Parisian spring for UK investors: Shares in French insurance companies could offer good value. Paul Durman reports

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THE next French privatisation, the sale of shares in Union des Assurances de Paris, (UAP), France's biggest insurance company, stands a good chance of receiving a warm welcome from the British investment community.

Over the past few months, Kleinwort Benson and Mercury Asset Management, the fund managers, have together raised more than pounds 1bn for trusts to invest in privatised European companies. And this month Fidelity will add to the pool with the launch of its global privatisation unit trust.

Institutional investors hope that companies on offer will have grown fat and inefficient in public ownership and that there will be considerable scope to cut costs and increase profits once they are cast adrift in a sea of market forces.

But they are also banking on the stocks involved being competitively priced. In the UK, much of the profit on privatisation shares has come from the way the Government, keen to make a success of privatisation, sold off many of the businesses cheaply.

The scope for big cost savings among French privatised companies is unlikely to be as great as in the UK - many of them were recently nationalised. But pricing will be just as important as it was here.

This will be doubly so in the forthcoming sale of the state's 50 per cent stake in UAP. The recent weakness of the French stock market has meant that, at Fr185 ( pounds 21.45), UAP's shares are Fr40 lower than at the end of last year.

Moreover, UAP, with annual premium income of about Fr140bn ( pounds 16bn), will be one of the government's biggest sales yet.

As Tim Dawson, an analyst with Lehman Brothers, points out, even at the depressed price, UAP's privatisation will be enormous, worth around dollars 4bn ( pounds 2.7bn).

'The public offer is going to be important,' he says. 'If they are going to drum up a lot of retail demand, investors will need confidence that they're not going to buy at X and be looking at X minus 20 in three months' time. From that point of view, the lower (the price is) the better.'

UAP's underlying trading prospects, however, look good. The French insurance market has suffered the same fierce competition and rising recessionary claims - car theft and arson - as the British industry in the past few years. French insurers have also suffered heavy losses from the dismal state of the Parisian property market.

But, just as in the UK, expectations of earnings recovery made insurance shares star performers during 1993. Moreover, UAP's property-related problems with its Banque Worms subsidiary have been offset by the strong performance of Sun Life, the British life insurer in which it owns a 50 per cent stake.

UAP will reveal its 1993 results next Tuesday. Details of its share sale are expected soon after. The 45-day offer period is likely to run until early May.

Analysts believe UAP's 1993 profits will be around Fr1.5bn ( pounds 172m). But Jacques Friedmann, who took over as chairman in November, says they could rise to Fr3.5bn-4bn.

With other privatisation candidates in difficulty, the French government is also expected to press ahead with the sale of the other state-controlled insurers. Assurances Generales de France (AGF) is heading for privatisation in the second half of the year and will be followed by Groupe des Assurances Nationales (GAN).

Like UAP, both have had their problems. AGF, which has premium income of about Fr65bn, has warned of depressed 1993 profits following its participation in a rescue of Comptoir des Entrepreneurs, a troubled French finance company and its involvement in the financial mess surrounding Banesto, the Spanish bank, through its stake in La Union y El Fenix, Banesto's insurance arm. But its main French insurance businesses are well regarded.

GAN, which has premium income of about Fr50bn,, grew rapidly in 1991 and 1992, taking on a lot of unprofitable business. Profits crashed from Fr2.3bn to only Fr400m in 1992, but as a result GAN is regarded as having enormous recovery potential.

From a British perspective, one of the most interesting questions is the extent to which privatisation could herald a bout of rationalisation. UK insurers are often criticised for being too small to compete internationally. Sun Alliance, the biggest UK insurer by premium income, is less than a quarter of the size of UAP. Commercial Union, the biggest UK composite by market value, is worth pounds 3.4bn, only about half as much as UAP.

But all three French groups are international players, and comments by Mr Friedmann that UAP wants to raise extra capital have fuelled speculation that UAP may well be planning a bid for one of the UK's quoted composite insurers.

But while UAP has made it clear it wants to expand its UK non-life interests, analysts are sceptical.

'Any expectation that they're going to come in and bid for a UK composite is pure fantasy,' says Mr Dawson. 'They can't afford it. And buying a UK composite is a very expensive way of buying UK insurance exposure.'

Insurers are notoriously fickle, switching companies to find the lowest premium. Anyone who buys an insurer can have little confidence the business is going to stay. A purchaser could be left with an expensive infrastructure it does not want.

Analysts suggest UAP would be better off buying a smaller unquoted insurer and expanding it rapidly by undercutting on premium rates for a few years.

Meanwhile, GAN owns GAN Minster, which is in the UK general insurance market, as well as General Portfolio, the life insurer. And AGF still retains a large general insurance business, despite announcing the sale of its small British life insurance arm three months ago.

Much will depend on how their privatisations turn out. French insurers look cheap when compared with their UK rivals because they generally trade at discounts to their net asset values. But they also make lower returns on their equity. And they have encountered big problems with their banking and other non- core businesses, casting doubts over the quality of the earnings.

UAP is, at least, well known to foreign investors, who already own nearly a quarter of its shares. 'UK institutions know the companies,' says Mr Dawson. 'They have just got to be attractively priced.'

(Photograph omitted)

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