A.M. Best Affirms Ratings of HDI-Gerling Lebensversicherung AG

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of HDI-Gerling Lebensversicherung AG (HG-LV) (Germany). The outlook for both ratings is stable.

The ratings reflect HG-LV’s good risk-adjusted capitalisation, solid overall earnings and good business profile. The ratings also take into account the importance of HG-LV to its ultimate parent, Talanx AG, as the main primary life entity of the group. (See today’s related press release on HDI Haftpflichtverband de Deutschen Industrie V.a.G. and Talanx AG, collectively the Group).

A.M. Best expects HG-LV’s risk-adjusted capitalisation to remain supportive of the ratings in 2011-2012, in particular due to the fact that HG-LV will not pay a dividend for 2011. However, capital levels continue to be dependent on a number of soft factors, such as investment valuation reserves, free reserves for policyholders’ surplus and value of in-force business. This means that prospective risk-adjusted capitalisation is likely to remain subject to volatility, whilst Talanx AG’s dividend policy (historically, between 60%-80% of profits have been distributed) limits the company’s potential for earnings retention.

HG-LV’s net profit after tax is expected to fall in 2011, driven by expected lower investment returns and one-off restructuring costs. HG-LV’s 2010 net profit before tax decreased from EUR 104.3 million to EUR 35.5 million, driven mainly by higher dividends to policyholders and higher other technical expenses. The decrease was only partially offset by a good investment result with HG-LV’s net investment yield including unrealised gains increasing to 6.3%. The 2010 results translated into a decrease in the return on equity from 16.6% to 6.7%.

HG-LV has a good business profile as the largest life operation of the Talanx group and a major German insurer. In 2010, premiums grew by 7.6% to EUR 2,041 million with single premiums increasing by a very strong 47% to EUR 229 million, while regular premiums rose by 4.1% to EUR 1,811 million. This strong increase resulted largely from the partial consolidation of Aspecta Lebensversicherung AG (A-LV), which was merged into HG-LV in October 2010. Although HG-LV has been losing market share in recent years, market share is forecast to increase in 2011 with the restructuring of Talanx Deutschland and the merger with A-LV. The restructuring and merger will enable HG-LV to improve its business profile by broadening its product range, improve efficiencies and reduce costs. Going forward, HG-LV believes it can strengthen its competitive position by concentrating on unit-linked products with guarantees and on disability insurance. The company also intends to increase growth in its corporate pension business, where it has historically had a good franchise.

Upward rating actions could occur if the Group improves its risk-adjusted capitalisation, 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 risk-adjusted capitalisation were to deteriorate as a result of investment losses and negative interest rate developments. A deterioration of the company’s market share and competitive position may also put negative pressure on the ratings.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilised include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Life/Health Insurers”; “Rating Members of Insurance Groups”; and “A.M. Best’s Ratings & the Treatment of Debt”. Best’s Credit Rating Methodology can be found at http://www.ambest.com/ratings/methodology.

In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: http://www3.ambest.com/emea/ambersdisclosure.pdf.

A.M. Best Europe – Rating Services Limited is a subsidiary of A.M. Best Company. Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source.