S&P Raises Hannover Re (Africa) Rating to ‘BBB’

Standard & Poor’s Ratings Services announced that has raised its long-term counterparty credit and insurer financial strength ratings on Hannover Reinsurance Africa Ltd. (Hannover Re Africa) to “BBB” from “BBB-” with a positive outlook.

“The upgrade follows a significant improvement in operating performance and capitalization during 2004,” said S&P. “Other positive rating factors include Hannover Re Africa’s good niche competitive position and the support of the Hannover Re group (Hannover Re; main entities are rated (AA-/Stable/–).”

As “negative rating factors,” S&P cited the “quality of capital, inherent weaknesses of the program insurance business model, and the small size of the South African market.

The rating agency noted that “Hannover Re Africa is one of the major reinsurers in South Africa, although it is small in size in global terms. The company has successfully completed a transition begun at the beginning of 2002, when the existing management team took charge and the underwriting and investment strategy was refocused and closely aligned with the strategic objectives of the Hannover Re group. Although the company is considered nonstrategic to Hannover Re on account of its small size relative to the group, one notch of implied support from the group is factored in. The company’s primary focus is the reinsurance of South African program business, written via underwriting agencies in which it often owns a stake.”

S&P cited the following “Major rating factors:
— Good current and prospective operating performance. 2004 was a highly successful year for the company, and Hannover Re Africa reported a combined ratio of 95.2 percent (101.3 percent in 2003) and ROE of 27.4 percent (negative 2.5 percent in 2003). The five-year averages are 101.2 percent and 10.1 percent, respectively. 2005 is expected to see a performance similar to that of 2004.

— Good prospective capitalization. Previously considered marginal, capitalization is considered good prospectively and has benefited from retained earnings of South African rand 87 million ($14 million) in 2004. Reserves are considered adequate, and a comprehensive reinsurance program from the parent is in place. Quality of capital is to some extent worsened by reliance on the loss reserve discount.

— Good niche competitive position. Hannover Re Africa has a good niche competitive position in the reinsurance of South African program business, written via underwriting agencies that source 83 percent of the gross business. Hannover Re Africa’s competitive position is constrained to some extent by the small absolute size of the South African market and the potentially volatile domestic business environment. There are weaknesses inherent in the program insurance business model, although Standard & Poor’s recognizes that there are strong controls in place to offset these.

S&P said the positive outlook reflects its “expectation that the combined ratio will remain around 95 percent and that Hannover Re Africa will report ROE and ROR of about 20 percent in 2005, continuing the positive trend from 2004. In addition, the company will continue to benefit from an extensive reinsurance program provided by the Hannover Re group, and risk-based capital adequacy is expected to be good in 2005. Continuation of the positive earnings and capitalization trends established in 2004 might result in the ratings being raised.”

Topics Reinsurance