(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By George Hay
LONDON, June 7 (Reuters Breakingviews) - Partnership’s (PA.L) IPO pricing isn’t as conservative as it looks. The insurer’s shares started trading on June 7 over 20 percent above the 385 pence at which it finally listed – which was near the top of the range. With the offering oversubscribed almost 10 times, it might look like the advisers left too much on the table. Yet the pricing could also just reflect how heavily Partnership’s future growth depends on its much-vaunted set of mortality data.
Investors salivate over Partnership for understandable reasons. An aging UK population means that the general annuity market should grow 50 percent to 21 billion pounds by 2016, according to consultancy Oliver Wyman. The sub-category of so-called “non-standard” annuities, which somewhat ghoulishly specialises in higher risk groups like heavy smokers or patients at death’s door like cancer sufferers, should grow 80 percent to 8.1 billion pounds by the same date. Only a third of annuities are currently non-standard, but this could potentially rise to well over a half.
Because Partnership executives have been compiling data on non-standard annuities for well over a decade, the firm is favourably placed to pick up a big chunk of this growth. The detail of who tends to die, and when, allows the company to price annuities at optimum rates without exposing it to excessive longevity risk. If it can continue to exploit this enviable barrier to entry, the IPO price – only 11.7 times expected 2014 earnings, just below the average for the UK insurance sector – looks cheap and explains investors’ interest in all things morbid.
The catch is that Partnership’s 56 percent compound annual growth rate in operating profit between 2010 and 2012 has been noticed. The advantage could erode if other insurers with deep pockets offer the same annuity rates and are ready to suck up losses to muscle in to the market.
That is a long-term risk, as is - at least from the company’s financial viewpoint – improvement in the medical treatment of serious diseases. In the short term, investors know Partnership has a headstart. They also know that a bigger player could also try to buy the company in the future. Hence the firm’s bumper opening day pop.
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- Shares in Partnership Assurance Group rose to 470 pence on its first day of trading, more than 20 percent above the 385 pence level at which the insurer priced its initial public offering on June 7.
- The IPO price, near the top of the 325 to 400 pence range, values the company at 1.54 billion pounds. It was nearly 10 times oversubscribed, with U.S. and UK long-only investors accounting for 75 percent of the book, according to a person familiar with the situation.
- Reuters: London float values Partnership Assurance at $2.4 bln [ID:nL5N0EJ0FK]
- For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Pierre Briançon and Sarah Bailey)
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