OREANDA-NEWS. Fitch Ratings has affirmed Hannover Rueck SE's (Hannover Re) and its reinsurance subsidiary E+S Rueckversicherung AG's (E+S Re) Insurer Financial Strength (IFS) ratings at 'AA-' and Hannover Re's Issuer Default Rating (IDR) at 'A+'. The Outlook on all the ratings is Stable.

Fitch has simultaneously affirmed Hannover Finance (Lux) S. A.'s EUR500m subordinated notes due 2040 and EUR500m subordinated notes due 2043 at 'A-'. Both issues are guaranteed by Hannover Re on a subordinated basis. Hannover Re's EUR500m 3.375% perpetual subordinated notes have also been affirmed at 'A-'.

The affirmations reflect Hannover Re's strong financial profile, supported by solid risk-adjusted capitalisation and consistent earnings generation.

KEY RATING DRIVERS

Financial leverage declined to 16% at end-2015 (end-2014: 22%) following the redemption of Hannover Finance (Luxembourg)'s EUR500m perpetual notes in June 2015. Hannover Re's five-year average fixed charge coverage ratio was 12x at end-2015, which is supportive of the ratings. Fitch expects this to improve in 2016 as the amount of interest paid further reduces.

We assess Hannover Re's capital adequacy as 'very strong' as measured by Fitch's Prism Factor Based Model, which is positive for the ratings. The reinsurer had organically grown its shareholders' equity to EUR8.8bn at end-2015 from EUR3.3bn at end-2008, supported by strong and consistent retained earnings. The quality of capital is marginally weakened by the high level of hybrid debt in the capital structure, but this has reduced over recent years and is mitigated by the low volatility of the reinsurer's portfolio relative to peers.

Fitch views positively the stability of Hannover Re's earnings in recent years, reflecting the diversified nature of the company's business profile as well as its prudent investment strategy. The company has benefited from the strong US dollar given the large US investment portfolio. The volatility of the combined ratio also remains lower than peers. Fitch considers the low volatility of the combined ratio an important factor in supporting the stability of the reinsurer's earnings.

Fitch recognises that the current operating environment remains challenging for Hannover Re and the wider (re)insurance industry. Persistently low interest rates and increasingly intense competition, especially in non-life reinsurance, continue to drive price softening across certain major reinsurance classes. The agency 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 the company's core status within the Hannover Re group. Fitch regards E+S Re as a core subsidiary of Hannover Re due to its role as the primary vehicle for underwriting reinsurance business in Germany, which is considered a key market by the group. Fitch believes E+S Re is core despite the presence of significant minority interests (E+S Re is 64.8%-owned by Hannover Re) and its distinct brand identity.

RATING SENSITIVITIES

Fitch considers an upgrade unlikely in the near term, although it could be achieved over the longer term if financial leverage declines to 15%, the combined ratio remains below 93% and capitalisation, as assessed by Fitch, 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 102% could also lead to a downgrade.

FULL LIST OF RATING ACTIONS

Hannover Rueck SE

IFS rating: affirmed at 'AA-'; Outlook Stable

Long-term IDR: affirmed at 'A+'; Outlook Stable

Subordinated debt: affirmed at 'A-'

E+S Rueckversicherung AG

IFS rating: affirmed at 'AA-'; Outlook Stable

Hannover Finance (Lux) S. A.

Subordinated debt: affirmed at 'A-'