Insurance Australia Group is still rejecting the $8.0 billion proposed takeover "offer" from QBE Insurance, despite being downgraded by Standard & Poor’s.
IAG said the rejection of the QBE offer was being maintained, despite the downgrade, revealed yesterday.
IAG shares dropped one cent to $4.35 while QBE shares fell to $25.24. That left the QBE offer of 0.142 QBE shares and 70 cents cash worth $4.28.
S&P cut IAG’s rating on IAG to ‘A+’ from ‘AA-‘ and cut the ratings on IAG’s wholly-owned insurers to ‘AA-‘ from AA.
IAG shrugged off the downgrade.
"The group continues to maintain a very strong balance sheet and our key wholly owned insurers remain the highest rated of any Australian-based general insurer," IAG Chief Financial Officer George Venardos said in a statement.
S&P said IAG had raised prices and was looking to cut costs and restructure to improve its earnings performance and financial position.
"While these initiatives are positive, their full impact is likely to take some time," S&P said in the ratings announcement.
IAG’s board rejected QBE’s suggested "offer" of 0.142 shares plus 70 cents last month; IAG cut its profit outlook last week and QBE extended its "offer" on Tuesday to May 19 to give IAG shareholders time to weigh up the impact of the earnings downgrade.
The IAG statement to the ASX revealing the downgrade was strangely reluctant to use a worth like ‘cut’ or ‘downgrade.’
Insurance Australia Group Limited (IAG) has today been informed by Standard & Poor’s (S&P) that its key wholly-owned licensed insurers would retain ‘very strong’ counterparty credit and financial strength ratings. The ratings will change from ‘AA’ (Watch Negative) to ‘AA-’ (Stable).
The holding company’s rating has changed from ‘AA-’ to ‘A+’ (Stable).
The change concludes the CreditWatch process announced by S&P following the release of IAG’s half year results on 29 February 2008.
IAG Chief Financial Officer, Mr George Venardos said that although the Group’s ratings have changed by one notch, the new ratings for the wholly-owned insurers remain ‘very strong’, confirming the strength of IAG’s balance sheet and capital position.
"S&P has acknowledged the consistency of IAG’s prudent reserving methodology, the strength of our reinsurance program and the actions management is taking to improve the profitability of the business as the insurance cycle recovers," Mr Venardos said.
"We also continue to work with S&P to try to get to a closer alignment between our internal model and S&P’s generic industry model as we believe IAG continues to hold ample capital to meet the risk tolerances required by S&P for a ‘AA’ rating. The internal model we use is tailored to our business and considers all of our specific business risks.
"The Group continues to maintain a very strong balance sheet and our key wholly owned insurers remain the highest rated of any Australian-based general insurer."
The downgrade isn’t dramatic, but it will cost IAG more money in the medium term.
But a downgrade is a downgrade, regardless of how you pitch it.
QBE has two months to make the "offer" formal by documenting it and turning it into an actual irrevocable deal. There is around a month to go.
