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Promina sheds light on problem child

Shoeshine

Friday 4th April 2003

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Investors scouring the Promina prospectus will be able to piece together yet another testament to the investing acumen of Sir Ron Brierley, our very own South Pacific Warren Buffett.

Sir Ron's Guinness Peat Group, it will be remembered, bought a 50.8% stake in financial services group Tyndall Australia in 1992.

Tyndall sat fairly quietly on GPG's books until 1998 when Sir Ron used it to take a tilt at Tower Ltd.

Tower's directors fought off the hostile bid and pushed on with demutualisation and listing. GPG, deprived of an opportunity to gain critical mass for Tyndall, didn't hang around, selling its shares into the takeover bid from Royal & SunAlliance Australia, now the Aussie part of Promina, in May 1999.

GPG's share of the loot was £145 million, about $426 million in those days. It booked a whacking £95 million ($279 million) profit.

Promina's chief executive, Michael Wilkins, knows the story well. From 1989, before GPG came aboard, until it sold out he was Tyndall's managing director.

After the Promina takeover he said he didn't know whether he'd hang around but he ended up accepting the new owner's top job. One of his first acts was to merge Promina's funds management functions under the Tyndall brand in Australia and under Guardian Trust in New Zealand.

All went well for a while but in the second half of 2001 Promina "made a strategic decision," as it puts it, "to concentrate on general insurance."

It put its financial services businesses ­ "life risk" (life and disability insurance), asset administration, funds management, and distribution ­ in Australia and New Zealand up for sale.

During 2002, the prospectus notes, the process soaked up senior management time and "frequent market rumours of an impending sale unsettled both staff and intermediaries." These hit Promina's funds management inflows and new life premium business.

The businesses attracted plenty of interest, according to Promina, but market conditions and the units' geographical and product diversity meant nobody made a high enough bid and they were taken off the market.

Shoeshine isn't sure Promina is quite telling the whole story here. Page 219 of the 226-page document shows Promina's foray into financial services has not been a success, particularly on this side of the Tasman.

Australia did fine until last year, when a $A418 million goodwill writedown took the division to a $A421.5 million loss. Given the Aussie outfit made profits pre-tax in all three years the size of the writedowns is surprising. How much of them related to the Tyndall purchase isn't revealed.

The New Zealand business copped a $A46.3 million writedown in 2001, when it made an after-tax loss of $A37.3 million. This followed an $A8.5 million loss in 2000.

In 2002's clean-out its value was written down by a further $A7 million taking it to an $A8.7 million loss.

Promina blames falling sharemarkets, uncertain economic conditions, the disruption caused by the unsuccessful trade sale and "prevailing market and valuation sentiments in respect of financial services businesses."

Wilkins told Shoeshine the New Zealand unit's losses were "not necessarily operational," attributing them to writeoffs of goodwill and other costs and integration expenses of "acquisitions made in the late 1990s."

The carrying value of the life risk business is now the "embedded value," $NZ259 million assuming an 11.75% discount rate, Ernst & Young assigned to it while the other financial services units are carried at their estimated market value, which isn't disclosed.

Shoeshine is drawing a speculative bow here but he reckons most of the writedowns on both sides of the Tasman relate to Tyndall.

He bases this on Wilkins' comments; in the late 1990s Promina didn't buy anything else of any note on the financial services side of the business.

Two Tyndall businesses ­ Guardian Trust Australia and Tyndall Meridian Trust ­ have been sold. Other units, not necessarily Tyndall ones, have "had their operations rationalised and refocused."

Promina's general insurance business on both sides of the Tasman is rock-solid and it has operated a life risk business in New Zealand since 1882 and in Australia since 1833.

This is not as much as to say Promina bought a dog. Some of the damage to Tyndall was self-inflicted, providing a salutary lesson on the effects on these sorts of businesses of trying and failing to conduct a trade sale.

Some of the rest at least can be put down to the state of the markets and market sentiment. But GPG shareholders can be forgiven for feeling smugly satisfied with the amount of Promina cash swishing around in their company's bank accounts.

Meanwhile Promina is on the prowl for acquisitions in its core general insurance business.

At the retail float price it will have a market capitalisation of $2.3 billion and no debt. Chief executive Michael Wilkins says the company "clearly has significant gearing capacity," up to the limits allowed by the Australian Prudential Regulation Authority.

With about $440 million of annual gross written premiums Promina is number two in New Zealand general insurance after IAG, which has premiums of about $900 million under the State and NZI Insurance brands.

AMI, Tower, QBE, and Lumley follow under the $200 million mark.

In Australia IAG is also number one with premiums of $A4.6 billion.

Suncorp/GIO follows with $A2 billion, then Promina with $A1.6 billion, and QBE and Allianz with $A1.3 billion each.

Premiums are on a rising cycle and are expected to climb further as the industry addresses past poor underwriting returns and absorbs the risks of war and terrorism.

Observers reckon the consolidation of the Australasian industry has some way to run but shareholders won't want to see money spent on empire-building at the top of the market.

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