Best Affirms HDI-Gerling Industrie Versicherung AG, and Subs Ratings

February 17, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit ratings (ICR) of “a” of Germany’s HDI-Gerling Industrie Versicherung AG (HGI) and its rated subsidiary, HDI-Gerling Welt Service AG (HG WS).

Best also affirmed the debt rating of “bbb+” on €250 million [$329 million] subordinated fixed to floating rate notes, due 2024 issued by the former, Gerling-Konzern Allgemeine Versicherung AG (GKA), which is now merged into HGI. The outlook for all ratings remains stable.

In a related action Best has affirmed the financial strength rating and the issuer credit rating of HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI V.a.G.), the ultimate mutual parent company of Talanx AG, which in turn is the intermediate management holding company for all HDI V.a.G. companies.

The ratings of HGI and HG WS reflect “both the explicit and implicit support from their parent company, Talanx AG,” said Best. The explicit support from Talanx AG comprises “a profit and loss absorption agreement, although this agreement limits HGI’s ability to retain earnings.”

The ratings also reflect Best’s “expectation that HGI’s risk-adjusted capitalization is likely to remain solid in 2012, supported by its investment revaluation reserves, which have appreciated in line with unrealized gains on the company’s bond portfolio. HG WS’ risk-adjusted capitalization is likely to remain stable in 2012, supported by a profit and loss absorption agreement with HGI.

Best also pointed out that “HGI continues to maintain an excellent business profile in the German industrial market, with a high penetration of DAX and EURO STOXX 50 companies. HG WS is integral to HGI as it acts as a hub for the company’s international program business, which has become strategically important as the company looks to expand its international reach. In 2011, HGI’s gross premiums written (GPW) are likely to increase by 5 percent to approximately €2.6 billion [$3.4216 billion] driven by improved motor rates in Germany, increased property premiums in France and the contribution of Nassau Verzekering Maatschappi N.V., a professional indemnity and directors’ and officers’ insurance company acquired in April 2011. HGI also has made a strategic acquisition of 25 percent of the share capital of PVI Holdings, in August 2011,” which “complements its globalization strategy and expansion of its international network.

“HGI’s underwriting performance is expected to improve, which is reflected in a combined ratio of approximately 90 percent in 2011, following a combined ratio of 99 percent in 2010 (local GAAP figures), principally as a result of improved reserve development that offsets some significant catastrophe losses in the year, particularly in relation to the Japanese earthquake and tsunami. The company’s profit before tax is likely to improve to approximately €180 million [$236.88 million], despite falling investment income as the interest rate environment continues to remain challenging. HG WS is expected to achieve an underwriting result of approximately €0.5 million |$658,000] in 2011 purely reflecting the reinsurance commissions the company earns to cover management expenses.

“Upward rating actions could occur if the Group improves its risk-adjusted capitalization, operating technical performance and business profile within the Group’s target emerging markets. An improvement in the Group’s financial flexibility, through a possible initial public offering, may also put upward pressure on the ratings.

“Negative rating actions could occur if there were a significant deterioration in the Group’s risk-adjusted capitalization, possibly driven by large losses in its exposure to euro zone debt. Poor execution and integration of the Group’s mergers and acquisitions strategy may also put negative pressure on the ratings.”

Source: A.M. Best

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