S&P Affirms Hannover Re’s ‘AA-‘ Ratings and Stable Outlook

Standard & Poor’s Ratings Services has affirmed its ‘AA-‘ long-term counterparty credit and insurer financial strength ratings on German reinsurer Hannover Rueckversicherung AG and its core entities – Hannover Re Bermuda Ltd., E+S Rueckversicherungs AG, E+S Reinsurance (Ireland) Ltd., Hannover Reinsurance (Ireland) Ltd., Hannover Reinsurance (Dublin) Ltd., and International Insurance Co. of Hannover Ltd., collectively referred to as Hannover Re.

All of the companies are majority owned by Germany’s Talanx AG, whose core insurance operating entities are rated ‘A+’/Stable. The outlook for Hannover Re and its operating companies is also stable.

“The affirmation reflects our opinion that the fundamentals supporting Hannover Re’s long-term financial strength remain robust, despite the sharp deterioration in third-quarter earnings (and likely in full-year results) announced this week because of continued turmoil in the capital markets and higher-than-expected natural catastrophe losses,” explained credit analyst Hiltrud Besgen. “We expect most reinsurers to report substantial investment-related losses for the third quarter, and in our view, the magnitude of the write-downs reported by Hannover Re does not make it stand out against its peers.”

S&P said that “despite these losses, we expect the group’s capital adequacy to remain very strong, thanks to considerable derisking of its balance sheet after a significant reduction in equity exposure and additional equity hedging.

“With further investment write-downs expected during the fourth quarter, the group’s net income for 2008 will likely be negative for the entire year. Nevertheless, we expect Hannover Re’s prospective underlying operating performance to remain very strong.”

S&P added that the “ratings also reflect Hannover Re’s strong enterprise risk management and very strong competitive position, combined with effective management strategies. These strengths are partly offset by the group’s limited financial flexibility, stemming from its restricted access to equity markets and moderate group capital quality.

Besgen noted: “The outlook is stable because in 2009 and beyond, we expect Hannover Re to maintain its very strong operating performance throughout the cycle by adhering to strict underwriting discipline and a conservative investment strategy.”

S&P concluded that the “group’s profitability, adjusted for its conservatism regarding loss reserve confidence levels, should be at least in line with that of peers of the same financial strength. In particular, we expect the non-life combined ratio to remain less than 100 percent throughout the cycle and the operating return on embedded value in life and health reinsurance to reach about 12 percent.

“In addition, the group should post a consolidated return on equity of close to 15 percent. We also expect capitalization to remain strong and capital adequacy to remain very strong.”

Source: Standard & Poor’s – www.standardandpoors.com