S&P Rates IAG Notes ‘A-‘

November 22, 2004

Standard & Poor’s Ratings Services announced that it has assigned its “A-” issue rating to the A$500 million (U.S. $392 million) issue of Reset Exchangeable Securities (RES) by the New Zealand branch of IAG Finance (New Zealand) Ltd., a wholly owned subsidiary of Insurance Australia Group Ltd. (IAG).

“The RES issue represents a contingent capital arrangement, whereby proceeds of the issue will be invested in a portfolio of highly-rated short-dated securities in a special-purpose vehicle,” S&P noted. “IAG may at any time exchange the RES for preference shares, which, if issued, are expected to qualify as Tier 1 regulatory capital and rank equally with other preference shares previously issued by IAG. At the exchange, funds in the special-purpose vehicle will flow to IAG.”

S&P credit analyst Michael Vine, (FSR) indicated: “The RES contingent capital arrangement is viewed favorably by Standard & Poor’s as a structure that enables IAG to access to Tier 1 regulatory capital if needed, especially at a time when market conditions may be uncertain or volatile.” He noted that S&P “accepts such contingent capital arrangements as eligible hybrid capital, up to a maximum of 5 percent of the group’s total adjusted capital, and the 5 percent is a subset of the 15 percent hybrid capital allowance for insurance groups.”

S&P added that “at present, IAG has utilized its 15 percent hybrid allowance with other preference shares previously issued, and, accordingly, the RES are not currently added to the group’s total adjusted capital. The flexibility and funding benefits of the contingent capital arrangement, however, are taken into account under Standard & Poor’s analytical assessment. The “A-” issue rating recognizes the subordinated nature of the issue, interest deferral characteristics, and a distributable profits test under the terms of the preference shares.

“The notching is taken from the ultimate issuer of the preference shares, IAG, if exchanged, which is the group holding company to principal operating entities, including Insurance Australia Ltd. (AA/Stable/–). Under the arrangement, Standard & Poor’s Investment Services has assigned its ‘AAAf’ bond fund rating to IAG Portfolio Limited (IAG P).

“IAG P is a corporate structure, wholly owned by IAG, and invests in a portfolio of highly-rated short term securities. The ‘AAAf’ rating indicates that the assets held by IAG P exhibit extremely strong protection against losses from credit default. Although IAG P is not a bond fund, the granting of a security interest in the asset portfolio in favor of RES noteholders allows IAG P to be rated ‘AAAf’, under ‘Standard & Poor’s Australian Bond Fund Rating Criteria'”.

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