A.M. Best Takes Various Rating Actions on HDI Haftpflichtverband der Deutschen Industrie; Assigns Ratings to Gerling-Konzern Lebensversicherungs-AG.

OLDWICK, N.J. -- A.M. Best Co. has removed the ratings of HDI Haftpflichtverband der Deutschen Industrie (HDI) (Germany) and those of its main subsidiaries from under review with negative implications and affirmed the ratings. A.M. Best has also removed from under review with developing implications the ratings of the main non-life subsidiaries of Gerling Beteiligungs-GmbH (GBG) (Germany) acquired by HDI and has upgraded the financial strength rating (FSR) to A (Excellent) from A- (Excellent) and the issuer credit rating (ICR) to "a" from "a-". Finally, A.M. Best has assigned an FSR of A (Excellent) and an ICR of "a" to Gerling-Konzern Lebensversicherungs-AG (GKL) (Germany). A stable outlook has been assigned to all ratings. (See below for a complete listing of the ratings.)

The rating actions reflect A.M. Best's view that the completion of the acquisition of GBG will result in a strengthened business position of the enlarged group, improving financial performance and stable capitalisation, albeit with increased levels of soft elements of capital.

Strengthened business position--The acquisition provides HDI with a greater presence in the German market, especially in the life, industrial risks and motor business segments. The enlarged group is likely to be the second-largest non-life and the fourth-largest life insurer in the German market. Consolidated non-life premiums are likely to remain stable in 2006 mainly due to the impact of the reduced rates in the motor market. A.M. Best believes that there is potential for loss of business in the industrial segment, especially among the larger industrial institutions. However, the acquisition provides HDI with access to small to medium companies, a segment where it traditionally has been underrepresented. A.M. Best believes that life premiums are likely to increase by approximately 5% in 2006 as the acquisition of GKL will result in increased sales in direct life insurance business at a time when the macroeconomic indicators point toward resumption of moderate growth in the German life market.

Stable financial performance--A.M. Best believes that the group's consolidated non-life technical profitability is likely to deteriorate slightly in 2006 as a result of the price declines in motor and property covers for industrial clients in the German markets. However, the combined ratio for the consolidated entity is likely to return to below 100% as underwriting conditions of the acquired primary non-life Gerling business and the HDI primary segment remain favourable. However, this will also be subject to improved catastrophe experience from its reinsurance subsidiary, Hannover Rueckversicherung AG (Hannover Re). A.M. Best expects profitability to improve further in 2007 due to the impact of the cost savings arising from the consolidation of back offices, improved bargaining power and rationalisation of reinsurance purchasing, while a reduced effective tax rate is likely to improve retained earnings.

Stable capitalisation but increased levels of soft elements of capital--A.M. Best expects the risk-adjusted capitalisation of the consolidated entity to remain stable with the majority of the impact of the acquisition being absorbed by the strong retained earnings of HDI over the last three years. The high level of reinsurance dependence is likely to reduce from 2007 onward as the group rationalises reinsurance purchase, especially among the acquired Gerling entities. Dependence upon soft elements of capital is likely to increase and remain high for the next two years mainly as a result of the acquisition of GKL. The assumption of EUR 600 million (USD 773 million) of pension liabilities by HDI has been factored into the ratings, and its impact is likely to continue being covered by strong retained profits. A.M. Best expects the current reinsurance support, which is provided for Gerling America Insurance Company (GAIC) by Gerling-Konzern Allgemeine Versicherungs-AG (GKA), to be continued in the medium term. The importance of Hannover Re to the HDI group is reduced and is improving the group's long-term prospects of raising additional capital and its overall financial flexibility.

The FSR of A (Excellent) and the ICR of "a" of the following entities have been affirmed, removed from under review and assigned a stable outlook:

--HDI Haftpflichtverband der Deutschen Industrie

--HDI Industrie Versicherung AG

The ICR of "bbb+" has been affirmed, removed from under review and assigned a stable outlook for HDI's main subsidiary-holding, Talanx Aktiengesellschaft.

The FSR has been upgraded to A (Excellent) from A- (Excellent) and the ICR to "a" from "a-" and have been removed from under review for the below entities. A stable outlook has been assigned.

--Gerling-Konzern Allgemeine Versicherungs-AG

--Gerling America Insurance Company

An FSR of A (Excellent) and an ICR of "a" has been assigned to Gerling-Konzern Lebensversicherungs-AG with a stable outlook.

The rating of the following debt instrument issued by Talanx Aktiengesellschaft has been affirmed, removed from under review and assigned a stable outlook:

--"bbb-" on EUR 350 million callable junior subordinated notes, due June 2025

The rating of the following debt instrument issued by Gerling Konzern Allgemeine Versicherungs-AG has been upgraded to "bbb+" from "bbb", removed from under review and assigned a stable outlook:

--"bbb+" on EUR 250 million subordinated notes, due August 2024

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.