Forced Deal Hits Hih Shares

Sydney Morning Herald

Thursday September 14, 2000

Anthony Hughes

HIH Insurance's shares slumped more than 17 per cent yesterday after the company was forced to cede control of its Australian retail general insurance operations to Germany's Allianz in an effort to restore its ailing balance sheet and meet tougher prudential regulations.

Allianz will pay the embattled insurer $200 million upfront for a controlling 51 per cent interest in a retail general insurance joint venture, comprising private motor, home and compulsory third party insurance. As a result of the deal, HIH will miss out on $300 million in annual retail premium revenue but bolster its balance sheet so it can meet stricter guidelines set by the Australian Prudential Regulation Authority on capital adequacy.

Allianz, which took over MMI two years ago, also has an option to buy HIH's remaining 49 per cent interest for the higher of $125 million or market valuation after five years.

The Allianz payment to HIH reflects Allianz's relatively scant presence in the Australian personal lines market, with its DirecDial home and motor insurance product its most visible presence. The joint venture will have annual premiums of $1.4 billion, trailing only NRMA in market share.

The deal follows a difficult negotiating process in which HIH delayed its results several times after the deal was delayed, putting the company under pressure to finalise a deal along with yesterday's ASX deadline for its annual results and painting HIH as a distressed seller.

HIH had more bad news for investors yesterday when it cut its final dividend from 4c to 2c fully franked and payable on September 22. The full-year payout is 6c fully franked. HIH yesterday reported an annual net profit of just $18.7 million, up from a $21.2 million loss in the previous corresponding period, which covered 18 months.

The result was below forecast and concern about the implications of the joint venture deal on HIH's position saw HIH's shares slump 17c to 82c, well below the $2.58 figure that former parent Winterthur exited at two years ago.

HIH's managing director, Mr Ray Williams, said the Australian result was sound and improving but the bottom line was marred by the poor performance of international operations in the UK (where HIH is a Lloyd's insurer) and the US (primarily workers' compensation), an unanticipated deterioration in the performance of discontinued parts of the FAI business and investment writedowns, including the troubled One.Tel investment.

The problems with the FAI business, which HIH bought 18 months ago, forced HIH to add $163 million to goodwill, taking goodwill on the FAI purchase that must be written down to $405 million. Mr Williams said the Allianz joint venture improved HIH's solvency, placed its undiluted net asset backing a share at more than $1 and represented a ``definitive response" to the issues posed by the new APRA regime.

HIH's decision to sell follows a hectic few years for the Australian general insurance industry including the massive losses of GIO Australia and reinsurers, though insurance analysts say insurance premiums are on the rise.

© 2000 Sydney Morning Herald

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