Best Revises Hannover Re, Subs Outlook to Positive; Affirms ‘A’ Ratings

November 3, 2010

A.M. Best Europe – Rating Services Limited has revised the outlook to positive from stable for the ratings of Germany’s Hannover Rueckversicherung AG (Hannover Re) and its related debt issues and rated subsidiaries. Best also affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of Hannover Re and the debt ratings of Hannover Finance (Luxembourg) S.A., which are either issued or guaranteed by Hannover Re.

The revision of the outlook to positive “reflects better than anticipated improvement in Hannover Re’s risk-adjusted capitalization,” Best explained; adding that in its view “that the improvement is likely to be maintained in 2010-2011, despite more difficult trading conditions.

“In 2009, a strong improvement in Hannover Re’s risk-adjusted capitalization was supported by solid underwriting performance, a recovery in the company’s investment returns and the absence of a dividend payment during the year. Assuming normal catastrophe experience for the rest of 2010, Hannover Re’s performance is expected to support some improvement in risk-adjusted capitalization, despite the resumption of dividend payments at pre-crisis levels.”

Best also noted that in 2009, the “lack of retrocessional capacity in capital markets was restrictive for Hannover Re, but for the future the renewal dates of the company’s retrocessional program have been spread across different dates to avoid over-reliance on capacity availability at a single point in time.” However, Best also indicated that in its view,” Hannover Re’s financial flexibility remains constrained by its dependence upon its majority shareholder, Talanx AG, which is a non-listed intermediate holding company.”

The reinsurer’s net income in 2010 is likely to be “solid,” said Best, “albeit somewhat lower than 2009, due to the impact of catastrophe experience on non-life reinsurance underwriting performance, particularly the Chilean earthquake loss.

“Performance is likely to be supported by a stable life reinsurance result, positive investment returns from Hannover Re’s conservative investment portfolio and reserve releases. Although the environment in 2011 is likely to be more challenging for Hannover Re, due to market softening for several of its main business lines and a continuation of the historically low returns available from investments, A.M. Best expects business growth to be moderated in order to protect profitability.

“Hannover Re continues to benefit from an excellent profile in the global reinsurance market. Premium growth in 2010 is likely to be driven by business written in the pension buy-out market in the United Kingdom, more US mortality business due to Hannover Re’s improved position in the market following acquisition of the ING portfolio and increased premium volume in certain emerging markets. Overall growth in gross premiums is likely to be above the company’s target of 5 percent due to the significant contribution made by the life reinsurance business.”

Best’s report summarized the rating actions as follows:
The FSR of A (Excellent) and the ICRs of “a+” have been affirmed for Hannover Rueckversicherung AG and its following rated subsidiaries:
E+S Rueckversicherungs AG
Hannover Reinsurance (Ireland) Limited
Hannover Re (Bermuda) Ltd.
Hannover Life Reassurance (UK) Limited
Hannover Life Reassurance (Ireland) Limited
Hannover Life Reassurance Bermuda Limited

The debt rating of “a” has been affirmed for the following issues:
Hannover Finance (Luxembourg) S.A.—(guaranteed by Hannover Re)
— € 750 million [$1.053 billion] subordinated fixed to floating rate bond, due February 2024
— € 350 million [$492 million] subordinated fixed to floating rate debentures, due March 2031
— € 500 million [$702.5 million] subordinated fixed to floating rate bond, due September 2040

The debt rating for the following issue has been upgraded to “a” from “a-” to bring the rating into line with other subordinated debt issues guaranteed by Hannover Re:
Hannover Finance (Luxembourg) S.A.—(guaranteed by Hannover Re)
— € 500 million [$702.5 million] undated guaranteed junior subordinated fix-to-floating callable bonds

Source: A.M. Best

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