HIH Insurance - financially strong
HIH Insurance - financially strong and positioned for the future Statement from the Chairman and Chief Executive
Sydney, 13 September 2000. Today's announcement marks the culmination of a lengthy process aimed at ensuring that HIH is a financially strong and strategically well-positioned company, especially in view of substantial changes proposed for the Australian insurance regulatory framework.
We would first like to provide you with the key element in today's announcement - a major new initiative.
HIH and Allianz create new force in Australian retail general insurance
* new venture to create $1.4 billion Australian retail general insurance underwriting agency, second in market share only to NRMA but with a superior geographic spread * HIH receives $200 million up front ; a second instalment of the fair market value of its interest (subject to a minimum of $125 million) as well as an ongoing earnings stream for up to five years enhanced by synergy benefits
HIH Insurance Limited ("HIH") and Allianz Australia Limited, a wholly-owned subsidiary of Allianz AG, ("Allianz") have agreed to market their retail general insurance business through a 100% owned Allianz company - a new market force second only to NRMA but with a superior geographic spread. These proposed arrangements are subject to the necessary regulatory approvals and fulfilment of the conditions of the agreement.
The agency business will comprise Allianz and HIH private motor; householders; CTP (New South Wales and Queensland) ; and rural and commercial business sourced through all distribution channels with the exception of international brokers.
This represents approximately $1 billion in annualised HIH gross written premium and $400 million in Allianz Australian business. The terms of the venture provide Allianz with 51% interest and HIH with 49% in the retail general insurance business, effectively reducing HIH's retail premium by around $300 million. Under the agreement, Allianz will pay HIH $200 million up front and have a call option to acquire HIH's interest at fair market value after 5 years (with a minimum of $125 million). HIH has a put option, exercisable at the minimum valuation at any time.
This transaction provides HIH with a sound capital base, steady earnings and the timing flexibility to make a smooth transition to the new Australian Prudential and Regulatory Authority regime expected to be in place by 2007.
The market has clearly had difficulty in attaching an appropriate value to this key retail market franchise. This transaction values a segment that represents less than half of our current business base at a valuation that represents around 70 cents per HIH ordinary share. Following the transaction, each HIH ordinary share will have an undiluted net tangible asset backing of $1.03 and $1.12 on a fully diluted basis. HIH solvency improves to more than 50 per cent.
HIH will enjoy ongoing benefits from the underwriting agency through the time value of the up front payment, as well as from the ongoing profit share which will be enhanced by the synergy benefits derived through the agency's enlarged business base.
And, most importantly, this transaction marks a managed shift in strategic direction for HIH. It is a staged, orderly and profitable exit from the retail insurance area. Our review has confirmed that a retail strategy is attractive but requires a level of scale that is not within our own means to support and grow if we are also to properly support our historically profitable and Australian market leading corporate business base".
An overwhelming positive is that we have formed a strong link and common interest with one of the world's largest and most highly respected insurance groups (with a market capitalisation in excess of A$140 billion and a Standard & Poor's AAA rating).
The new HIH - still large and composite
* post-transaction HIH is a $2.5 billion gross earned premium business ($1.8 billion stand-alone and $0.7 billion through the joint venture) * the Australian business mix exposure is broadly 50/50 personal lines/corporate
As the impact of the venture with Allianz only effectively reduces HIH's Australian retail premium by around $300 million, the company retains a total gross earned premium business of $2.5 billion.
The continuing exposure to Australian retail general insurance (for up to five years) will continue to generate an ongoing earnings stream that will be enhanced by the synergy benefits derived from the larger scale of the underwriting agency.
This provides HIH with a profitable pathway to the new APRA regime and will allow for further business restructuring to improve earnings performance and deliver greater shareholder value.
A managed transition to the new APRA regime - the background
* a global management review launched in April 2000 * as promised, no capital raising but a solvency strong company
In a statement to the ASX in June 2000, we disclosed that a management initiated global business review was focussing on further improving business distribution and margins. The review was initiated in April 2000 against the backdrop of a changing operating environment - APRA's proposed new regulatory regime that, quite simply, will change the cost of our capital and hence all of our earnings return benchmarks.
The APRA regulatory reform process has led to a series of proposals which, in total, will make Australia one of the world's most capital intensive insurance jurisdictions.
In June we emphatically stated that there would be no capital raising in order to meet the proposed APRA guidelines but, rather, HIH would manage the transition to the new regime through a combination of portfolio restructuring and high quality reinsurance support.
I can now confirm those intentions. The review, which is now substantially completed, has been the catalyst for today's strategic announcement and underlined the imperative to optimise bottom-line financial performance, even if that means conceding some scale in the pursuit of efficiency.
The APRA inspired global business review has led to some important conclusions on our operations :
* In Australia, we believe that we cannot independently achieve the scale necessary to maintain and further develop a large-scale retail distribution market franchise. Even the largest players in that arena have recently reported on the significant costs associated with such a market. Consequently, we have joined forces with Allianz, one of the world's largest insurers, to facilitate further generation of the scale economies required for retail business. In the medium to longer-term, we have decided to concentrate our operations and capital on the corporate classes of business in Australia, where we are market leaders, as well as in New Zealand, the United Kingdom and Asia. These business classes have been profitable historically and are where premium rates are now recording strong increases. They also constitute the original and core business base of HIH.
* In the United Kingdom, we have recently endured substantial losses due to the impact of business written in recent years during the depressed stage of the market rate cycle. There is an overwhelming consensus that the rate cycle is already showing a significant upswing which will be further enhanced by the rate increases the market is generally expecting for the December 2000 renewal period. We also note the confidence shown in the Lloyd's market by our peers who are now investing heavily in that area. The HIH United Kingdom presence is now entirely within Lloyd's where we shall be carefully managing our business back to providing a solid earnings contribution. Over the longer term, HIH's Cotesworth syndicates have a commendable record of superior financial performance.
* The United States business which is still mainly California-based workers' compensation, remains problematic. We have an efficient business operating in a volatile market environment. This business can, and will, be capable of delivering suitable earnings returns, but we are concerned that the timeframe for earnings recovery may not be capable of meeting our internal benchmarks. Therefore, these operations remain under close and on-going review.
* Strategic expansion in Asia remains a key element of our strategy. Work is now at an advanced stage on establishing the best approach for meeting the operational and capital requirements for Asian expansion.
* The global review underlined the consistent and continuing earnings strength of our New Zealand business. We remain totally committed to that market.
At the Board level, Messrs Michael Payne and George Sturesteps have retired from the Board and executive duties. Both gentlemen have been closely associated with the company since it was founded in 1968 and have made substantial contributions to the business. We wish them well for the future.
HIH 1999/2000 preliminary final result
* $42.1 million operating profit after tax before abnormals ($18.4 million after tax, abnormals and outside equity interest) * Australian general insurance operations (representing two-thirds of the company's business) sound and improving - combined ratio now 102.0% (down from 106.0% for the previous year) * group combined ratio now 105.2% (down from 108.8% for the previous period) * a fully franked final dividend of 2 cents per share
A sound and improving Australian result for HIH Insurance (which represents two-thirds of the company's business) was the highlight of a period adversely affected by results from international operations ; a deterioration in the run-off of discontinued FAI long-tail business ; and market generated investment write-downs.
The operating profit after tax before abnormals for the 12 months ended 30 June 2000 was $42.2 million and represented an unsatisfactory outcome given that the second half only marginally added to the first half equivalent result.
The full year result was also impaired by the accounting treatment of our sizeable holding in One.Tel as required under the AASB 1023 standard. The mark-to-market valuation approach meant that significant gains reported on this investment for the first-half were virtually reversed out in the second-half.
Our position on the international operations, especially the United Kingdom and the United States, has already been outlined.
The discontinued FAI business run-off issues have, however, led to us adding a further $163 million in goodwill this period. This means that, as at 30 June 2000, the goodwill on the acquisition of FAI stands at $405 million.
The magnitude was not indicated or anticipated from the external actuarial review completed for our interim results announcement in March 2000. The extent of this development was certainly not quantified until very recently when we completed a further exhaustive review. Further external review and cross-checking was undertaken before the final total was settled and we now believe that all of the FAI run-off adverse claims development has been accounted for.
In any event, the Allianz transaction means that the substantial value in the on-going FAI business has materially assisted to ensure that the large goodwill figure is replaced by $400 million in cash and receivables.
With the Allianz transaction, HIH has group premium solvency in excess of 50 per cent and an undiluted net tangible asset backing per share of more than $1.00.
In addition, the nature of the Allianz venture is a definitive response to the issues posed by the new APRA regime.
This solution also leaves intact a financially strong, profitable and independent HIH. The company has control of its own destiny in that it can retain that independence or choose to explore further insurance alliances and/or associations that are capable of enhancing shareholder value.
G A Cohen R R Williams Chairman Chief Executive