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Rating Action:

MOODY'S DOWNGRADES RATING FOR GERLING LEBEN (TO A2 FROM A1), REMAINS UNDER FURTHER REVIEW, DIRECTION UNCERTAIN; RATINGS OF GERLING NCM UNCHANGED AND REMAIN UNDER REVIEW

31 Jan 2003
MOODY'S DOWNGRADES RATING FOR GERLING LEBEN (TO A2 FROM A1), REMAINS UNDER FURTHER REVIEW, DIRECTION UNCERTAIN; RATINGS OF GERLING NCM UNCHANGED AND REMAIN UNDER REVIEW

Moody's comments further on Gerling Group developments

London, 31 January 2003 -- Moody's today downgraded its rating for Gerling-Konzern Lebensversicherungs-AG ("Gerling Leben") to A2 from A1. Moody's ratings for the Gerling NCM Group (A1 long-term IFSR for main entities and see ratings list below, P-1 short-term IFSR for main entities) remain unchanged. All long-term ratings remain under review, direction uncertain. Moody's reaffirmed its review for possible downgrade for the P-1 short-term IFSR for the main Gerling NCM entities. In this press release Moody's also comments on the potential future rating movements for the Gerling entities.

Gerling Leben downgrade reflects weakened capital

The rating agency said that the downgrade for Gerling Leben reflects the continued effects of capital markets weakness on the solvency position of the company. Moody's said that Gerling Leben has historically maintained a relatively high level of equity exposure (20% of assets at end 2001), which, as equity markets have fallen through 2002, has led to a deterioration in economic capitalisation. Moody's therefore views Gerling Leben's capital position currently as comparatively weaker than before, although solvency remains well above regulatory requirements. In addition, Moody's added that although Gerling Leben retains significant elements of financial flexibility, with in particular a still significant volume of in-force embedded value currently inadmissible for regulatory solvency, the continued ownership uncertainty at the Gerling Group level could restrict the company's external financing options in future.

More positively, Gerling Leben has continued to show strong new business growth, and remains well positioned in its core corporate pensions business. In addition, Gerling Leben has recently announced relatively significant cuts to its bonus rates for 2003 (from 7.35% in 2002 to 5.5% for 2003, including final bonus), which immediately reduces financial pressures. Gerling Leben has also increased the proportion of bonus it allocates as final bonus, which Moody's believes will improve the company's financial flexibility over time. The company has also acted to reduce its future exposure to any further equity market falls, removing a major source of recent capital weakness.

GERLING NCM : ratings unchanged; remain under review

Moody's unchanged ratings for the GERLING NCM ("GNCM") companies (see list below) largely reflect the broadly maintained level of earnings and capital during a time of severe economic and credit stress within some of GNCM's main credit markets. Moody's added that GERLING NCM's more diversified shareholder base (25% ownership by Swiss Re) and corporate governance, as well as the still-planned future IPO for the Group, further support GERLING NCM's capital position and somewhat distance GERLING NCM from issues at the Gerling Group level. Although Moody's regards the GERLING NCM group as relatively modestly capitalised relative to its credit insurance peers, Moody's believes that the high level of geographical business diversity and significant use of high-quality reinsurance act as positive offsets. Furthermore, Moody's comments generally that credit insurers retains significant financial flexibility during times of economic stress to mitigate the effects of economic downturns, and that GERLING NCM continues to act appropriately in this regard.

Commenting on the continued review for possible downgrade of the short-term P-1 ratings for the main GERLING NCM entities, Moody's noted that whilst it believes liquidity levels within GNCM remain strong, any future downgrades for the current A1 long-term IFSR's would create pressure on the short-term P-1 ratings.

Gerling Konzern Allgemeine (unrated)

In the context of its ratings on the Life and Credit Insurance operations of the Gerling Group, Moody's notes that the franchise and financial condition of the Gerling Group's significant (mainly German) non-life business remain important factors. In particular, the need to provide further capital, or any deterioration in the non-life insurance franchise, might potentially impact on the rated entities.

In that context Moody's said that it views Gerling-Konzern AllgemeineVersicherung's ("GKA") business mix as relatively high-risk, with significant proportions of liability and industrial risk business. Consequently, Moody's regarded GKA's reported capitalisation levels at end 2001 as relatively modest. Furthermore, Moody's expects that GKA's capitalisation, like that of it's peers, might have come under pressure during 2002, as a result of equity market exposure and generally poor investment returns, although Moody's expects GKA's capitalisation levels to still be at adequate levels. However, Moody's notes that, as a result of some significant premium rate rises for some of GKA's business lines, as well as some increases in business volumes, relatively material amounts of capital are likely to be required at GKA in order to maintain the current capitalisation position. The rating agency added that it regards GKA's earnings generation as relatively modest, such that any substantial capital requirements might largely have to be sourced at the Gerling Group level.

Succesful completion of Gerling Globale sale remains critical to financial stability of Gerling Group

The Gerling Group recently (November 2002) announced the intended sale of its reinsurance business (Gerling-Konzern Globale Rueckversicherungs-AG, "Gerling Re", not rated by Moody's) to a third-party fund ("Lago Achte"). In Moody's view, the successful legal and regulatory completion of the reinsurance sale remains critical to the ongoing financial stability of the Gerling Group and therefore the primary insurance entities. In connection with this, Moody's understands that the German regulator BaFin has yet to approve the transaction, and that some policyholders of Gerling Re may seek to legally link the liabilities of Gerling Re with the Gerling Group even after a completed sale. Moody's also notes that Gerling Re still has significant external debt obligations (€220m of subordinated debt, due 2021), with interest deferral possible in certain scenarios.

Overall, Moody's believes that the sale procedure is relatively well advanced, and that in most cases Moody's would expect insurance regulators to act to protect primary insurance policyholders and not debtholders or reinsurance policyholders. However Moody's believes that if the sale is not definitive, the Gerling Group could be at risk from policyholder and bondholder claims in respect of Gerling Re. Failure of this sale to be completed could therefore trigger further rating actions.

Potential introduction of new shareholder could be ratings positive

The Gerling Group has also announced that it is in negotiations with at least one potential partner (HDI), in connection with introducing a new shareholder to the Gerling Group. Moody's would regard such a development positively, due to the potential for additional capital to be injected to support the future growth and solvency of the primary insurance businesses. In addition, Moody's general concerns over the long-term franchise damage to the Gerling group, as a result of the continued ownership uncertainty, would be removed. In Moody's opinion, however, the introduction of any new partner is unlikely unless a successful and final sale of the reinsurance business is concluded, underlining the key nature of this transaction.

Future ratings changes contingent on completed reinsurance sale and introduction of new shareholder

In conclusion, Moody's long-term ratings for the Gerling group remain under review, direction uncertain, reflecting the still considerable level of uncertainty over developments regarding the sale of Gerling Re and the introduction of a new shareholder partner. In terms of future ratings changes, Moody's comments that

· If Gerling Re is not ultimately successfully legally separated from the Gerling Group, Moody's would need to consider further ratings downgrades from current levels, as the potential capital liabilities at Gerling Re could, via the Gerling Group, impact on the primary insurance operations.

· If no new shareholder is introduced to the Gerling Group, but Gerling Re is successfully separated, Moody's may need to consider reducing its ratings from their current level, but to a lesser extent than in the case where Gerling Re is not sold. Moody's added that in this scenario, ratings for the main primary insurance entities (A1 for GERLING NCM, A2 for Gerling Leben) would be unlikely, in the normal course of events, to fall into the Baa-category.

· The successful introduction of a new capital partner, and the successful final sale of Gerling Re, could stabilise or lead to increases in the current ratings of the Gerling group, depending on the credit quality of any new shareholder and the level and format of any new capital provided.

The Gerling Group, headquartered in Cologne, Germany, had total assets of €44.8bn as at end 2001.

The following rating was downgraded and placed under further review, direction uncertain

Gerling-Konzern Lebesnversicherungs-AGInsurance Financial Strength to A2 from A1

The following ratings remain under review, direction uncertain

Gerling-Konzern Speziale Kreditversicherungs-AGInsurance financial strength at A1

Gerling Namur Assurances du Credit SAInsurance financial strength at A1

Nederlandsche Credietverzekering MaatschappijInsurance financial strength at A1

GERLING NCM Credit Insurance Inc.Insurance financial strength at A1

(previous NCM Americas)

Societa Italiana Cauziona SpAInsurance financial strength at A1

Gerling Nordic Kredittforsikring ASInsurance financial strength at A2

NCM Reinsurance LtdInsurance financial strength at A3

Namur Re SAInsurance financial strength at A3

The following short-term ratings remain under review for possible downgrade:

Gerling-Konzern Speziale Kreditversicherungs-AGShort-term insurance financial strength P-1

Gerling Namur Assurances du Credit SAShort-term insurance financial strength P-1

London
Mark Hewlett
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454

London
Simon Harris
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454

No Related Data.
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