S&P Ups Hannover Re Outlook to Stable; Affirms ‘AA-‘ Ratings

May 23, 2007

Standard & Poor’s Rating Services has revised its outlook to stable from negative on German reinsurer Hannover Rückversicherung-AG and its core entities, collectively referred to as Hannover Re. The Group is majority owned by Germany’s Talanx AG. S&P also affirmed the “AA-” counterparty credit and insurer financial strength ratings on Hannover Re.

In addition S&P revised its outlook on the strategically important International Insurance Co. of Hannover Ltd. to stable from negative and affirmed its “A+” counterparty credit and insurer financial strength ratings.

“The outlook revision on Hannover Re reflects the group’s very strong operating performance, strong enterprise risk management, and very strong competitive position, combined with effective management and strategies,” explained S&P credit analyst Hiltrud Besgen.

She added, however, that these strengths “are partially offset by a competitive position more reliant on retrocession support than peers and moderate group capital quality although the capital adequacy ratio is very strong.”

S&P acknowledged that its previously expressed fears concerning “the continued availability of traditional and nontraditional retrocession have not been realized.” Hannover Re has also reduced its need to seek retrocession coverage following the sale of its U.S. specialty insurance operations.

The stable outlook reflects S&P’s expectation that Hannover Re “will maintain its very strong operating performance while its competitive position and future earnings will become less reliant upon retrocession.” Following the U.S. sale S&P said it doesn’t expect the “reinsurance utilization ratio” to exceed 15 percent. The reduced dependence on reinsurance has removed some significant pressure on the ratings.

S&P said it expects the following results from Hannover Re:
— P/C reinsurance gross premiums for 2007 to be at a level similar to that in 2006. The segment is expected to post a combined ratio of less than 100 percent and ROR of about 10 percent.
— Life and health reinsurance to maintain its current positive trend of value creation (8 percent-10 percent growth in European embedded value [EEV] per year). During 2007, the division is expected to demonstrate progress toward the goals set for 2008, that is, value of new business (VNB) in excess of €110 million [$147.7 million] and operating embedded value earnings about €150 million [$201.4 million].
— The group to post a ROE close to 15 percent and ROR of about 7 percent.
— Completion of the disposal of the U.S. specialty insurance operations in the second quarter of 2007, which will release additional capital to support the core business of the group. In addition, non-life earnings are expected to benefit prospectively from the omission of nonstrategically important business, which has historically been a drag on the group’s overall performance.
— Capitalization to remain strong with the capital adequacy ratio to be maintained at the 2006 level. Hannover Re should benefit from the support of its parent Talanx AG in case of a stress scenario due to its core status, although it is considered unlikely that Talanx AG will provide additional capital to finance Hannover Re’s business growth.

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