Clarendon Clarifies Hannover Re Decision on Programs

September 5, 2005

Many people questioned what Hannover Re’s Chief Executive Wilhelm Zeller, meant when he announced a “new strategy” for its U.S. subsidiary, Clarendon Insurance Group. Presiding over the German reinsurer’s “Investors Day” press conference on July 1, he said that following an “intense analysis of business,” management had concluded that Clarendon should be transformed into “a highly focused specialty insurer.” He laid out an “organizational separation of the past (programs in run-off) and the future (profitable specialty business).” The story, as reported on the IJ Web site July 6 and elsewhere, was interpreted to mean that Hannover had ordered a “sea change” in Clarendon’s operations. It seemed to indicate that the company, one of the U.S. leading program specialists, would no longer write programs.

Several commentators, however, pointed out that Clarendon already does a majority of its business in specialty lines, and that it was actually only exiting “commodity programs.” In order to clarify the situation IJ contacted Juergen Lang, Clarendon’s chief program officer, and asked him what was going on.

“The process is more evolutionary than revolutionary,” Lang wrote in an e-mail. “We have been increasing our retentions since 2001 and will continue to do so going forward.” Clarendon was one of the first insurers to specialize in program business and has been in the program marketplace since 1992. Lang said it wrote about $2.33 billion in business last year.

In 1999 Hannover Re purchased Clarendon. By then the Group had honed its business model to become a leading pass through insurer, or fronting company. Business came in from general agents (wholesalers, GAs and MGAs) and was passed through to reinsurers. The general agents assumed responsibility for underwriting and policy administration. Clarendon took a fee for accepting the risks and placing the business, but retained little premium or exposure.

That began to change in 2001, when, following the Sept. 11 attacks and other factors, hard market conditions reasserted their presence. It was no coincidence that the Target Markets Program Administrators Association (TMPAA) was formed that same year, as a number of carriers had begun to exit the program marketplace.

“Four or five years ago we would have retained maybe 10 percent of the business,” Lang said. ” Now we retain between 35 to 36 percent on average. Our longer-term target is to retain approximately 80 percent of the gross premium. We are moving in that direction, but have to take existing reinsurance relationships into consideration.”

The changes are not therefore a radical departure from Clarendon’s traditional business operating strategy. They are twofold: The first part was the decision to move from “a fee-based business model” to greater retentions of the insured risks. The second part is the decision to concentrate efforts on specific areas, or target markets. It is a change in emphasis, rather than structure. “We will continue writing business through MGA’s,” Lang said. “We will, however, strategically emphasize doing business with those MGAs that have a narrowly defined focus either on a certain customer group or product line.”

This explains why Zeller took pains to point out that Clarendon would be moving out of “commodity” type programs and more into specialty lines. The most visible example of this is the company’s decision to stop renewing homeowners’ policies in Florida as of October. Clarendon posted a $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.

Lang stressed that these changes are incremental. The description of Clarendon as a “Specialty Lines” insurer therefore simply describes what the company is trying to do in a more accurate way. “By far most of the specialty business we continue writing consists of existing programs and ongoing business relationships, ” he continued. He explained that “program business and specialty business are areas that overlap. Our specialty business will result from programs that have a narrow focus and are underwritten by following a stringent underwriting protocol.”

These decisions do not come without a price, however. 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 estimated the change will initially result in a $1 billion decrease in premiums, but will raise retentions in future years. The goal is to recoup that lost premium income by specializing in areas that offer more profitability and more future growth potential.

However, Clarendon doesn’t intend to “throw out the baby with the bath water.” Lang stressed the close connections between the approximately 40 MGAs who “have the pen” and the company’s refocused strategy. Most of the business is written through Clarendon’s New York office. “The general agents [we deal with] know their customer groups and product lines well,” he continued. “We’ve done business with most of them for a number of years and they are capable underwriters and program mangers.” Clarendon’s not a closed shop, however. “We’re looking for new GA’s with expertise in specialty lines who can increase our opportunities,” Lang said.

The company also offers a chance for independent agents through its Itasca, Ill. office, which does most of its own underwriting. “It has about 20 in house programs and is more for smaller business and retail agents with different types of policies,” Lang said.

Although Clarendon outsources much of its business-and Lang said it would probably continue to do so-the company keeps tight controls over what’s going on. “Any outsourcing we do must be monitored,” he stressed. “If everything is going smoothly we would do this once a year, but if an audit reveals problems then they would be more frequent.”

Lang also indicated that Clarendon’s focus would emphasize more geographic diversity, rather than product lines. It currently works with GAs from all parts of the U.S., and intends to preserve and expand those relationships. In doing so Clarendon will continue its close association with the TMPAA. It played a leading role in establishing the association and has been active in its development.

“These changes aren’t so major right now,” Lang said, “but within two to three years they will be.” Many discontinued programs have already gone into runoff, which he indicated was going smoothly. “We did communicate our ongoing strategy to our business partners,” he continued. “The specialty writers welcomed our move. We had to tell some of our business partners that the business does not fit into the ongoing strategy, which is a more painful, but necessary, measure,” Lang said.

“As outlined we will concentrate on business that has a clear focus and is result-wise less driven by general market cycles,” he continued. “We are therefore discontinuing business that is more commodity in nature and is impacted by the present softening market cycle.”

Clarendon’s changed focus is also part of Hannover’s strategy. Zeller has denied any plans to sell the company, but did acknowledge that “disposal was also considered, but we concluded we can maximize the value by continuing to own it, rather than disposing of it right now.” How well the company does in the future could well determine whether that decision stands.

Topics Agencies Excess Surplus Insurance Wholesale

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