Best Affirms Ratings of HDI Hftp. der Deutschen Industrie, Talanx AG

February 17, 2012

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit rating (ICR) of “a” of Germany’s 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 (collectively the Group).

Best also affirmed the FSR of ‘A’ (Excellent) and the ICRs of “a” of HDI-Gerling Industrie Versicherung AG (HDI-Gerling Industrie) and its subsidiary, HDI-Gerling Welt Service AG, the leading non-life direct insurance operation within Talanx AG and HDI-Gerling Lebensversicherung AG (HDI-Gerling Leben), the leading life insurance operation within Talanx AG.

In addition Best affirmed the ICR of “bbb+” of Talanx AG and affirmed the debt rating of “bbb” on the €350 million [$460.6 million] junior subordinated fixed to floating rate notes, due 2025 issued by Talanx AG.

Best has also affirmed the financial strength rating of ‘A'(Excellent) and issuer credit rating of “a” of HDI-Gerling Lebensversicherung AG (HG-LV), Talanx life insurance division, with stable outlook for both, as well as its ratings on the group’s U.S. operations, Gerling America.

The outlook for all of the ratings remains stable.

In a related action Best affirmed the financial strength rating and the issuer credit ratings of “a” of Germany’s HDI-Gerling Industrie Versicherung AG (HGI) and its rated subsidiary, HDI-Gerling Welt Service AG (HG WS).

Best said it expects Talanx AG “to continue to maintain excellent consolidated risk-adjusted capitalization in 2012 supported by significant unrealized gains on the company’s bond portfolio as well as retained earnings, which are expected to show an improvement on 2010.

“Talanx AG has a relatively low level of exposure to peripheral sovereign debt at approximately 15 percent of capital and surplus at third quarter 2011; however, total exposure to peripheral euro zone debt, including covered bonds, is higher at approximately 60 percent of capital and surplus.

“The Group also has a high level of exposure to euro zone financial institutions senior and subordinated debt at approximately 180 percent of capital and surplus at third quarter 2011. However, a significant portion of this debt is held in German and Dutch financial institutions of a good credit quality, with much of the debt also backing life liabilities with the potential for losses to be absorbed by policyholders. These negative rating factors are partly offset by the heavy bias within the portfolio towards German corporate and sovereign debt, which has appreciated markedly in recent months.”

Best also indicated that it “expects Talanx AG’s 2011 consolidated earnings after tax and minorities to increase to approximately €400 million [$526.4 million] from €220 million [$290 million] in 2010, driven by good underwriting results across all lines of business with the exception of non-life reinsurance, which suffered heavy catastrophe losses. The 2010 net profit of €220 million was affected by a number of one-off expenditures in relation to restructuring expenses as well as costs in relation to the merger of the Aspecta life operations into the Group.

The report pointed out that “Talanx AG benefits from an excellent business profile within the German and international reinsurance markets. The Group has made a number of strategic bolt-on acquisitions during the year that are expected to further enhance its business profile within the retail international division. The recently announced acquisitions of TU Europa SA (Towarzystwo Ubezpieczeń Europa SA and Towarzystwo Ubezpieczeń na Życie Europa SA) and TUiR Warta S.A. (Towarzystwo Ubezpieczen I Reasekuracji Warta S.A.) should improve the Group’s business profile in the targeted markets of Poland and Eastern Europe.

“Overall premium growth of approximately 5 percent is expected in 2012, with growth primarily driven by retail international lines (in particular Brazil and Poland) and non-life reinsurance (due to rate increases and new business gains). The retail Germany division is expected to remain flat as declining life sales offset increases in non-life premiums as a result of an improved rating environment, particular in motor insurance.

“Upward rating actions could occur if the Group were to improve 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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