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24 January 2018Insurance

Navigators targets Continental Europe retail market as CEO bemoans high costs of Lloyd’s

His comments come on the back of a rare  acquisition in the region, which it will now use to drive growth.

In December 2017, Navigators decided to acquired Belgium-based BDM-ASCO. ASCO is a specialty insurance company offering marine, property and casualty insurance. BDM is an insurance underwriting agency that underwrites risks in niche markets on behalf of ASCO and a number of major international insurers.

“We’re excited about Europe,” Navigators CEO Stan Galanski told Intelligent Insurer.

The BDM-ASCO acquisition is a surprising move by Navigators, which has preferred growing organically in the past. Its last acquisition was in 1999 when it purchased Anfield underwriting agency in San Francisco, which specialises in construction liability insurance.

“Our culture has always been one of hiring very experienced underwriters in the local markets, giving them meaningful authority to make decisions and expecting them to do a good job in managing their business and making an underwriting profit. Our culture is one of competing on the basis of service, not price,” Galanski explains.

Expanding in Continental Europe

“We were very fortunate to have come across BDM-ASCO,” Galanski notes.

Instead of finding expense synergies through combining of the businesses, Navigators is seeking growth opportunities across Continental Europe through the BDM-ASCO acquisition.

Navigators will pay €35 million in cash at the closing of the transaction. As part of the deal, it will also acquire all the shares of Canal Re, a Luxembourg reinsurance company that is a wholly-owned subsidiary of ASCO.

The acquisition reinforces Navigators' presence in the European Union's single market, enabling it to serve its European clients after Brexit. It also provides an opportunity for BDM and ASCO to take their expertise to a wider European audience, according to a company statement at the time.
Navigators CEO Stan Galanski
To date, US P&C has been Navigators’ largest operating segment generating $632 million gross written premium in 2016. This was followed by international marine with $183 million in GWP and international P&C, which generated $181 million. Overall, Navigators’ gross written premium was $1.6 billion in 2016.

Navigators now intends to combine its existing European underwriting operations with those of BDM. Antwerp will serve as the hub for continental Europe.

“There are a significant number of sophisticated buyers on the continent, which made it [the BDM-ASCO acquisition] really attractive to us,” says Michael Casella, president international insurance.

“Navigators’ strategy is about finding those slivers in the marketplace where we can really add value by taking our existing products, such as specialty casualty, marine, and professional and management liability, into these markets.”

In order to expand in Continental Europe, Navigators is focused on the retail market as opposed to Lloyd’s service company markets.

Lloyd's not helpful for European expansion

“We are writing more business onto retail paper instead of relying wholly on Lloyd’s paper or service companies. That transition has already started,” Casella explains.

“We see the continent as a retail play for us. If you want to use Lloyd’s in places like France it becomes a much more challenging proposition.”

Some market participants have been complaining that operating via Lloyd’s has become overly expensive – something Galanski agrees with.

“The regulatory overreach that is being demonstrated over the last few years has added significant administrative expenses to the business as a result of overzealous reporting requirements. This has negatively impacted the competitiveness and the attractiveness of the London Market,” Galanski says.

“Lloyd’s was historically the home of the small entrepreneur. But today, that regulatory overreach has incentivised scale and size. And that’s unfortunate.”

At Lloyd’s, where Navigators Underwriting Agency manages Navigators Syndicate 1221, the company has taken measures to control operating costs.

Costs need to come down

“We are playing very tough in that regard to really bring those commission levels back in line,” Casella says.

“I am confident that we have done our job and will be able to take our business forward in a profitable fashion.”

In the first half of 2017, Navigators’ international insurance business delivered a combined ratio of 105.5 percent. This compares to 94 percent in the US insurance business and 91.1 percent in Global Re.

“It’s been a tough couple of years,” says Casella, noting that the performance of the international business has been poor partly because of the product mix and partly because of high costs.

“We made an assessment that large Lloyd’s property business is better placed locally in North America than coming into Lloyd’s,” Casella explains.

Navigators now wants to further improve the cost structure of the international operations.

“Costs in London continue to climb,” Casella says. “The amount of binder business in London has grown to incredible levels over the past few years and some of it is fetching really exorbitant commission fees on it. For us to move to profitability we need to make strategic decisions about those product lines that aren’t core to us.”

Navigators is, for example, selling its fixed-premium protection and indemnity business to Thomas Miller Specialty.

“It’s very tough to get scale in the fixed premium P&I market because it is such a niche market,” Galanski explains. “We love niche businesses, but it’s tough to really get the type of market scale given the volatility associated with the capacity required to be in the market.”

Navigators believes that by moving into the retail market it will be able to improve the cost structure of its European business.

“For the business on the continent, profit drivers will be different,” Casella says. “If we are doing business with retail independent brokers the commission levels we expect to pay in those markets will be significantly less than what we would be paying here in the London market.”

The internal or operating costs may be higher than those in a Lloyd’s environment. But Navigators expects to have a better grip on the cost structure in a retail environment.

“If you are in a retail environment you are controlling your destiny,” Casella says. “You are in a much greater position to really make those decisions on what will drive margins inside of your business.”

To grow in Continental Europe, Navigators is targeting large and middle market sized customers in marine. In doing so, the firm will be cooperating with specialty brokers, either international marine brokers or specialised, regional marine brokers. In casualty and financial lines, targeted customers may be of the middle-market type. To expand in this area, independent brokers may be helpful.

Navigators estimates that the continental European market for marine insurance is worth around $2.8 billion in premiums annually.

“That business doesn’t come to London or New York. It’s done in those indigenous markets,” Galanski says.

The professional and management liability lines are potentially an even bigger market, probably about a $4 billion opportunity, according to Navigators.

“There is absolutely a place in our business for Lloyd’s, but there is also a place for Navigators in the insurance company market,” Galanski notes. “That is where the BDM-ASCO acquisition will fit in nicely in Europe.”

Going forward, Navigators is likely to grow its Continental Europe business organically rather than via M&A.

“For us, our international strategy has always been driven by the desire to take our specialty products such as marine, energy and now D&O, professional liability and casualty, into new geographic markets,” Galanski says.

“We would love to find more specialty opportunities that have the attributes that BDM-ASCO has: a culture that reflects our culture, a specialty orientation and a very strong regional presence. Unfortunately, those businesses are few and far between,” Galanski explains.

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