Fitch: IAG's Ratings Unaffected by Proposed Wesfarmers Acquisition

Mon Dec 16, 2013 9:54pm EST

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(The following statement was released by the rating agency) SYDNEY, December 16 (Fitch) Fitch Ratings has commented that Insurance Australia Group's (IAG) ratings are unaffected by the proposed acquisition of Wesfarmers Limited's (Wesfarmers) insurance underwriting operations. Totalling AUD1.845bn, the acquisition will be predominantly equity funded and have a modest negative impact on capital and financial leverage ratios, which would remain within Fitch's expectations for a 'AA-' rated insurer. IAG have disclosed that on a pro-forma basis coverage of its regulatory prescribed capital amount would fall from 1.67x to 1.59x at 30 June 2013 (FYE13). IAG will issue AUD300m of Tier 2 subordinated debt relative to the AUD1.4bn of ordinary equity to fund the acquisition. Fitch calculates that financial leverage as measured by debt to debt plus equity, on a pro-forma basis, will have increased to 15% from 14% at FYE13. This remains well within Fitch's 'AA' median criteria guideline of 20%. The transaction, if granted regulatory approval, will strengthen the group's competitive position in its core markets. IAG currently holds an approximate 22% and 40% share of the Australian and New Zealand non-life insurance markets, respectively. Fitch estimates that this will increase to around 26% and 49%, respectively. Moreover, it will give the group a leading share of the Australian intermediated business at 24% (currently 17%). Fitch believes the Wesfarmers' insurance businesses would sit well within the group's current intermediated operations. In Australia it would improve geographic diversification in addition to gaining an exclusive 10 year distribution arrangement with Wesfarmers' Coles supermarket. In New Zealand it would provide greater exposure to the faster growing upper North Island region and commercial motor insurance sector. Fitch does not believe the transaction would adversely impact key earnings or interest coverage ratios. The insurance profit was lower in the Wesfarmers insurance portfolios at 7.8% versus IAG's 17.2% in FY13, but had strengthened on the prior year. Moreover, IAG should be able to successfully accelerate the current remediation of the Wesfarmers portfolios given their predominantly short-tail nature. The agency considers the outlook for the operating environment in the Australia and New Zealand non-life insurance sectors to be good, and expects this to underpin future operating expectations. Moreover, profitability would be further enhanced should the group achieve projected expense synergies of AUD140m. Contact: Primary Analyst John Birch Director +61 2 8256 0345 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney, NSW 2000 Secondary Analyst Tim Roche Director +61 2 8256 0310 Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available at Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: Additional information is available at ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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