2008-07-21 22:58:08 -

www.ambest.com - A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit rating (ICR) of "a" of HDI-Gerling Industrie Versicherung AG (HGI) (Germany). Concurrently, A.M. Best has affirmed the debt rating of "bbb+" on the 250 million Euro subordinated fixed to floating rate notes due 2024 issued by the former Gerling-Konzern Allgemeine Versicherung AG (GKA) (Germany). The outlook for the ICR and debt rating has been revised to positive from stable, and the outlook for the FSR remains stable.

The ratings of HGI factor the implicit support from the parent company, Talanx AG. Other factors include adequate risk-adjusted capitalisation and the successful integration of GKA, leading to an enhanced business profile. However,

these positive effects are partly offset by increasing pressure on premium rates in HGI's main lines of business and by a limited operational risk from the relocation of former Gerling employees.

HGI's risk-adjusted capitalisation remains adequate despite the reduction of equalization reserves in 2007, unrealised losses in its bond portfolio due to higher interest rates and upstreamed profits to the parent company. Prospectively, equalisation reserves are likely to be strengthened in 2008 as a result of improved underwriting performance. Supporting the robust capital base, HGI benefits from a profit and loss absorption agreement with Talanx AG, even if this agreement limits its ability to retain earnings.

A.M. Best expects HGI's gross premiums written to decline by approximately 12% to EUR 2.4 billion (USD 3.5 billion) in 2008 due to portfolio transfers to other entities of Talanx AG, combined with a continuing rate decrease in the industrial lines market. A.M. Best's initial concerns regarding the loss of business have been alleviated by the fact that HGI successfully renewed almost all business with its large industrial clients.

HGI's underwriting performance deteriorated in 2007 with a combined ratio of 105.8% (based on German accounting standards) (from 85.2% in 2006), reflecting the alignment of former GKA reserves with HDI Industrie standards and non-recurring integration costs. Without these items, the combined ratio would have been well below 100% in 2007. However, HGI still achieved an after tax profit of EUR 28 million (USD 42 million), translating into an 8.1% pre-tax return on premium supported by excellent net investment returns (including realized and unrealized losses) of 4.4% in 2007. Against this backdrop, A.M. Best expects the combined ratio to recover to a level of below 100% in 2008. The absence of a reserve alignment will positively impact the loss ratio, whereas the continued pressure on premium rates in HGI's main lines of business will have a partly offsetting effect. Overall, the loss ratio is expected to return to more historical strong HDI-Industrie levels. The expense ratio will benefit from the absence of non recurring integration costs balanced by the impact of GKA's predominately broker-based business model. As a result, the expense ratio is expected to stabilise around 23%, from historical HDI Industrie levels in the range of 10% to 15% due to GKA's concentration on the broker market.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.

A.M. Best
Analysts:
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michael.zboron@ambest.com
Vasilis Katsipis, +(44) 20 7626 6264
vasilis.katsipis@ambest.com
or
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Rachelle Morrow, +(1) 908 439 2200, ext. 5378
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