Hannover Re Reorganizing U.S. Business with Praetorian Launch; S&P Ratings and Comments

March 8, 2006

Germany’s Hannover Re has announced a fundamental restructuring its U.S. primary insurance business. “All specialty business – henceforth the strategic focus – is to be transferred to the newly established Praetorian Financial Group, Inc. [PFG],” said the announcement.

“Clarendon Insurance Group, Inc., which had previously been responsible for these activities, will concentrate on the professional and proactive management of around 200 terminated programs as well as existing commodity business that falls outside of Praetorian’s focus,” it continued.

As an immediate result Standard & Poor’s ratings services announced that it has downgraded Clarendon’s rating, primarily because it was no longer “considered strategically important to Hannover Re” (See related article in “National”). However S&P affirmed its “A+” counterparty credit and financial strength ratings on Insurance Corp. of Hannover and Redland Insurance Co.,” the operating subsidiaries of Praetorian Financial Group Inc. (PFG).” S&P rates Hannover Re “AA-” with a negative outlook.

“With this separation we have taken the last logical step as part of our restructuring measures geared to maximizing the value of our specialty insurance business group,” explained Hannover Re’s CEO Wilhelm Zeller.

“Praetorian – led by its Chief Executive Officer Rodman Fox – will remain rigorously focused on specialty lines such as the insurance of select niche automobile risks and unusual professional risks as well as – inter alia – risks involving art collections, health insurances for pets, mobile phones and jewelry businesses,” the bulletin continued. “In view of its excellent financial strength ratings and market leadership Praetorian enjoys clear competitive advantages, prompting Mr. Zeller to speak of the company getting off to a ‘flying start'”.

In its analysis of the ramifications of the Hannover Re’s reorganization, S&P said it has assigned its “BBB+” counterparty credit rating to PFG, but has given a negative outlook to all of the companies involved. “The ratings on PFG reflect the ratings on its operating subsidiaries and its strategic importance to Hannover Re,” explained S&P credit analyst Siddhartha Ghosh.

S&P said the “negative outlook on PFG and its operating subsidiaries directly relates to the outlook on Hannover Re. The outlook also reflects uncertainties surrounding PFG’s successful business execution strategies with respect to profitability in the specialty program business. PFG is considered one of Hannover Re’s four major business segments and its only primary insurance vehicle in the U.S. Hannover Re has shown strong commitment to PFG, which is demonstrated by its capital contribution of $185 million to the operating subsidiaries in 2005. Furthermore, a 50 percent quota share reinsurance arrangement from Hannover Re to PFG’s insurance operations enhances Standard & Poor’s view that PFG is strategically important to Hannover Re.”

Zeller noted that “by putting in place a clear distinction between the companies we have also kept open more options for the future of our specialty business: over time we can consider continuing to manage Clarendon’s activities internally, engaging the services of additional external experts or moving towards more extensive outsourcing solutions and other alternatives. Based on Praetorian’s positioning as a specialty insurer Hannover Re can generate highly attractive earnings in the years ahead and has also given itself the option of enlisting partners and thereby profiting from the above-average valuation ratios for such specialized insurers, irrespective of whichever avenues we may ultimately decide to pursue,” he stressed. “We are not under any time or financial pressure whatsoever.”

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