Business & Finance

Standard & Poor's Affirms CGU Rating After Acquisition Plan

CreditWire - June 16th, 2001

Standard & Poor's today affirmed its double-'A'-minus insurer financial strength and counterparty credit ratings on CGU Insurance Ltd. and Swann Insurance (Aust) Ltd. (collectively referred to as CGU Australia).

The rating action follows the announcement of the nonlife insurer's intention to acquire Fortis Australia Ltd. The nonlife insurance operating company of Fortis Australia, Fortis Insurance Ltd., has a triple-'Bpi' public information rating. The transaction is subject to Australian regulatory approval and is expected to be completed by July 2001.

The acquisition is for the amount of A$293 million in cash, funded with an appropriate capital structure. The effect of the transaction on CGU Australia's capital ratios is expected to be negligible in the medium term, although it will cause a slight dilution in solvency in the short term. Fortis Insurance is a predominantly short-tail underwriter with a good capital profile; hence, the overall impact on CGU Australia's capital profile is expected to be within the tolerance of the double-'A'-minus rating.

CGU Australia's acquisition of Fortis Australia expands CGU Australia's market franchise, becoming the third- or fourth-largest nonlife insurance group in Australia. Fortis Australia's net written premium base in 2000 was A$269 million, compared with CGU Australia's premium base of A$1.2 billion. The business fit of Fortis Australia with CGU Australia is strong, complementing CGU Australia's portfolio of strong niche businesses and distribution channels. The acquisition will lift the group to market leadership among motor dealer and financial institution distribution channels, and a strong market share of consumer credit insurance.

Fortis Australia recorded a sound profit in 2000, and should support CGU Australia's solid underwriting and operating profile. As both groups have their operations in Melbourne, the potential to achieve further cost efficiencies is significant. CGU Australia expects to achieve pretax cost savings of A$23 million by 2003, which represents about 20% of CGU Australia's net profit in 2000. Standard & Poor's believes that management is capable of extracting these savings from Fortis Australia, but has modest concerns that initial, upfront restructuring charges may postpone the savings until later in 2002. The rating outlook on CGU Australia remains stable, Standard & Poor's said.