Corporate Finance : Focus: Global Equity/DRs

Insurers and Reinsurers Flood Into Equity Capital Market In Wake of Hurricanes

Since Hurricane Katrina plowed into the United States Gulf Coast at the end of August, insurers and reinsurance companies have been the biggest issuers of stock in the US capital market. The insurers are raising money not only to pay claims and to stave off downgrades by the ratings agencies but also to position themselves to take advantage of an expected rise in premiums during the important insurance-renewal season starting in January.

Nearly half of the total follow-on equity capital new-issuance volume in the US from September 1 through October 10 came from the property and casualty insurance sector, according to Dealogic. Follow-on stock issues, as opposed to initial public offerings, are often made through shelf registrations. Using such procedures, the registration is already on file with the Securities and Exchange Commission, and the details of size, price and terms are filled in at the time of sale. This enables companies to raise money more quickly.

The SEC eased its rules even further last month to enable insurance companies to tap into the capital markets more easily so they can pay victims of hurricanes Katrina and Rita. “The SEC will do what it can to see to it that every victim’s insurance has the capital to back it up and that there are no unnecessary delays in paying claims due to a lack of liquidity,” SEC chairman Christopher Cox said in a statement.

The agency said its division of corporate finance would allow insurance and reinsurance firms with exposure to Katrina and Rita to simply send a notice by fax to activate an offering document and they would be allowed to offer up to 20% of the amount originally registered. “Our disclosure rules remain in force, but we will work to ensure that our regulatory processes do not interfere with market access,” Cox said. The SEC, which acted after warnings from rating agencies that hurricane losses for some insurers could result in capital shortfalls, said the regulatory relief would remain in effect until December 1, 2005.

Hurricane Katrina is likely to result in at least $34.4 billion in personal and commercial property loss claims, according to New Jersey-based ISO’s Property Claim Services Unit. That preliminary estimate released in early October would make Katrina the most costly US natural disaster ever, surpassing the $20.87 billion in inflation-adjusted losses from Hurricane Andrew in 1992. The estimates exclude losses to property insured under the federal flood insurance program.

The estimates of damage could be significantly different, depending on whether strong winds or flooding are to blame. Jim Hood, Mississippi’s attorney general, filed a restraining order against the insurance industry to stop it from using flood-damage exclusions to get out of paying claims.

This year’s hurricanes struck at a favorable time for the insurance industry, which had largely recovered from the large claims of September 11, 2001, and was beginning to reduce premiums. The US property/casualty insurance industry’s net income after taxes rose to a record $31 billion in the first half of 2005, up 29% from the year-earlier period, according to an analysis by the ISO and the Property Casualty Insurers Association of America.

Still, reinsurance companies based in London and Bermuda had considerable exposures to Katrina. Hamilton, Bermuda-based insurer ACE, providing updated losses in an SEC filing, said it will post losses of up to $700 million after tax in the third quarter related to the two Gulf Coast hurricanes. The company announced plans to raise $1.25 billion in a stock issue, plus an additional $187 million of stock to be purchased by the underwriters. The company said that proceeds from the public offering, of nearly double its expected losses, would be used to take advantage of growth opportunities in the insurance and reinsurance markets. New York-based rating agency Standard & Poor’s affirmed ACE’s A+ financial rating following the announcement, saying that the stock issue would improve the company’s capital adequacy.

American International Group, or AIG, issued an initial estimate of its third-quarter catastrophe losses, mainly from Hurricane Katrina, of $1.1 billion after tax. Standard & Poor’s upgraded AIG to a “buy” from a “hold,” saying that the pricing power that will likely emerge as a result of Katrina’s insured losses will provide AIG shares with a catalyst.

Zurich, Switzerland-based Swiss Reinsurance, which estimated its Katrina-related losses at $1.2 billion before tax, said it will dip into its reserves, but the loss won’t reduce its capital. John Coomber, Swiss Re’s CEO, said the increasing trend of catastrophe losses will lead to higher reinsurance prices at year-end renewals.

First Omani GDR

BankMuscat, the largest bank in Oman, listed its global depositary receipts on the London Stock Exchange on October 5. Sheikh AbdulMalik bin Abdullah Al Khalili, the bank’s chairman, marked the listing by formally opening the day’s trading on the exchange.

BankMuscat is the first company from Oman and the first bank from the Persian Gulf region to be listed on the LSE. Citigroup managed the $149 million GDR offering as global coordinator and sole bookrunner. Each GDR represents one ordinary share of BankMuscat, which trades on the Muscat Securities Market. BankMuscat appointed the Bank of New York as depositary for the sponsored GDR, which is a Regulation S issue for trading outside of the US.

“We believe this [London listing] will result in far greater international investor interest in Oman and its economy and will also set a trend which many institutions can follow, resulting in greater inflows of foreign capital into the country,” says Sheikh AbdulMalik.

The bank will use the net proceeds to fund the expansion of its domestic and international banking operations. The GDR issue, the bank’s first, represents 10% of its issued share capital.

BankMuscat has a network of 90 branches in Oman and a representative office in Dubai, United Arab Emirates. It also holds a 37% strategic stake in Centurion Bank, a commercial bank in India, and recently established BankMuscat International, an independent banking entity in Bahrain.

Rattlesnake Anti-Venom

Three other companies recently selected the Bank of New York as depositary for their American depositary receipt programs. They are Protherics of the UK, Universal Holdings of Hong Kong and ACOM of Japan.

Protherics, a biopharmaceutical company, began trading ADRs on Nasdaq. Its shares are traded on the London Stock Exchange. The company is the first UK-based biotechnology company to develop and manufacture two products approved by the US Food and Drug Administration. Its CroFab is the first new rattlesnake anti-venom on the US market in 50 years. It also markets a treatment in the US for the toxic effects of over-dosage with the heart drug digoxin.

Protherics plans to use revenue from its marketed products to develop a pipeline of new products. “As we expand our presence in the US, Protherics wanted to work with a depositary bank that would help streamline our program’s administration and generate the greatest visibility,” says Andrew J. Heath, the company’s CEO.

Universal Holdings, whose ADRs trade in the US over-the-counter market, provides entertainment content in China. Each ADR represents 50 ordinary shares, which are traded on the Hong Kong Stock Exchange.

Tokyo-based ACOM provides consumer financial services. Its ADRs trade in the over-the-counter market, and four ADRs represent one ordinary share

Gordon Platt