Hannover Rueck SE. Table Of Contents. Rationale. Outlook. Base-Case Scenario. Company Description. Business Risk Profile. Financial Risk Profile

Transcription

1 Primary Credit Analyst: Jean Paul Huby Klein, Frankfurt (49) ; Secondary Contact: Johannes Bender, Frankfurt (49) ; Research Contributor: Kakkad Milan, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Support Related Criteria Related Research JULY 26,

2 SACP* Assessments SACP* Support Ratings Anchor aa- + Modifiers 0 = aa- + 0 = Business Risk Very Strong ERM and Management 0 Liquidity 0 Group Support 0 Financial Risk Very Strong Holistic Analysis 0 Sovereign Risk 0 Gov't Support 0 *Stand-alone credit profile. See Ratings Detail for a complete list of rated entities and ratings covered by this report. Rationale Business Risk Profile: Very Strong One of the leading global reinsurers based on its top-three position in the international property/casualty (P/C) and life reinsurance markets. Very strong diversification by line of business and geography, with selective and stringent underwriting allowing for some offset in P/C reinsurance's softening pricing environment. Intermediate industry and country risk assessment for the P/C business, while it is low for life. Financial Risk Profile: Very Strong Capital adequacy, based on our risk-based capital model, in excess of our benchmark for an 'AAA' rating through 2018 to 2019, supported by strong retained earnings and flat capital requirements during this period. Potential capital and earnings volatility, owing to large risks, such as natural catastrophes and pandemics, mitigated by the mix of business and comprehensive retrocession coverage when compared to most reinsurance peers. Proven access to a variety of capital and liquidity sources, and healthy financial leverage and fixed-charge coverage ratios, but somewhat limited access to equity markets compared to some peers due to its shareholder structure. JULY 26,

3 Other Factors Very strong enterprise risk management and management and governance assessment, with a good economic capital model. Although we view Hannover Rueck SE (Hannover Re) as core to its majority shareholder, Talanx AG (A-/Stable/--), intermediate holding company of Talanx Primary Insurance Group (Talanx Group; core operating primary insurance operations rated A+/Stable/--), we recognize its operational independence and therefore can rate Hannover Re higher than Talanx Group. This, in our view, mainly reflects Hannover Re's strong minority shareholding structure, its de-linked business model from Talanx Group and its independent funding capabilities. Outlook: Stable The stable outlook on Germany-based global reinsurer Hannover Rueck SE (Hannover Re) reflects S&P Global Ratings' expectation that the group will maintain its very strong business risk profile over the next months, supported by its very strong competitive position. We also expect its capital and earnings to stay at least very strong through the group's stable income, benefitting from prudent underwriting and investment allocations. Downside scenario We would consider taking a negative rating action on Hannover Re over the next two years if its capital and earnings weakened to lower than very strong levels over a prolonged period, due, for example, to unexpectedly large claims, higher risk capital charges than we currently expect, or a material erosion of underlying earnings. We also may take a negative rating action if Hannover Re's underwriting controls deteriorated or if it assumed an overall riskier profile through heightened underwriting or investment risks. Upside scenario We do not expect to raise the ratings on Hannover Re over the next months because of challenging operating conditions, including softening prices in the global P/C reinsurance sector and low interest rates, their impact on Hannover Re's earnings potential, and continued high competitive pressure. Base-Case Scenario Macroeconomic Assumptions Moderate global economic growth and inflation. Long-term risk-free rates to increase to 3.0% in the U.S. and to 0.8% in Germany in JULY 26,

4 Company-Specific Assumptions Total gross premiums written (GPW) to remain broadly flat at 16 billion- 17 billion in Consolidated capital adequacy to develop above the 'AAA' level based on our risk-based capital model in , supported by annual group net income of about 1,000 million. A combined ratio (the industry's main profitability metric) of 95%-97%, including assumed large losses of about 825 million per year (lower combined ratios indicate better profitability and a combined ratio of greater than 100% signifies an underwriting loss). EBIT margin of 5%-6% in life reinsurance leading to IFRS net earnings of 200 million- 300 million. Fixed-charge coverage above 10x and financial leverage of about 10% in Key Metrics --Year ended Dec (Mil. ) 2018F 2017F Gross premiums written ~16,000-16,500 ~16,500-17,000 16,354 17,069 14,362 Net income (attributable to all shareholders) 900-1, ,000 1,226 1,215 1,065 Return on shareholders' equity (reported) (%) P/C: Net combined ratio (%) Return on revenue (%) Net investment yield (%) ~3,0-3,2 ~3,1-3, Standard & Poor's capital adequacy Extremely Strong Very Strong Very Strong Extremely Strong Extremely Strong Fixed charge coverage (x) >10 > Financial leverage (%) ~10 ~ F--Forecast based on S&P Global Ratings base-case scenario. P/C--Property/casualty. Company Description Hannover Re is a publicly listed reinsurance company based in Germany. Its ultimate majority shareholder is HDI Haftpflichtverband der Deutschen Industrie VaG (A+/Stable/--), which has a 50.2% stake in the group through intermediate holding company Talanx AG. From the remaining 49.8% of the group's shares that are in free float, 3.1% are held by BlackRock, 38.5% by institutional investors, and 8.2% by private investors. Hannover Re is one of the top three global reinsurers worldwide. For 2016, the group reported consolidated GPW of 16.4 billion, split into 56% P/C and 44% life and health business. The group writes business globally through a set of local subsidiaries and branches. The group's majority shareholding in E+S Rueckversicherung AG () provides access to the German market. Business Risk Profile: Very Strong We regard Hannover Re's business risk profile as very strong. It is one of the leading global reinsurers reflecting a well established brand, with strong and long-standing relationships with brokers and clients. Our assessment is also JULY 26,

5 supported by the group's well-diversified business by regions and lines of business including a strong position in the global life reinsurance sector. Insurance industry and country risk: Intermediate risk through global P/C and life reinsurance Our assessment of Hannover Re's industry and country risk as intermediate reflects our view of the group's well-diversified global life and P/C operations. We view the group's country risk as low because it operates worldwide, including major developed markets. We believe that Hannover Re's P/C reinsurance operations are exposed to moderate industry risks, predominantly due to exposure to unpredictable natural catastrophe risks. However, Hannover Re is less exposed to natural catastrophe losses compared with less diversified P/C reinsurers. Its life reinsurance business is exposed to low industry risks, reflecting the sector's positive earnings trend, high barriers to entry, and moderate product risk, in our view. Table 2 IICRA (Re)Insurance sector IICRA Business mix (%) Global P/C reinsurance Intermediate Risk 56% Global life reinsurance Low Risk 44% Weighted average IICRA Intermediate Risk IICRA--Insurance Industry And Country Risk. Competitive position: Very strong based on market-leading position in global reinsurance Hannover Re--one of the market leaders in the global reinsurance market, operating in diverse lines of business and geographies--has a very strong competitive position. It is the world's third-largest reinsurer and benefits from a well-established brand, strong underwriting and claims service abilities, and long-standing relationships with brokers and clients. It has many leading positions in the reinsurance treaties it underwrites globally. We believe this is further backed by Hannover Re's ability to offer a number of private deals with differentiated terms, allowing for some independence from the general declining pricing trend in P/C reinsurance. In its domestic market, Hannover Re benefits from its role as the main reinsurer of Talanx Group's primary insurance operations and from its durable long-term relationship with a number of mutual insurers, which are also shareholders of Hannover Re's core subsidiary, E+S Rueckversicherung AG. We consider that Hannover Re's competitive position benefits from its diversity by business line. In terms of GPW, P/C accounts for 56% and life for 44% of total business written in In particular, Hannover Re's life operations (about 20% of EBIT in 2016) are not significantly correlated to its P/C business and, in our view, continue to provide meaningful diversity. Hannover Re has solid market credentials such as its well-established brand, strong underwriting and claims service abilities, and long-standing relationships with brokers and clients, which should enable the group to defend its very strong competitive position. Hannover Re is well-diversified across the regions in which it writes business. We view this as a major competitive advantage over its regional and more concentrated competitors. In P/C reinsurance, business written in Europe accounts for 39%, North America for 35%, and Asia-Pacific for 17%, with Latin America and Africa accounting for the remainder as of The picture is similar in life reinsurance, with 39% of GPW stemming from Europe, 30% from JULY 26,

6 North America, 25% from Asia-Pacific, and the rest from Latin America and Africa. We believe Hannover Re is better positioned to withstand the soft pricing conditions in P/C reinsurance than its peers that are more concentrated and less diversified, given its prudent cycle management and strong diversification of business lines. Hannover Re's competitive position also visibly benefits from its consistently lower expense ratio compared to its peers. Hannover Re's overall GWP declined in 2016 by 4.2% to 16.4 billion (-2.1% foreign-exchange adjusted). In P/C, foreign-exchange-adjusted premiums remained nearly stable, with some premium growth derived from structured reinsurance and U.S.-related business, mostly offset by reduced volumes in the China motor business and specialty lines. The premium growth trend in structured reinsurance continued in the first three months of 2017, contributing to adjusted P/C growth of 11.3%. In life, adjusted year-end premiums declined by 4.3% mainly due to the discontinuation of some large-volume contracts. We observed a further premium decline to March 2017 for the same reasons. Under our base case assumptions, we therefore expect the group's GPW to increase by about 3% in 2017 supported by the P/C business, followed by an overall flat average premium development in the subsequent two years, with some potential volatility. Table 2 Competitive Position --Year ended Dec (Mil. ) Gross premiums written 16,354 17,069 14,362 13,963 13,774 Change in gross premiums written (%) (4.2) Net premiums written 14,604 14,850 12,581 12,420 12,366 Change in net premiums written (%) (1.7) Reinsurance utilization - premiums written (%) Business segment (% of gross premiums written) Life Property/casualty Financial Risk Profile: Very Strong We regard Hannover Re's financial risk profile as very strong, based on its capital and earnings as extremely strong. However, we believe that potential natural catastrophe claims might cause some volatility in the group's capital position. Capital and earnings: Extremely strong capital adequacy expected by 2018 We view Hannover Re's capital and earnings as extremely strong, based on 'AAA' capital adequacy, which we assume the group will achieve by We believe that the group's strong earnings generation will support capital adequacy. We also assess Hannover Re's economic capital model as good, leading us to give additional quantitative credit in our risk-based capital model. We moreover give quantitative credit for loss reserve redundancies in our model, following a review of the group's reserves, which we view as very strong. JULY 26,

7 Table 3 Capital --Year ended Dec (Mil. ) Common shareholders' equity 9,741 8,777 8,253 6,530 6,714 Change in common shareholders' equity (%) (2.7) 19.8 Total reported capital 11,613 10,643 10,598 9,097 9,209 Change in total reported capital (%) (1.2) 21.0 We forecast extremely strong capital adequacy in our base-case scenario in 2018 and 2019, based on the following assumptions: Low and relatively stable interest rates; No material financial market dislocations; Continued soft pricing in P/C reinsurance; and Catastrophe claims approximately in line with Hannover Re's annual budgets of about 825 million. In terms of capital generation, we forecast Hannover Re will maintain sound net income of about 1,000 million annually, distributing about 40% as dividends. In our forecast, we assume some pressure on revenues from softening market conditions in the P/C reinsurance business, resulting in a slight increase in net combined ratios to 95%-97%. In life, we expect the average performance over the next two years to be broadly in line with 2016, with an EBIT margin of 5%-6% leading to net earnings of 200 million- 300 million. We also assume that pressure on investment returns will prevail, based on our expectation of continued low bond yields, resulting in net investment yields declining by about 10 basis points (bps) to 20 bps per year. We assume a stable development in life reinsurance liability risk exposures over For P/C reinsurance, we assume that liability risk exposures will also develop flatly, reflecting the moderate business growth. In terms of asset risk exposures, we assume a conservative strategy with no material change in the relative composition of asset risks over Table 4 Earnings (Mil. ) --Year ended Dec Total revenue 15,812 16,161 13,775 13,542 13,639 EBIT adjusted 1,533 1,657 1,345 1,131 1,096 Net income (attributable to all shareholders) 1,226 1,215 1, Return on revenue (%) Return on reported shareholders' equity (%) Return on total reported capital (%) P/C: net expense ratio (%) P/C: net loss ratio (%) P/C: net combined ratio (%) P/C--Property/casualty. JULY 26,

8 Risk position: Moderate risk based on well-diversified business mix We view Hannover Re's risk position as moderate. Hannover Re, in line with global reinsurance peers, is significantly exposed to risks from severe natural catastrophes, man-made claims, and pandemics, which can result in volatility of earnings and capital. However, we think Hannover Re's business mix of life reinsurance and P/C--of which catastrophe business is a small and well-managed portion (about 4% of the group's P/C gross premiums emanated from catastrophe excess of loss in 2016)--renders the group less exposed to these risks than most global reinsurance peers. We also recognize Hannover Re's underwriting risk controls and its comprehensive retrocession program using traditional reinsurance protection, insurance-linked securities, and collateralized quota-share contracts, which help to manage the volatility risk from large natural catastrophes. Hannover Re also maintains a conservative stance vis-à-vis investments via relatively low-risk asset allocation, limits for foreign currency exposures, and prudent diversification by sectors and single obligors. Table 5 Risk Position --Year ended Dec (Mil. ) Total invested assets 41,736 39,307 36,162 31,805 31,814 Change in total invested assets (%) Net investment income 1,394 1,566 1,350 1,314 1,358 Realized capital gains/(losses) Unrealized capital gains/(losses) (50.0) (37.0) (61.0) (46.0) 70.0 Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Net investment yield including realized and unrealized gains/(losses) (%) Portfolio composition (% of general account invested assets) Cash and short term investments (%) Bonds (%) Equity and investment fund investments (%) Real estate (%) Investments in affiliates (%) Other investments (%) Financial flexibility: Adequate, and healthy fixed-charge coverage and financial leverage We view Hannover Re's financial flexibility as adequate. It has demonstrated access to different sources of capital, and we expect it to continue to be able to regularly access different sources of capital via hybrid securities, reinsurance coverage, and insurance-linked securities. We continue to believe that Hannover Re's access to equity markets is somewhat limited compared with that of some peers, owing to the reluctance of its majority shareholder, Talanx AG, to support further capital injections, other than in a stress scenario. Hannover Re's financial leverage ratio (debt plus hybrids to economic capital) remained stable at about 10% in Fixed-charge coverage increased to 15x from 10x in 2015, mainly driven by a lower interest expense burden. Based on our capital and earnings forecast and assuming no major change in Hannover Re's capital management approach, we JULY 26,

9 expect that financial leverage will remain at about 10% and the fixed-charge coverage to be higher than 10x over Table 6 Financial Flexibility --Year ended Dec Fixed charge coverage (x) Financial leverage* (%) *Includes net present value of operating leases and pension deficit as debt. Other Assessments We consider Hannover Re's very strong enterprise risk management (ERM) and management and governance to support the rating. Its liquidity is exceptional. Enterprise risk management: Very strong ERM and good economic capital model In our opinion, Hannover Re's ERM is very strong and we believe it unlikely that the group will experience losses outside its risk tolerances. ERM is of high importance for our rating assessment given the complexity of Hannover Re's business and operating structure and the group's exposure to financial volatility. The major factors supporting our overall assessment are a positive risk-management culture, as well as positive scores for emerging risk and strategic risk management. Controls for the group's most important risks related to investments, underwriting, and reserving are positive, in our opinion. Hannover Re showed the efficiency of its ERM program during the economic and capital market crisis in and the catastrophe loss environment in We view Hannover Re's risk-management culture as positive. We observe a transparent risk strategy, senior management's strong commitment to effective risk management, and a comprehensive governance framework combining central group risk-management functions with local accountability. The group's overall risk appetite appears cross-linked with its risk tolerance and a comprehensive set of risk limits. Investment risk controls, including equity, asset-liability management, and credit risk controls, are in our view positive, based on consistent guidelines, multiple measures, clear limits, benchmarks, and minimum standards. We believe life and non-life underwriting controls, including those related to catastrophe risks, are positive. The group exerts strong central control over the non-life reinsurance underwriting process, supported by centralized modeling and pricing. Catastrophe risk-related controls are based on the group's overall risk tolerances and include central catastrophe modeling and risk accumulation controls through group risk management. Hannover Re demonstrates a strong knowledge and understanding of catastrophe models. Model limitations are analyzed and extensive validations translate into centralized and consistent adjustments across perils and regions. Life underwriting processes are closely controlled through explicit guidelines and central controlling of treaty wording, JULY 26,

10 pricing, and risk accumulation. We also view controls for reserve risk as positive. Group risk management coordinates and oversees the groupwide reserving processes. In addition to internal reserve adequacy reviews, third parties perform regular external reviews as a second line of defense. We view emerging risk and operational risk controls as positive. Supported by formalized frameworks enhanced in recent years, Hannover Re has demonstrated the ability to monitor, identify, quantify, and mitigate both risks. In our opinion, Hannover Re's strategic risk management is positive. Hannover Re has implemented a full-fledged economic valuation approach, which enables the group to optimize the trade-off between risk and returns, based on its defined risk appetite. We believe the group has a clear view of risk-adjusted minimum profit targets and a well-established methodology for allocating capital to business segments and managing the reinsurance cycle. Management and Governance: Strong Hannover Re's management and governance is strong, in our opinion. We believe that the management team has a consistent and successful track record of strategic planning, strong execution, and transparent, demanding, and sophisticated financial management. We believe Hannover Re has a strong track record of meeting its strategic and financial targets and reviews its strategy regularly and at least every three years. Liquidity: Exceptional, thanks to ample sources We regard Hannover Re's liquidity as exceptional, owing to the strength of available liquidity sources, mainly premium income, and a highly liquid asset portfolio. Moreover, there are no refinancing concerns in our view. Support Group support Despite its operational independence, Hannover Re is, in our view, core to Talanx Group because of its strategic role and size. The ratings on Hannover Re are therefore underpinned by the financial strength of Talanx Group's core primary insurance entities. The combination of Hannover Re's core status and its relative operating independence means that, under our current rating methodology, the ratings on Hannover Re will not fall below those on Talanx Group's core primary insurance operating entities. Related Criteria General Criteria: Principles For Rating Debt Issues Based On Imputed Promises, Dec. 19, 2014 Criteria - Insurance - General: Insurer Hybrid Capital Instruments With Nonviability Contingent Capital (NVCC) Features, July 24, 2014 Criteria - Insurance - Property/Casualty: Assessing Property/Casualty Insurers' Loss Reserves, Nov. 26, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Insurance - General: Enterprise Risk Management, May 7, 2013 Criteria - Insurance - General: Insurers: Rating Methodology, May 7, 2013 Criteria - Insurance - General: Insurers: Rating Methodology, May 7, JULY 26,

11 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Criteria - Insurance - General: A New Level Of Enterprise Risk Management Analysis: Methodology For Assessing Insurers' Economic Capital Models, Jan. 24, 2011 Criteria - Insurance - General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Criteria - Financial Institutions - General: Methodology: Hybrid Capital Issue Features: Update On Dividend Stoppers, Look-Backs, And Pushers, Feb. 10, 2010 Criteria - Financial Institutions - Banks: Assumptions: Clarification Of The Equity Content Categories Used For Bank And Insurance Hybrid Instruments With Restricted Ability To Defer Payments, Feb. 9, 2010 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Insurance - General: Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Related Research Deja Vu All Over Again: Global Reinsurers Awake To Another Year Of Declining Rates, June 22, 2017 Insurance Industry And Country Risk Assessment: Global Life Reinsurance, April 18, 2017 Insurance Industry And Country Risk Assessment: Global Property/Casualty Reinsurance, March 17, 2017 Research Update: Hannover Reinsurance South African Entities s Raised to 'AA-' On Guarantee; Outlook Stable, Feb. 8, 2017 Ratings Detail (As Of July 26, 2017) Operating Company Covered By This Report Hannover Rueck SE Counterparty Credit Rating Senior Unsecured Related Entities E+S Rueckversicherung AG Hannover Life Reassurance Africa Ltd. Hannover Life Reassurance Bermuda Ltd. Hannover Life Reassurance Co. of America AA- AA-/Negative/-- JULY 26,

12 Ratings Detail (As Of July 26, 2017) (cont.) Hannover Life Reassurance of Australasia Ltd. Hannover Re (Bermuda) Ltd. Hannover Reinsurance Africa Ltd. Hannover Re (Ireland) DAC International Insurance Co. of Hannover SE Domicile AA-/Negative/-- Germany *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@spglobal.com JULY 26,

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