S&P Affirms Hannover Re’s ‘AA-‘ Ratings; Outlook Revised to ‘Stable’

May 24, 2010

Standard & Poor’s Ratings Services has revised its outlook on German reinsurer Hannover Rueckversicherung AG (Hannover Re) and on various operating entities to stable from negative. S&P also affirmed the ‘AA-‘ long-term counterparty credit and insurer financial strength ratings on Hannover Re and its core operating companies.

“The outlook revision reflects our view on the continuity and effectiveness of Hannover Re’s management and corporate strategy under the new CEO appointed in July 2009,” explained credit analyst Hiltrud Besgen. “What we regard as a long-standing track record of successful execution supports the group’s competitive position, which we believe, is very strong.”

“In addition, the capital-market pressure on Hannover Re’s capital adequacy and financial flexibility has eased, in our view, allowing the group to restore its risk profile and, particularly, its net catastrophe exposure to more tolerable levels,” she continued. We regard the group’s enterprise-risk-management framework as strong and a continued rating support.

However S&P cited Hannover Re’s non-life operating performance as “not fully commensurate with the ratings,” as an offsetting factor. “Our opinion is based on the group’s combined (loss and expense) ratio of about 102 percent on average between 2005 and 2009, which we regard as less favorable, even considering the impact of conservative loss reserving,” the bulletin explained. “In addition, we consider Hannover Re’s financial flexibility to be still constrained and its capital quality moderate, representing weaknesses for the rating.”

In addition S&P said that, in its opinion the “group’s capitalization is strong, but remains a weakness for the rating at its current level. Our assessment takes into account the moderate quality of capital and the group’s high reliance on equity substitutes. Capital adequacy has improved to an extremely strong level, according to our model. Based on our recent non-life loss reserve analysis, we consider reserve confidence levels to be very conservative. We believe that this cushion will help reduce any negative effects from the group’s exposure to catastrophe risks and support earnings and capital stability in a difficult operating environment.”

Besgen added: “The outlook is stable because we expect Hannover Re to defend what we see as a very strong competitive position in the challenging operating environment. This includes the exploitation of additional business potential in the U.S. from the acquisition of the ING portfolio.”

S&P concluded that the group may, in our opinion, “likely post a net income of at least €600 million [$750 million] in 2010 and 2011, assuming no further major economic and capital market distress. The consolidated return on equity is likely to reach about 15 percent. We expect capitalization to remain strong and capital adequacy to stay at least very strong. The ratings could come under pressure if the group doesn’t meet these earnings or capitalization assumptions. We believe the prospect for upward rating potential is remote at this stage.”

Source: Standard & Poor’s

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