Best Affirms ‘A-‘ Ratings on Hannover Re U.K. Sub

August 30, 2006

A.M. Best Co. has affirmed the financial strength rating of “A-” (Excellent) of International Insurance Company of Hannover Limited (Inter Hannover), the U.K.-based subsidiary of Germany’s Hannover Re. Best also assigned Inter Hannover an issuer credit rating of “a-” and gave the ratings a stable outlook.

“The ratings reflect Inter Hannover’s continuing importance to Hannover Re and its improving risk-adjusted capitalization,” said Best. “Offsetting factors are poor returns on premium and the effect of softening rates.”

Best noted that the ratings duly consider Inter Hannover’s importance to Hannover Re “as its only platform for writing agency business in the United Kingdom and across Europe. Additionally, Inter Hannover exclusively fronts business for its parent in these regions where Hannover Re is not licensed to write direct business. Inter Hannover also shares resources available through Hannover Re such as its security committee, actuarial, legal and underwriting support functions.”

Best also indicated that it “expects Inter Hannover’s risk-adjusted capitalization to improve in 2006 and 2007 due to an increase in share capital of £5 million ($9.4 million) and an additional subordinated loan issue of £6.7 million ($12.6 million) to Hannover Re. The proceeds from the debt issue have some equity characteristics for which A.M. Best has given partial credit in its quantitative analysis of Inter Hannover. A.M. Best’s analysis of Inter Hannover’s risk-adjusted capitalization factors the company’s high level of reinsurance recoverables arising from Hannover Re (81 percent of all recoveries as at the 2005 year end).

However Best also noted that it “expects a poor return on net premiums of 0.4 percent in 2006 (0.5 percent in 2005), driven by a high loss ratio of 77 percent, leading to a combined ratio of around 109 percent (including non-technical operating expenses related to managing agents).

“Results are likely to remain depressed due to the financial drag from a significant unprofitable agent. This negative impact will reduce into 2007 as the five-year agreement on a short-tail personal lines account terminates in 2006.” Best also indicated that it “believes changes in risk management and contract structure that were implemented by the new management team will curtail the chances of any one agent being so significant that it could adversely affect the overall profitability of the company.”

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