Bilta

MARKET NEWS, DATA AND INSIGHT ALL DAY, EVERY DAY

ISSUE 4,341

THURSDAY 30 APRIL 2015

European insurers face €850bn reinvestment challenge – BlackRock

p2 p8

p3

Watford Re books first underwriting profit

US commercial insurers achieve rate increases despite pricing pressure

www.insurancedayawards.com

Who do you know that deserves recognition for

their career? Submit a nomination for the Lifetime

Achievement award at Sponsored by

Market news, data and insight all day, every dayInsurance Day is the world’s only daily newspaper for the international insurance and reinsurance and risk industries. Its primary focus is on the London market and what affects it, concentrating on the key areas of catastrophe, property and marine, aviation and transportation. It is available in print, PDF, mobile and online versions and is read by more than 10,000 people in more than 70 countries worldwide.

First published in 1995, Insurance Day has become the favourite publication for the London market, which relies on its mix of news, analysis and data to keep in touch with this fast-moving and vitally important sector. Its experienced and highly skilled insurance writers are well known and respected in the market and their insight is both compelling and valuable.

Insurance Day also produces a number of must-attend annual events to complement its daily output. The London and Bermuda Summits are exclusive networking conferences for senior executives; meanwhile, the London Market Awards recognise and celebrate the very best in the industry. The new Insurance Technology Congress provides a unique focus on how IT is helping to transform the London market.

For more detail on Insurance Day and how to subscribe or attend its events, go to subscribe.insuranceday.com

Insurance Day, Christchurch Court, 10-15 Newgate Street, London EC1A 7HD

Editor: Michael Faulkner+44(0)20 7017 [email protected]

Editor, news services: Scott Vincent+44 (0)20 7017 [email protected]

Deputy editor: Sophie Roberts+44 (0)20 7551 [email protected]

Global markets editor: Graham Village+44 (0)20 7017 [email protected]

Global markets editor: Rasaad Jamie+44 (0)20 7017 [email protected]

Reporter: Alexis Burris+44 (0)20 7017 [email protected]

Publisher: Karen Beynon +44 (0)20 8447 6953Sales director: Mark Windsor +44 (0)20 8447 5266Advertising director: Andrew Stone +44 (0)20 7017 4027Advertising sales executive: Alan Hart +44 0(20) 3377 3820Sponsorship manager: Marcus Lochner +44 (0)20 7017 6109Marketing manager: Randeep Panesar +44 (0)20 3377 3809Subscriptions key account manager: Carl Josey +44 (0)20 7017 7952Head of production: Liz Lewis +44 (0)20 7017 7389Production editor: Toby Huntington +44 (0)20 7017 5705Subeditor: Jessica Sewell +44 (0)20 7017 5161Subeditor: Bruce Williams +44 (0)20 7017 5677Production executive: Claire Banks +44 (0)20 7017 5821Events manager: Natalia Kay +44 (0)20 7017 5173

Editorial fax: +44 (0)20 7017 4554Display/classified advertising fax: +44 (0)20 7017 4554Subscriptions fax: +44 (0)20 7017 4097

All staff email: [email protected]

Insurance Day is an editorially independent newspaper and opinions expressed are not necessarily those of Informa UK Ltd. Informa UK Ltd does not guarantee the accuracy of the information contained in Insurance Day, nor does it accept responsibility for errors or omissions or their consequences.ISSN 1461-5541. Registered as a newspaper at the Post Office.Published in London by Informa UK Ltd, Mortimer House, 3 Mortimer Street, London, W1T 3JH

Printed by St Clements Press, Unit 16, Bow Industrial Park, Carpenters Road, London E15 2DZ

© Informa UK Ltd 2015.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photographic, recorded or otherwise without the written permission of the publisher of Insurance Day.

NEWS www.insuranceday.com | Thursday 30 April 20152

Watford Re books first underwriting profitHedge fund reinsurer reports underwriting income of $1.8m in first quarter

Michael FaulknerEditor

Hedge fund reinsurer Watford Re moved into underwriting profit in the first quarter of the year.

The multi-line reinsurer, which launched in March 2014, reported un-derwriting income of $1.77m for the first three months of 2015.

Last year, the Bermuda-based compa-ny made an underwriting loss of $3.1m.

The figures, disclosed in the first- quarter results of Bermudian re/insurer Arch Capital, which owns an 11% stake in the start-up, also showed Watford Re is making progress in building the size of its book.

The carrier wrote gross premiums in the quarter of $128.6m – its largest quarterly writing.

In the fourth quarter of 2014 it wrote $98.4m of gross premiums. In the quarters before that it wrote $103.4m and $54.6m.

Watford Re has now written $417.2m of premium since it launched.

The reinsurer generated a combined ratio for the first-quarter of 100.3%. Its combined ratio in 2014 was 103%.

Watford Re’s business comes either di-rect from cedants, or via a quota-share arrangement with Arch, which sees Wat-ford Re take 10% of Arch Re’s property catastrophe excess-of-loss portfolio.

In return, Arch Re assumes a 15% quota-share of all business directly written by Watford Re.

It was not disclosed how much busi-ness was written direct by Watford Re in the first quarter.

Watford Re’s portfolio is becoming much more heavily weighted towards casualty business, including US pro-fessional lines, UK motor and workers’ compensation business.

In an interview last year with Insur-

ance Day, Watford Re’s chief executive, John Rathgeber, spoke of opportunities in Italian medical malpractice business and said he is keen to build the reinsur-er’s mortgage reinsurance book.

Meanwhile, Arch Capital Group saw first-quarter net earnings surge 57% to $277.9m as higher investment re-turns offset a slight decline in under-writing income.

The Bermudian carrier generated operating profits of $149.8m, down on the $164.4m reported in the first quarter of 2014, but surpassed analysts’ consensus expectations.

The re/insurer reported a 1.3% in-crease in gross written premiums to $1.31bn for the quarter.

Underwriting income dropped 14.1% to $114.7m.

Ironshore, Antares and Markel form liability consortiumIronshore International’s Pembroke syndicate 4000 has joined forces with Lloyd’s Antares syndicate 1274 and Markel Global Insurance to form XXV Consortium, writes Scott Vincent.

The consortium will focus on lead umbrella liability cover for US-based corporates and will begin underwriting risks on July 1.

The consortium, which will have capacity limits of up to $25m per oc-currence, will be managed and under-written by Ironshore Europe. It will be led by Mark Hill, senior vice-president of Ironshore Specialty Casualty.

Chris Horton, director of US liability

at Ironshore Europe, said the consor-tium represents a syndicated approach to underwriting US lead umbrella lines of business via a single access point.

“Through this partnership with shared interests, US clients can develop a closer relationship with the London market,” he said.

John Boylan, chief underwriting officer for excess liability at Markel, added: “We believe the overall con-sortium team has the requisite under-writing expertise, financial security and broad relationships to make a dif-ference in this underserved sector of our market.”

“We believe the overall con sortium team has the requisite underwriting expertise, financial security and broad relationships to make a difference in this underserved sector of our market”John BoylanMarkel

Hamilton, Bermuda: Watford Re has reported its first underwriting profitRaul Rosa/Shutterstock.com

NEWSwww.insuranceday.com | Thursday 30 April 2015 3

Michael FaulknerEditor

Scor grows April renewals book by 5.8%Scor increased its April renewals book by around 5.8% this year, the French reinsurer has revealed, with gross premiums up 8% for specialty treaties and 5% for property/casualty treaties, writes Scott Vincent.

In total, Scor Global Property & Casualty wrote €396m ($441.4m) at April 1, compared with an expiring book of €374m. Property/casualty treaties represented 71% of the premiums up for renewal, with Scor writing €278m of business at April 1.

Specialty premiums of €117m were written this year, boosted by agriculture growth in India and engineering growth across Asia.

The premiums up for renewal at 1 April were distributed Asia (55%), Americas (30%) and EMEA (15%). The April renewals primarily focused on Japan, the US and India, and represent roughly 10% of Scor’s total annual volume of property/casualty and specialty treaties.

The overall price decrease at April 1 was 1.2%, and Scor said the renewals included the cancellation of contracts by one of the three main Japanese insurance groups.

European insurers face €850bn reinvestment challenge – BlackRock

Significant shift in insurers’ asset allocation expected in 2015

Willis’ organic growth slows in first quarter

European insurers have been urged to take more liquidity risk as they grapple with plunging

yields and a €850bn ($949.4bn) annual reinvestment challenge.

BlackRock, the world’s largest asset manager, said there were opportunities for insurers to increase their investment returns through ramping up their exposure to less liquid alternative assets such as infrastructure and bank loans.

The money manager’s analysis indicates €850bn of assets held by European insurers, reinsurers and life companies must be reinvested each year.

But with record low interest rates, set to come under further pressure from the European Cen

Global broker Willis achieved organic revenue growth of 3.4% in the first quarter of the year in the face of challenging market conditions, as it reported a fall in earnings of 14.6% to $210m, writes Sophie Roberts.

The first quarter’s organic growth fell short of the 4.2% fee and commission growth it achieved in the first quarter of 2014. Total fees and commissions were $1.08bn compared to $1.09bn in the same period last year.

By comparison, rival broker Arthur J Gallagher achieved organic growth of 4.5% in the first quarter of the year as revenues soared 36% in its insurance broking business.

Organic growth slowed in each of Willis’ four businesses, save for the Willis GB segment of the group, which grew 1.1% in the first quarter

of the year, compared to a decline of 6.3% in the first quarter of 2014.

The biggest slowdown was in the Willis capital, wholesale and reinsurance segment, which reported organic growth of 1.3% in the first three months of the year from 6.3% in the first quarter of 2014.

Despite the slowdown in underlying revenue growth, the broker did achieve strong growth in Willis North America and Willis International businesses, which achieved 4.7% and 5.3% growth respectively.

The broker achieved strong growth in Latin America in the international segement, where Brazil and Columbia showed doubledigit growth.

In Asia, marine specialty business has been driving good growth, posting high singledigit growth figures.

Despite anticipating strong headwinds from Russian sanctions to negatively impact its eastern Europe segment, this did not materialise in the first quarter.

Growth in North America, was driven by the M&A, Finex and real estate/hospitality practices.

Willis group chief executive, Dominic Casserley, said the results demonstrate the “three strategic pillars of the broker’s value creation strategy in action”.

Casserley defined these pillars as organic growth through a diversified portfolio, strategic M&A and operational improvement.

“It is this deliberate and determined approach that is enabling us to sustain good momentum overall in an external context of uneven economic performance and a challenging

rate environment,” Casserley said.The group’s first quarter results

closely follow the announcement of Willis’ intentions to acquire the remaining 70% of French broker Gras Savoye that it does not currently own for €510m.

“Strategic acquisitions remain a key aspect of our growth strategy and we continue to make progress, having bought in highquality business in 2014 to further strengthen our client proposition and our growth prospects,” Casserley said.

The transaction is expected to close on or around December 31, 2015, subject to customary regulatory consents and approvals, and acceptance of the firm offer by Gras Savoye’s shareholders.

Willis’ acquisition of London market broker Miller by the middle of 2015 is expected to provide mea

sureable growth for the foreseeable future, John Greene, chief financial officer of Willis Group, said. “We are very focused on cashflow and improved group EBITDA and how new business can contribute to this is very important,” he said.

However, the transaction is already flagging up some integration challenges, with more than 20 specie, fine art and jewellery specialists, leaving Willis to join JLT.

This exit has, in turn, led to a lawsuit alleging contract misconduct, by former global managing director of the division, David Gordon.

Careful not to say whether or not revenues would be affected, Casserley said: “As a company, we will always pursue legal redress against actions which we feel compromise the business, but we are still very committed to our specie clients.”

tral Bank’s (ECB) €1.1trn asset buying programme, insurers will struggle to reinvest at a comparable yield to the expiring instruments.

Patrick Liedtke, head of BlackRock’s financial institutions group for Europe, the Middle East and Africa, told Insurance Day: “Everyone is chasing the same assets the ECB is buying up. These assets are becoming more expensive. Insurers need to look for something different.”

Liedtke said insurers do not want to increase risk appetite much more, but they can take diversification benefit and increase exposure to alternative assets.

Infrastructure equity, bank loans, private equity and emerging market debt could provide attractive opportunities, he said.

Liedtke said property/casualty insurers are starting to become more sophisticated in terms of liquidity management as they look to eke out greater investment yield.

Insurers could build a diversifying portfolio of assets beneath their liability matching portfolio, building in layers of different liquidity.

“There is a realisation on the property/casualty side that good liquidity management is a healthy contributor to investment success,” he said. “We have seen advances on the liquidity side – it is an asset that is become much more important.”

In contrast, life companies have traditionally been more advanced given their need to match the long-duration liability cashflows.

A recent survey by BlackRock found large insurers are likely to make significant shifts in asset allocation in 2015.

More than twothirds (69%) of respondents were planning to increase allocations to real assets, while 59% planned to increase allocations to private equity and 57% to real estate. No respondents anticipated moving assets

away from real assets.Many insurers were planning a

move out of “core” fixed income investments and short duration, while increasing allocations to emerging market debt, bank loans and securitised assets.

The findings chime with a Goldman Sachs Asset Management (GSAM) survey, which found many insurers are planning to increase investment risk.

The GSAM survey found European insurers have increased their risk appetite over the years and this year they intend to take more liquidity risk.

“The companies that will be most competitive in the future will be the ones that can react to invest in new asset classes when conditions are challenging,” Liedtke said.

“A few basis points can make a huge difference on the investment side. Companies that can deploy capital flexibly will profit.”

FINANCIAL WORLD TODAY www.insuranceday.com | Thursday 30 April 20154 www.insuranceday.com | Thursday 30 April 2015 5

Traditional reinsurers appeared to have fallen out of favour but Exor’s bid for PartnerRe has prompted second thoughts on the industry’s position

The spike in merger and acquisition (M&A) activity in the international reinsurance market

over the past few months has mostly involved existing players within the sector and has had a mainly defensive character about it. So Exor’s bid for PartnerRe, announced earlier this month, came as something of a surprise, indicating investors outside the market may have a more positive view of the reinsurance sector than professionals within it currently hold.

Exor was involved in the formation of PartnerRe in 1993 as a minority investor and it also holds other investments in the insurance market, but the purchase of the Bermudian reinsurer would bring it much greater exposure to the sector. Its bid is a serious one, taking the form of an all cash transaction that, according to Exor at least, represents a 16% premium to the implied value per share under the Axis proposal.

If successful, Exor would allow PartnerRe to continue trading under its own brand name and with its existing management team.

M&A activity in any given sector is often a sign of improving financial prospects of the sector but can also be indicative of defensive thinking brought about by fundamental changes to the trading landscape. This seems to be the main driving factor behind the upturn in deals in the reinsurance sector. Bermudian companies have sought to re inforce their position in the

Graham VillageGlobal markets editor

to the international players in the established reinsurance markets. Deals are up by size and number in many markets, and are set to continue to rise throughout the year. After many years of disappointment for outside interests, India’s market is opening further now new rules have come into force allowing foreign companies to up their stake in local insurers to 49% from the previous threshold of 26%. That change is likely to prompt considerable inter national interest in India, where the untapped potential for the industry is vast.

In a counter direction, insurers and investors in Japan and China are looking towards mature western markets for acquisition opportunities. The three Japanese megainsurers are all keen to dilute their heavy domestic exposure through largescale international expansion that means further takeovers are on the cards.

Fosun has been the most internationally active Chinese company in the insurance industry, although not the only one to move abroad. It is interesting to see how insurance fits into the wider context of the country’s outwards expansion. In a note on overall M&A trends in 2015 so far, consultant Deloitte said Chinese companies had countered the slowdown in their domestic economy with a “remarkable international expansionary programme”.

Last year, Chinese companies announced a record $46.8bn of outbound M&A, the highest annual total and more than 10 times the amount spent a decade previously. M&A deal flows reflect the shift in China’s economy from exportoriented to consumption driven, Deloitte said. n

market in which they are already active as much as seeking diversification by acquiring rivals with exposure to different geographic or market sectors.

In an industry analysis issued earlier this year, rating agency Standard & Poor’s (S&P) said it expected to see “an arms race” for small and mediumsized reinsurers as acquisition or merger targets. But takeovers are no guarantee of success and could drive the reinsurance sector into further pricecutting. The process is likely to lead to fewer but larger reinsurers. “The path to that result is strewn with challenges

in executing and integrating new transactions, growing into new capital bases, and competing against a different set of peers,” S&P said. “Profitability and capital preservation will be difficult to achieve as pricing declines and investment yields are slow to rise.”

While reinsurers are looking nervously at the competition and the impact of alternative capital on their traditional business model, it is comforting for the sector at least one investor has enough faith to launch a major bid for a reinsurance company.

Acquisition activity in the insurance industry is not restricted

Latest M&A activityAce has closed the acquisition of Fireman’s Fund’s high net worth personal lines business in the US for $365m. The account will be integrated into Ace’s existing high net worth business, Ace Private Risk Services. That unit now has more than 120,000 premier personal lines customers.

AIG has completed the takeover of a controlling stake in US managing general agency and programme administrator NSM Insurance from ABRP Partners and NSM’s management.

Separately, AIG has acquired a minority stake in K2 Intelligence, an investigative consultancy formed in 2009 by two members of the Kroll family, Jeremy and Jules. K2 has about 300 employees, with operations in London, Madrid and Tel Aviv, as well as New York.

Aioi Nissay Dowa Insurance Europe, part of Japan’s MS&AD Insurance Group, has completed the acquisition of a 75% stake in Box Innovation Group, parent of Insure the Box, a provider of telematics in Europe. Existing managements hold the remaining 25%. The purchase price was £105m ($161.4m). One of the previous owners of the telematics group, Catlin, said it had raised £85m from the sale of its stake.

Assured Guaranty Corp has completed the purchase of Radian’s financial guarantee insurance subsidiary, with Radian raising total net proceeds of $789m.

Axa Liability Managers (Axa LM), the Axa group’s unit for handling legacy business, has acquired Gera, a pool-providing European aviation reinsurance that entered run-off in 1998. Axa LM has now completed 11 external acquisitions.

Axis Capital has acquired Ternian Insurance Group, a provider of voluntary, limited benefit health plans and other employee benefits for hourly and part-time workers and their families. The takeover has been made through Axis Accident & Health.

Barclays Bank has completed the purchase of a 50% stake in its Spanish joint venture life assurance company, CNP Barclays Vida y Pensiones for €457m ($502.7m), including a special dividend. The seller, French insurance group CNP Assurances, booked a capital gain of €248.5m on the disposal.

Charles Taylor has completed the acquisition of Scottish Widows International, Jersey from Scottish Widows through the purchaser’s Metrowise subsidiary. Charles Taylor has administered the policies of the acquired company for the last eight years.

Separately, Charles Taylor has decided not to continue with the previously announced deal to acquire a life insurance business. The company said it had concluded the takeover would not meet its financial criteria for acquisitions.

Co-operators has acquired Premier Group, a Canadian managing underwriting agency based in Vancouver. Premier, founded in 1989, has more than 1,000 staff based in five office locations in Canada and the US. It distributes products through 4,000 broker locations. Premier’s management team, including chief executive Troy Moreira, will remain in place and the operations will function as an independent entity within Co-operators.

Exor, an investment vehicle controlled by the

Agnelli family, has offered $6.4bn to acquire PartnerRe in a bid that would derail the earlier proposed combination between the Bermudian reinsurer and Axis Capital. Exor said its bid was superior to the rival proposal because it was an all cash deal, fully financed and required no capital increase by Exor nor a vote by its shareholders. Exor has been a minority shareholder in PartnerRe since the reinsurer’s formation in 1993. Axis said it remained committed to the combination with PartnerRe and intended to combine the companies to create a broadly diversified global specialty insurance and reinsurance company with scale and enhanced market presence.

Fairfax has agreed to sell a stake of up to 29.9% of Lloyd’s insurance group Brit to Ontario Municipal Employers Retirement System (Omers) for about $560m. Fairfax is in the process of completing its $1.88bn takeover of Brit and has announced plans to raise $1.2bn through a combination of equity financing and note issues to finance the acquisition. Omers was not a shareholder in Brit before the agreement with Fairfax.

Farmers Mutual Hail Insurance of Iowa has completed the takeover of John Deere Insurance Co and John Deere Risk Protection. Deere has been involved in the crop insurance sector for nine years, becoming one of the 10 largest providers of crop insurance in the US, selling government-backed multi-peril crop cover and private products such as crop hail.

First American Title Insurance Co has announced the acquisition of TitleVest Holdings, a title agency based in New York. The two companies have worked together for many years. TitleVest was formed in 2000 and offers a range of title insurance and related services for property purchase and refinance transactions.

Hamilton Insurance Group has completed the acquisition of Sportscover Underwriting, manager of Lloyd’s syndicate 3334 and Kinetic Insurance Brokers. Dermot O’Donohue, previously with Torus International, has been approved as chief executive of the managing agency, which has been renamed Hamilton Underwriting Ltd. Syndicate 3334 will use the brand name Hamilton at Lloyd’s.

HC2 Holdings has agreed to take over the legal entities containing all of the run-off long-term care insurance of American Financial Group. The initial payment will be $7m plus HC2 securities, and American Financial may receive up to $13m of additional proceeds based on the release of certain statutory liabilities of the legal entities. The companies involved, United Teacher Associates and Continental General Insurance, contain all of American Financial’s $800m in net long-term care insurance reserves plus nearly $300m of annuity and life reserves. The deal is expected to close in the third quarter. American Financial expects to take a loss of between $105m and $115m on the disposal but will book proceeds of a similar amount due to a significant tax benefit on the sale. For American Financial, the sale marks its exit from supplemental medical insurance lines following the sale in 2012 of its Medicare supplement and critical illness businesses.

Heritage Property & Casualty and Mount Beacon have received regulatory approval to remove policies from Citizens Property, a residual market insurer in Florida. Heritage will remove up to 23,000 policies and Mount

Beacon up to 25,000. The total number of policies approved for removal in 2015 is now more than 580,000.

HRG Group, a diversified holding company formerly known as Harbinger, is considering strategic alternatives for Fidelity & Guaranty Life (FGL) that may lead to the sale of all or part of HRG’s 80.6% interest in the US life company. In December 2013, FGL completed an initial public offering of 19.3% of its interest, although HRG did not sell any of its stake.

Legal & General has completed the purchase of Home Finance Ltd, a UK provider of lifetime mortgage products, for £5m.

Markerstudy, a privately held UK group of insurance companies and service providers, has agreed to take on the UK motor account of Hanover group through a 100% reinsurance arrangement for existing business and the sale of the entities associated with the account. The price will be about $60m. The account, currently underwritten by Chaucer, Hanover’s Lloyd’s unit, focuses on traditional personal motor as well as specialist classes such as motorbikes, classic cars and commercial motor. The business generated net premium of $297.7m last year and recorded a combined ratio of 100.7%.

Pan-American Life has agreed to take over Mutual Trust Holding Co through a combination of the two mutual groups. The combined company will continue to operate as a mutual holding company, with $1bn in revenue, $5.5bn in total assets and 1.5 million covered lives. Total capital will be about $1bn. On completion, Mutual Trust will operate as a wholly owned subsidiary of Pan-American Life and will allow the group to combine US operations into one domestic life business. Stephen Batza will lead Pan-American Life’s relaunched domestic life business from Mutual Trust’s current headquarters in Illinois.

Progressive Corp has completed the acquisition of a controlling interest in ARX Holding, the parent of American Strategic Insurance Corp.

RSA has completed the sale of the insurance business of its branches in Singapore and Hong Kong to Allied World.

Travelers has agreed to buy a majority interest in the non-life business of its J Malucelli joint venture in Brazil, underwriting since 2012. Following the transaction, Travelers will own 95% and Paraná Banco the remaining 5%. The unit will operate under the Travelers brand. The US group’s stake in the surety business of the J Malucelli joint venture will remain at 49.5%. Paraná Banco will deploy the capital from the transaction to its general banking operations. The deal is expected to close in the fourth quarter.

United Insurance Holdings, based in St Petersburg, Florida, has completed the acquisition of Family Security Holdings, owner of Family Security Insurance Co and Family Security Underwriters, a managing general agency. The acquired underwriting company is authorised in Hawaii and Louisiana. The consideration was $9m.

United Property & Casualty has received approval to remove nearly 60,000 policies from the Texas Windstorm Insurance Association.

Exor bid for PartnerRe disrupts conventional wisdom

Table: Major insurance underwriting company M&A deals and flotations 2015*

Acquirer Target Notes Price ($m)

AxisPartnerRe Merger of Axis and PartnerRe

PartnerRe shareholders to hold 51.6% and Axis 48.4%

11,000

Aviva Friends Life Planned takeover has received FCA/PRA and European

Commission approval

8,780

Exor PartnerRe Rival to AxisPartnerRe combination plan

6,500

Daiichi Protective Life Announced in 2014, completed 2015

5,700

XL Catlin Enlarged XL will be largest operator in Lloyd’s market

4,228

Manulife Standard Life’s Canadian business

Approval from Canadian authorities now received

3,165

Institutional investors/Voya

Voya Sale by ING cuts its stake in Voya to nil

2,010

RenaissanceRe Platinum Deal closed in March 1,900

Fairfax Brit CVC and Apollo have agreed to sell their 73% stake

1,880

Endurance Montpelier Creates group with proforma GWP of $3.6bn

1,883

Anbang Vivat Dutch holding of SNS Reaal’s insurance businesses

max 1,702

Generali Generali PPF Holding Italian group acquires final stake of 24% to take full control. Total price

for whole transaction €1.25bn

1,450

Sompo Japan Scor Japanese group agreed to buy 7.5% stake and plans to take 15% in all

950

Progressive Corp American Strategic Additional stake of 62% to give 67% majority control

875

Assured Guaranty Radian Asset Radian’s financial guarantee insurance unit

810

Omers Brit Stake of up 29.9% sold by Fairfax 560

Fosun International

Ironshore 20% share in Ironshore. Fosun is largest shareholder

465

Global Indemnity American Reliable Sold by Assurant 394

La Mondiale La Mondiale Participations

Aegon has sold its 35% stake 384

Ace Fireman’s Fund personal lines

High net worth account sold via renewal rights transaction

365

Alliant Insurance Services

QBE North America’s US agency businesses

Price includes $217m upfront in cash and earnout provisions

for the balance

300

Old Mutual UAP Holdings Stake of 60.7% in East African insurance group UAP

253

Allied World RSA branches in Hong Kong and Singapore

Accounts include commercial specialty and retail business

212

Talanx Inversiones Magallanes

Chilean insurer 198

Aioi Nissay Dowa Box Innovation Group Owner of Insure The Box telematics

161

Intact Financial Canadian Direct Insurance

Sold by Canadian Western Bank 158

Institutional investors

Patriot National IPO of US underwriting and other services provider

116

HCC Producers Ag Group Sold by Cuna Mutual 105

Source: Company announcements/Insurance Day M&A database*announced &/or completed in 2015

PartnerRe/Exor: PartnerRe’s Bermuda HQ and (inset) Exor chief, John Elkann

© 2015 Luca Bruno/AP

LAW & ORDER www.insuranceday.com | Thursday 30 April 20156

Insurance Act 2015: potential impact on non-disclosure and misrepresentation litigation

The ‘biggest reform to insurance contract law in more than a century’ promises to shake up the market, but will it reduce or increase litigation?

Nicholas Bradley and Stephen KilnerPinsent Masons

The UK’s Insurance Act 2015 received royal as-sent a little more than two months ago and was

described by the government as “the biggest reform to insurance contract law in more than a cen-tury”. When it comes into force in August 2016, it will amend key parts of the Marine Insurance Act 1906. In doing so, it will introduce substantial changes to the law governing warranties and other contractual terms; insurers’ rem-edies for fraudulent claims; and pre-contractual disclosure duties in non-consumer contracts.

In both legal and practical terms, it would be very difficult to argue the changes to the pre- contractual duty of disclosure in non-consumer contracts are in-substantial. This duty is, of course, a vital component in the under-writing process; it allows the un-derwriter to underwrite and price the risk properly.

The duty of disclosure (and the question of whether it has been breached) has produced vast amounts of litigation before both the courts and arbitration panels. The question is whether such lit-igation will increase or decrease after August 2016. At present the insured is required to disclose each and every material fact it knew or ought to have known to its insurer. A material fact is one which would influence a prudent insurer in fix-ing the premium for the risk or de-ciding whether or not to write the risk. Where the insured has not disclosed or has misrepresented a material fact and that fact induced the underwriter to write the risk, the insurer is able to avoid the insurance contract from its incep-tion, leaving the insured without any cover whatsoever.

The Insurance Act creates a new “duty of fair presentation”, with the insured required to:

1. disclose “every material cir-cumstance which the insured knows or ought to know”; or failing that

2. disclose that “which gives the insurer sufficient information to put a prudent insurer on notice it needs to make further enqui-ries for the purpose of revealing those material circumstances”.

The first limb is, of course, very similar to the present position and retains the element of “would influence the judgment of an in-surer in determining whether to take the risk”. Whether an alleged non-disclosed or misrepresent-ed fact is material has, of course, caused many disagreements be-tween parties across the years and the act provides scope for dis-putes on this issue to continue.

The second limb becomes active where the insured has failed to ful-fil the first limb, but has disclosed a level of information that re-quires the insurer to make further enquiries. Its introduction will mean the insurer must take an ac-tive part in the disclosure process. Where the insurer does not, it will be more difficult to call the insured to account for related disclosure failures. The second limb undoubt-edly adds an additional hurdle to the materiality test, albeit one that may have historically been plead-ed in different terms as part of an inducement case.

To protect the insurer, the act requires disclosure to be in a manner “which would be reason-ably clear and accessible to a pru-dent underwriter”. As a result, the insured cannot simply “dump” a vast amount of material upon the insurer and rely on the sec-ond limb. Indeed, the very struc-ture and format of presentations themselves may add an extra ele-ment to litigation.

There are exemptions to the duty of a fair presentation under

the act. Unless the insurer makes enquiries, the insured is not un-der an obligation to disclose a circumstance:1. which lessens the risk;2. which the insurer knows, ought

to know or is presumed to know; or

3. if it is something as to which the insurer waives its right to information.

The insurer’s deemed know-ledge is potentially an area where disputes may arise and which ultimately may require expert ev-idence to be determined.

To bring an action for relief for non-deliberate non-disclosure/mis representation, the insurer will still need to demonstrate “but for” the breach it would not have entered into the contract or would have done so on different terms. This is an issue that histor-ically has been faced by insurers seeking to avoid policies on the grounds of non-disclosure and/or misrepresentation.

One of the biggest changes can be found in the wider and more proportionate remedies available to the insurer where the insured has breached its duty to provide a fair presentation. Previously, an insurer was able to avoid the entire insurance contract if the duty of disclosure was breached. The act has now introduced a

range of proportionate remedies:1. where there is a deliberate or

reckless breach, the insurer will be able to avoid the contract and keep any premiums;

2. where the breach is neither de-liberate nor reckless and the insurer would not have entered into the contract, the insurer will be able to avoid the contract but must return any premiums;

3. where the breach is neither de-liberate nor reckless and the in-surer would have entered into the contract on different terms, other than terms relating to premium, the insurer will be able to treat the contract as if those different terms apply; and

4. where the breach is neither de-liberate nor reckless and the in-surer would have entered into the contract for a higher premi-um, the insurer will be able to reduce the cover to which the insured is entitled on a propor-tionate basis.

The act therefore gives the court or arbitration panel a far great-er degree of flexibility than the sole avoidance remedy. The ques-tion of whether a wider range of remedies will result in more or less litigation will only be an-swered in time.

On the one hand, judges and ar-bitrators may be more willing to accept an actionable breach has

taken place, thereby leading to a greater success rate in such ac-tions. On the other hand, the less-er remedies may mean the cost and risk of litigation make such actions unattractive; whether lit-igation is pursued may therefore depend on what each remedy will produce in financial terms.

The other question this raises is whether this change will have an impact on the jurisdiction clauses parties choose for their insurance contracts. Will it make England and Wales a more attrac-tive jurisdiction for insureds and a less attractive one for insurers if they have a lesser remedy? For the reason stated above, namely that the change reflects a more realistic acknowledgement of the true commercial interests of both insureds and insurers alike, we think it will bring English law up to date and will therefore make England a more favourable juris-diction for both.

How these changes are inter-preted in other insurance hubs that follow English common law but have not enacted legislation, such as Bermuda, will also be worth watching. n

Nicholas Bradley is head of the insurance team and Stephen Kilner a senior associate at Pinsent Masons

Houses of parliament: the Insurance Act will come into force in 2016

www.insuranceday.com | Thursday 30 April 2015 7

Almost time to dip a toe in the water?

The recent announcement a framework deal has been agreed between Iran and the so-called P5+1 nations regarding Iran’s nu-clear programme has given rise to the prospect of sanctions against Iran being lifted.

At present, there is a broad EU/UK prohibition on the provision of re/insurance to the Iranian gov-ernment and to Iranian legal enti-ties, as well as to anyone acting on their behalf or at their direction. In addition, there are prohibitions on the provision of re/insurance relating to the import, purchase or transport of Iranian crude oil, petroleum or petrochemical prod-ucts (albeit these restrictions are suspended at present).

Talks are ongoing to put flesh on the bones of the framework agreement, with a deadline of June 30 for a final deal to be agreed. It

is thought, however, sanctions relief is likely to be phased, condi-tional on Iran complying with its obligations under the agreement. As noted, certain of the sanctions against Iran are already suspended pending the outcome of the negoti-ations. However, notwithstanding this partial easing of the restric-tions, re/insurers have generally maintained a cautious approach to writing business with an Iranian nexus. From discussions with our clients we understand they will continue to maintain this approach until it becomes clear the terms of any future agreement are holding.

One potential source of uncer-tainty, particularly for insurers with US parentage or US reinsur-ers, arises from the outcome of the US presidential election in 2016 and from Congress generally, which has voiced some scepticism

regarding Iran’s intentions and has threatened to veto any deal. Indeed, only this week US presi-dent, Barack Obama, has agreed Congress should have the power to review any deal with Iran. Any intimation a future US administra-tion might pull out of any deal with Iran may mean insurers with a US nexus will continue to avoid writ-ing business connected with Iran.

In conclusion, while the an-nouncement of the framework deal may mean, ultimately, the pros-pects for re/insurers that may wish to enter the Iranian market look brighter, the likelihood seems to be that many will continue to main-tain a cautious approach and may initially dip a toe into the water rather than diving in head first. n

Lindsay McQuillian is a partner at Mayer Brown

Transaction policies on riseTransaction policies are effective in allocating risk, providing fi-nancial certainty and facilitating the closing of merger and acqui-sition (M&A) transactions. With Thomson Reuters recording a 47% increase in the total value of worldwide M&A activity in its annual Mergers & Acquisitions Review for 2014 and the Financial Times reporting a 21% increase of M&A activity within the first three months of 2015, it is not surpris-ing there has been a rise in the use of transaction insurance policies.

Warranty and indemnity insur-ance (W&I) is one solution that has gained significant traction. W&I provides financial cover for losses arising from a seller’s breach of warranties and, in certain juris-dictions, tax indemnities. Under English law, a warranty is a contrac-tual promise which, if breached, gives rise to a claim for damages so as to put the innocent party in the position it would have been in had the warranty been true. Claims for breaches of such reps and warran-ties are the most common to arise out of such transactions.

There are essentially two types of W&I: a buyer policy and a seller policy. A buyer W&I policy indem-nifies the buyer for losses caused by breaches of warranties and claims arising under tax indem-nities. This alleviates the need to pursue the seller and enables the buyer to claim directly from the insurer. A seller W&I policy, on the other hand, indemnifies sellers for losses resulting from claims made by the buyer for breaches of war-ranties and/or tax indemnities.

In each instance, a significant number of benefits arise. Buyers obtain commercial certainty when dealing with a distressed seller or one with a poor trading history, a situation in which the ability of the seller to reimburse the buyer for breaches of such warranties or tax indemnities may be minimal. This is further exacerbated if alterna-tive solutions such as escrow funds or a letter of credit are unavailable. Additionally, if the seller is in a dif-ferent jurisdiction from the buyer, the ability to claim through a W&I policy removes the added costs and potential jurisdictional issues that

arise when dealing with interna-tional transactions and disputes.

A seller W&I policy, on the other hand, may result in higher bids be-ing received. The ability of a seller to offer a customary set of warran-ties and a higher warranty cap from the outset may raise the attractive-ness of the purchase. A W&I policy may also, by reducing the risk and uncertainty of an M&A deal, allow for a larger group of bidders to be interested and therefore a more competitive bidding environment. W&I policies are of particular use to the private equity industry, where they may be unwilling or unable to provide the warranties and indem-nities needed for a sale.

There are some key factors to be borne in mind for the private equity sector. It is therefore only one avenue for risk reduction but may assist in ensuring the difficul-ties faced in 2014, when approxi-mately 93% of M&A deals valued at more than $100m were litigat-ed, do not transpire in 2015. n

Georgina Squire is head of dispute resolution at Rosling King

UK Supreme Court considers ex turpi causa in Bilta

Despite the simplicity of Lord Mansfield’s state-ment, made in 1775, that “no court will

lend its aid to a man who founds his cause of action on an im moral or an illegal act”, it has been, in the words of Lord Sumption, among the most heavily litigated rules of common law, “encrusted with an incoherent mass of in-consistent authority”.

The most recent attempt to unravel that inconsistency, Jet-via SA and another v Bilta (UK) Ltd (in liquidation) and others (2015), ended last week in the UK’s Supreme Court.

The respondent, Bilta, claimed damages against its two former directors and the appellants (Swiss company Jetiva SA and its French chief executive) for the losses it suffered as a result of a fraudulent VAT scheme, in which Bilta purchased VAT-free carbon credits outside of the UK for VAT-applicable resale within the UK. The proceeds of Bilta’s sales, including the VAT, were paid to Jetivia SA either by Bilta itself or directly by the UK buy-ers. Bilta had no other business or income and so was unable to meet its liabilities to HM Revenue & Customs.

Bilta went into liquidation and subsequently alleged against the appellants conspiracy to defraud, dishonest assistance of Bilta’s directors in the breach of their fiduciary duties and the fraud-ulent trading provisions of the Insolvency Act 1986 (although outside the scope of this article, interestingly the Supreme Court found the Insolvency Act applied extra-territorially).

The appellants argued the (ille-gal) acts and knowledge of Bilta’s directors were attributable to Bilta, so as to taint Bilta’s claim and prevent it from proceeding. The appellants sought to rely on

the debated decision in Stone & Rolls Ltd (in liquidation) v Moore Stephens (2009), in which the ille-gality defence was made out by auditors against a company that was created for the sole purpose of defrauding banks. Having been unsuccessful at both the first instance and on appeal, the appellants also failed in the Su-preme Court.

While there were differences in the approaches taken by the seven justices, the conclusion was where a company has been the victim of wrongdoing by its directors or of which its directors had notice, that wrongdoing or knowledge cannot be attributed to the company and the directors may not argue the company’s claim against them is founded in such wrongdoing so as to trigger the illegality defence.

The decision ends the long- running dispute for Bilta, which may now proceed with its claim, but issues remain as to the prop-er approach to the illegality defence. Lord Neuberger has in-dicated this should be addressed by the Supreme Court another time. It is therefore clear we have not yet heard the last of the illegality defence, in partic-ular (following Lord Sumption’s remarks) regarding the scope of an auditor’s duty vis-à-vis the il-legality defence, given an auditor sued by the company would not usually be involved in the direc-tor’s breaches or ever hold com-mensurate duties.

In the meantime Lord Neuberg-er has provided some comfort to claimants in Bilta’s position with his final comments on Stone & Rolls, which should now be “put on one side and marked ‘not to be looked at again’”. n

Simon Konsta is a partner and Justin Fredrickson an associate at Clyde & Co

Framework deal means end to sanctions on Iran is in sight, but re/insurers are likely to remain cautious

US commercial insurers achieve rate increases despite pricing pressureThe US commercial property/casualty market is showing signs of softening but major US insurers remain confident about prospects in the sector

Scott VincentEditor, news services

US commercial business is showing a similar downward rating trend to most global lines at

a time of high competitive pres-sures, with the latest report from the Council of Insurance Agents & Brokers (CIAB) indicating an aver-age price decline of 2.3% during the first quarter.

Ken Crerar, CIAB president and chief executive, said buyers gained some advantage as pricing slid across the board and across all regions for most lines of busi-ness during the first three months of the year.

A relatively calm catastrophe season, with the exception of the harsh winter in the north- eastern US, which brought record snowfall to parts of the region, helped push commercial property pricing down across much of the country, the survey found.

Broker comments picked out of the responses by the association suggest insurers are becoming “more aggressive” for business, with a “hungry, hungry, hungry” appetite increasing downward pricing pressure from a year ago.

But the picture painted is not one of all gloom for US insurers, particularly in the north-east, where winter storms have hit so hard in recent months. In this re-gion, some tightening and slightly higher deductibles for roof dam-age caused by ice damming has been reported.

As is often the case, the sen-timent among major insurance companies on the rating envi-ronment is more positive than broking counterparts, although the impact of this year’s winter weather in the north-east has not been discounted.

Brian MacLean, president and chief operating officer at Travel-ers, said the insurer’s expectations for catastrophe losses from events such as winter storms were now significantly higher than in the previous decade.

“Weather patterns continue to be very unpredictable, which was clearly evidenced by anoth-er challenging quarter. Weather losses in the first quarter were slightly higher than they were in the first quarter of 2014. In both years, losses were above expecta-tions. Last year the Polar Vortex was the dominant story, while this year it was the snow and ex-treme cold in the north-east,” he told analysts during the group’s first-quarter earnings call.

“Boston received 110 inches of

snow – a record for a season. But the real story is the amount of snow – nearly 95 inches – that fell within a 30-day period in Boston. The Washington Post cited a mete-orologist who said Boston should not expect to see another 30 days with as much snow for approxi-mately 26,315 years. Suffice to say it is an extremely unusual event.”

The Boston event contributed towards $2.3bn of insured winter storm losses during the quarter, according to Property Claim Ser-vices figures.

“It is now all too common to have significant catastrophe losses from what were tradition-ally thought to be low-severity, high-frequency events such as tornado, hail and winter storm,” MacLean said. “Our expectation for catastrophe losses is signifi-cantly higher today than it was six or seven years ago.”

Despite the rising catastrophe impact, MacLean is positive about the prospects for Chubb’s US com-mercial business, with much of the hard work needed to drive profitability in this business hav-ing already taken place.

“In the fourth quarter of 2010, we established a study to improve our commercial business, focused on increasing rate, improving terms and conditions and focus-ing risk selection. The initial goal

was gradual rate increases and to drive improved terms and condi-tions over time. Once rates had reached an appropriate level, we hoped they would moderate at acceptable terms. This is exact-ly what we have seen in the past four-and-a-half years. We couldn’t have scripted it better,” he said.

“We feel very good about the rates we are seeing in this busi-ness. We are encouraged by the continued stability in the market.”

Chubb, another major player in the US commercial market, is an-other carrier to feel the impact of winter storm activity in the quar-ter but reports underlying positiv-ity about market conditions.

The insurer said catastrophe losses of $250m added 3.4 per-centage points to its first-quarter combined ratio of 90.8%, but its overall renewal retention base was 87%, in line with its largest three quarters and high by histor-ical standards.

Dino Robusto, president of Chubb’s commercial and specialty lines, said the high retention rate was achieved without compro-mising on rates. “Even with this level of retention, we achieved an average renewal rate increase of 1% for the US book,” Robusto said. “This was the 16th consec-utive quarter during which we achieved rate increases.”

Doug Elliot, president of Hart-ford Financial Services, said his firm had achieved rate increases of 3% on its renewed written busi-ness during the first quarter, a sim-ilar level to the fourth quarter of 2014. “Prices have been buoyed by commercial auto business,” Elliot said. “For workers’ compensation, improving rate adequacy for the industry has meant increased com-petition, particularly for middle- market business.”

Hartford’s renewed written business saw increases of 1% for workers’ comp, down 2% from the fourth quarter of 2014. Small com-

mercial workers’ comp renewed written premiums saw rates up 2%, a reduction of just 0.5 percentage points from the previous quarter.

“Catastrophe losses were very similar in quantum to what we saw in the first quarter of 2014, but much more concentrated in the north-east, where we have a higher concentration of commer-cial business,” Elliot said.

Broker views differWhile insurers are largely posi-tive about prospects for US com-mercial markets, the findings of the CIAB survey suggest condi-tions are tough for the majority of lines of business.

Large accounts saw the biggest declines, with an average reduc-tion of 3.7% during the quarter, following four consecutive quar-ters of falling rates in 2014, the survey found.

Medium-sized accounts saw reductions of 2.7%, far in excess of rate reductions in 2014 which peaked at 0.9% in the fourth quarter. Small accounts, which had seen small single-digit rate increases last year, saw average reductions of 0.5% in the first quarter, the CIAB figures show.

Commercial property was one of the most affected lines, with more than 55% of respondents to the CIAB quarterly survey sug-gesting commercial property rates were down as much as 20% in the quarter. A similar response was generated among general liability brokers, while around 53% saw falls for business interruption.

Expectations of a continuation of this trend will likely see more focus on risk selection among in-surers in the coming quarters.

But as major market players continue to report small rate in-creases to their overall book of business, it is likely to take a num-ber of quarters before market conditions lead to a significant re-duction in business written.

“It is now all too common to have significant catastrophe losses from what were traditionally thought to be low-severity, high-frequency events” Brian MacLeanTravelers

Snow in Boston earlier this year: nearly 95 inches fell in a 30-day period

Svitlana Grygorenko/ Shutterstock.com

Bilta

Documents

Transcript of Bilta