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

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1 Primary Credit Analyst: Christian Badorff, Frankfurt (49) ; Secondary Contact: Johannes Bender, Frankfurt (49) ; Table Of Contents Rationale Outlook Base-Case Scenario Company Description Business Risk Profile Financial Risk Profile Other Assessments Support Related Criteria And Research JUNE 30,

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 Very strong competitive position based on its market position in the global reinsurance sector and the diversity of its business. Intermediate industry and country risk, factoring in our views of low country risk and moderate and low industry risks for its property/casualty and life reinsurance operations, respectively. Financial Risk Profile: Very Strong Extremely strong capital and earnings on our assumption of 'AAA' capital in Potential capital and earnings volatility owing to risks such as natural catastrophes and pandemics, partly offset by the group's lower exposure to these risks compared with most reinsurance peers, its comprehensive retrocession coverage, and its broad business diversification. Adequate financial flexibility, reflecting proven access to a variety of liquidity sources, and healthy financial leverage and fixed charge coverage ratios. Other Factors Very strong enterprise risk management and a good economic capital model. Strong management and governance. Although we view Hannover Re as core to its majority shareholder Talanx AG (A-/Stable/--; intermediate holding company of Talanx Group; core operating primary insurance operations rated A+/Stable/--), we recognize its operational independence and therefore allow the ratings on Hannover Re to be up to two notches higher than those on Talanx. JUNE 30,

3 Outlook: Stable The stable outlook on Germany-based global reinsurer Hannover Rueck SE reflects Standard & Poor's Ratings Services' expectation that the group will maintain its very strong business risk profile, supported by its very strong competitive position. We also expect capital and earnings to stay at least very strong through the group's stable income, benefitting from prudent underwriting and investment allocations. Upside scenario We do not expect to raise the ratings on Hannover Re over the next months, due to the challenging operating environment, including pressure to reduce prices in some non-life business lines, low interest rates, and the constraints on the group's competitive position. Downside scenario We would consider taking a negative rating action on Hannover Re if its capital and earnings weakened to lower than very strong levels, due for example to unexpectedly large claims, higher risk capital charges than we expect, or a material erosion of underlying earnings. We also may take a negative rating action if Hannover Re's underwriting controls deteriorated or it assumed an overall riskier profile through heightened underwriting or investment risks. Base-Case Scenario Macroeconomic Assumptions Government yields to increase over the next two-to-three years, but to remain below long-term historical norms until at least Economic growth in developed markets to improve, but remain sluggish, lagging growth in developing markets. Some pressure on rates in global property/casualty (P/C) reinsurance. Company-Specific Assumptions Consolidated capital adequacy that should remain in excess of our benchmark for a 'AAA' rating, supported by annual group net income in the range of 800 million to 900 million. Total gross premiums written (GPW) to grow moderately to 15 billion- 16 billion by year end A combined ratio (the industry's main profitability metric) of 95%-98%, including assumed large losses of about 670 million per year. Fixed charge coverage and financial leverage that will likely remain reasonably conservative and supportive of Hannover Re's adequate financial flexibility. JUNE 30,

4 Key Metrics --Year ended Dec (Mil. ) 2015f 2014f Gross premiums written 14,300 14,000 13,963 13,774 12,096 Net income (attributable to all shareholders) Return on shareholders' equity (reported) (%) P/C: Net combined ratio (%) Return on revenue (%) Net investment yield (%) Standard & Poor's capital adequacy Extremely strong Extremely strong Extremely strong Extremely strong Very strong Fixed charge coverage (x) Financial leverage (%) f--forecast based on Standard & Poor's 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. Some 49.8% of the group's shares are in free float, of which German institutions and individuals hold the majority. Hannover Re is one of the top three global reinsurers worldwide. For 2013, the group reported consolidated GPW of 14.0 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. Access to the German market is through a majority shareholding in E+S Rueckversicherung AG (). Business Risk Profile: Very Strong We regard Hannover Re's business risk profile as very strong, reflecting our assessment of the group's industry and country risk as intermediate and its competitive position as very strong. Insurance industry and country risk: Intermediate risk through global property-casualty and life reinsurance We assess Hannover Re's industry and country risk as intermediate, based on our views of low country risk and moderate and low industry risks for its P/C and life reinsurance operations, respectively. Our view of Hannover Re's low country risk reflects its globally diversified risk exposures, mainly in major global developed markets. We believe that Hannover Re's P/C reinsurance operations are exposed to moderate industry risks predominantly due to the exposure to natural catastrophe risks. Hannover Re's life reinsurance business is exposed to low industry risks reflecting the sector's positive earnings trend and moderate product risk, in our view. JUNE 30,

5 Table 2 Hannover Re Industry And Country Risk (Re)Insurance sector IICRA Business mix (%) Global P/C reinsurance Intermediate 56.0 Global life reinsurance Low 44.0 Weighted average IICRA Moderate 2.6 IICRA--Insurance Industry And Country Risk. Competitive position: Very strong based on market leading position in global reinsurance Hannover Re's very strong competitive position is based on the group's market leading position in the global reinsurance sector and its diversity both in terms of business lines and geographies in which it operates. Hannover Re is the world's third-largest reinsurer and benefits from a well-established brand, strong underwriting and claims service abilities, and longstanding relationships with brokers and clients. It has a large number of lead positions in the reinsurance treaties it underwrites on a global basis. 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 23% of pre-consolidated earnings before interest and tax on a five-year average) are not significantly correlated to its P/C business and in our view continue to provide meaningful diversity and growth potential. In our opinion, Hannover Re has solid market credentials that should enable the group to defend its competitive position. Hannover Re is well diversified across regions it writes business in, and we view this as a major competitive advantage. In P/C reinsurance, business written in Europe accounts for 49%, North America for 25%, and Asia-Pacific for 14%, with Latin America and Africa accounting for the remainder. The picture is similar in life reinsurance, with 38% of GPW stemming from Europe, 34% from North America, 22% from Asia-Pacific, and the rest from Latin America and Africa. We assume that pressure on rates in P/C reinsurance will prevail at least in 2014, and likely in as well, but consider it likely that Hannover Re will offset these pressures through diversification and cycle management. We therefore expect the group to report stagnating or moderately growing P/C GPW for We expect stronger growth impetus to stem from life reinsurance, owing to further leveraging on business opportunities in capital-relief-motivated transactions and continued expanding market share in the U.S. Table 3 Hannover Re Competitive Position --Year ended Dec (Mil. ) Gross premiums written 13,963 13,774 12,096 11,429 10,275 Change in gross premiums written (%) Net premiums written 12,420 12,366 11,026 10,301 9,516 JUNE 30,

6 Table 3 Hannover Re Competitive Position (cont.) Change in net premiums written (%) 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, reflecting the group's extremely strong capital and earnings, moderate risk position, and adequate financial flexibility. Capital and earnings: Extremely strong capital adequacy expected in We view Hannover Re's capital and earnings as extremely strong, based on our forecast of the group maintaining capital adequacy at the 'AAA' level over , based on the our capital model. Table 4 Hannover Re Capital --Year ended Dec (Mil. ) Common shareholders' equity 6,530 6,714 5,607 5,118 4,257 Change in common shareholders' equity (%) (2.7) Total reported capital 9,068 9,181 7,610 7,248 5,810 Change in total reported capital (%) (1.2) We forecast extremely strong capital adequacy in our base-case scenario for , based on the following assumptions: A slight increase in interest rates; No material financial market dislocations; Some pressure on rates, particularly in the P/C reinsurance segment; and Catastrophe claims approximately in line with Hannover Re's annual budgets. In terms of capital generation, we forecast Hannover Re will maintain sound net income in the range of 800 million to 900 million annually, distributing about 40% as dividends. In our forecast, we assume some pressure on revenues from a softening market environment in the P/C reinsurance business will result in a slight increase in net combined ratios to the 95%-98% range. We also assume that pressure on investment returns will decrease only gradually, based on our expectation of increasing bond yields, resulting in net investment yields in a range of 2.8%-3.2%. In life, we expect Hannover Re to return to stronger profitability than in 2013 and closer to previous years' levels both in terms of earnings before interest and tax margins and new business margins. We assume moderate growth in life reinsurance liability risk exposures over For P/C reinsurance, we assume that liability risk exposures will grow more strongly than indicated by growth in premiums, reflecting the JUNE 30,

7 pressure on rates. In terms of asset risk exposures, we assume some exposure growth but no material change in the relative composition of asset risks over Table 5 Hannover Re Earnings --Year ended Dec (Mil. ) Total revenue 13,542 13,639 11,998 11,197 10,351 EBIT adjusted 1,131 1, ,052 1,051 Net income (attributable to all shareholders) 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 (%) (Favorable) unfavorable reserve development (%) (6.2) (4.7) (5.3) (4.0) (1.6) P/C--Property/casualty. Risk position: Moderate risk based on well-diversified business mix We now 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 (44% of GPW in 2013) and P/C (56%) business, of which catastrophe business is a small and well-managed portion, render 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 in managing the volatility risk from large natural catastrophes. Hannover Re also maintains a conservative stance to investments through relatively low-risk asset allocation, limits for foreign currency exposures, and prudent diversification by sectors and single obligors. Table 6 Hannover Re Risk Position --Year ended Dec (Mil. ) Total invested assets 31,805 31,814 28,320 25,356 22,449 Change in total invested assets (%) (0.03) Net investment income 1,314 1,358 1,237 1,133 1,208 Realized capital gains/(losses) Unrealized capital gains/(losses) (46) 70 (33) (36) (22) Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Net investment yield including realized and unrealized gains/(losses) (%) JUNE 30,

8 Table 6 Hannover Re Risk Position (cont.) Portfolio composition (% of general account invested assets) Cash and short term investments (%) Bonds (%) Equity and investment fund investments (%) Real estate (%) Mortgages (%) Loans (%) Investments in affiliates (%) Investments in partnerships, joint venture and other alternatives investments (%) 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. However, we believe Hannover Re's access to equity markets to be somewhat limited compared with that of some peers, owing to the reluctance of its majority shareholder Talanx to support further capital injections, other than in a stress scenario. Hannover Re's financial leverage ratio (debt plus hybrids to economic capital) was approximately 16% and fixed-charge coverage was roughly 6x in Based on our capital and earnings forecast and assuming no major change in Hannover Re's capital management approach, we expect financial leverage to remain below 20% and fixed charge coverage to be in the range of roughly 6x-7x over Table 7 Hannover Re Financial Flexibility --Year ended Dec Fixed charge coverage (x) N/A Financial leverage* (%) N/A *Includes net present value of operating leases and pension deficit as debt. N/A--Not available. Other Assessments Hannover Re's enterprise risk management (ERM) and management and governance are neutral factors for the ratings, in our view. 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 to our rating assessment, given the complexity of Hannover Re's business and operating JUNE 30,

9 structure and its 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. Risk 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 (ALM), and credit risk controls, are in our view positive, based on consistent guidelines, multiple measures, clear limits, benchmarks, and minimum standards. Due to the group's effective equity and credit risk controls, losses from equity markets in the capital market crisis stayed within the group's limits and risk tolerances. Furthermore, the group was not significantly hampered by losses from counterparty defaults and has no material exposure to sovereign debt in Europe's periphery countries. 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, pricing, and risk accumulation. We believe controls for reserve risk to be also 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 fully-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: Satisfactory, clearly communicated capital-light approach Hannover Re's management and governance is strong in our opinion. We believe that the management team has demonstrated a consistent and successful track record of strategic planning, strong execution, and transparent, demanding, and sophisticated financial management. JUNE 30,

10 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 an asset portfolio that is highly liquid. 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 the core primary insurance entities of the Talanx Group. 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 the core primary insurance operating entities of the Talanx Group and could remain up to two notches higher. Related Criteria And Research Related Criteria Group Rating Methodology, Nov. 19, 2013 Insurers: Rating Methodology, May 7, 2013 Enterprise Risk Management, May 7, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 Related Research Past The Tipping Point: Competition And Soft Pricing Could Lead To Rating Pressure For Global Reinsurers, Jan. 20, 2014 Insurance Industry And Country Risk For The Global Property/Casualty Reinsurance Sector Is Intermediate, Sept. 6, 2013 Global Life Reinsurance Sector Carries A "Low Risk" IICRA, Sept. 6, 2013 Ratings Detail (As Of June 30, 2014) Operating Companies Covered By This Report Hannover Rueck SE Counterparty Credit Rating Junior Subordinated Subordinated E+S Rueckversicherung AG A A JUNE 30,

11 Ratings Detail (As Of June 30, 2014) (cont.) Hannover Life Reassurance Bermuda Ltd. Hannover Life Reassurance Co. of America Hannover Life Reassurance of Australasia Ltd. Hannover Re (Ireland) Ltd. Hannover Re Bermuda Ltd. International Insurance Co. of Hannover PLC Domicile Germany *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com JUNE 30,

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