A.M. Best Affirms Rating of Gerling-Konzern Allgemeine Versicherungs-Aktiengesellschaft and Its U.S. Subsidiary; Assigns Issuer Credit Rating.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Gerling-Konzern Allgemeine Versicherungs-Aktiengesellschaft (GKA) (Germany) and its U.S. subsidiary, Gerling America Insurance Company (New York) (99% reinsured by GKA). The outlook on these ratings has been changed to stable from negative. At the same time, A.M. Best has assigned an issuer credit rating (ICR) of "a-" to each of these entities. The outlook for this rating is stable.

Concurrently, A.M. Best has affirmed the "bbb" debt rating of the EUR 250 million fixed-to-floating-rate subordinated notes issued by GKA. The outlook on this rating is stable.

The ratings reflect GKA's improving operating performance in 2004, the strengthening of its consolidated risk-adjusted capitalisation and the maintenance of its leadership in the German industrial insurance sector. Offsetting these factors is the uncertainty surrounding GKA's future ownership and the remaining credit exposure to Globale Re (formerly Gerling Re) and to its ultimate parent, Gerling Konzern Beteiligungs AG (GKB), with regard to pension liabilities.

Improving operating performance--A.M. Best expects GKA's earnings improvement during 2004 to continue in 2005 as result of a continued attractive rate environment--in particular for industrial liability--as a consequence of the shortage of capacity. The expected net combined ratio of approximately 97% for 2004 is higher than the gross combined ratio of approximately 92% as GKA continues to forego underwriting profits to reinsurers. GKA is planning to increase its net retention in 2005, which will likely lead to higher profits but increased underwriting volatility.

Credit risk relating to Globale Re and from pension liabilities--GKA has significantly reduced its credit exposure to Globale Re by means of normal run-off and other measures in 2004, but it remains high at approximately 20% of total reinsurance recoverables. A.M. Best expects a further reduction in 2005 from the normal run-off. GKA's pension liabilities have been outsourced to GKB; however, GKA remains liable for these obligations. This credit risk will be partially alleviated by a transfer of liquid assets of approximately EUR 120 million (USD 160 million), of which EUR 25 million (USD 33 million) will be paid at year-end 2004 from GKB, subject to the regulatory approval, which the company expects to receive in the first half of 2005.

Strengthening of risk-adjusted capitalisation--The EUR 250 million subordinated bond issued in August 2004, treated as hybrid capital in A.M. Best's risk-adjusted model, has enhanced GKA's capitalisation after factoring higher prospective capital requirements for the proposed increased retention.

Maintenance of a leading business position--GKA has retained the support of its key domestic clients in 2004 and remains one of the leading industrial insurers in Germany. A.M. Best anticipates a 4% decline of the total gross premium income to approximately EUR 2.4 billion (USD 3.2 billion) at year-end 2004 reflecting the continued loss, albeit on a smaller scale, of business outside Germany. GKA's profile in domestic personal and small commercial lines is relatively small but likely to grow after the acquisition of Gerling G&A Versicherungs-AG's (GG&A) broker-derived client business.

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