Court Decision Clears the Way for Gerling to Sell GKG; S&P Comments

June 25, 2003

Germany’s Gerling Group announced that the Hessen Higher Administrative Court in Kassel has dismissed an appeal by BaFin, the German financial supervisory authority, from an earlier decision by the Frankfurt Administrative Court, which rejected BaFin’s efforts to block the sale of Gerling’s Reinsurance Group (GKG) to businessman Achim Kann.

The ruling clears the way for the sale to be completed. Gerling’s excutive board chairman, Björn Jansli, welcomed the decision. “It is exceptionally important to ensure freedom of movement for the Gerling Group,” he stated. “We assume that the foreign supervisory authorities, too, will now quickly approve the sale of our reinsurance operations. And we are also convinced that the rating agencies will recognize the signaling effect of this decision.”

Perhaps in answer to Jansli’s request, Standard & Poor’s Ratings Services issued a bulletin stating: “The court ruling and subsequent acceptance by the German regulator allowing the sale of the Gerling group’s reinsurance operations Gerling-Konzern Globale Ruckversicherungs-AG (GKG; not rated) to private investor Dr. Achim Kann, will have no immediate effect on the ratings on the Gerling group’s primary insurance operations Gerling-Konzern Allgemeine Versicherungs-AG (BB+/Watch Dev/–) and Gerling-Konzern Lebensversicherungs-AG (BB+/Watch Dev/–).”

S&P indicated, however, “that the successful completion of the transaction will provide substantial balance-sheet relief to the group and could potentially result in an upgrade.” It added, “the sale of GKG has improved the likelihood of securing new potential investors,” and noted that “Gerling’s management is currently in negotiations with a number of potential investors and is considering a new ownership structure. Once investors are identified, and depending on the structure of the deal, this could also have a positive impact on the ratings.”

S&P also indicated that while the deal would “allow the Gerling group to fully deconsolidate its reinsurance operations from 2003 onward, the group, and in particular GKA, will remain exposed to GKG’s ability to pay outstanding claims on a timely basis.” It set aside 112 million euros ($130 million) with regard to the GKG credit risk in 2002. “GKA booked EUR1.1 billion [$1.268 billion] reinsurance receivables from GKG in 2002,” said S&P.

The rating agency stated that, as part of its review, it “will assess the legal protections in place that could justify a segregation of the ratings on GKA and GKL,” and noted that “In addition, the group is still awaiting approval from other regulators, in particular in the U.K. and the U.S., before closing the sale of GKG. Standard & Poor’s will re-evaluate the financial strength of GKA and GKL in light of recent developments, and expects to resolve the CreditWatch status upon legal completion of the GKG sale, which is expected within the next two weeks.”

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