Best Affirms Hannover Re ‘A’ Ratings

September 12, 2007

A.M. Best Co. has affirmed the financial strength rating (FSR) of “A” (Excellent) and the issuer credit rating (ICR) of “a” of Germany’s Hannover Rueckversicherung AG (Hannover Re) and its rated subsidiaries. Best also upgraded all ratings for debt issued or guaranteed by Hannover Re “in order to reflect the ranking of debt relative to policyholder obligations of German reinsurers.” The outlook for all ratings remains stable.

“The ratings reflect Hannover Re’s excellent risk-adjusted capitalization, excellent profitability despite the softening market conditions in the non-life sector and the company’s excellent business profile in the global reinsurance sector,” said Best. “Offsetting factors remain the company’s limited financial flexibility and high exposure to catastrophe losses.”

Best expects Hannover Re’s risk adjusted capitalization to remain “excellent” in 2007 even though the Group has resumed dividend payments. Hannover Re has also managed to reduce its dependence on the retrocession market in 2006 and has redeployed “a substantial part of the capital released from the sale of Praetorian Financial Group (PFG) to increase its net retention.”

Hannover Re, however, according to Best’s analysis, “continues to have limited financial flexibility as its ability to raise equity remains dependent upon its majority shareholder, Talanx AG, which is a non-listed intermediate holding company. In addition, the company has already exhausted the maximum credit for hybrid equity of 20 percent of total adjusted capital.”

Pre-tax earnings for 2007 are expected to increase to approximately €950 million ($1.3 billion) from €834 million ($1.1 billion) “translating into an excellent and stable pre-tax return on equity of 25 percent (assuming catastrophe losses not exceeding 8 percent of net premiums).” While improved returns from life reinsurance earnings and investment returns constitute a major portion of the improved earnings, “it is also driven by improved non-life underwriting results with a combined ratio of approximately 99 percent in 2007 from 101.5 percent (including finite reinsurance) in 2006.” In 2005 Hannover Re’s conservative reserving policy and “exceptionally high reinsurance cost related to Florida windstorm risks at its subsidiary Clarendon” combined to impact its underwriting performance.

Best also noted that the earnings improvements have been achieved, “despite higher catastrophe losses from the winter storm ‘Kyrill’ and flooding in the UK as well as rate declines in U.S. casualty and marine and aviation lines which highlights the potential earnings volatility from Hannover Re’s exposure to natural catastrophe risks.

“Hannover Re’s business profile remains excellent in the global reinsurance market in 2007. The company focuses now only on reinsurance following the sale of PFG. Gross premiums are expected to decrease by approximately 9 percent to €8.5 billion ($11.6 billion) in 2007 mainly due to this transaction.

“In its core business Hannover Re was able to gain several new domestic non-life clients as well as in the UK impaired annuity market which will likely compensate for softening rates in other non-life reinsurance markets.”

Source: A.M. Best

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