Tuesday, November 3, 2009

At RACV, the feeling's mutual

racv insurance

WHEN Victoria's RACV members hold their annual meeting in a few weeks, the potential pot of gold from demutualisation may be closer than they think.

Chairman John Isaac and chief Colin Jordan have long rejected the concept of demutualisation and instead have been happy to hide behind a constitution that makes it difficult to move them.

Their smartest move was a joint venture with the soon-to-be-listed IAG, which meant the old NRMA combined with RACV, and the latter has enjoyed a steady stream or profits.

The 70:30 joint venture now marries a mutual with a for-profit company. That's not always a happy combination, but 10 years on this one is still alive.

For how long depends in part on whether RACV sees the benefits in rewarding members with $30,000-plus as their share of the proceeds when IAG buys out the RACV's 30 per cent share.

Maybe the RACV members would be interested in that sort of money, or even questioning the board on whether someone would be willing to buy the RACV insurance stake in a way that would preserve the brand.

Back in 1999, on the eve of IAG's float, it formed a joint venture with the RACV in which they split profits from the Insurance Manufacturers of Australia (IMA) insurance business.

IMA houses the RACV and NRMA home and car insurance businesses and it is highly profitable.

RACV's 30 per cent share of last year's profit was $64.5 million, according to its annual report, and it received a dividend of $45 million.

All this has helped RACV expand its member services, with recent acquisitions including Eagle House, a Melbourne CBD building next to its Royal Pines resort, and Torquay golf club.

IAG owns the other 70 per cent of the business, and each has first right of refusal on the other's stake. That emerged when QBE went hunting for IAG. It was revealed the change in control could trigger the sale of the business to RACV.

In a report, Axiome Capital's Brett le Mesurier argues IAG should look at buying the RACV's share of the business to maximise the benefits and stop the leakage.

Based on Axiome's buyout price of $765 million, RACV's two million members would receive a cash grant of $35,000 on the deal, assuming it was demutualised.

This depends on a few factors, such as just what each member really deserves, because right now the 27,200 club members who generate about $68.8 million in revenue are the senior parties.

The 1.2 million road service members, who generate $132.5 million in revenue, are second-class citizens in equity.

Or so it seems from recent AGM commentary.

Still, even allowing for some discrepancies in the figures, it would seem RACV members would have plenty of reason to support demutualisation and IAG boss Mike Wilkinson would be politely cheering the move on the sidelines.

This would seem the most rational path to any IAG buyout of the minorities in IMA.

IAG's Mike Wilkinson may well agree with Le Mesurier but publicly only has good things to say about the joint venture.

The trouble with joint ventures is that sometimes interests are not aligned. This is especially the case when one is trying to maximise profits for shareholders and the other is a mutual with little interest in profits but a lot of interest in expanding the empire.

This is where the RACV members should ask some questions in support of long-term activist Stephen Mayne, whose partner Paula Piccinini is standing for re-election to the RACV board, along with former Foster's boss Trevor O'Hoy. According to Axiome, the net tangible assets of RACV's 30 per cent share in IMA are about $153 million, which implies a total value of $765 million, or 12 times this year's earnings.

Le Mesurier argues an IAG buyout of RACV, funded by a $690 million equity raising, would increase earnings per share by 4 per cent.

Measured against recent IAG corporate activity, this deal would rank as an outright stunner.

IAG's Wilkinson used to run Promina, whose AAMI insurance company is RACV's major competitor. The two have about 22 per cent each of the local market.

Trouble is, as Wilkinson knows, AAMI is increasing its share and RACV is falling, which is obviously a concern. Within the IAG family the IMA joint venture is a star with returns on equity consistently 15-20 per cent better than that of IAG.

The accompanying table compares the performance of the two over the past five years, underlining the superior performance of the IMA business.

Better still, if Wilkinson could have included 100 per cent of IMA's profit and NTA, he would have increased return on equity last year from 14 per cent to 16 per cent.

The deal may be a no-brainer for Wilkinson but the trick is to get RACV's board moving, and this requires leadership -- or a revolution.

A message for Ryan

THE aforementioned RACV club was the venue for the Transurban annual meeting, at which David Ryan joined the two-strikes club with a 47 per cent vote against the board in an extraordinary turnaround.

The proxies were running 70 per cent against the board, but on the floor an additional 377 million votes came in supporting the board.

These votes came from the two big Canadian shareholders, Ontario Teachers and Canada Pension plan -- the latter the beneficiary of a sweetheart placement deal last year.

The former, oddly enough, owns governance group CGI Glass Lewis, which recommended shareholders vote against the remuneration report.

Some argue big shareholders should vote with the board, because if you own 30 per cent of a company, presumably you like it.

But I question just why two big Canadian shareholders would vote at the meeting and not by proxy -- and then ask whether they withdrew their proxies?

In the end, one assumes Ryan has got the message that shareholders are fed up with his overly generous pay deals -- including this one, which rewarded management for growing earnings not linked to shareholder returns, and including retention allowances.

The latter is the blight of this round of remuneration votes. It also features in the Lend Lease report, which happens to include one David Ryan as a member of the remuneration committee.

Just why management should be rewarded for surviving is hard to fathom.

Switch the camera down to the old Allco Equity Partners, now known as Oceania Capital, in which the top three managers will receive a total of $975,000 in six-monthly allotments from April 2011 onwards.

Company chief Robert Moran will collect $150,000 each half, just for being there.

Worse, company chair Ian Tsicalas, Peter Yates et al saw fit to change the benchmark for performance fees from a 15 per cent internal rate of return hurdle to zero, which will net the team $9.4 million.

Just what has changed to warrant that generosity beggars belief.