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 [See also related articles].
Best also affirmed the debt ratings of “bbb+” on the subordinated and the “bbb” on the undated junior subordinated bond either issued or guaranteed by Hannover Re. The rating agency has removed all of the ratings from under review with negative implications and assigned a stable outlook. Best had placed the ratings under review on Nov. 8, 2005 in connection with the acquisition of Gerling by the parent company, Talanx AG.
“These rating actions follow the resolve of the under review status of Talanx AG (see related A.M. Best press release of August 29 [and following article]) and the completion of A.M. Best’s review of Hannover Re,” said the bulletin.
“Hannover Re’s ratings reflect its excellent risk-adjusted capitalization, excellent business position and the expected earnings recovery following the substantial catastrophe losses in 2005,” Best continued. “Offsetting factors are the group’s limited financial flexibility and high dependence upon retrocession in property/casualty.”
The following is a summary of the factors Best considered relative to Hannover Re’s Ratings:
Excellent risk-adjusted capitalization — Best expects Hannover Re’s risk-adjusted capitalization to be maintained at an excellent level through retained earnings, which compensate for the anticipated growth in 2006. Capital levels for 2005 were substantially lower due to significantly lower earnings, which best had anticipated. Hannover Re partially compensated by not paying dividends. It also successfully issued hybrid capital in 2005, including $80 million of trust preferred securities as part of the restructuring of its U.S.-based subsidiary Clarendon in the third quarter of 2005.
Best believes the group could issue further instruments. However, Hannover Re has already exhausted the maximum equity credit for hybrid capital of 20 percent of total adjusted capital, thus negatively impacting its financial leverage. In Best’s opinion, “Hannover Re’s ability to raise equity is dependent upon its majority shareholder, Talanx AG, which in turn is a non-listed intermediate holding company.” Best also expects that the dependence upon retrocession, which remains high (particularly in property/casualty) although the successful transfer of risks to the capital market through K5 and the recent catastrophe bond issue, alleviates some of the concerns.
Excellent business position –Hannover Re remains one of the five-largest reinsurers worldwide with an excellent business position in the global reinsurance market. Gross premiums are expected to increase to around €10.2 billion ($13.1 billion) in 2006 from €9.7 billion ($12.5 billion) in 2005. This is mainly due to “new non-proportional casualty business; the recovery of financial reinsurance following the closing of accounting fraud investigations against several competitors; and a growth in life/health reinsurance,” particularly in the U.K. that offsets the exit from most of the commodity program business in the U.S.
Anticipated earnings recovery – Best expects Hannover Re’s 2006 income to be around €400 million ($514 million) “based on the expectation of lower catastrophe claims in the second half of 2006 than experienced in 2005.” Best also notes that Hannover Re’s recalibration of its catastrophe models and the “reduction of exposures to catastrophe-prone lines in the U.S., as well as rate increases,” should limit the impact of large catastrophes on its earnings. Results of the first half of 2006 have been strong as net income increased by 4.2percent to €257 million $330 million), compared to exceptionally low net income in 2005 – due mainly to hurricane claims of approximately €840 million ($1.1 billion).
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