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24 August 2018Insurance

The Hartford goes global with Navigators

Founded in 1810 in Hartford, Connecticut, where it still has its headquarters, The Hartford’s trademark logo echoes the majestic stag depicted in Sir Edwin Landseer’s 1851 painting Monarch of the Glen. Soon, this logo will become more prevalent throughout the world—if the management’s plan works out.

“We’re an ROE-focused company. There’s a tools methodology approach mindset that we’ll be able to bring to the organisation.” - Christopher Swift

Focused on property/casualty insurance, group benefits and mutual funds in the US, The Hartford is now planning to go global through the acquisition of specialty insurance provider Navigators Group. The move will add new lines of business such as reinsurance, products and expertise, as well as an international footprint.

The Hartford has entered into a  definitive agreement to acquire The Navigators Group in an all-cash transaction of approximately $2.1 billion.

It is looking to expand the Navigators’ business after the acquisition, creating synergies where there are overlaps, and taking advantage of Navigators’ international experience to take its own products to markets outside the US.

“Our footprint outside the US is very small,” said The Hartford president Doug Elliot during a conference call following the announcement of the Navigators acquisition.

Pointing to the fact that Navigators has a Lloyd’s platform and physical locations in nine cities around the world, Elliot explained that the acquisition will accelerate the development of more global thinking at The Hartford, which will be important for the group’s strategy over the next three to five years.

Close neighbours

Headquartered in Stamford, Connecticut, one-and-a-half hours’ drive from Hartford, Navigators reported $1.7 billion in gross written premiums for 2017. Of the total, 58 percent or $988 million was US insurance, 29 percent or $501 million was international insurance, and 13 percent or $224 million was global reinsurance.

In international insurance, Navigators operates in international marine (12 percent of total premium), international professional liability (8 percent) and international property/casualty (9 percent).

Commenting on the transaction, the Hartford CEO Christopher Swift said: “It expands our product offerings and geographic reach, and adds tenured and proven underwriting and industry talent while strengthening our value proposition to agents and customers. We are optimistic about our combined growth opportunities.”

The Navigators acquisition will help The Hartford grow underwriting operations in Europe, Asia and Latin America, including through a post-Brexit platform in Belgium, according to a presentation.

The Lloyd’s platform will also support future growth of The Hartford’s specialty lines and industry verticals, the presentation said. Navigators Syndicate 1221 is managed by Navigators Underwriting Agency and serves as Navigators’ primary platform for business produced outside the US.

Navigators Underwriting Division enables Navigators Syndicate 1221 to access reinsurance business throughout China.

The global reinsurance business is a new operating field for The Hartford.

The Navigators Underwriting Division provides reinsurance products via the Lloyd’s China platform in specie, fine arts & cash in transit ($50 million); marine & cargo ($25 million); directors & officers liability ($25 million); general liability, public and products liability ($25 million); and environmental impairment liability ($25 million), among others.

The biggest segment of Navigators’ reinsurance operation is accident and health, followed by Latin America and US property. Other fields with significant exposure are international P&C, international surety, specialty casualty and agriculture.

Targeting reinsurance growth

The Hartford wants to expand Navigators’ reinsurance business, which the management considers to be relatively small. Reinsurance capabilities provide efficient access for select products in some markets, according to the presentation.

“This business is an efficient way to participate in certain US and international markets,” Swift said.

“We’ll look to continue to allocate capital to that division,” he explained, noting that Navigators has been using the reinsurance segment to enter territories and grow profitably.

“I’m looking forward to learning more about it because I’m intrigued by it,” Swift said.

The Navigators’ global reinsurance business produced a five-year average combined ratio of 93.8 percent.

Overall, Swift expects premium growth in the range of 5 to 6 percent at Navigators in the future, which is less than it has managed in recent past years. In 2017, for example, Navigators grew gross written premiums at 9.2 percent year on year to $1.71 billion. The combined ratio deteriorated to 103.2 percent from 96.7 percent over the period. Net income declined 51 percent year on year to $40.5 million in 2017.

“What is an appropriate growth mentality?” Swift asked. “You could grow a lot faster, but you’re going to have poor underwriting results and probably not the profitability you want.

“We’re trying to strike what we think is the right balance with their product sets, our product sets and creating a growth environment that makes prudent sense to grow and maximise ROEs (returns on equity) at the same time. That’s what we believe is accurate,” Swift explained.

Wary of soft prices

Elliot noted that not all the markets Navigators operates in offer growth opportunities. “Their markets really do extend outside the US and around the world,” he said. “There are certain product niches in parts of the world where, I would say, pricing is rather soft,” he explained.

While taking a more measured approach to the growth pace, The Hartford sees opportunities to boost Navigators’ profitability.

“I think there are opportunities to increase the portfolio yield,” Swift said.

“It is about growing the premium base with, I’ll call it, a slightly higher loss ratio and using our financial strength, our distribution networks, cross-selling in a more effective way,” Swift explained.

The Hartford is hopeful that it can improve the underwriting process at Navigators to increase business profitability.

“We’ll be able to contribute to their underwriting process, contribute maybe in risk-taking in different ways to help drive a higher ROE,” Swift said.

Historically, Navigators’ ROE has been in the range of 7 to 9 percent, but The Hartford expects more than that.

“We’re an ROE-focused company. There’s a tools methodology approach mindset that we’ll be able to bring to the organisation,” Swift said.

Elliot noted that The Hartford has invested significantly in data science and data analytics in the past decade.

“We’ll offer something in that regard as we work hard together on improving underwriting results across the board at The Hartford and at Navigators,” Elliot said.

In combination with Navigators, The Hartford expects to  grow the business by cross-selling the combined product offerings to the respective customer bases.

“We can offer more products and services through a shared distribution network enhanced by The Hartford’s brand and financial strength,” Swift said.

“Together, we are confident that we can accelerate profitable growth,” he noted.

Analysts broadly positive—with some reservations

Initial reaction to the deal among analysts was broadly positive because of the diversification and global reach which will result. But there were also some concerns.

Some analysts have tipped the company’s shares to trade lower in the short term at least, as some investors have expressed doubt the deal will result in earnings growth over time and wonder that M&A on this scale is the right move for the company, as its CEO has indicated.

Hartford has said it expects the purchase to add to its profits starting in 2019 and add $200 million to annual core profits over four to five years.

CEO Christopher Swift said in a second-quarter earnings call that the company was seeking deals in commercial specialty lines and industry verticals. He had previously said Hartford was targeting deals in the $1 to $2 billion range.

In this deal, Navigators shareholders will receive $70 per share in cash, an 8.9 percent premium to the company’s closing price the day before the announcement.

Meanwhile, the rating agonies also seem broadly positive on the deal. AM Best said it expects the ratings of The Navigators Group and its subsidiaries to remain unchanged following the announcement.

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17 May 2019   US-based property/casualty insurer The Hartford has received all regulatory approvals necessary for the closing of its acquisition of global specialty insurance holding The Navigators Group.