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Promina tests Chinese walls and brokers' patience

By Shoeshine

Friday 21st March 2003

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Down in sharebrokerland a few collars are starting to smoke over the bizarre arrangements for this year's "Mother of all Floats," the $A2 billion-odd Promina sale.

Private client advisers are once again fuming over the rules that give fund managers a two-week information edge over Joe Blow investors.

The Australian press this week was full of leaked Promina valuations from the army of investment banks signed up to get the float away. The Sydney Morning Herald reported ABN Amro had a $A2.6-3 billion ($2.5-3.2 billion) valuation while JP Morgan had a sum-of-the-parts valuation of $A2.1 billion.

According to the Australian Financial Review Macquarie Equities values Promina at $A2.02-2.48 billion while Goldman Sachs has a "peer group-adjusted" valuation range of $A1.9-2.3 billion.

Under the rules both here and over the Tasman on pre-marketing floats, brokers acting in the float can release research reports only to the institutions that will take part in the "book-build" to price the shares; private investors will have to wait until the prospectus is out.

Promina, the Australian and New Zealand arm of embattled British insurance company Royal & SunAlliance, will release its prospectus in early April and aims to list on the ASX and the NZSE on May 12.

Investors have been invited to pre-register their interest in return for guaranteed minimum allocations of $A5000 worth (Promina customers) or $A3500 (everybody else).

The squawking is coming from sharebroking private-client advisers, who are taking calls from clients asking why they're being asked to register their interest in a float they know next to nothing about because they're denied access to the research they've helped pay for.

Nobody seems to know quite what purpose this rule is supposed to serve. It seems utterly pointless when the "restricted" reports appear in the media before the ink is dry.

In any case investors will need a touchingly naive faith in Chinese walls to put much stock in the analysts' valuations. All four brokers named above plus, in New Zealand, JB Were, ABN Amro Craigs, ASB Securities, Forsyth Barr and First New Zealand Securities are lead managers, co-lead managers or co-managers that have signed on to get the float away. Salomon Smith Barney seems to be about the only broker with research capability that isn't involved but it doesn't have a valuation yet because it doesn't have Promina's 2002 financials.

The institutions poring over the marketing brokers' research are already reported to be questioning the high valuations they put on the company.

The lowest figure to date, Goldman Sachs' bottom-of-the-range $A1.9 billion, is handy as it comes to just over £700 million.

That's exactly the amount London's Financial Services Authority has identified as the shortfall in the British parent group's capital adequacy. Royal & SunAlliance's share price is dragging at 20-year lows following claims losses from the World Trade centre terrorist attacks, flooding and asbestosis.

Hence its eagerness to start marketing a float just days before the Iraq invasion deadline and in the face of weakening growth and flaccid equity markets worldwide. The pre-registration invitation is plainly an attempt to see if there's enough demand out there to go ahead with a float at all.

One worry for investors is that there's no indication yet that the issue will be underwritten.

The marketing job is made doubly hard by the fact insurance companies in these parts aren't exactly sharemarket darlings. The memory of HIH's demise with $A5 billion of debts is still fresh and AMP and Tower's troubles are a daily press diet.

In fact Promina shouldn't be compared to any of those insurers. Most of its income is from general insurance, direct insurance (home and motor) and financial services such as funds management and superannuation administration.

The general insurance division lost a packet in 2000 but returned to profit in 2001.

In 2002 Promina made a $A121 million profit before abnormals but goodwill write-offs and provisioning against future claims of $A425 million left it with a $A289 million bottom-line loss.

According to the Australian press, the prospectus will forecast a $A188 million net profit this year and $A291 million in 2004.

General insurers around the world have been benefiting from the rising premium cycle driven by the September 11 attacks and insurance industry undercapacity.

Australian insurers IAG and QBE, the two companies to which Promina is most often compared, are in good heart.

IAG reported a 27% higher $A62 million December first-half net profit, citing big rises in both its underwriting and insurance profitability and reduced exposure to equity markets.

QBE posted a $A279 million gain, up from a $A25 million loss in 2001, and said it expected to do half as well again this year "subject to relatively stable financial markets and large claims not exceeding allowances in our business plans."

If an American-led attack on Iraq triggers a fresh round of terror attacks, premiums are likely to rise further. Only those, like Royal & SunAlliance, with exposure to major single-entity risks will suffer.

Despite the size of the issue and market uncertainty, Royal & SunAlliance may yet be able to get the float away. Everything will depend on the price; local institutions aren't exactly awash with cash these days and can be expected to drive a very hard bargain.

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