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-'. At the same time, in line with Fitch's revised Insurance Notching Criteria, the Issuer Default Rating (IDR) for Hannover Re has been downgraded to 'A+' from 'AA-'. The Outlooks on all ratings are Stable. Fitch has simultaneously downgraded Hannover Re's subordinated debt to 'A-' from 'A'. All issues are guaranteed by Hannover Re on a subordinated basis. A full list of rating actions is at the end of this commentary.

The downgrade of the IDR and subordinated debt ratings reflects Fitch's recently updated notching criteria for the insurance sector, published on 14 July 2015. This followed publication of an initial exposure draft of proposed criteria on 12 May 2015. The updated notching criteria appear in Section VI of the insurance master criteria report 'Insurance Rating Methodology'.

The agency now positions all IFS ratings one notch above the operating company IDR when solvency regulation is considered to be effective.

The affirmation of the IFS rating reflects Hannover Re's strong financial profile, supported by very strong risk-adjusted capitalisation, as assessed by Fitch, and consistent earnings generation from the core non-life reinsurance segment.

Fitch views positively the stability of Hannover Re's earnings generation in recent years and believes that this reflects the diversified nature of the reinsurer's business profile, as well as its prudent investment strategy. In 2014, the reinsurer's earnings remained strong, driven by the very strong performance of its non-life reinsurance segment. The company reported net income of EUR985m for 2014 (2013: EUR895m). The volatility of the combined ratio also remains lower than peers, which in the agency's view reflects Hannover Re's selective underwriting approach and focus on preserving margins rather than on strong growth.

KEY RATING DRIVERS
Financial leverage declined to 21.8% as at end-2014 as the company redeemed its EUR750m subordinated bond in February 2014. The five-year average for Hannover Re's fixed charge coverage ratio is 10.1x (2014), which is supportive of the rating. Fitch expects this to improve in 2015 as the amount of interest paid reduces.

Capital adequacy, as measured by Fitch, is very strong and a positive rating factor. The reinsurer has organically grown its shareholders' equity to EUR8.3bn at end-2014 from EUR3.3bn at end-2008, supported by strong and consistent levels of retained earnings. The quality of capital is marginally weakened by the high level of hybrid debt in the capital structure but this is mitigated by the low volatility of the reinsurer's reinsurance portfolio relative to peers.

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 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 64.8%-owned by Hannover Re) and its distinct brand identity.

RATING SENSITIVITIES
Fitch considers an upgrade 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, as assessed by Fitch, remains very strong.

A downgrade may occur if financial leverage remains consistently above 25% or if fixed charge coverage is consistently below 9x. A combined ratio consistently above 102% could also lead to a downgrade.

Hannover Re is one of the largest global reinsurers with gross premiums of EUR14bn in 2014 and shareholders' equity (including minority interests) of EUR8.3bn at end-2014. 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 majority-owned subsidiary of Haftpflichtverband der Deutschen Industrie V.a.G.

FULL LIST OF RATING ACTIONS

Hannover Rueck SE
IFS rating: affirmed at 'AA-'; Outlook Stable
Long-term IDR: downgraded to 'A+' from 'AA-'; Outlook Stable
Subordinated debt: downgraded to 'A-' from 'A'

E+S Rueckversicherung AG
IFS rating: affirmed at 'AA-'; Outlook Stable

Hannover Finance (Lux) S.A.
Subordinated debt: downgraded to 'A-' from 'A'.