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,
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
GERLING NCM Credit Insurance Inc.Insurance financial strength at
(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
Gerling-Konzern Speziale Kreditversicherungs-AGShort-term
insurance financial strength P-1
Gerling Namur Assurances du Credit SAShort-term insurance financial
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
44 20 7772 5454