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SYDNEY, Australia -- A surge in losses and higher expenses have led to losses for two large Australian insurers, and one plans to raise capital to restore its balance sheet.
Sydney-based MMI Ltd. last week announced a $119.3 million Australian ($67.4 million) aftertax loss for the fiscal year ending June 30, which MMI Chairman John Curtis said was because "a combination of negative events occurred in one year."
The insurer subsequently announced a share issue to raise $150 million Australian ($86.4 million) to help restore its balance sheet. Although MMI remains within regulatory solvency requirements, the company was unhappy with its internal solvency level following the loss. For the year ending June 30, 1997, MMI reported a year-end profit of $42.2 million Australian ($24.3 million).
MMI Ltd. is not affiliated with Deerfield, Ill.-based insurer MMI Cos. Inc.
Earlier this month, Sydney-based GIO Australia Ltd. recorded an aftertax loss of $27 million Australian ($15.2 million) for the year to June 30, after seeing substantial losses from reinsurance, property/casualty and workers compensation. For the previous fiscal year, GIO Australia Ltd. recorded a net profit of $222.4 million Australian ($125.6 million).
Last week, GIO's board rejected a $3.01 billion Australian ($1.70 billion) takeover bid from Australia's largest life insurer, AMP Ltd. (see story, page 59).
MMI Ltd. attributed its losses to a combination of unfavorable market conditions across most market segments, reduced investment results, adverse Asian economies and the high cost of building its personal insurance telephone marketing program, DirecDial. In a statement, MMI said the start-up costs of DirecDial, which had just recorded its first full year of operation, were significant and expected to continue for several years.
DirecDial recorded an operating loss of $16 million Australian ($9.2 million) for the fiscal year ended June 30, and MMI wrote off $10.3 million Australian ($5.9 million) n start-up costs.
The statement said MMI received $69 million Australian ($39.8 million) less in investment income than the previous year, because of declines in interest rates and Australian stocks.
Mr. Curtis said extreme price competition had continued in commercial lines, with average rates in various classes falling by approximately 10% in the last year.
MMI's workers compensation premiums for the year was down $28.5 million Australian ($16.4 million) and was consistent with other insurers' experiences, he said.
A dramatic increase in common-law claims in Western Australia, because of changes to legislation in 1993 which allowed injured workers to sue their employers if they suffered an economic loss of more than $104,000 Australian, contributed to the loss. The Western Australia Government has drafted legislation designed to limit common-law claims but it has not been passed yet. The rise in claims occurred this year due to their long-tail nature, an MMI spokesman said.
Not counting the exceptional items, which included workers comp claims, DirecDial costs and restructuring expenses, MMI would have had a $40 million Australian ($22.6 million) pretax loss.
MMI filed Aug. 25 with the Australian Securities & Investments Commission to float a revocable rights issue to raise approximately $150 million Australian. MMI plans to use the capital meet its internal minimum solvency benchmark and replace the reduction in shareholders' funds caused by the loss. Australian insurance regulators did not take any action on MMI as the company continued to meet regulatory solvency requirements.
Nick Steffey, GIO Ltd. chief executive officer, said GIO Ltd.'s $189 million Australian ($106.7 million) pretax loss for the latest fiscal year in reinsurance resulted from a rise in claims, particularly aviation, and the implementation of a more conservative approach to reporting profit.
Air crashes involving Korean Air, Federal Express, Silk Air and China Air in 1997 contributed to aviation hull and liability losses of $60 million Australian and other aviation losses totaled $125 million Australian ($70.6 million), he said.
Canadian ice storms were primarily responsible for property catastrophe losses totaling $9 million Australian ($5.1 million).
"Most of these reinsurance losses can't be attributed to bad luck," Mr. Steffey said. "They are due to poor underwriting in reinsurance business."
But Brian Crews, national president of the Assn. of Risk & Insurance Managers of Australasia Ltd., said he was "not overly concerned" about either company's losses because they were not indicative of the entire market's performance.
Mr. Crews said GIO's and MMI's poor results were probably caused by the soft market, and poor results may be the turning point in the insurance cycle.
"I don't feel there is a need to raise the alarm bells," Mr. Crews said. "There is a lot of consolidation in the market and I don't expect to see (the losses) as a trend.'