Talanx in Talks to Acquire Gerling’s Primary Operations; S&P, Best Place Ratings Under Review

November 9, 2005

Germany’s Talanx AG, which among other interests holds a 51 percent stake in Hannover Re (and consequently Clarendon in the U.S.), is currently in “advanced talks” to acquire the Gerling Group’s primary insurance business.

Talanx is Germany’s third largest insurance group (after Munich Re and Allianz) with 2004 premium income of around €14.2 billion. One of its primary subsidiaries is HDI Versicherungen.

Both Standard & Poor’s Ratings Services and A.M. Best have placed the company’s ratings under review. Their view on Talanx is negative. S&P’s outlook on Gerling is positive, while Best said it has Gerling’s ratings “under review with developing implications.

S&P currently rates Talanx “AA-‘. Credit analyst Hiltrud Besgen stated: “The negative CreditWatch implications reflect the likely negative impact on the currently very strong capitalization of Talanx AG’s consolidated primary insurance operations, due to the acquisition of the financially weaker Gerling primary insurance operations, the possible initial dilution of group profitability, and the managerial challenges related to combining two large complex insurance groups with distinct corporate cultures.

“We currently expect that, on resolution of the CreditWatch placement, the ratings on Talanx AG and its related primary insurance subsidiaries will either be affirmed or lowered, but not by more than two notches.”

S&P added that the “affirmation of the ratings on Hannover Re reflects the reinsurer’s very strong stand alone business and operating characteristics and strong capital and financial flexibility characteristics, which warrant a rating of up to two notches above the rating on the core operating entities of the Talanx group. Hannover Re’s relative independence is further supported by its 49 percent minority shareholding, which is in free float, thereby making the actions of Talanx management, in its capacity as controlling shareholder, the subject of significant public scrutiny.”

Best indicated that it had taken the rating action – on HDI – “so that it could “fully assess the impact of the acquisition.” Best said it “believes that the acquisition is going to provide HDI with greater presence in the German market, especially the life and industrial risks segments. The consolidated entity will benefit from greater economies of scale despite the incurring one-off restructuring costs.” The rating agency also indicated that it “believes that risk-adjusted capitalisation will be adversely impacted and would be seeking to clarify the levels of goodwill and the method of financing the transaction, as well as the level of stand-alone capitalisation of Gerling-Konzern Lebensversicherungs-AG prior to resolving the under review status.”

Commenting on any possible effect of the acquisition on Hannover Re, S&P credit analyst Simon Marshall stated: “Wet take further comfort from Talanx AG’s continued commitment to safeguard Hannover Re’s value as its largest asset and to maintain good relations with capital markets, with which Talanx AG has increasing interaction. In addition, Hannover Re’s business model is not dependent on Talanx’s primary insurance operations to any significant extent.”

Both rating agencies noted they would continue to monitor the situation and would take appropriate action when further details concerning the transaction are announced.

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