A.M. Best Affirms Ratings of HDI Haftpflichtverband der Deutschen Industrie V.a.G. and Talanx AG

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LONDON--(BUSINESS WIRE)-- 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 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). A.M. Best also has 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 (HDI-Gerling Leben), the leading life insurance operation within Talanx AG.

Concurrently, A.M. Best has affirmed the ICR of “bbb+” of Talanx AG and affirmed the debt rating of “bbb” on the EUR 350 million junior subordinated fixed to floating rate notes, due 2025 issued by Talanx AG. The outlook for all ratings remains stable. All the above companies are domiciled in Germany. (Please see also today’s related press releases on HDI-Gerling Industrie Versicherung AGand HDI-Gerling Lebensversicherung AG.)

A.M. Best expects Talanx AG to continue to maintain excellent consolidated risk-adjusted capitalisation in 2012 supported by significant unrealised 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% of capital and surplus at third quarter 2011; however, total exposure to peripheral eurozone debt, including covered bonds, is higher at approximately 60% of capital and

surplus. The Group also has a high level of exposure to eurozone financial institutions senior and subordinated debt at approximately 180% 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.

A.M. Best expects Talanx AG’s 2011 consolidated earnings after tax and minorities to increase to approximately EUR 400 million from EUR 220 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 EUR 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.

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 Ubezpieczen Europa SA and Towarzystwo Ubezpieczen na Zycie 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% 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 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 there were a significant deterioration in the Group’s risk-adjusted capitalisation, possibly driven by large losses in its exposure to eurozone debt. Poor execution and integration of the Group’s mergers and acquisitions strategy 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 Universal BCAR”; “Understanding BCAR for Property/Casualty 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 www.ambest.com/ratings/methodology.

In accordance with Regulation (EC) No. 1060/2009, the following is a link to required disclosures: A.M. Best Europe - Rating Services Limited Supplementary Disclosure.

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. For more information, visit www.ambest.com.