Best Affirms Gerling K.A.’s ‘A-‘ Rating

December 11, 2003

A.M. Best Co. announced that it has affirmed the financial strength rating of ‘A-‘ (Excellent) of Gerling-Konzern Allgemeine Versicherungs-Aktiengesellschaft (GKA) (Cologne) and its core subsidiary, Gerling America Insurance Company (New York). The outlook, however, remains negative.

“The rating reflects GKA’s excellent business position in industrial insurance, restored excellent capitalisation and improving earnings,” said Best. “This is offset by GKA’s continued high exposure to reinsurance recoveries from Gerling-Konzern Globale Rueckversicherungs-AG (GKG) and its increased net underwriting exposure.”

Best explained that the negative outlook reflects its “concerns regarding the challenges to achieve earnings in 2004 supportive of the existing financial strength rating, given the marginal returns forecast for 2003.”

The rating agency noted that “GKA’s risk-adjusted capitalisation has been restored to an excellent level, following the injection of EUR 152.8 million (USD 175.2 million) equity in 2003. The capital increase was contributed by a syndicate of GKA’s principal industrial clients and private investors, which A.M. Best views as positive, given the tangible commitment afforded to GKA’s future business plans.”

It also said GKA should experience an improved operating performance, profiting from “the strong pricing of industrial risks and GKA’s cancellation of a large volume of unprofitable commercial and motor insurance policies.” This should “lead to a reduction in the combined ratio to approximately 101 percent in 2003, from 107 percent in 2002.”

Best also noted that overall earnings have improved following a 271.2 million euro ($330 million) loss after tax in 2002, but said they are “likely to be only marginally positive during 2003 following additional equity impairments, higher profit commissions to reinsurers and the reduction in earned premium, which should continue to impact 2004 results.”

The bulletin noted that despite “the uncertainties surrounding GKA’s ownership and the temporary withdrawal of support from several brokers in the London market in 2003, GKA has retained the support of the majority of its key accounts and remains one of the leading industrial insurers in Germany.”

It is, however, “highly exposed to reinsurance recoverables,” as it cedes “over 40 percent of its premiums to its reinsurers.” It is also exposed to ceded loss reserve recoveries from GKG, with approximately 800 million euros ($972 million) outstanding in 2003. Best indicated, however that it “expects the run-off of GKG’s remaining liabilities to GKA to be concluded in a satisfactory manner.”

It added that it also “expects GKA to demonstrate a sustainable improvement in operating performance, reflected by a combined ratio below 100 percent in 2004, to confirm the efficacy of its re-underwriting and restructuring initiatives. Whilst GKA achieved a significant improvement in gross underwriting performance during 2002, retentions have increased across the majority of classes, which exposes the net result to greater volatility prospectively.”

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