Norwich Union shares likely to be in short supply

Members should not let the discount offer pass them by

On the face of it, applying for extra shares in Norwich Union looks to be a no-brainer. A fixed 25p discount should give plenty of protection against a weak opening, even if the flotation price is fixed at the top end of the projected range. And if the performance of the other demutualised stocks is anything to go by, a weak opening is not likely.

Let us look at the figures. Norwich Union says it expects its shares will float at a price between 240p and 290p, to give a total market value of around pounds 5.5bn, placing it number two to the mighty Prudential in the life assurance league and just a whisker ahead of Legal & General.

About pounds 3bn of the flotation value will be in the form of shares distributed to members, with the bulk of the pounds 2bn in new money raised to be reinvested in the with-profits fund, with an estimated pounds 670m worth of shares to be sold on behalf of policyholders unable to accept the windfall allocation.

Norwich Union expects the issue to be taken up roughly 50/50 between the institutions and private investors. Although some members may sell early, releasing stock to help satisfy institutional appetites, this still does not seem like an adequate supply for the professionals who own on average 80 per cent of the UK stock market. This has been the problem through all these demutualisations. Even if you are not an indexed fund, most managers run a closet index matching position, so adding in a big company in a sector makes owning the shares mandatory.

Look at the problems this has created in banks. The sector has been driven up hard by those who fear they will not obtain sufficient Halifax shares to maintain their weighting. This discourages the private client sellers who will have seen how badly those first out of Alliance & Leicester faired when dealings commenced. Fewer sellers means more buying of other available shares. Ratings rise. So it goes.

The life assurance sector is not in quite such a stretched position, but Norwich Union is no small player. Moreover, the life assurance sector of the stock market index almost certainly under-represents the importance of this part of the industry to the UK as a whole. We still have such major businesses as Standard Life remaining in mutual hands, while quite a lot of the ex-mutuals - Scottish Mutual, Scottish Amicable - have fallen to other predators. There is no doubt the lines of demarcation between various financial services businesses is being fast eroded.

This is part of the justification for Gordon Brown tossing City regulation into the air and letting it all come down into a single all-encompassing bowl. Super SIB, the new financial regulator, will cover everything. The bent bank, the rogue trader, the defaulting broker, the poorly sold pension will all be the responsibility of the new regulator. I wish Howard Davies well. If anyone can do it, he can.

But back to Norwich Union. Valuing a company like this is not easy. Richard Harvey, chief executive elect, referred to the embedded value that may be applied to a life assurance company.

This is a term much beloved by actuaries (yes, the chief executive designatechose this profession having, if anecdotal evidence is to be believed, found the accountancy profession too exciting) and is based upon current assets plus discounted future profits from business already written.

The life business, by far the most important single part of Norwich Union's ongoing operations, probably accounts for pounds 3.6bn of embedded value. Add to that pounds 770m for general insurance and the pounds 130m that will be left out of the money raised by the sale of shares, after paying for the cost of the flotation and investing in the with-profits fund, and you reach pounds 4.5bn. A premium of 20 per cent is probably not unreasonable, but I would not be surprised to see it move higher, particularly if the closet index players get to work.

There are 2.9 million Norwich Union members - lucky people who have with- profits policies with this demutualising insurance company. Some 2.2 million of them are UK-based. What they will receive will depend upon the size of their policy and how long it has been in force.

My wife receives a mere 300 shares, the minimum as a with-profits investor. Investors in unit-linked policies, which more closely reflect stock market performance, will receive 150 shares. A friend will gain 17,750. All of them have the opportunity to apply for shares at the public offer at a discount of 25p to the issue price. They can apply for anything between pounds 400 and pounds 100,000 worth of shares.This is not a chance they should pass by.

Brian R Tora is chairman of the Greig Middleton investment strategy committee and can be contacted on 0171-655 4000