S&P: QBE, IAG Ratings Unchanged After Rejected Merger Proposal

April 16, 2008

Standard & Poor’s Ratings Services said that its ‘A+’ ratings on the core operating entities of QBE Insurance Group Ltd. (currently ‘A-‘ with a stable outlook) are unchanged after QBE’s announcement that Insurance Australia Group Ltd. (rated ‘AA-‘, but on CreditWatch-Negative by S&P) has rejected its merger proposal. (See related article above).

S&P explained that its CreditWatch with negative implications on IAG, placed on Feb. 29, 2008, “was driven by a combination of unusually large storm impacts, volatile investment markets, operational issues in IAG’s U.K. business, and the soft cycle in its domestic business.”

S&P said it has “not taken any rating outlook or CreditWatch action on the proposed merger participants, given IAG’s decision to reject the offer. However, any downside risk on the IAG rating arising from a merger with a lower rated counterpart is captured in its current CreditWatch status.”

The rating agency also indicated that it “considers the potential merger or acquisition to be material in terms of scale of operations, which could provide QBE with an enhanced competitive position in the personal lines business in Australia, complement its already strong presence in the commercial lines segment, and add meaningful synergy benefits.

“Although QBE benefits from strong financial flexibility at the ‘A+’ rating level, funding and acquisition risk is inherent in the transaction, including a potentially substantial goodwill component that could pressure capitalization levels, depending on the ultimate financial structure of a successful merger,” S&P concluded.

Source: Standard & Poor’s – www.standardandpoors.com

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