Best Affirms Gerling’s A- (Excellent) Rating for Insurance Operations

A.M. Best announced that it has affirmed the A- (Excellent) financial strength rating of Gerling-Konzern Allgemeine Versicherungs AG (GKA) and its core subsidiaries, Gerling Canada Insurance Company and Gerling America Insurance Company. It confirmed the latter as “core subsidiaries of GKA” and gave the ratings a “stable” outlook.

“The continued uncertainties regarding the future ownership of the Gerling Group are not expected to have a negative impact on GKA’s business profile,” said Best.

The company was forced to place the operations of Gerling-Konzern Globale Ruckversicherung (GKG), its reinsurance operations, into runoff, following losses, reserve strengthening and lowered investment returns, but the insurance operations, GKA, have continued to operate. Best also said that it “does not expect any significant increase in GKA’s net retention as a result of the withdrawal of the reinsurance protection from Gerling Re.”

The ratings are based on “GKA’s excellent business position in industrial insurance, excellent capitalisation and improving operating performance.” Offsetting factors, however, include “GKA’s limited financial flexibility and the inherent volatility of its industrial portfolio,”
said Best.

It noted that “GKA is one of the leading industrial insurers benefiting from its strong risk management and service capabilities.” It believes the company is “well positioned to take advantage of a shortage of capacity in this specialist segment and expects that GKA will continue its profit-oriented growth strategy.” The rating agency forecast “moderate premium growth” of around 3 percent to 3.1 billion Euros ($ 3.24 billion) in 2002.

The report also indicated that “GKA’s prospective risk-adjusted capitalisation is excellent based on A.M. Best’s capital model.” It doesn’t foresee any need for additional capital in the next two years “based on GKA’s business plans,” and it “expects a further strengthening of the company’s equity base from retained profits in 2002 and 2003.”

Increased premium rates, averaging around 15 percent, and a “comprehensive review of GKA’s book of business” should improve underwriting results and lead to higher profits in 2002, said Best. It expects GKA to achieve a combined ratio of approximately 104% for last year, but also noted that these gains would be at least “partially offset by lower investment income due to weak equity markets.” It also noted that “further cost-cutting measures for the entire Gerling Group should gradually reduce GKA’s high expense levels.”

Best did recognize, however that the “uncertainties” regarding Gerling’s future ownership remain a concern. Germany’s Deutsche Bank, which now owns 34.5 percent of the company, has been pushing for an outright sale, especially following the decision to place the reinsurance operations into runoff. GKA’s financial flexibility is limited as long as the situation remains unresolved, and Best expects its financial leverage “to be at a low 11% at year-end 2002” as a result.

It concluded that “GKA’s book of business comprises mainly more volatile industrial risks, although it has a very strong risk management approach aiming to limit its exposure,” and noted that the company was “seeking to further diversify into commercial and personal lines.”