Hannover Re’s Praetorian Launch Is Not Defensive, Says Fox

Rod Fox, chief executive of Hannover Re’s new U.S. speciality insurer Praetorian Financial Group, denies the firm’s launch is an attempt to salvage its parent’s reputation in the North American market following a series of troubles at U.S. unit Clarendon Insurance.

Rod Fox, chief executive of Hannover Re‘s new U.S. speciality insurer Praetorian Financial Group, denies the firm’s launch is an attempt to salvage its parent’s reputation in the North American market following a series of troubles at U.S. unit Clarendon Insurance.

In mid-2005, following a string of losses, Clarendon restructured. It put its programme business into run-off but continued to write U.S. speciality business. On March 7, Hannover Re set up Praetorian, a legally separate entity headquartered in New York, and transferred Clarendon’s continuing speciality business into it. Clarendon will now focus on running off its program business. It will also write some commodity business that falls outside Praetorian’s remit.

Some observers think Praetorian’s launch is a defensive move by Hannover Re. Thomas Fossard, an analyst at investment bank Exane BNP Paribas, says that when chief executive Wilhelm Zeller hinted there would be big news from Hannover, investors expected it to be the sale of Clarendon’s run-off program business, not the launch of Praetorian. He believes Praetorian may have been Zeller’s back-up plan if he was unable to get the price he wanted for Clarendon.

“Zeller said he would dispose of the entire run-off business if he could find a buyer, but that he was not willing to accept less than book value,” says Fossard. “When buyers started to seek significant discounts, it may have been easier for them to launch something with a new name. Clarendon was not such a strong brand name with which to launch a new business.”

Fox, who was named Clarendon’s chief executive in February this year, denies this. He says Hannover had set speciality business in its sights ever since it began reorganising Clarendon in 2002, and that it decided to launch Praetorian in the summer of 2005. He adds that favourable market conditions will give Praetorian a running start.

“I’ve only been in the job five weeks and I am not sure what analysts were expecting,” says Fox. “But Hannover had to launch it now. Clarendon’s business model had changed. You effectively had two organisations operating in the same framework, which created a lack of direction and focus. In order to get to the next level this was a necessary step.”

The competitive environment does not worry Fox. He says there is enough room for Praetorian because it will write high-margin business that few other U.S. speciality lines insurers participate in. This includes coverage for fine art, jewellery and mobile phones, health insurance for pets, selected habitational property coverage, and liability coverage for municipalities.

The company intends to make an underwriting margin of between 10% and 15% on this business, and generate between $1.5 billion and $2 billion in premium by the end of its first year. Hannover has committed $515 million of new capital to its U.S. operations. About $265 million will go to Praetorian and its subsidiaries Insurance Corporation of Hannover and Redland Insurance Company. The remaining $250 million will go to Clarendon.

Fox is now running both Praetorian and Clarendon, but will step down as head of Clarendon once his appointed successor has left his old job. Hannover will name the successor within the next two weeks.

Timothy Bienek, previously executive vice-president and chief financial officer of U.S. motor insurer Affirmative Insurance, will serve as chief operating officer of Praetorian. He once worked with Fox at broker EW Blanch.

Rating agency AM Best has given Praetorian an A- financial strength rating, and Standard & Poor’s has rated it A+. The company’s name derives from the Praetorian Guard, an elite military force that was responsible for protecting Roman emperors and keeping order.