A.M. Best announced that it has affirmed its A+ (Superior) financial strength ratings for Hannover Ruckversicherungs AG and other entities of the German-based reinsurer, but maintains a “negative outlook.”
“These rating actions reflect Hannover Re’s excellent business position and historically strong earnings. Offsetting factors include Hannover Re’s deteriorating capital base and limited financial flexibility”, said Best’s announcement.
The rating agency also noted that “Hannover Re is the world’s fifth-largest reinsurer, with an excellent geographic business spread and strong diversification by product line. It has substantially expanded its life reinsurance business, reducing its dependence on traditional property/casualty quota share business while establishing itself as a major provider of financial reinsurance via the Hannover Re Advanced Solutions group.”
The report noted, however, that Hannover Re’s capitalization could come under additional pressure this year. Following strong results in 1999 and 2000, the company was hit by a $400 million in WTC related losses. Best expects “significantly improved profits in 2002 as a result of favourable underwriting conditions in the non-life segment,” but added that “investment returns will be negatively affected by capital market development.”
Best’s main concern is Hannover’s “Limited financial flexibility.” While noting that the company’s “financial leverage has increased in recent years,” it “believes that Hannover Re’s access to additional capital resources is now more limited due largely to weak capital markets and its already high financial leverage.” It also noted that company subsidiary HDI’s “current focus on expanding its life portfolio may restrict its ability to provide further funds for Hannover Re.”
The announcement indicated that the “negative outlook reflects concerns that Hannover Re’s limited financial flexibility may affect its growth strategy in life reinsurance, which could ultimately have a negative impact on its business profile.”
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