Hannover Re cuts back US business; Clarendon restructured
German reinsurer Hannover Re has revealed plans to realign its under performing US subsidiary Clarendon away from program business to specialty insurance, potentially cutting gross premiums by $1bn and increasing group net retention to 80 percent over the next two years.
The strategy, described by chairman Wilhelm Zeller as “not a revolution”, but the “consummation of an evolution” was unveiled at the company’s annual investor day in Hannover last Friday (1 July).
Zeller told investors that the decision was taken following an “intense analysis” of the business, conducted by the new management team brought into Clarendon last October, headed up by CEO Steven Najjar.
As a result of the review, said Zeller, it became clear that Hannover Re would have to “transform Clarendon into something different”, as a “highly focussed specialty insurer” by “separating organisationally the past from the future”.
The reinsurer will separate internally the organisational structure of the program business, now in run-off, and its newly designated growth area of specialty insurance.
It will also appoint a new divisional head, to “proactively and professionally manage” the more than 150 programs in run-off.
Zeller said that Hannover Re had come to this “clear conclusion” based on the rationale that fee-based program business is no longer viable for the company, primarily as a result of a dramatic change in market dynamics in the wake of the 1999 Unicover debacle, as primary insurers were prohibited from writing workers’ compensation carve-out business, and reinsurers displayed an increasing unwillingness to pay.
He also pointed to a lack of adequate proportional reinsurance available for some of the key lines written by the business, including workers’ compensation and homeowners’ cover.
Zeller also highlighted knock-on problems facing Hannover Re as a result of the business, with the sensitivity of commodity style products to cycle dynamics, and growing disputed reinsurance recoverables along with the rating agency attention they bring.
Instead, Clarendon will now focus on select niche specialty business lines, with Zeller emphasising that the future of the subsidiary was never in doubt.
“There is inherent value in Clarendon. It enjoys a terrific market position, it has a great management team, it has well established long standing client relationships, good infrastructure, licenses and ratings,” he explained.
He added that the group’s growth into specialty lines in the US would not have a destabilising effect on the softening market.
“We will carefully select the business and emphasise gross underwriting profitability and we will not chase volume,” he stated.
The company said the move would not have any impact on its net income guidance of €470mn for 2005.