S&P Affirms Hannover Re, Clarendon Ratings; Off CreditWatch

January 23, 2006

Standard & Poor’s Ratings Services announced that it has “affirmed its long-term counterparty credit and insurer financial strength ratings on Hannover R├╝ckversicherung-AG and its core entities (collectively Hannover Re) and removed them from CreditWatch, where they had been placed with negative implications on Nov. 10, 2005.” S&P’s overall ratings on Hannover Re and its various operating entities thus remains at “AA-.”

S&P also said it has “affirmed its long-term counterparty credit and insurer financial strength ratings on Clarendon National Insurance Co. and three of its subsidiaries–Clarendon America Insurance Co., Redland Insurance Co., and Insurance Corp. of Hannover–and on International Insurance Co. of Hannover Ltd., and removed all the ratings from CreditWatch, where they had also been placed with negative implications on Nov. 10, 2005.”

S&P, however, specified that the outlook “on all entities is negative.”

The CreditWatch placement: “Followed the announcement by Hannover Re of its third-quarter results, which included a significant increase in the loss estimates relating to hurricanes Katrina and Rita,” said the announcement. “This news raised concerns over the ultimate cost of the hurricane season; the group’s risk-management, modeling, and pricing capabilities; and the exposure of earnings to natural catastrophes, despite the group’s apparent high diversity of risk by business line and geography.”

S&P credit analyst Simon Marshall explained: “Following discussions with management, we consider the group’s risk-management, modeling, and pricing capabilities to be sound. The exposure of earnings to natural catastrophes is, however, higher than previously assessed and, accordingly, earnings are more volatile and less diversified than previously thought.”

S&P said: “The ratings on Hannover Re reflect the group’s effective management and strategy, very strong operating performance, very strong competitive position, and strong capitalization. Despite its operational independence, Hannover Re is considered core to its parent, Talanx AG (A/Watch Neg/–), on account of its strategic role and size. The ratings on Hannover Re are therefore underpinned by the financial strength of the core primary insurance entities of the Talanx group.”

The rating agency added: “The ‘A’ ratings on Talanx AG and the ‘AA-‘ ratings on the core primary insurance entities remain on CreditWatch with negative implications, where they were placed on Nov. 7, 2005 (see ‘Talanx AG And Subs On Watch Negative On Plan To Buy Gerling Group; Hannover Re Ratings Affirmed,’ published Nov. 7, 2005, on RatingsDirect, Standard & Poor’s Web-based credit analysis system).”

On the plus side, S&P noted that the “combination of Hannover Re’s core status and its relative operating independence means that the ratings on Hannover Re will not fall below those on the core operating entities of the Talanx group, and could be up to a maximum of two notches higher.”

“The negative outlook is driven by uncertainties over the benefits deriving from the diversified activities of the group,” Marshall noted. “Specifically, there are concerns over the successful restructuring and profitability of the financial reinsurance and specialty units. The negative outlook is also driven by doubts over the group’s ability to purchase adequate reinsurance protection at economic prices, following the high losses of Hannover Re’s reinsurers relating to the 2005 hurricane season.”

S&P also indicated: “The current ongoing reinsurance securitization transaction is expected to complete satisfactorily in the coming weeks, while the placement of the group’s traditional reinsurance program in May is expected to be satisfactory. The combined ratio for financial reinsurance business, including interest on funds withheld, is projected to be about 98 percent in 2005 and 95 percent in 2006.

“Gross premiums written in this segment are expected to have fallen by 25 percent in 2005, but to fall by no more than 5 percent in 2006. The combined ratio for the specialty business segment is projected to be about 102 percent for 2005, 99 percent in 2006, and 95 percent in 2007.

“Group ROE is expected to be close to 15 percent for 2006 and ROR for traditional property/casualty reinsurance around 10 percent. Value in force on life reinsurance business is expected to grow by 10 percent.”

However, S&P warned “failure to meet these expectations could lead to the ratings being lowered. The successful restructuring of the financial reinsurance and specialty units and the placement of the group’s reinsurance program at economic prices could result in a stable outlook, however.

“A stable outlook could also be assigned if, upon resolution of the existing CreditWatch status of the Talanx group, the ratings on Talanx AG’s core primary insurance entities are affirmed and a stable outlook assigned.”

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