Ratings Recap: AMI, HDI-Gerling

October 15, 2009

A.M. Best Co. has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of New Zealand’s AMI Insurance Limited, both with stable outlooks. The ratings are based on an “analysis of the consolidated financial accounts of the AMI Members Trust, of which AMI is the only operating entity,’ Best explained.”The ratings reflect AMI’s well-established market position, solid risk-adjusted capitalization, consistent operating performance and corresponding surplus accumulation. AMI’s capitalization remained strong in 2008 as reflected in its moderate underwriting leverage and Best’s Capital Adequacy Ratio (BCAR). Although risk-adjusted capital decreased in 2008 primarily due to an increase in underwriting risk, the company has consistently strengthened its capital and surplus through full retention of its operating earnings. On an absolute basis, AMI’s capital and surplus grew at an average of 11.2 percent over the past five years to NZD 334 million [US$247.6 million] in 2009 (from NZD 230 million [US$170 million] in 2005).” Best expects AMI’s risk-adjusted capitalization to remain stable as “consistent operating profitability and corresponding surplus accumulation will continue to support future premium growth. A decrease in fair value of investment assets and unfavorable underwriting performance exacerbated AMI’s total net earnings to NZD 7.5 million [US$5.56 million] in 2009 from NZD 26.2 million [US$19.43 million] in 2008.” Best also indicated that the “fall in AMI’s underwriting margin in 2009 following three catastrophe losses and lowered short-term investment yield from falling interest rates in 2009. As a result of continued deterioration in loss experience and a higher than planned underwriting expenditure, AMI’s combined ratio increased to 100.0 percent in fiscal year 2009 (from 96.9 percent in fiscal year 2008). Notwithstanding the deteriorating trend, A.M. Best believes that recent hardening in rates will gradually improve the company’s underwriting margin going forward.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of HDI-Gerling Lebensversicherung AG (HG-LV) The outlook for the FSR is stable, while the outlook for the ICR has been revised to stable from positive. Best said the ratings reflect “HG-LV’s improving risk-adjusted capitalization, stable overall earnings and strong business profile. The ratings also take into account the importance of HG-LV to its ultimate parent, Talanx AG, as the main primary life entity of the group.” Best pointed out that HG-LV’s risk-adjusted capitalization improved to a strong level in 2008, and the rating agency believes that it will “remain in line with its current ratings in the next couple of years. However, capital levels are dependent on a number of soft factors, such as investment valuation reserves (which significantly decreased in 2007), free reserves for policyholders’ surplus and value of in-force business. This is likely to result in volatile prospective capital levels. In addition, the parent’s dividend policy limits HG-LV’s potential of earnings retention. HG-LV has a strong business profile as a major player in the local German life market and has become the main carrier for the group’s corporate pension products, a segment in which HG-LV has a strong franchise. However, the company’s gross written premiums decreased by 2.7 percent to €1.955 billion [$2.918 billion] in 2008, which was slightly below average market performance. This was due to ongoing integration efforts and the company’s focus on independent agents and unit-linked products, which were both more exposed to the recent market downturns. In 2009, A.M. Best expects the company’s premium volume to remain constrained in the absence of any Riester pension step-up and the ongoing difficult market conditions.” In 2008, the company’s net profit before tax deteriorated from €88.7 million [$132.33] to €54.3 million [$81 million], driven mainly by a lower investment result. The 2008 results translated into a relatively stable return on equity of 17.2 percent. Best anticipates that HG-LV’s overall 2009 earnings will improve slightly to between €60 and €80 million [$89.5 and $119.3 million] due to a normalization of investment results.

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