Fitch Affirms Hannover Re's IFS Rating at 'AA-'; Outlook 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 from the company's core non-life reinsurance business.
KEY RATING DRIVERS
Financial leverage declined to 17.2% at end-3Q15 (end-2014: 21.8%) 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 10.1x at end-2014, which is supportive of the ratings. Fitch expects this to improve in 2016 as the amount of interest paid reduces further.
Fitch assesses Hannover Re's capital adequacy as 'very strong' as measured by the agency's Prism Factor Based Model, which is positive for the ratings. The reinsurer has organically grown its shareholders' equity to EUR8.4bn at end-3Q15 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 volatility of the combined ratio also remains lower than peers', which reflects Hannover Re's selective underwriting approach and focus on preserving margins rather than on strong sales growth. Fitch considers the low volatility of its 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
An upgrade is unlikely in the near term, although this 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 is 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.
Hannover Re is one of the largest global reinsurers with gross premiums of EUR14bn in 2014 and shareholders' equity (including minority interests) of EUR8.4bn at 9M15. 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: 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-'.
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