Haas, now chief financial officer at Hannover's parent company, Talanx AG, laughed at the recollection. "My first reaction was, 'This is pure blackmail.' " Then he concluded that, for Moody's, it was just business. S&P was already making headway in Germany and throughout Europe in rating the insurance business. Moody's was lagging behind. And, Haas thought, Hannover represented a fast way for the credit rater to play catch-up.
Within weeks, Moody's issued an unsolicited rating on Hannover, giving it a financial strength rating of "Aa2," one notch below that given by S&P. Haas sighed with relief. Nowhere in the press release did Moody's mention that it did the rating without Hannover's cooperation. But, Haas thought, it could have been worse.
Then it got worse. In July 2000, Moody's dropped Hannover's ratings outlook from "stable" to "negative." About six months later, Moody's downgraded Hannover a notch to "Aa3." Meanwhile, Moody's kept trying to sell Hannover its rating service. In the fall of 2001, Zeller, Hannover's chairman, said he bumped into a Moody's official at an industry conference in Monte Carlo and arranged a meeting for the next day at the Cafe de Paris. There, the Moody's official pressed his case, pointing out that the analyst who had been covering Hannover -- a man whom the insurer disliked -- had left Moody's. Zeller still declined Moody's services.
Two months later, Moody's cut the insurer's rating by two more notches to "A2." In December 2002, the rating firm put Hannover on review for another possible downgrade. Somewhere along the way, Haas appealed to his boss to yield.
"I said, 'Ultimately, you cannot win against the rating agency. Let's bite the bullet and pay,' " Haas recalled. "But for Willie [Zeller], it was a matter of principle. He said, 'I'm not going to pay these guys.' "
In March 2003, Moody's downgraded Hannover's financial strength rating by two notches and lowered its debt by three notches to junk status, sparking a 10 percent drop in the insurer's stock. S&P and A.M. Best, both of which were privy to the German insurer's confidential data, continued to give Hannover a high rating.
Industry analysts were confounded. "The scale of the Moody's downgrade was a surprise," said Damien Regent, an analyst at UBS AG, in a research report at the time. "There was no new information in the public domain to justify a three-notch downgrade."
Larry Mayewski, A.M. Best's executive vice president, said he thinks Moody's has been using unsolicited ratings to get companies like Hannover to buy its services.
Moody's declined to comment for this article about Hannover, but in its reports on the insurer, it said it was concerned that the German company had "high levels of financial and operational leverage" and a "high level of reinsurance recoverables" due to it. Since then, Moody's has softened its stance, raising Hannover's outlook from "negative" to "positive." But it still rates Hannover's debt as junk.
Zeller called the latest downgrade "ridiculous." But when his company's stock dropped sharply, he began to wonder whether he had any recourse.
As in the United States, lawmakers in Germany and elsewhere in Europe have taken a look at credit raters. But there has been no action. And Zeller isn't optimistic about the prospects of change.
"They have built up such a franchise," he said, "it's difficult, if not impossible, to do anything against it."
