S&P Ratings on Gerling to Remain on CreditWatch

April 4, 2003

Standard & Poor’s Ratings Services reacted to the news that talks between Germany’s Gerling Group and HDI have broken off (See IJ Website April 3) with an announcement that its current ‘BB+’ long-term counterparty credit and insurer financial strength ratings on Gerling-Konzern Allgemeine Versicherungs-AG (GKA) and Gerling-Konzern Lebensversicherungs-AG (GKL) “will remain on CreditWatch with developing implications, where they were placed on Oct. 29, 2002.”

Although the ratings update coincided with the announcement that the negotiations aimed at structuring a deal for HDI to acquire GKA and GKL had been terminated, S&P said it had also considered the recent “ruling by a German administrative court stating that German insurance law does not provide the German regulator with a legal basis to block the sale of the group’s reinsurance operations, Gerling-Konzern Globale Ruckversicherungs-AG (GKG), to private investor Dr. Achim Kann.” (See IJ Website March 31) S&P also noted that the regulator has appealed the decision.

S&P noted that Gerling’s reinsurance operations (GKG) have essentially been in runoff since last October, and indicated that it had lowered its ratings on GKA and GKL to their current level in February, “reflecting the German regulator’s objections as well as additional pressure on the group’s already weakened capitalization represented by the German regulator’s decision, which would have meant retaining GKG within the Gerling group.”

While the favorable ruling increases the chances that Gerling will eventually be able to sell GKG, “the group is still likely to seek the approval from other regulatory bodies, particularly in the U.S. and the U.K., before it completes the sale to Dr. Kann,” S&P observed.

“Successful implementation of the sale of the reinsurance operations is a key consideration for the group’s capitalization and regulatory solvency coverage, which is already under significant pressure,” stated S&P credit analyst Jorg Ritthaler. “Moreover, a disposal will increase the likelihood of finding a suitable partner for the group’s primary insurance operations. In any event, Gerling management needs to find a strong partner for either the Gerling group as a whole or for its primary insurance operations in the medium term, to alleviate the strains on its capital position.”

He indicated that “The ratings on GKA and GKL might be raised to secure levels if it becomes clear that all impediments to the successful completion of the sale to Dr. Kann have been removed;” however, S&P stated that “failing this, the ratings on GKA and GKL could be lowered further, mainly reflecting concerns about the group’s capital strength.”

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