S&P Affirms Talanx ‘AA-‘ Ratings

November 19, 2003

Standard & Poor’s Ratings Services announced that it has affirmed its ‘AA-‘ long-term counterparty credit and insurer financial strength ratings on the core members of Germany’s Talanx primary insurance group, including industrial insurer HDI Haftpflichtverband der Deutschen Industrie VaG (HDI VaG) and private lines carrier HDI Privat Versicherung AG (HDI Privat).

S&P said it has also assigned its ‘AA-‘ long-term counterparty credit and insurer financial strength ratings to the recently founded HDI Industrie Versicherung AG (HDI Industrie). The outlook on all companies is negative.

In addition S&P affirmed its ‘A-‘ long-term counterparty credit rating on HDI VaG’s intermediate holding company, Talanx AG (Talanx), and its long-term senior unsecured debt rating on Talanx’s EUR175 million [$208 million] exchangeable bond. The outlook on Talanx is also negative.

“The ratings on HDI VaG, HDI Privat, and HDI Industrie reflect the companies’ core status within the Talanx insurance group,” stated S&P credit analyst Jorg Ritthaler. “Further rating factors are the primary insurers’ strong business position, significantly improved earnings prospects, very strong capitalization, and very strong financial flexibility (defined as the ability to source capital relative to requirements).”

The bulletin noted: “These factors are partially offset by the Talanx primary insurers’ concentration on the competitive German property/casualty market. Earnings at the group’s life operations remain below Standard & Poor’s expectations.

“The ratings on Talanx reflect its status as an unregulated holding company of the Talanx group, and are derived from the debt-servicing capabilities of the consolidated group,” which includes Hannover Re, also rated ‘AA-‘ Negative, by S&P.

“The negative outlook on Talanx’s primary insurance operations reflects the negative outlook on Hannover Re, which in turn reflects the pending initiatives of Hannover Re to further improve its quality of capital,” Ritthaler continued. “These will mainly focus on the gradual reduction of reinsurance recoverables, with the total amount (before collateral) expected to have reduced by about one-third from its 2002 level by the end of 2005.

“The primary non-life insurers are expected to post a strong underwriting result, with combined ratios significantly below 100% in 2003 and 2004 and ROR for both operations of more than 10%.” S&P said it expects the combined life insurance operations to return to profitability and positively contribute a 10 percent ROE for the primary insurance group in 2003.

“Retained earnings will allow very strong capitalization to be maintained at the Talanx primary insurance group level. Talanx’s interest coverage is expected to remain strong,” it concluded.

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