The world's fourth biggest reinsurer Hannover Re is expected to return pre-tax earnings of $1.3 billion this year, estimates rating agency AM Best.

If correct that would be a $200 million improvement year-on-year for the Germany-based giant, which earlier this week hinted it is looking to relocate to a low-tax jurisdiction most likely Ireland.

New Jersey's AM Best made its prediction as it affirmed its "a" issuer credit rating for the company and its rated subsidiaries.

An "a" is considered "strong" in the rating agency's listings, above "bbb" (adequate) but below "aa" and "aaa."

AM Best has also upgraded all ratings for debt issued or guaranteed by Hannover Re in order to reflect the ranking of debt relative to policyholder obligations of German reinsurers.

The outlook for all ratings remains stable.

The agency said: "The ratings reflect Hannover Re's excellent risk-adjusted capitalisation, excellent profitability despite the softening market conditions in the non-life sector and the company's excellent business profile in the global reinsurance sector.

"Offsetting factors remain the company's limited financial flexibility and high exposure to catastrophe losses."

In AM Best's view Hannover Re continues to have limited financial flexibility as its ability to raise equity remains dependent upon its majority shareholder, Talanx AG, which is a non-listed intermediate holding company.

In addition, the company has already exhausted the maximum credit for hybrid equity of 20 percent of total adjusted capital.

The agency said it expects Hannover Re's pre-tax earnings to increase to $1.3 billion for 2007, from $1.1 billion, translating into "an excellent and stable pre-tax return on equity of 25 percent (assuming catastrophe losses not exceeding 8 percent of net premiums)."

AM Best said: "Hannover Re's business profile remains excellent in the global reinsurance market in 2007.

The company focuses now only on reinsurance following the sale of PFG. Gross premiums are expected to decrease by approximately nine percent to $11.6bn in 2007 mainly due to this transaction.

"In its core business Hannover Re was able to gain several new domestic non-life clients as well as in the UK impaired annuity market which will likely compensate for softening rates in other non-life reinsurance markets."