Best Affirms Lloyd’s Adriatico ‘A+’ Ratings

December 26, 2006

A.M. Best Co. has affirmed the financial strength rating of “A+” (Superior) and the issuer credit rating of “aa-” of Italy’s Lloyd Adriatico S.p.A., a subsidiary of Allianz SE (See related article). The ratings outlook is stable, corresponding to Best’s overall ratings outlook on the Group.

Best also noted that the “ratings reflect the enhancement Lloyd Adriatico receives from the implicit support of Allianz. Other factors include the company’s excellent consolidated risk-adjusted capitalization and very strong operating performance. An offsetting factor is Lloyd Adriatico’s declining business position in the life sector.”

According to Best’s analysis, “Lloyd Adriatico’s consolidated risk-adjusted capitalization is likely to remain excellent in 2006 despite substantial dividends paid to the parent company. Lloyd Adriatico has a stable risk profile as it writes mainly private motor insurance and has a very prudent approach to reserving and reinsurance.
Very strong operating performance–Lloyd Adriatico’s operating performance is likely to remain very strong with an anticipated after-tax profit of approximately of €280 million ($370 million), which translates into a return on equity of 25 percent in 2006.

“Profits are mainly driven by the continued strong non-life underwriting performance in 2006 with an anticipated combined ratio of approximately 75 percent (compared to 76.9 percent in 2005), although technical results are benefiting from run-off profits from previous underwriting years.”

Best also indicated that “in the absence of further reserve releases and strong competition in the Italian motor market,” underwriting results are likely to deteriorate in 2007. However, Best added that it “believes that Lloyd Adriatico’s unique pricing system and effective risk selection are likely to limit the impact of softening premium rates on earnings. In A.M. Best’s view, life earnings remain excellent; however, the contribution to overall results is likely to decline due to a significant drop in premium income expected in 2006 and 2007.”

As far as the Company’s life activities are concerned, Best said it “expects a significant decline in life gross premiums written by approximately 25 percent to €1.5 billion ($2 billion) (including unit-linked) in 2006 as a result of the restructuring process that affected the company’s bancassurance partner.

“In non-life, Lloyd Adriatico has an excellent business profile in the Italian motor market. Despite efforts to diversify into to other lines of business, Lloyd Adriatico’s non-life portfolio remains concentrated on motor, where it writes approximately 75 percent of total non-life premiums,” the report concluded.

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