Best Affirms HDI ‘A’ Rating; Revises Outlook

A.M. Best Co. announced that it has affirmed the financial strength rating of “A” (Excellent) and assigned an issuer credit rating of “a” to German insurer HDI Haftpflichtverband der Deutschen Industrie V.a.G. It also said the outlook on the ratings has been revised from negative to stable.

“The ratings reflect HDI’s strengthened capitalisation, excellent business profile which is expected to come under strong competitive pressures, as well as strong and improved operating performance,” Best said. “An offsetting factor is the risks arising from the company’s plan for a large acquisition.”

Best noted that HDI has continued to strengthen its capital position “as profitability improves and after the sale of approximately 20 percent of the company’s share in its reinsurance subsidiary, Hannover Rückversicherung AG (Hannover Re), earlier this year. The reduction of reinsurance utilisation will also have a positive effect on capital. Reinsurance leverage (reinsurers’ share of technical reserves to shareholders’ funds) remains high, although A.M. Best expects it to be reduced significantly to approximately 250 percent by year-end 2004 (300 percent in 2003).”

Best also observed that “HDI remains one of the leading industrial insurers,” and said it “anticipates consolidated premiums to remain stable, with a marginal fall of approximately 2 percent at year-end 2004 as a result of enhanced selective underwriting at Hannover Re.” However, “the overall primary business is likely to continue growing, reflecting strong life sales from the bancassurance channel, the acquisition of Neue Leben in Germany and international business expansion,” Best’s report continued. The overall growth in this sector, however, was characterized as “likely to be only moderate, as premium from industrial and motor business remain stable and under increasing competition and softening rates.”

HDI has also been strengthened by its strong operating performance. Best expects the company’s “consolidated pre-tax profits to increase by approximately 18 percent in 2004, exceeding 900 million euros ($1.19 billion), as stability in the equity markets is likely to benefit the life business results as well as improved investment returns.”

Best saw HDI’s combined ratio as “likely to deteriorate slightly to above 96 percent in 2004 because of the impact of the hurricane losses on Hannover Re. The maintenance of this strong performance largely depends on the company’s ability to maintain its selective underwriting in the key business lines of industrial risks and reinsurance and to further reduce operating expenses.”

In conclusion Best cited “risks arising from major acquisition, as a factor to be considered. It said that “HDI’s plans for an acquisition of a major insurer will bring integration challenges and potentially increase their financial volatility especially in areas of potential business overlap.”