Investment Column: Norwich dangles a sizeable carrot

Only a broken TV set or an extended holiday recently would have prevented Norwich Union members from being aware of the fact that they have until next Tuesday, 10 June, to apply for further shares in the mutual insurance group's pounds 2.4bn cash raising. Just to make sure, the group is pitching the shares being sold to its existing members, who are already receiving free handouts worth at least pounds 1,500, at a 25p discount to the price other shareholders, including the big institutions, will have to pay. With a strike price estimated at between 240p and 290p, that means members are being offered a discount of around 10 per cent, a sizeable carrot.

It is certainly an attractive deal, although because Norwich is choosing to raise fresh capital at the same time as its conversion to a publicly quoted company, institutions will not be quite so desperate as with Halifax and Alliance & Leicester to buy a meaningful weighting in the stock. That means the silly ratings applied to the building societies are unlikely to be repeated.

That said, Norwich Union is a well-regarded company, operating in a market that is bound to grow fast thanks to the steady unravelling of the welfare state. Its management has an improving reputation and there is still plenty of scope to cut costs. Most of the benefit of that process will now accrue to shareholders. Sales and profits from the UK life business are improving substantially, while the smaller general insurance arm has refocused on personal and small commercial lines and away from long tail policies and large risks. There is a strong healthcare business.

The dividend is well covered by life profits, so a gross yield at the flotation price of near to 5 per cent is both safe and attractive against the rest of the market. With a current "grey market" price of 305p, members should take up more shares, while the equity also looks reasonable value for outside investors.

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