Best Affirms Gerling, U.S. Sub Ratings

August 18, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating of “A-” (Excellent) of Germany’s Gerling-Konzern Allgemeine Versicherungs-Aktiengesellschaft (GKA) and its U.S. subsidiary, the New York-based Gerling America Insurance Company (GAIC). Best also affirmed the issuer credit rating (ICR) of “a-” of GKA and the debt rating of “bbb” of the 250 million euro ($307 million) fixed-to-floating-rate subordinated notes issued by GKA and assigned an ICR of “a-” to GAIC. The outlook on all ratings remains stable.

“The rating of GKA reflects its strong risk-adjusted capitalisation, sufficient earnings level and maintenance of a strong business profile as an industrial insurer in Germany despite the uncertainty surrounding GKA’s future ownership,” said Best.

Expanding on its analysis, Best said it “expects GKA’s risk-adjusted capitalisation to remain strong as higher capital requirements from the planned increase in net retention (to approximately 78 percent from 57.5 percent in 2004) are alleviated by retained earnings. Through normal run-off as well as commutations and other transactions, the net exposure to the former group reinsurer GLOBAL Re has been significantly reduced but is still high and not expected to change materially in 2006 and 2007.”

Best also indicated that it “expects GKA’s net income to be sufficient to support the current rating despite an anticipated decline from 92 million euros [$113 million) in 2004 to approximately 70 million euros ($86 million) in 2005 (which translates into a return on premium of approximately 6 percent). The deterioration will be largely driven by higher catastrophe claims frequency as well as rate cuts in the property and liability businesses, resulting in an approximately 3 percent increase in the combined ratio to 98 percent.”

Best notes that GKA is “one of the three leading industrial insurers in Germany,” and it expects that the company will maintain that “strong business position.” Best also said GKA “is likely to regain business previously lost due to the difficult financial situation relating to the Gerling group in 2001-2003. Consequently, gross premium income is expected to increase by approximately 6 percent to 2.5 billion euros ($ 3.1 billion) in 2005, mainly driven by strong new business in industrial property largely from the United Kingdom.

“While A.M. Best believes that the future ownership of GKA remains uncertain, it does not expect this to have a negative impact on GKA’s short-term prospective business profile,” the report concluded.

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