Australia Juggles Mergers & Disasters

Driven in part by 1999’s particularly poor results, and perhaps encouraged by the recent mega-merger announcements from Europe (CGU-Norwich Union and Deutsche Bank-Dresdner Bank), Australia’s insurance/ banking/financial services sector seems set to go in the same direction.

On March 10, Commonwealth Bank (CB) announced that it had concluded Australia’s biggest corporate merger agreement so far with bancassurance group Colonial. CB will exchange seven of its shares for 20 shares of Colonial in a deal that gives Colonial shareholders a 48 percent premium over the recent market price and is estimated to be worth approximately $5 billion.

The merger will create Australia’s second largest financial group, with a market capitalization of $17.15 billion and total assets in excess of $132 billion. Yet to be decided is the eventual fate of Colonial’s extensive insurance business in the U.K., which had been up for sale for $625 million.

The news immediately rekindled speculation that National Australia Bank (NAB), the country’s largest, would renew its bid for troubled financial services group AMP, which has recently suffered huge losses following its takeover of Australian insurer GIO.

Consolidation is also taking place on the brokerage front. From its Itasca, Ill., headquarters, Arthur J. Gallagher & Co. announced the purchase of a majority interest in R.L. Youngdahl & Associates Inc. and the Towle Agency Inc., both located in Minneapolis, Minn.; the Rebholz Insurance Agency Inc. of St. Louis; and Powell Insurance Services Inc. of Northfield, Ill. The acquisitions will strengthen Gallagher’s position as the world’s fourth largest insurance broker and risk manager.

Gallagher also expanded on the international front with its acquisition of a 60 percent interest in leading Australian reinsurance broker, Sydney-based MBR Pty. Ltd. The move is further evidence of the consolidation of the reinsurance market, and the trend towards the formation of large multinational insurance service providers.

Following its acquisition by Gallagher, MBR will be less focused on the troubled international reinsurance market and will play a more regionally oriented role as a full service broker. Renamed Arthur J. Gallagher Australasia, the new group will be headed by Paul Allison, who thinks there will be more consolidation in the industry “as local companies attempt to recover from the difficulties of the past two years.”

While mergers and consolidations are an ongoing trend everywhere in the insurance world, Australia’s situation is especially critical, due to the disastrous losses suffered by insurers over the last two years. A pattern of over-extension and poor risk management, coupled with 1999’s series of typhoons, earthquakes, hurricanes and floods, have combined to wreak havoc on the already shaky Australian insurance market.

Reinsurance Australia Corp. (ReAC) was recently forced into runoff after acknowledging losses exceeding $183 million for 1999. This followed the disasters of 1998 when the company lost “only” $31.3 million. ReAC restructured its business to reduce exposures to low-profit direct business, especially in the Caribbean, but was still hit with catastrophic losses in 1999, ending with the windstorms in Europe at the end of December.

The fallout following the loss announcement was immediate and catastrophic. A.M. Best downgraded ReAC’s rating from “A-” to “B++,” which effectively meant brokers couldn’t place business with the company due to security concerns without the express permission of their clients. Swiss Re had backed the company in the past, but given the size of the losses, refused to become further involved, ultimately forcing ReAC into runoff.

ReAC is the fourth Australian insurer to run into serious difficulty as a result of 1999’s disastrous events. QBE is still in business and is making progress, but New Cap Re is also in liquidation, and has insufficient resources to fully pay off its obligations, and GIO was forced into a merger with AMP as a result of its losses.

GIO’s problems started closer to home, with losses of $19.6 million from the freak hailstorm which caused widespread destruction in Sydney last April. Then came the Turkish and Taiwan earthquakes, Hurricane Floyd, Typhoon Bart, and the China Air and EgyptAir plane crashes. By December, GIO’s estimated losses were in excess of $706 million, and by then it had already agreed to be absorbed by AMP. The relatively good results achieved by the National Road & Motor Association (NRMA) remain a bright spot down under. Following its recent merger with RACV, the insurer has begun an aggressive marketing and acquisition campaign to expand its general insurance market share, already the largest in Australia with 19 percent. NRMA has weathered 1999’s hazards well, managing a small profit of $8.5 million on its insurance operations, and strong pretax earnings on investments of an estimated $273.8 million.

Topics Catastrophe Mergers & Acquisitions Profit Loss Agencies Reinsurance Market A.J. Gallagher Australia