Sun Alliance will own 60 per cent of the new company, which will initially carry the clumsy name of Sun Alliance and Royal Insurance Australia.
The structure of the deal will allow Royal to repatriate pounds 50m to the UK and to increase its solvency ratio by 1 per cent. As a 40 per cent shareholder, Royal will not have to include Australian premium income in its solvency calculation.
The new company will have net premium income of more than Adollars 500m ( pounds 212m) and a market share of 6.7 per cent. Last year, Royal's Australian subsidiary made a pre- tax profit of Adollars 22m on premiums of Adollars 252m while Sun Alliance made dollars 17m on premium income of dollars 260m.
Richard Gamble, Royal's chief executive, said his company believed the way ahead for its overseas businesses was through alliances. Earlier this year Royal transferred its Dutch business to Epic, its three-way partnership with Aachener und Munchener Beteiligungs of Germany and Fondiaria of Italy.
Nick Bunker, Sun Alliance's corporate development manager, said the motivation of the deal was 'purely and simply to attempt to reap economies of scale'. He estimated the merged company would be able to make economies of Adollars 25m a year.
The deal, which is subject to regulatory approval, follows other realignments in the Australian market. These have included Guardian Royal Exchange's merger of its business with that of Zurich Insurance. Mr Bunker said Sun Alliance made the initial approach.
The two companies already have experience of co-operating with one another in Australia through their stakes in AAMI, a direct writing motor insurer. Roger Neville, Sun Alliance's chief executive, said: 'This is an excellent opportunity for two companies with complementary market positions and compatible management cultures to join forces.'
Royal's shares were steady at 183p while Sun Alliance climbed 3p to 296p.Reuse content