August 20, 2014 / 2:41 PM / 3 years ago

Fitch Upgrades Hannover Re's IFS Rating to 'AA-'; Outlook Stable

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(The following statement was released by the rating agency) LONDON, August 20 (Fitch) Fitch Ratings has upgraded Hannover Rueck SE's (Hannover Re) and its reinsurance subsidiary E+S Rueckversicherung AG's (E+S Re) Insurer Financial Strength (IFS) ratings to 'AA-' from 'A+' and Hannover Re's Issuer Default Rating (IDR) is upgraded to 'AA-' from 'A+'. The Outlooks are Stable. Fitch has simultaneously upgraded Hannover Finance (Lux) S.A.'s EUR500m subordinated notes due 2040, EUR500m perpetual subordinated notes, and EUR500m subordinated notes due 2043, to 'A' from 'A-'. All issues are guaranteed by Hannover Re on a subordinated basis. KEY RATING DRIVERS The upgrade reflects Hannover Re's strengthened financial profile, including reduced financial leverage, very strong risk-adjusted capitalisation and consistent earnings generation from the core non-life reinsurance segment. Financial leverage reduced to 19.8% at 1H14, following the call of the EUR750m subordinated bond issue in February 2014. The reinsurer's five-year average fixed charge coverage ratio has improved to 11.6x, which remains supportive of the rating. Capital adequacy, as measured by Fitch remains very strong and is a rating positive factor. Hannover Re has organically grown its shareholders' equity to EUR7.1bn at 1H14 (FY2013: EUR6.5bn), driven by increased unrealised investment gains in 1H14 but also by a consistent increase in retained earnings over a longer period. Capital quality is marginally reduced by a higher level of hybrid debt within the reinsurer's capital structure. This is mitigated by what Fitch considers a less volatile mix of reinsurance business relative to peers. Fitch views positively the stability of Hannover Re's earnings generation in recent years. The agency believes that this reflects the diversified nature of the company's business profile as well as its prudent investment strategy. The Fitch-calculated 2013 combined ratio of 94.4% remains below the company's target of 96%. The volatility of the combined ratio also remained lower than peers, which in Fitch's view reflects Hannover Re's selective underwriting approach and focus on preserving margins rather than on strong growth. Fitch considers the low volatility of the combined ratio an important factor supporting the stability of the reinsurer's earnings. Fitch recognises that the current operating environment remains challenging for Hannover Re and the wider insurance industry, including persistently low interest rates and increasingly intense competition, especially in non-life reinsurance, which drives price softening across certain major reinsurance classes. Fitch expects Hannover Re's diversified business profile and prudent underwriting policy to provide resilience to a protracted period of price softening, should this occur. E+S Re's rating continues to reflect its core status within the Hannover Re group. Fitch regards E+S Re as a core subsidiary of Hannover Re due to its position within the group as the primary vehicle for underwriting reinsurance business in Germany, which is considered a key market by the group. This is despite the presence of significant minority interests (E+S Re is 63.7%-owned by Hannover Re) and its distinct brand identity. RATING SENSITIVITIES An upgrade is considered as unlikely in the near-term, but could be achieved over the longer-term if financial leverage declines to 15%, the combined ratio remains below 93% and capitalisation remains very strong. A downgrade may occur if financial leverage remains consistently above 25% or if the fixed charge coverage is consistently below 9x. A combined ratio consistently above 100% could also lead to a downgrade. Hannover Re is one of the largest global reinsurers with gross premiums of EUR14bn in 2013 and shareholders' equity (including minority interests) of EUR7.1bn at 1H14. The group transacts all lines of the non-life, life and health reinsurance business and has representative offices in 20 countries. Hannover Re is 50.2%-owned by Talanx AG, a wholly-owned subsidiary of Haftpflichtverband der Deutschen Industrie V.a.G. Contact: Primary Analyst Martyn Street Senior Director +44 20 3530 1211 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE. Applicable criteria, 'Insurance Rating Methodology', dated 19 August 2013, is available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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