Insurance Jottings

The Hartford to Acquire Specialty Insurer Navigators in US$2.1 Billion Deal

The Hartford Financial Services Group has agreed to acquire specialty insurer The Navigators Group in a transaction that values Navigators at approximately US$2.1 billion.

 

Under the terms of the agreement, Navigators stockholders will receive US$70.00 per share in cash upon the closing of the transaction. The US$70.00 per share offer price represents a multiple of 1.78 times Navigators’ fully diluted tangible book value per share as of the 30th June 2018 and an 18.6 percent premium to the 90-trading-day average stock price.

 

Stamford, Connecticut-based Navigators is a global insurance holding company which specialises in maritime, construction, energy, environmental, professional services and life sciences — 22 vertical markets in all — and it has relationships with global retail and wholesale brokers. It has offices in the United States, the United Kingdom, Continental Europe and Asia.

 

In addition to an established presence at Lloyd’s, the company also has growing underwriting operations in Europe, Asia and Latin America. The company currently operates three business segments: US Insurance (58 percent of 2017 gross written premiums), International Insurance (29 percent) and Global Reinsurance (13 percent).

 

Navigators has approximately 820 employees globally who will join The Hartford upon closing. Approximately 600 of its employees are based in the US and 150 are located in the UK.

 

Its US offices include sites in New York, Chicago, Houston, San Francisco, Los Angeles, Atlanta and Seattle.

 

The Hartford said the Navigators business is “highly complementary” to its current commercial lines portfolio with added specialty and surplus lines capabilities and reduced workers’ compensation concentration. It is also complementary geographically and its Lloyd’s platform will help support future specialty lines growth.

 

Navigators has specialty lines coverages and markets where The Hartford does not currently underwrite or have a significant market presence, including marine, energy, environmental, construction wrap ups, international and the deal increases the scale of The Hartford’s existing positions in construction, professional liability, financial products and life sciences.

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Combined the two will have more than $8.2 billion in commercial lines net written premiums — which would rank it seventh among U.S. commercial lines insurers.

 

In June, Navigators completed its acquisition of Belgian specialty insurer Bracht, Deckers & Mackelbert NV, a specialty underwriting agency, and its affiliated insurance company, Assurances Continentales – Continentale Verzekeringen NV, and a Luxembourg reinsurance company, a wholly owned subsidiary of ASCO.

 

LIIBA warns on missing Brexit equivalence regime for brokers

London & International Insurance Brokers’ Association (LIIBA) chairman Roy White has written to the UK’s prime minister Theresa May to drive attention to the fact that insurance intermediates do not have an equivalence framework in place to allow for business continuity after the UK leaves the EU.

 

In the letter, Mr White said: “We have noted the proposals the government has made in its white paper for trade arrangements for financial services after UK leaves EU. However, we are concerned that any agreement to an “enhanced equivalence” regime will create uncertainty for insurance intermediaries. As you will be aware, there is no equivalence framework either under Insurance Mediation Directive nor Insurance Distribution Directive (IDD), which comes into force on the 1st October. Clearly in the absence of an existing equivalence regime, enhancements will not work.”

 

The letter goes on to propose that the government seeks an equivalence regime akin to that enjoyed by investment managers under the Market in Financial Instruments Regulation. This allows firms to provide services to professional clients in the EU provided they are registered with European Securities and Markets Authority (ESMA). Investment firms do not need to have an establishment in the EU under this regime.

 

LIIBA CEO Christopher Croft continued: “Buyers of insurance must not be the unintended victims of Brexit. Major EU corporations could be faced with profound consequences post Brexit without access to London insurance. We need to find a way of maintaining client access to the specialty expertise in London that allows us to provide the cover that simply could not be sourced anywhere else.

 

“The government’s white paper provides a measured foundation from which the right future trade agreement for financial services can be built. We understand in general why that focusses on the existing equivalence regimes but our relevant directive – IDD – has no such concept. We are keen to work with the government to help find a workable way forward.”

 

UK Insurers Push Ahead with Brexit Plans in Absence of Trade Deal: A M Best Report

In the absence of a Brexit trade deal between the United Kingdom and the European Union, insurers in the UK have accelerated their plans to establish new EU subsidiaries and ensure business continuity after Brexit, according to a report published by A M Best.

 

The ability to continue to conduct cross-border business is a particular concern for Lloyd’s, London market carriers and other UK-based commercial insurers, said the Best’s Briefing, explaining that this is less of an issue for retail insurers because of their focus on UK domestic business.

 

The formation of EU subsidiaries will enable insurers in the UK to underwrite EU business after March 2019, or following an agreed transition period, said the briefing, entitled “Insurers Step up Brexit Plans in Absence of Clarity.”

 

On the other hand, small insurers, which do not have the resources to form EU-based subsidiaries, are forming relationships with local carriers who can front business for them in the EU, the report added.

 

London is likely to remain one of the world’s leading insurance centres and the principal insurance hub in Europe, supported by its pool of underwriting talent and access to related services.

 

In the absence of a political solution for Brexit, UK companies which currently make use of EU passporting rights “will not be able to service claims on existing EU policies after Brexit,” the report said.

 

As a result of these uncertainties, a growing number of insurers “are exploring potentially expensive Part VII transfers of existing EU business to their newly created subsidiaries,” it added. [Editor’s note: Part VII transfers, in part, enable a UK insurer to transfer its cross-border contracts into an EU subsidiary.]

 

Rationale Varies for EU Domiciles

While Luxembourg and Ireland have emerged as the popular EU domiciles for UK insurers, A M Best commented, “no single city appears likely to challenge the position of London as Europe’s principal re/insurance hub.”

 

The choice of domiciles is driven by the needs of individual insurers, including proximity to clients, the available talent pool, an existing presence in a location (such as a branch), the local tax regime and the approach, expertise and accessibility of the domestic regulator, the Best’s Briefing explained.

 

However, the principal driver of the chosen EU domicile is whether there is an existing operation, the report affirmed.

 

“Where companies have established branches or a material presence in a particular market, it is usually because they believe it will help them access attractive business,” A M Best explained. “In addition, they will already have underwriting talent and infrastructure in place at that particular location, and they will usually have a relationship with the local regulator.”

 

Amlin and QBE have selected Brussels as their EU domiciles — decisions which were “largely driven by the fact that they have an existing presence there,” said the report.

 

It noted that Beazley, Aspen and XL chose Dublin because they had operations in that city, while Chubb opted for Paris for similar reasons, as did Markel when it decided to locate its EU headquarters in Munich.

 

While Lloyd’s did not have business or operations in Brussels previously, it chose this domicile as the location for its EU subsidiary due to the strength of the regulatory framework, said Mathilde Jakobsen, A M Best director.

 

“In cases where an insurer does not have existing operations in an EU location, Luxembourg is proving to be an attractive domicile,” the briefing said, noting that the local regulator is viewed as business friendly and efficient, while the domicile has good support services such as lawyers and accountants.

 

“In each of these chosen locations, A M Best expects subsidiaries to be small relative to the insurer’s UK operations,” the report stated.

 

“London is likely to remain one of the world’s leading insurance centres and the principal insurance hub in Europe, supported by its pool of underwriting talent and access to related services,” the report added.

 

Cost Implications of EU Units

The Best’s Briefing pointed to the cost of setting up new risk carriers in the EU, which is weighing on insurers and will impact their earnings.

 

Further, the formation of a separately capitalized subsidiary in the EU “may reduce the fungibility of capital across an insurance group and its capital efficiency,” the report affirmed.

 

As a result, insurers are seeking “to reduce capital requirements at these new subsidiaries and minimise trapped capital,” it continued. “One way to achieve this is to transfer material underwriting risk back to other group entities through reinsurance.”

 

However, such moves would require a nod from regulators, who also will be key “in determining what constitutes a meaningful presence in a particular market…”

 

A M Best provided a list of the planned re/insurance domiciles in the EU, as of the 27th June:

 

  1. Lloyd’s: Belgium
  2. MS Amlin: Belgium
  3. QBE: Belgium
  4. Chubb: France
  5. Ironshore (Ironshore International’s Mergers & Acquisitions and Tax Insurance unit): Germany
  6. Markel: Germany
  7. St Julians (transfer of domicile from Malta): Gibraltar
  8. Aspen: Ireland
  9. Aviva: Ireland
  10. Beazley: Ireland
  11. Chaucer: Ireland
  12. Equitable Life: Ireland (to be confirmed)
  13. Everest Insurance: Ireland
  14. Legal & General: Ireland
  15. NEON Underwriting: Ireland (to be confirmed)
  16. North P&I Club: Ireland
  17. Royal London: Ireland
  18. Standard Life: Ireland (to be confirmed)
  19. The Standard Club: Ireland
  20. Travelers: Ireland
  21. XL Group: Ireland
  22. Sompo Japan Nipponkoa Insurance: Luxembourg
  23. AIG: Luxembourg
  24. Aioi Nissay: Luxembourg
  25. CNA Hardy: Luxembourg
  26. FM Global: Luxembourg
  27. Hiscox: Luxembourg
  28. Liberty Specialty Markets: Luxembourg
  29. RSA: Luxembourg
  30. Tokio Marine: Luxembourg
  31. Starr: Malta
  32. Compre (transfer of London & Leith Insurance SE): Malta
  33. The UK P&I Club: Netherlands
  34. Steamship Mutual: Netherlands
  35. Chesnara: Netherlands
  36. Admiral: Spain

 

Acrimonious, Disruptive No-Deal Brexit Is Growing Risk, Says Fitch

Ratings agency Fitch said on the 16th August that it saw a growing risk of a bitter and economically damaging Brexit that could lead to a further downgrade of Britain’s sovereign credit rating.

 

“We no longer believe it is appropriate to identify a specific base case,” Fitch said in an update on its views on how Brexit might affect Britain’s economy and public finances.

 

“An acrimonious and disruptive ‘no deal’ Brexit is a material and growing possibility,” it said.

 

Previously Fitch had assumed Britain would leave the EU in March next year with a transition deal in place and the outline of a future trade deal with the bloc.

 

However Prime Minister Theresa May is struggling to get her own Conservative Party to support her proposed Brexit deal, while the European Union has raised objections to key parts of her plan, suggesting it will seek more concessions which could deepen the divide within the Conservatives.

 

“An intensification of political divisions within the UK and slow progress in negotiations with the EU means there is such a wide range of potential Brexit outcomes that no individual scenario has a high probability,” Fitch said.

 

Bank of England Governor Mark Carney said this month that the possibility of a no-deal Brexit was “uncomfortably high” and British trade minister Liam Fox put the chance at 60 percent, helping send sterling to a 14-month low against the US dollar.

 

An adverse Brexit scenario which slowed growth sharply could push up Britain’s budget deficit towards 2.5 percent of gross domestic product, meaning the debt-to-GDP ratio would decline by less than expected over 2019 and 2020, it said.

 

“A severe enough shock could reverse the downward trajectory in the ratio since 2015.

Worsening public finances leading to a rising government debt ratio could also lead to a downgrade of the UK,” Fitch said.

 

The ratings agency currently rates British government debt at AA with a negative outlook which means a further lowering of the rating is possible.

 

Fitch cut its top-notch AAA rating on Britain in 2013, citing the weaker public finances outlook.

 

Moody’s Forms Stockholm Subsidiary to Prepare for Brexit

Credit ratings agency Moody’s is converting its Stockholm branch into a subsidiary as the sector faces regulatory pressure to have enough staff in the European Union post Brexit.

 

Moody’s, one of the “Big Three” global agencies along with Standard & Poor’s and Fitch, has hitherto run a large chunk of its European operations from a base in London, but Britain is due to leave the EU next March.

 

Under EU rules, credit ratings for customers in the bloc can only be issued by agencies registered with the European Union’s European Securities and Markets Authority (ESMA).

 

ESMA said it has “registered” Moody’s Stockholm branch, meaning it will become a fully-fledged operation.

 

“Moody’s Investors Service (Nordics) AB is based in Sweden and intends to issue sovereign and public finance ratings, structured finance ratings and corporate ratings,” ESMA said.

 

ESMA data shows Moody’s has an EU market share of 31 percent, behind S&P’s 46 percent