PICC pulls in $696 million amidst huge demand

PICC raises the bar for the rest of China''s insurance companies lining up to IPO.

PICC, China's leading property and casualty insurance company, has raised $696 million pre-greenshoe in Hong Kong's biggest and most over-subscribed IPO this year. Pricing came at the top of the HK$1.60-$HK1.80 range. Post greenshoe, to be exercised when the company starts trading, the total raised will be $800 million.

CICC and Morgan Stanley co-led the issue, which saw the retail tranche oversubscribed by 135 times.

The company achieved its target of increasing it solvency ratio: post-IPO, its ratio of net written premiums to surplus will drop to 2.3 for 2003, and will be 2.4 in 2004. The lower the figure, the greater the company's ability to pay claims. The China Insurance Regulatory Commission specifies a minimum level of four.

Prior to the IPO, the company was contravening China Insurance Regulatory Committee rules by not having enough reserves to cover potential insurance claims.

The issuance values the company at 1.27x book, based on 2003 pro forma numbers, and a price equivalent to 14.3x 2003 earnings.

That testifies to the attraction of the deal, since several comparable insurance companies in Korea and Japan are valued at a discount to book because of capitalization problems.

Helped by the participation of the US insurance giant AIG, buoyant markets, as well as the growth story in China's rapidly growing insurance sector, the offer saw with huge demand from Hong Kong. This left little for international investors, including the Public Offer Without Listing (POWL) in Japan, complained some bankers.

The initial offering consisted of 3.005 billion shares, of which the retail tranche was initially earmarked to get 10%. However, whenever an offer in Hong Kong is more than 100 times subscribed the allocation to retail is automatically increased to 50%.

In the case of the institutional tranche, 1.1 billion shares went to AIG, leaving just 850 million shares, post-greenshoe, for international fund managers. Following the exercise of the greenshoe, another 450 million shares will go to institutional investors.

In percentage terms, post greenshoe, 43% will be in retail hands, 32% with AIG, and 25 % with international institutions, including POWL.

The POWL received 3.4% of total deal pre-greenshoe; or about 7% of the whole international tranche. Demand again exceeded supply by a wide margin: demand was around $1 billion for $24 million of stock with virtually zero price sensitivity. Thanks to the sheer surfeit of demand, the POWL was nowhere near as big as POWL arranger Nomura would have liked. In fact, it is the smallest POWL ever, but the strength of the demand shows the high net worth Japanese client base that subscribes to these issues is losing none of its enthusiasm for the China story.

The Hong Kong retail tranche was over-subscribed 135x and institutional demand was 15x, pre-greenshoe.

Apart from AIG's strategic stake, the biggest single block allocated to any single investor was 3%.

"This issuance didn't only hit the button with all the China focused funds, but also sector and global funds. There's a huge amount of money being recycled from the US into Asia and focused on China at the moment, and it took some of that," says one banker.

The popularity of the issue benefited both on money coming from US and the attractive equity story.

"The regulatory environment for insurance in China is unusually good. Plus, casualty and property, with one year contracts, is less risky than the several decades of life insurance. And you've got very strong growth in an underdeveloped market," says one banker.

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