A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) of Germany’s Gerling-Konzern Allgemeine Versicherungs-Aktiengesellschaft (GKA) and its U.S. subsidiary, Gerling America Insurance Company (New York) (99 percent reinsured by GKA).
Best also raised its outlook on the ratings to stable from negative, and assigned an issuer credit rating (ICR) of “a-” to each of these entities, also with a stable outlook. Concurrently, Best affirmed the “bbb” debt rating of the 250 million euro ($332 million) fixed-to-floating-rate subordinated notes issued by GKA. The outlook on this rating is also stable.
“The ratings reflect GKA’s improving operating performance in 2004, the strengthening of its consolidated risk-adjusted capitalisation and the maintenance of its leadership in the German industrial insurance sector, said Best. “Offsetting these factors is the uncertainty surrounding GKA’s future ownership and the remaining credit exposure to Globale Re (formerly Gerling Re) and to its ultimate parent, Gerling Konzern Beteiligungs AG (GKB), with regard to pension liabilities.”
Commenting on the improving operating performance, Best said it “expects GKA’s earnings improvement during 2004 to continue in 2005 as result of a continued attractive rate environment—in particular for industrial liability—as a consequence of the shortage of capacity. The expected net combined ratio of approximately 97 percent for 2004 is higher than the gross combined ratio of approximately 92 percent as GKA continues to forego underwriting profits to reinsurers. GKA is planning to increase its net retention in 2005, which will likely lead to higher profits but increased underwriting volatility.”
Concerning GKA’s credit risk relating to Globale Re and from pension liabilities, Best noted that, even through the company has “significantly reduced its credit exposure to Globale Re by means of normal run-off and other measures in 2004,” it nonetheless “remains high at approximately 20 percent of total reinsurance recoverables.” Best said it “expects a further reduction in 2005 from the normal run-off. GKA’s pension liabilities have been outsourced to GKB; however, GKA remains liable for these obligations. This credit risk will be partially alleviated by a transfer of liquid assets of approximately 120 million euros ($160 million), of which 25 million euros ($33 million) will be paid at year-end 2004 from GKB, subject to the regulatory approval, which the company expects to receive in the first half of 2005.”
GKA’s capital position has improved. The 250 million euro ($332 million) subordinated bond issued in August 2004, is “treated as hybrid capital in A.M. Best’s risk-adjusted model.” The issue has “enhanced GKA’s capitalisation after factoring higher prospective capital requirements for the proposed increased retention,” Best continued.
After the severe difficulties Gerling suffered in 2002-03, perhaps the most significant factor in the report was Best’s conclusion that “GKA has retained the support of its key domestic clients in 2004 and remains one of the leading industrial insurers in Germany.” Best said it “anticipates a 4 percent decline of the total gross premium income to approximately 2.4 billion euros ($ 3.2 billion) at year-end 2004 reflecting the continued loss, albeit on a smaller scale, of business outside Germany. GKA’s profile in domestic personal and small commercial lines is relatively small but likely to grow after the acquisition of Gerling G&A Versicherungs-AG’s (GG&A) broker-derived client business.”
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