Best Assigns Ratings to HDI, Gerling

A.M. Best Co. has removed the ratings of Germany’s HDI Haftpflichtverband der Deutschen Industrie and those of its main subsidiaries from under review with negative implications and affirmed the ratings. Best has also removed from under review with developing implications the ratings of the main non-life subsidiaries of Gerling Beteiligungs-GmbH (GBG), acquired by HDI, and has upgraded the financial strength rating (FSR) to “A” (Excellent) from “A-” (Excellent) and the issuer credit rating (ICR) to “a” from “a-“. Best also assigned an FSR of “A” (Excellent) and an ICR of “a” to Gerling-Konzern Lebensversicherungs-AG (GKL). All of the ratings affected have been assigned a stable outlook.

“The rating actions reflect A.M. Best’s view that the completion of the acquisition of GBG will result in a strengthened business position of the enlarged group, improving financial performance and stable capitalization, albeit with increased levels of soft elements of capital,” said the announcement.

Best noted the following ratings’ factors (in summary form):

Strengthened business position – HDI’s acquisition gives it a “greater presence in the German market, especially in the life, industrial risks and motor business segments.” It’s close to being the second-largest non-life and the fourth-largest life insurer in the German market. Consolidated non-life premiums are likely to remain stable in 2006 mainly due to the impact of the reduced rates in the motor market.

Best believes there’s a potential for loss of business in the industrial segment, especially among the larger industrial institutions. However, the acquisition provides HDI with access to small to medium companies, a segment where it traditionally has been underrepresented. Best sees life premiums increasing by around 5 percent in 2006 as the acquisition of GKL will result in increased sales in direct life insurance business at a time when the macroeconomic indicators point toward resumption of moderate growth in the German life market.

Stable financial performance — Consolidated non-life technical profitability is likely to deteriorate slightly in 2006 as a result of the price declines in motor and property covers for industrial clients in the German markets. However, the combined ratio for the consolidated entity is likely to return to below 100 percent as underwriting conditions of the acquired primary non-life Gerling business and the HDI primary segment remain favorable.

This supposition includes an expectation of “improved catastrophe experience from its reinsurance subsidiary,” Hannover Re (See related article). Best expects profitability “to improve further in 2007 due to the impact of the cost savings arising from the consolidation of back offices, improved bargaining power and rationalization of reinsurance purchasing, while a reduced effective tax rate is likely to improve retained earnings.”

Stable capitalization but increased levels of soft elements of capital — Best “expects the risk-adjusted capitalization of the consolidated entity to remain stable with the majority of the impact of the acquisition being absorbed by the strong retained earnings of HDI over the last three years. The high level of reinsurance dependence is likely to reduce from 2007 onward as the group rationalizes reinsurance purchase, especially among the acquired Gerling entities.”

The Group’s “dependence upon soft elements of capital is likely to increase and remain high for the next two years mainly as a result of the acquisition of GKL.” HDI has assumed €600 million ($773 million) in pension liabilities, and its impact “is likely to continue being covered by strong retained profits.”

Best expects “the current reinsurance support, which is provided for Gerling America Insurance Company (GAIC) by Gerling-Konzern Allgemeine Versicherungs-AG (GKA), to be continued in the medium term. The importance of Hannover Re to the HDI group is reduced and is improving the group’s long-term prospects of raising additional capital and its overall financial flexibility.”