Hannover Re has issued hybrid bonds over the recent years as an equity substitute. At the end of 2011, 24% of policyholder surplus comprised hybrid debt, which Fitch considers relatively high. In Fitch's view, the extensive use of hybrid debt adversely affects the quality of Hannover Re's capital, although the agency notes that the proportion of hybrid capital declined versus 2010.
Fitch notes that Hannover Re's debt leverage is at the higher end of its peer group but continues to be at acceptable levels for the current rating level. Hannover Re also has higher levels of underwriting and investment leverage than some of its peers, which increases the likelihood of earnings volatility over the course of the insurance cycle. Hannover Re's conservative investment portfolio and extensive use of retrocession somewhat offset the risk of highly volatile earnings and erosion of capital.
The key rating triggers that could result in an upgrade include:
--Net financial leverage consistently below 22%
--Fixed charge coverage consistently above 11x
--Combined ratio consistently below 97%
The key rating triggers that could result in a downgrade include:
--Net financial leverage consistently above 30%
--Fixed charge coverage consistently below 5x
--Combined ratio consistently above 103%
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 64.2%-owned by Hannover Re) and its distinct brand identity.
Hannover Re is one of the largest global reinsurers with gross premiums of EUR12.1bn in 2011 and shareholders' equity (including minority interests) of EUR5.6bn at end-2011. 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 wholly-owned subsidiary of Haftpflichtverband der Deutschen Industrie V.a.G.