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Hannover Re ratings affirmed

Hannover Re was boosted last week with the news that rating agency Standard & Poor’s (S&P) had affirmed its AA- insurer financial strength and long-term counterparty credit ratings on the German reinsurer, removing them from CreditWatch with negative implications in the process.

In a statement on Friday (20 January), the agency said it was also affirming the A+ ratings on Hannover Re’s US arm Clarendon National Insurance and three of its subsidiaries, and removing them from CreditWatch.

The outlook on all entities is negative, added S&P.

S&P placed Hannover Re on CreditWatch on 10 November following the company’s third quarter results in which it significantly increased loss estimates from hurricanes Katrina and Rita.

According to the agency, the revelation “raised concerns over the ultimate cost of the hurricane season; the group's risk-management, modelling, 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”.

In the agency’s latest release, however, S&P credit analyst Simon Marshall commented: “Following discussions with management, we consider the group's risk-management, modelling, and pricing capabilities to be sound.”

Nevertheless, S&P continues to offer a note of caution over the company, Marshall stating: “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.”

Hannover Re ratings are also subject to the financial strength ratings of its parent Talanx group, whose A rating is currently on Watch Negative.

The relationship, with Hannover Re core to Talanx combined with the reinsurer’s “relative operating independence”, dictates that its ratings will not fall below those of its parents, but cannot be more than two notches higher (where they currently sit), explained S&P.

The agency added that its negative outlook on ratings was influenced by uncertainty over the group’s diversified activities, and its ability to buy sufficient reinsurance.

“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,” said Marshall.

The reinsurer revealed last July that it would move Clarendon away from programme business to specialty business, potentially cutting gross premiums by $1bn and increasing net retention to 80 percent in the process.

Despite its reservations, S&P predicts Hannover Re will complete its proposed EUR500mn cat bond deal (see December issue of The Insurance Insider) in the next few weeks, with its traditional reinsurance programme “expected to be satisfactory” when it is placed in May.

S&P concluded by stating that a stable outlook could be returned to the ratings is Hannover Re succeeds in restructuring financial reinsurance and specialty units and places its reinsurance at economic prices, or if the CreditWatch of its parent Talanx is resolved.

Conversely, failure to hit combined ratio and return on equity targets could see ratings cut, warned the agency.

As reported in this month’s The Insurance Insider, Hannover Re is also seeking a solution to reduce its exposure to reinsurance recoverables, which have seen significant rises as a result of last autumn’s record industry hurricane losses.

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