Best Affirms Hannover Re, Subs Ratings; Revises Outlook to Stable

December 22, 2004

A.M. Best Co. announced that it has affirmed the “A” (Excellent) financial strength rating of German reinsurer Hannover Rückversicherung AG (Hannover Re) and its core subsidiaries. At the same time Best also affirmed, the “bbb+” ratings on the subordinated debt issued by Hannover Finance Inc. (U.S) and Hannover Finance (Luxembourg) S.A., which are guaranteed by Hannover Re, and said the outlook on the ratings has been revised to stable from negative.

In a separate announcement Best affirmed the “A” (Excellent) financial strength rating of Hannover Reinsurance (Dublin) Limited, and removed the company from under review. Concurrently Best assigned an issuer credit rating of “a”. Both ratings have a stable outlook, said Best, and “reflect the strategic importance of Hannover Re Dublin to its parent, Hannover Re, and the company’s strong risk-adjusted capitalisation as well as good, albeit volatile, earnings.”

Best also assigned a “bbb+” rating to the 750 million euro ($1 billion) subordinated bond due 2024 issued by Hannover Finance (Luxembourg) S.A. and guaranteed by Hannover Re. At the same time, an issuer credit rating (ICR) of “a” with a stable outlook has been assigned to all entities.

“These ratings reflect Hannover Re’s excellent business position, improving risk-adjusted capitalization and financial flexibility, which is offset by the still relatively high dependence on reinsurance recoverables,” said Best. “The ratings also factor the company’s lower earnings, due to a number of natural catastrophes, albeit in line with the current rating.”

Best indicated that Hannover Re’s “Risk-Adjusted Capitalisation and Financial Flexibility” has benefited from the 750 million euro subordinated bond that partially replaces a $400 million subordinated bond issued early in the year, as in Best’s assessment it is treated as “hybrid capital.”

Best noted, however, that “Hannover Re’s dependence on reinsurance recoverables and underwriting leverage (technical reserves/shareholder funds) remains high at above 210 percent, as the reduction in 2004 was somewhat offset by an increase in claims provisions for the recent catastrophes. Financial flexibility has been enhanced as result of the increase in free float to 48.8 percent, but remains somewhat dependent on its ultimate parent, HDI, which in turn is limited due to its mutual status.”

The rating agency also foresees lower earnings for the company. It expects 2004 earnings to be lower than the 354 million euros ($473 million) achieved in 2003, “due the significant exposure to a number of natural catastrophes (approximate loss of 358 million euros [$479 million]),” but Best said they nevertheless remain within its “expectations for the current rating.” It also forecast that the earnings picture would improve in 2005 “as rate softening remains moderate.”

Best gave the following details on those group companies affected by the ratings:
— The A (Excellent) financial strength ratings of the following core companies of Hannover Rueckversicherung AG have been affirmed. The outlook has been revised to stable from negative.
— E+S Rueckversicherungs – AG– Hannover Reinsurance (Ireland) Limited
— E+S Reinsurance (Ireland) Ltd
— Insurance Corporation of Hannover
— Hannover Life Reassurance (Ireland) Limited

— A “bbb+” rating has been assigned to the following debt issue with a stable outlook.
Hannover Finance (Luxembourg) S.A.—
— EUR 750 million subordinated fixed to floating rate bond, due 2024 and guaranteed by Hannover Re

— The “bbb+” rating for the following debt issues have been affirmed. The outlook has been revised to stable from negative.
— Hannover Finance Inc. (United States)—
— USD 400 million subordinated bond, due March 2029
— Hannover Finance (Luxembourg) S.A.—
— EUR 350 million subordinated debt, due March 2031
(Both issues guaranteed by Hannover Re)

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