Further advice re CGU & NZI Acquisition

Transcription

1 Further advice re CGU & NZI Acquisition Document date: Fri 18 Oct 2002 Published: Fri 18 Oct :29:25 Document No: Document part: A Market Flag: Y Classification: Asset Acquisition INSURANCE AUSTRALIA GROUP LIMITED ASX-SIGNAL-G HOMEX - Sydney FUNDING DETAILS Insurance Australia Group Limited ('IAG' or 'the Group') has entered into a bridge funding agreement with Deutsche Bank AG ('DB') and UBS Warburg Australia Limited ('UBSW') to finance the acquisition by IAG of the Australian and New Zealand general insurance operations of Aviva plc ('the Acquisition'). It is intended that the bridge will be fully repaid from a combination of internal funds and funds raised through the equity, hybrid and debt capital markets. In addition, IAG intends to restructure some existing debt of the Group for capital mix optimisation purposes. In summary, the proposed funding in-flows and out-flows are expected to be: CASH IN A$MILLION CASH OUT A$MILLION Bridge funding debt 1,925 Purchase price 1,855 Ordinary equity 1,040 Costs of transaction 70 Internal funds 124 Repayment of bridge 1,925 funding debt Hybrid equity 250 Repayment of existing 224 senior debt Debt 735 Total 4,074 4,074 ORDINARY EQUITY The ordinary equity portion will comprise an institutional placement, a share purchase plan ('SPP') and possibly a dividend re-investment plan ('DRP'). The institutional placement will be for $500 million and has been underwritten at $2.55 per share. Due to IAG's placement capacity under ASX Listing Rule 7.1, part of the institutional placement may be conditional on shareholder approval at the Annual General Meeting ('AGM') on 13 November At the AGM, a resolution is under consideration to refresh under ASX Listing Rule 7.4 IAG's placement capacity to issue equity securities (Resolution 6 in the notice of AGM). The SPP will be offered to all IAG's eligible shareholders in Australia and New Zealand registered on the record date (24 October 2002). The SPP price will be the lower of the institutional placement

2 price or a 5% discount to the 10 day Volume Weighted Average Price following the close of the SPP offer period. Detailed terms and conditions of the SPP will be forwarded to shareholders shortly. Depending on the level of demand under the SPP, IAG may introduce an underwritten DRP in 2003 to provide additional equity funding. The approximate breakdown of the funds to be raised from these proposed issues of ordinary shares is as follows: ISSUE COMPONENT A$MILLION Placement 500 SPP 380 DRP 160 1,040 The placement and DRP have been underwritten by DB and UBSW and the SPP has been underwritten up to A$339 million by DB and UBSW. The placement is being conducted by a global bookbuild for which DB and UBSW are the joint bookrunners and global co-ordinators. The ordinary shares to be issued in the placement, the SPP and, if applicable, the DRP will rank pari passu with IAG's existing ordinary shares once allotted. IAG has obtained the necessary waivers from ASX in respect of ASX Listing Rule 7.1 in order to undertake the ordinary equity component of the funding. EFFECT OF 5% LIMIT IN CONSTITUTION Article 6 of IAG's constitution states that if a person has a relevant interest in more than 5% of the total number of voting shares in IAG in the 5 years which follow IAG's ASX listing (the '5% Limit'), the directors may at any time issue a divestiture notice to that person in respect of so many voting shares as exceed the 5% Limit. The Board of IAG has resolved that if solely by participation in the placement any person obtains an interest in IAG shares in excess of the 5% Limit, the Board will not exercise its powers under the constitution to require disposal of the excess. The Board considers that this is in the best interests of IAG in light of the fundraising requirements for the Acquisition. It enables full participation in the placement by investors, facilitates the underwriting and sub-underwriting of the fundraising, and allows tolerance for participation in the fundraising that may exceed the 5% Limit only until the other components of the fundraising are completed. At the AGM, the directors have recommended that shareholders vote in favour of a special resolution to delete the 5% Limit from IAG's constitution (Resolution 6 in the notice of AGM). Participants in the placement who may cause the 5% Limit to be exceeded will be required to provide an undertaking to IAG that they will not vote any shares obtained in the placement in excess of the 5% Limit on this resolution. HYBRID EQUITY DB and UBSW have been engaged as bookrunners and joint lead

3 managers for a proposed issue of hybrid securities. The hybrid equity is expected to be issued in New Zealand to repay the existing senior debt in New Zealand and improve the regulatory capital efficiency of the Group. It is intended that this hybrid equity issue will qualify as Tier 1 capital from the perspective of the consolidated Group's capital position for the Australian Prudential Regulation Authority ('APRA'). It is expected that the issue will take place in the first quarter of DEBT DB and UBSW have been engaged as bookrunners and joint lead managers for various contemplated issues of debt securities. Part of the debt is expected to be in the form of term subordinated notes which should qualify as Tier 2 capital from APRA's perspective It is expected that an offer of $300 million of term subordinated notes will be made in the fourth quarter of CAPITAL RATIOS & BALANCE SHEET MIX As at 30 June 2002, IAG's consolidated capital position was at 1.56 times the Minimum Capital Requirement ('MCR'), within its desired operating range of 1.35 to 1.65 times MCR. MCR for the purpose of calculating the consolidated position is derived from the APRA requirements for the Australian licensed general and life insurers in the Group and IAG's estimate of equivalent minimum capital for its other operations. The APRA requirements are also applied by IAG to its New Zealand operations for this purpose. It is estimated that IAG's consolidated capital position, after the Acquisition is completed and the intended long term funding arrangements noted above are in place, will still be within IAG's desired operating range of 1.35 to 1.65 times MCR. Based on pro forma calculations as at 30 June 2002, the MCR multiple has been estimated at approximately 1.5 times MCR upon completion of the Acquisition and funding arrangements. IAG intends to have the following combined balance sheet mix between ordinary equity, hybrid equity and debt after the Acquisition (based upon the 30 June 2002 financial information): PRO-FORMA POST-ACQUISITION AS AT 30 JUNE 2002 Ordinary equity 69% Hybrid equity 13% Debt 18% Total 100% In calculating the pro-forma post-acquisition capital mix, it should be noted that the basis of the calculation now no longer involves the deduction of goodwill from available capital. The change in the Group's capital structure is not expected to have any impact on the insurer financial strength ratings from Standard & Poor's for NRMA Insurance Limited and IAG NZ Limited (formerly State Insurance Limited). MORE TO FOLLOW

4 Further advice re CGU & NZI Acquisition Document date: Fri 18 Oct 2002 Published: Fri 18 Oct :44:20 Document No: Document part: B Market Flag: Y Classification: Asset Acquisition INSURANCE AUSTRALIA GROUP LIMITED ASX-SIGNAL-G HOMEX - Sydney SUMMARISED HISTORICAL FINANCIAL PERFORMANCE OF CGU AND NZI The financial information set out below relating to CGU and NZI is derived from CGU's and NZI's management accounts presented in accordance with generally accepted accounting principles in the United Kingdom ('UK-GAAP') and statutory accounts and other information provided by Aviva plc to IAG, including information furnished by CGU to APRA. CGU and NZI collectively account for approximately 100% of premium revenue, 90% of net profit and 93% of the net assets as at 31 December 2001 of the businesses being acquired The financial information presented does not purport to be a complete description of CGU's and NZI's financial performance or financial position. There is very little publicly available information regarding CGU or NZI, and there is limited segment information regarding CGU and NZI in Aviva plc's published accounts. Neither Aviva plc, CGU nor NZI has assisted in the preparation of this information or has reviewed the information to verify its accuracy or completeness. CGU's audited annual financial statements to 31 December each year are prepared in accordance with generally accepted accounting principles in Australia ('A-GAAP'). However, NZI's audited annual financial statements to 31 December each year are prepared in accordance with generally accepted accounting principles in New Zealand ('NZ-GAAP'), which differs in certain respects from A-GAAP. The unaudited 30 June 2002 financial information for each of CGU and NZI is prepared in accordance with UK-GAAP, which differs in certain respects from A-GAAP and NZ-GAAP. No adjustments have been made to reconcile the financial information set out below to A-GAAP, other than as disclosed in the "Notes" to the tables below. Where the consolidated financial position of CGU and NZI has been presented, the information is essentially an aggregation of the two groups' consolidated results with no adjustments for any balances that may exist, or transactions undertaken, between the two groups. The consolidated financial performance for the three years ended 31 December 2001 and the six months ended 30 June 2002 is as follows:

5 CONSOLIDATED FINANCIAL PERFORMANCE YEAR ENDED 31 DECEMBER SIX MONTHS ENDED 30 JUNE A$million Gross written 1,668 1,640 1,879 1,082 premium Net earned premium 1,454 1,450 1, Net claims expense (1,106) (1,015) (1,089) (630) Underwriting (490) (516) (615) (308) expenses Underwriting result (142) (81) (60) (28) Investment income Other operating revenue Other operating (42) (20) (32) (11) expenses Profit before tax (43) (27) Income tax (expense)/benefit 6 (17) (46) (18) Net profit after tax (37) (45) INSURANCE RATIO Loss ratio 76.1% 70.0% 66.2% 69.3% Expense ratio 33.7% 35.6% 37.4% 33.8% Combined ratio 109.8% 105.6% 103.6% 103.1% NOTES: 1. For the six months ended 30 June 2002, the CGU and NZI management amounts do not separately disclose the other operating revenue and other operating expenses. They have therefore been disclosed on a net basis. As the management accounts are in UK-GAAP, minor adjustments to estimate the A-GAAP equivalent results were made in respect of discounting claims, inclusion of prudential margins and goodwill amortisation. 2. Gross written premium is not separately disclosed in the audited financial statements of CGU and NZI. Therefore gross written premium has been estimated as the addition of gross earned premium and the net movement in the unearned premium reserve as disclosed in the audited financial statements. The consolidated financial position for CGU and NZI as at 31 December 2000 and 2001 and as at 30 June 2002, are as follows:

6 CONSOLIDATED FINANCIAL POSITION AS AT 31 DECEMBER 30 JUNE A$million Cash assets Receivables ,099 Investments Other TOTAL CURRENT ASSETS 1,963 2,444 2,388 Receivables Investments 1,401 1,528 1,455 Intangible assets Other non-current assets Total non-current assets 1,774 2,042 1,891 TOTAL ASSETS 3,737 4,486 4,279 Payables Outstanding claims Unearned premiums Interest bearing liabilities Other TOTAL CURRENT LIABILITIES 1,796 2,372 2,240 Outstanding claims Unearned premiums Other non-current liabilities Total non-current liabilities 1,087 1,120 1,090 TOTAL LIABILITIES 2,883 3,492 3,330 Net assets Net assets of other entities 73 (2) TOTAL NET ASSETS 1,022 NOTES: 1. The adjustments made on an estimated basis to convert the 30 June 2002 information from UK-GAAP to A-GAAP were in respect of discounting of claims provisions and reinsurance recoveries, the application of prudential margins and recognition of goodwill. 2. Represents the net assets of entities acquired outside CGU and NZI at 30 June 2002 (assuming no change in net assets, excluding investments in subsidiaries, from those existing at 31 December 2001 as these entities are essentially dormant)