Hannover Re Exits U.S. Program Business; Clarendon to Focus on Specialty Lines

Germany’s Hannover Re, the world’s third largest reinsurer, announced the adoption of a new strategy for its U.S. subsidiary Clarendon at its annual “Investors Day” press conference on Friday, July 1.

Following what it described as an “intense analysis of business,” Hannover’s management, led by Chief Executive Wilhelm Zeller, concluded that Clarendon should be transformed into “a highly focused specialty insurer by organizational separation of the past (programs in run-off) and the future (profitable specialty business).”

Hannover said it had reached the conclusion that due to a number of changes in the industry, “a fee-based business model is simply not viable,” leading it to change focus to a “retained/underwriting approach.” It hopes to remake Clarendon, the reinsurer’s major U.S. operation and a leading writer of program coverage, into a specialty lines insurer. Zeller said that in the future Clarendon would focus on short-term and mid-term insurance contracts and improve geographic and sector diversification of its disaster exposure. Hannover estimates the change will initially result in a $1 billion decrease in premiums, but will raise retentions in future years.

In a review of the company, Jochen Schmitt, analyst at LRP Landesbank Rheinland-Pfalz, indicated that Hannover “is increasingly signing cat exposures,” and has therefore decided to change Clarendon’s primary business objectives. The U.S. operation posted a 91.4 million euro ($110 million) loss in 2004, largely due to the Florida hurricanes, and Hannover had to come up with $45 million to shore up its reserves in the fourth quarter. Hannover said it will stop renewing policies in the State beginning in October, and will closely supervise any run-off operations, as necessary.

Hannover’s plan to gradually convert Clarendon’s program business into specialty lines is seen as offering more profitability and more future growth potential. It will offer coverage for such diverse products as specialty workers’ comp, specialty auto, “second loss (e.g. public entity, fine arts, bobcats and mobile phones.”

In the presentation of the new strategy Hannover also emphasized that it intends to “cooperate with highly focused, talented agents (both general and retail) in non-standard specialty segments”.

Zeller specifically denied that the company plans to sell Clarendon. “Disposal was also considered, but we concluded we can maximize the value by continuing to own it, rather than disposing of it right now,” he stated.