S&P Affirms NRMA, IAGNZ ‘AA’ Ratings

October 18, 2002

Standard & Poor’s announced that it has affirmed its double-‘A’ long-term insurer financial strength and counterparty credit ratings on NRMA Insurance Ltd. and IAG New Zealand Ltd., with a “stable” outlook.

The affirmation follows the announcement that their parent company, Insurance Australia Group Ltd. (IAG) will acquire Aviva PLC’s general insurance businesses in Australia and New Zealand for A$1.86 billion (U.S. $1 billion) (See IJ Website Oct. 17). The deal is still subject to regulatory approvals, and will be closely scrutinized, as it involves the largest and third largest general insurance groups in Australia.

Aviva’s subsidiaries are currently assigned double-‘A’-minus ratings. S&P said this would remain unchanged, but noted that it now “classifies these entities as strategically important subsidiaries of IAG.”

“The acquisition is highly complementary from a business perspective, is conservatively funded to maintain very strong capital benchmarks, and is expected to provide good operational synergies within a short time frame, provided integration risks are well managed,” stated S&P director of Financial Services Ratings, Michael Vine.

He added that “While operational and integration risks are present in a major acquisition such as this, IAG is well placed to manage these risks, with a history of successful acquisitions, the benefit of extensive internal due diligence, and the exclusion of inwards reinsurance risks from the contract.”

The bulletin noted that the ratings affirmation relied on IAG successfully raising A$ 1.04 billion (U.S. $569 million). The company in fact had no problem placing 196.08 million shares on the market, thus raising around half of the required amount. Trading in its stock, which was halted while the negotiations with Aviva were going on, has resumed. IAG has proposed to fund the remainder of the acquisition through hybrid equity and debt issues.

“The businesses are highly complementary, providing an excellent balance between the direct distribution focus of IAG’s existing operations, with the broker and intermediary distribution bias of CGU and NZI The acquisition also broadens IAG’s product mix into commercial insurance lines, while increasing geographic diversity into Queensland, Victoria, and rural markets generally,” said S&P.

Vine noted that “The combined group will have a suite of strong brands, a varied distribution and product mix, and a clear expense advantage from scale.”

“The stable outlook reflects the expectation that the acquisition risks will be well managed, and the company will successfully balance its articulated growth strategy with maintenance of very strong capital levels and improving operating performance,” he continued.

“At the double-‘A’ rating level, Standard & Poor’s has previously noted that IAG maintained flexibility to exercise and fund its growth targets, which has now been demonstrated in the market with this acquisition,” the announcement concluded.

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