the float is one thing. Working out how to allocate money to the float is another.

Should you raise funds by selling down other shareholdings and if so, which ones? Or should you allocate fresh capital, thus increasing the proportion of your share portfolio held in insurance and financial services stocks?

These aren't easy questions to answer. It depends on each investor's individual position, and more often than not the task will be made easier with the help of a competent adviser.

But given that professional investors are grappling with the very same issue, their views are probably a good place to start.

Angus Geddes, co-founder of the Fat Prophets share information service, says if you're coming to the insurance sector for the first time, and committing fresh capital to the float, Promina represents a very good entree. However, he says a blend of Promina and QBE insurance shares is probably even better.

If you already have exposure to the insurance sector, it's likely to be via IAG (the former NRMA Insurance), Geddes says. IAG looks relatively expensive compared with QBE and Promina.

He says IAG also looks to be at a disadvantage for the time being, because it holds a greater proportion of its reserves in equities than QBE and Promina do.

An insurer has to account for its investments at their market value on each balance date, and declare any movement up or down as a profit or a loss. It means that if equity markets fall which Fat Prophets thinks is likely over the next 18 months or so then an insurer with a lot of its reserves held in equities will suffer.

``We would rate Promina over IAG," Geddes says. ``If you had to have either Promina or IAG, we would go for Promina, because its asset mix is more conservative. IAG has a lot greater exposure to equities. But we still like QBE that's our number one pick in this sector. We see QBE going through a really robust cycle over the next couple of years. They're the clear market leader in Australia we would not sell QBE."

A fund manager, who asked not to be named because he'll be bidding for shares in the upcoming float, said Promina was a solid business, well-capitalised and attractively priced. He said he had already begun reducing the exposure of the funds he manages to IAG, to raise money to buy Promina shares.

He said IAG had performed well since its float, and it was appropriate to take some profits and reallocate the money to Promina. The result of this strategy would be to leave his funds' exposure to the insurance sector pretty well unchanged, and take advantage of a good buying opportunity.

He said his funds' exposure to QBE would only change as a side-effect of the switch from IAG to Promina.

Michael Wilson, chief investment officer for Ausbil Dexia, says his firm is still working through the Promina offer.

Wilson says the way Promina will be assessed, and ultimately how the decision will be reached to include or exclude it from a portfolio, would be no different to any other stock.

``Our approach is to review it as a stand-alone stock, and then rank it against all the insurance stocks and indeed all the stocks in the S&P/ASX 300 index," Wilson says.

``We judge it on its relative value to the insurance sector first, and the whole market second.

``We look at consensus-type estimates of earnings. We have our own estimates of earnings, and if we think the consensus is too low we would be more inclined toward the stock, and if we think the consensus is too high, we'd be less inclined to it."

Wilson says if a decision is made to include Promina in Ausbil's equity portfolios it will be at the expense of an existing holding.

``We would downweight an existing stock that we think has less appeal, using the same criteria. It's a relative game.

``The style of our process is to decide which sectors we want to underweight and overweight, so we've already made that decision before we get to this stage."

If Promina sells 1.057 billion shares at $2 each, it will raise up to $2.1 billion. However, the price Promina will sell its shares for is to be determined by demand by institutions between May 7 and May 9.

On May 7, institutions begin bidding for shares. The number of shares they say they want, and the prices they're prepared to pay for those shares, will determine both how many they get, and how much they pay for them.

These institutional investors will have a close eye on the state of the equity market, and they have the flexibility to vary their bids right up until midnight on Friday, May 9, the Friday before the Monday that shares start trading on the ASX.

If markets fall dramatically between when bidding opens and midnight on that Friday, institutions are likely to revise their bids downwards, and the price that retail investors will have to pay for their Promina shares will also fall.

The good news for retail investors is that the hard yakka working out what the shares are worth will be carried out for them, by a large group of seasoned and competitive professionals who are dead keen not to pay a cent more than they have to.

In any case, the offer is structured so that retail investors pay 10c less than whatever institutional investors end up paying.

Fat Prophets' Geddes says the Promina float looks attractive.

``We quite like Promina," he says. ``Certainly, the pricing is quite compelling. If it went off for $1.75 you are looking at a [price earnings] multiple of seven to eight times, and that's quite attractive because it's a sharp discount to others, like IAG and QBE, which are trading at 13 to 14 times.

``And the yield is going to be attractive at that level, too something like 6 per cent, and it will be fully franked, I believe."

Geddes says the net tangible asset backing of the Promina shares (the total value of the company's assets less the total value of its liabilities, divided by the number of shares on issue) is about $1.71.

If the shares eventually sell for $1.75 each, which is the mid-point of the range that Promina has used in its prospectus, it means investors will be paying only very slightly more than NTA for the shares.

``And that's nice compared to other insurers, which are [selling for] around 2.2 to 2.3 times," Geddes says.

He says retail investors also might be the beneficiaries of some fortunate timing. RSA announced its plans to sell its Australian and New Zealand businesses when the sharemarket was in a lot better shape than it is now.

He says it appears RSA is committed to the timetable and is pushing ahead even though it knows it will have to offer the business at an attractive price to sell it.

``It looks like they are committed to getting it away and getting the cash through the door," Geddes says.

``Plus, retail investors get that 10c under the price that institutions pay."

Mike Wilkins, managing director and chief executive of Promina, has been on a national roadshow for the past fortnight promoting the upcoming float to potential retail and institutional investors.

Wilkins acknowledges that the state of the sharemarket is not the very best for a float, but he says the insurance industry is in good shape.

``I think the timing is OK clearly not ideal, but OK," Wilkins says.

``I think what we're bringing to the market is a pretty good story, in a sector that's becoming increasingly attractive.

``What's driving the timing is the strategic decision Royal & SunAlliance has taken internationally to get out of this part of the world.

``We announced the timing of this last November and one thing the group is keen to do, having announced it, is bring it to market.

``Clearly these are important businesses to RSA and there's been a lot of effort put into making sure they have come to market in as clean a state as they can.

``We're finding the people are starting to get back to the fundamentals in general insurance.

``They are looking at the need to make underwriting profits. That's good news for consumers."

Wilkins says a profitable insurer is an insurer that will remain in business ``to pay legitimate claims as and when they come in".

The Promina group includes a few brand names that many consumers already will be familiar with, including AAMI, Australian Pensioners Insurance Agency, Tyndall and Shannons.

It operates in nine different segments of the general insurance industry, including motor, home, NSW compulsory third party (CTP), workers' compensation, marine and property.

In addition, it has businesses in the superannuation, risk insurance, pensions and annuities segments of the financial services market.

``The way we have put this business together, we're saying we don't want to be all things to all people," Wilkins says.

``We're talking about concentrating on our chosen sectors, a `specialist focus' model. We're using a multi-branding strategy and we tailor our offerings to the specific needs of the market we want to be in.

We don't have a big sausage machine sitting behind what we are doing, pumping out the same sausage and slapping a different brand on it.

One other point you might like to consider is that Promina plans to use its newly created shareholder register as a mailing list for some of its products and services. If you wish to remain a shareholder only, and don't want to be pestered with offers of insurance, you'll need to contact the company's head office in Chatswood to have your details removed from the mailing list.

HOW THEY SLICE IT

If you're ... An employee applicant

You're guaranteed to get ... $5000 worth of shares guaranteed minimum and general preference in allocation for shares applied for above $5000 worth.

If you're ... A pre-registered customer applicant

You're guaranteed to get ... $5000 worth of shares guaranteed minimum and general preference in allocation for shares applied for above $5000 worth.

If you're ... A non pre-registered customer applicant

You're guaranteed to get ... $3500worth of shares guaranteed minimum and general preference in allocation for shares applied for above $3500 worth.

If you're ... A pre-registered general applicant

You're guaranteed to get ... $3500worth of shares guaranteed minimum and general preference in allocation for shares applied for above $3500 worth.

If you're ... A broker firm offer applicant

You're guaranteed to get ... Broker Firm Offer allocation

Source: Promina prospectus

HOW THE FLOAT MEASURES UP
Key statistics
* Retail application price                              $1.90
* Institutional offer indicative price range            $1.50 to $2.00 a share
* Minimum number of shares available under the offer    900 million
* Total shares on issue following the offer             1057 million
* Net earned premium (forecast 2003)                    $2,395 million
* Reported net profit after tax attributable
to shareholders (forecast 2003)                 $188 million
* Dividend per share (forecast 2003)                    7.1 cents
* Net tangible assets per share                 $1.71
                                At lower end of range   At upper end of range
* Institutional offer price             $1.50                   $2.00
* Retail offer price                    $1.40                   $1.90
* Offer size                    $1.6 billion            $2.1 billion
* Market capitalisation         $1.6 billion            $2.1 billion
The above should be read in conjunction with notes appearing in
the "Key offer statistics" of the Promina prospectus.
SOURCE: PROMINA PROSPECTUS