Best Rates Lufthansa Captives ‘B++’

April 5, 2007

A.M. Best Co. has assigned a financial strength rating of “B++” (Good) and an issuer credit rating of “bbb” to Germany’s Delvag Luftfahrtversicherungs-AG, and its subsidiary, Delvag Rueckversicherungs-AG (Delvag Rueck). All the ratings have a stable outlook.

“The ratings of Delvag and Delvag Rueck reflect their main role as the composite insurance captive of their ultimate parent, Lufthansa German Airlines,” Best explained. “Other rating factors include Delvag’s adequate risk-adjusted capitalization and excellent operating performance. The ratings of Delvag Rueck benefit from a partial rating enhancement from the profit and loss absorption agreement with Delvag, its immediate parent. ”

Best noted that the two Companies are “Lufthansa’s primary and reinsurance captives, whilst also accepting third-party business to diversify their portfolios. Delvag’s captive portfolio (44 percent of gross premiums written) comprises mainly aviation fleet business, whereas its third-party business consists of marine, aviation and transport and short tail niche lines such as cash in transit and other valuables transportation.”

Best said it “expects Delvag’s gross premiums written to have remained stable at €90 million ($120.3 million) as the cancellation of a larger cargo contract is compensated by a higher number of multiyear policies.”

The rating agency also noted that “Delvag Rueck is no longer reinsuring Delvag’s aviation and marine risks, which will lead to a significant decline in gross premiums written (by approximately 45 percent to €25 million [$33.4 million]) in 2006. Prospectively, the company will focus mainly on business related to the Lufthansa group (including private lines business such as disability, health, life and other) but will also continue accepting third-party non-life reinsurance (such as transport and property).

“In A.M. Best’s opinion, Delvag’s risk-adjusted capitalization is adequate, factoring the volatile nature of its aviation portfolio but also its strong dependence on reinsurance. A.M. Best expects Delvag’s capitalization to improve moderately in the next two years through transfers to the equalization reserves and a partial retention of earnings. In A.M. Best’s opinion, Delvag Rueck’s risk-adjusted capitalization remains weaker than that of its parent company, despite the planned capital injections, increases in retained earnings and reduced dependence on retrocession. However, a profit and loss absorption agreement between Delvag and Lufthansa protects the balance sheet of Delvag, and consequently, that of Delvag Rueck.”

Best said it “expects Delvag to maintain excellent pre-tax earnings of approximately €17 million ($22.7 million) in 2006 supported by a very good underwriting income and very strong investment returns.” Best also indicated that it believes “Delvag benefits from relatively low expense levels due to high reinsurance commissions but is also less affected by the pricing trends in aviation. In addition, investment returns are positively impacted by profit transfers from Albatros, Delvag’s captive broker. Delvag Rueck’s pre tax earnings are likely to remain positive in 2006 (approximately €500,000 [$0.7 million]) due to good investment income.”

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