Best Affirms Hannover Re and Subs ‘A’ Ratings; Outlook Positive

November 7, 2011

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

The outlook for all of the ratings remains positive.

Best indicated that it “expects a slight reduction in Hannover Re’s risk-adjusted capitalization in 2011, as the impact of higher catastrophe losses reduces current year net income.” However, Best also said that despite this, Hannover Re “continues to maintain excellent risk-adjusted capitalization, which improved in 2010 supported by net earnings after dividends, unrealized gains on the investment portfolio and lower foreign exchange losses.”

In addition Best noted that the company had “issued a €500 million [$686.5 million] convertible bond in September 2010, which further supported risk-adjusted capitalization.” Hannover Re’s 2011 reinsurance program has been hit by a number of large catastrophe losses in the first half of the year; however, Best added that its remaining capacity for the rest of the year “is expected to be sufficient at approximately €320 million [440 million].”

In addition the report points out that Hannover Re “has a low direct exposure to peripheral Euro zone debt at just 1 percent of the total invested asset base at the first half (H1) of 2011. However, the continued uncertainty surrounding the economic and investment environment within the Euro zone remains an offsetting factor for the ratings.”

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.”

Best expects the reinsurer to report “a reduced net income in 2011 of approximately €500 million [$686.5 million] after experiencing a number of large catastrophe losses in the first half of the year. Net major losses amounted to €625 million [$858.13 million], (€390 million [$535.5 million] above the H1 budget and €95 million [$130.44 million] above the budget for 2011).

“The largest losses have included the Japanese earthquake (€233 million [$320 million]), New Zealand earthquake (€$127 million [$174.4 million]), Australian flooding (€55 million [$75.5 million] and frost in Mexico (€54 million [$74.14 million]).”

Best added that these losses have “resulted in a combined ratio for non-life reinsurance of 110 percent at H1 2011. The company reported an improved net income in 2010 of €749 million [$1.0284 billion] (2009: €731 million [$1.0036 billion]) despite an increase in net large losses from €240 million [$329.5 million] in 2009 to €662 million [$908.93 million] (above a budget of €500 million [$686.5 million]). The increase in large losses was driven by the Chilean and New Zealand earthquakes, Deepwater Horizon and windstorm Xynthia.”

Nonetheless, Best described Hannover Re as continuing to “benefit from an excellent profile in the global reinsurance market. Premium growth in 2011 is likely to be driven by rate increases on catastrophes exposed to lines of business in Australasia and Japan as well as improvements in their life business in the United States following the acquisition of the ING portfolio and increased premium volume in certain emerging markets. Overall growth in gross premiums is likely to be at the company’s target of 7 percent due to the significant contribution made by the life reinsurance business.”

Best summarized the companies affected by the ratings announcement as follows:
The FSR of ‘A’ (Excellent) and the ICR of “a+” have been affirmed for Hannover Rueckversicherung AG and its following subsidiaries:
— E+S Rueckversicherung AG
— Hannover Reinsurance (Ireland) Limited
— Hannover Re (Bermuda) Ltd
— Hannover Life Reassurance (UK) Limited
— Hannover Life Reassurance (Ireland) Limited
— Hannover Life Reassurance (Bermuda) Limited
— International Insurance Company of Hannover Limited

The following debt ratings have been affirmed:
Hannover Finance (Luxembourg) S.A—(guaranteed by Hannover Re)
— “a” on €750 million [$1.03 billion] subordinated fixed to floating rate bond, due Feb. 2024
— “a” on €500 million subordinated fixed to floating rate bond, due September 2040
— “a” on €500 million undated guaranteed junior subordinated fix-to-floating callable bonds

The following debt rating has been withdrawn due to its redemption:
Hannover Finance (Luxembourg) S.A—(guaranteed by Hannover Re)
— “a” on €350 million [$480.55 million] subordinated fixed to floating rate debentures, due March 2031

Source: A.M. Best

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