Nrma The Provider Of Mutual Satisfaction

Sydney Morning Herald

Saturday August 12, 2000

Anthony Hughes

To the relief of the passengers, NRMA this week smoothly changed gear from mutual to corporation, reports Anthony Hughes.

NRMA Insurance ends its first week on the sharemarket having achieved what few other demutualisations have: keeping the punters buyers and sellers mostly happy, despite the inevitable overhyping of the float.

Having priced the shares at $2.75, the top end of the indicated range, NRMA chairman Mr Nick Whitlam and chief executive Mr Eric Dodd were able to sidestep criticism that they didn't achieve the best price for the main seller, the highly politicised road service association.

The association sold an 8 per cent stake into the float, raising $322 million to fund the ongoing running of the road service, while it continues to be biggest shareholder with a 2 per cent stake.

The easing of the share price later in the week meant that the 300,000-plus NRMA shareholders who decided to cash out before the shares listed missed out on only a small premium.

And while hype ahead of Tuesday's sharemarket debut singed the fingers of some retail investors, who bought heavily above $3, the settling of the stock around $2.89 was regarded by most as an acceptable outcome though still a premium to most respected stockbroking analysts' valuations.

``It's trading much closer towards what people expect it to be," said Commonwealth Securities director Mr Paul Rickard, whose firm did much of the early buying on behalf of retail clients.

``I think NRMA has been a much more successful listing in the sense we have a much more orderly market [than previous demutualisations]."

Rothschild's head of equities, Mr Andrew Brown, said: ``It's been very smooth. It ended up where the company had hoped. It's above the issue price but not ridiculously so.

``It shows that in the whole process of coming to a valuation, the market seems to have worked quite efficiently." The situation is much different to that of the AMP float. AMP soared to $45 in its first day of trading in June 1998 before settling at around $22, still well above any sensible valuation.

The main difference, according to brokers, was that because of its sheer size AMP was considered a ``must-have" stock, prompting institutional investors to aggressive buy shares on the first day of trading to ensure they could build index-weight positions.

While it is a top 30 company and the largest general insurer in Australia, NRMA is still not considered a must-have for the influential fund managers. As borne out by the brokers who did most of the early trading, it was retail investors scouring for another successful large IPO that were the primary buyers of shares.

National Mutual, now called AXA Asia Pacific, was a different story again, because the default option if a member did not respond to the prospectus mail-out was to receive cash. The default option in NRMA was to keep the shares. In the case of National Mutual that meant about half of its members sold out, reducing the pressure for institutions to build holdings once the shares listed.

Despite AXA's poor financial performance, investors in the October 1996 listing are well up on the $1.50 a share retail price set at the time of listing.

In the case of Colonial's listing a year later, the timing coincided with a strong market for financial stocks. Its management, too, was focused on expansion and its shares rose fourfold in the three years before its takeover by the Commonwealth Bank.

While NRMA is a general insurer rather than life insurer, it faces similar challenges to ensure it does not repeat AMP's mistakes.

That NRMA is trading closer to what respected analysts say is its true value should reduce the risk of disappointment as it sets about the task of implementing its growth strategy. The strategy is simple, but not necessarily easy increase the penetration of financial services into the traditional insurance customer base and separately find new channels through which to sell insurance products.

How demutualisation changes that strategy is unclear.

Mr Whitlam said on Tuesday that the sole purpose of the demutualisation was to unlock the value of the organisation ``for the very people who created it", or in his grander interpretation of events, to promote the ``embourgeoisement" of society.

Being a mutual did not stop NRMA expanding.

In the past two years it has bought MLC Building Society and SGIO Insurance, both of which are cited as important add-ons to expand NRMA's product range and geographical spread. It also forged an insurance joint venture with RACV.

Perhaps the most obvious impact of demutualisation is to highlight NRMA's surplus capital (estimated at more than $500 million) and the need for management to use it wisely.

As ABN Amro's Mr Nick Caley pointed out earlier in the year, ``so long as NRMA Insurance management does not find a productive use for shareholders' capital, there is the risk that a rival management team will".

While takeover provisions restrict a bid for NRMA, ``the surplus capital position could be easily liquidated by a potential acquirer and used to part-fund a takeover of the company".

According to Mr Dodd, the surplus can be supplemented with debt to make a $2 billion acquisition and if there is no suitable acquisition out there (as some suspect at the moment), he will spend it buying back NRMA shares.

FACT FILE

First trade on Tuesday was $3.02, compared with facility price of $2.75.

Shares trade as high as $3.10 and as low as $2.82 over first four days.

More than 300m shares changed hands (not including 387m in facility shares put through on Tuesday).

© 2000 Sydney Morning Herald

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