Bach on the front foot in London

US insurer The Hartford made its big move into the London and international specialty market in May 2019, with the $2.1bn acquisition of Navigators. Through that deal, The Hartford acquired Syndicate 1221 and a growing business in mainland Europe, Asia and Latin America, which complemented its existing mainly middle-market US commercial business. The integration in London has been led by Carl Bach, and has not been simple, but he tells Global Risk Manager that the job is now done and the next journey begins.

Bach has kept a low profile for the past couple of years as he led the integration of the Navigators business during the pandemic and as the commercial and specialty insurance market underwent a significant shift from soft to hard.

This was clearly some challenge to undertake during a highly uncertain period. But Bach believes that the fundamentals are now in place and it’s time to step back onto the front foot from the group’s Lloyd’s base.

The historic work that the Lloyd’s market leadership is carrying out with renewed vigour to digitalise and modernise the market – and crucially demystify and make the market more transparent, accessible and cheaper to use – gives Bach confidence that the foundations are firmly in place.

The fact that the market shows few signs of softening, despite the excellent 2021 results posted by leading international insurers and reinsurers including The Hartford, will obviously also help Bach and his team look to grow in a profitable way, as is determined by The Hartford culture, he says.

“This is a results-driven company, deeply embedded in the culture. This is just the start of the journey – it is not job done. We are now backed by a company like The Hartford and its financial strength, with an appetite to expand internationally, which makes it a great time. It feels like we have momentum. We have had a good few years of strong rate and that will continue for some time yet. The key message remains that The Hartford has a steadfast commitment to building a strong underwriting business through underwriting excellence on the Lloyd’s platform,” he tells GRM.

London’s central position
Lloyd’s was chosen as the base for The Hartford’s international specialty push because of its historic benefits, not least its unrivalled distribution and global licence network. The fact that the market is committed to a significant digitalisation and modernisation programme under CEO John Neal and chairman Bruce Carnegie-Brown is also an important factor.

“There are a variety of reasons, including access to market and a distribution model that is unparalleled, and the rich history of the market. This is a huge advantage. There is a programme of modernisation designed to make the market more accessible and efficient. We do have confidence in the leadership at Lloyd’s to deliver a premier underwriting market and to make it an easier and cheaper place to do business,” explains Bach.

“We now need to deliver strategic growth but not growth for the sake of growth. We are definitely bottom-line-focused and need to be close to the top quartile and achieve target returns on equity of 15%-plus on a consistent basis. So, for the next few years, the goal will be investment in the people focused on specialty lines and to build market share. Our focus will be on our core areas of expertise and building the data and analytics that provide the insights needed for our underwriters to flourish,” he adds.

The journey has not been simple for Bach and his team since the acquisition.

Prior to the deal, Navigators held about 1% of the Lloyd’s market through its Syndicate 1221, complemented by its UK branch. In 2018, it acquired Bracht, Deckers & Mackelbert (BDM), a specialty underwriting agency, and its affiliated insurance company ASCO, both based in Antwerp, Belgium. This added to the company’s existing European presence in Rotterdam, Milan, Paris, Madrid and its existing Antwerp office.

Bach is honest in his assessment of the scale of the job at hand. “This brought deep experience but was certainly a task. We had to simplify a $500m business that was overly complex, lacked investment in the back office and was basically trying to do too much with too little. The task when the acquisition was closed therefore was to take a step back and overhaul the international business, and focus first and foremost on London,” he says.

The main European business – Navigators Holdings (Europe), including BDM and ASCO – was ultimately sold to Bermuda-based legacy insurer Premia.

This was a lengthy process and its conclusion freed up a “huge amount of management time” to build the London market business via Syndicate 1221 and the UK Navigators Insurance Company operating as a branch of the US parent, says Bach.

Huge IT investment
At the same time, the operating model and non-underwriting functions had to be reorganised, improved and aligned with The Hartford group’s systems. There was a huge investment programme in the IT platform for the group, including automation of pricing tools that at some points had involved the rekeying of data seven times.

There were also some difficult decisions to be made about the composition of the portfolio. Lines such as onshore energy, power and hull were exited because of historical underwriting losses. Transactional liability was also exited because of control and cost, given that it was via delegated underwriting sources.

The result was a product mix based on four core divisions: marine and energy, financial lines, casualty, and political risk. This meant that the total products on offer dropped from more than 25 down to 19.

“This gave underwriters a sharper focus, and brokers and customers access to deeper expertise. Now we are focused on specialty lines at Lloyd’s in which we have real strength, and we will add to this when opportunities arise, such as our recent expansion into trade credit in the political risk division, which also includes political violence and terrorism. Maybe we will add in the technology and E&O space where we have the expertise and it complements the existing business. But we wouldn’t suddenly anticipate expanding into whole new areas such as motor and A&H,” continues Bach.

The timing of the reorganisation and re-underwriting of the Navigators business was good because the overall market turned as the process was underway. The team was able to win valuable new business without compromising underwriting standards.

“We took advantage of market conditions to really get the foundations of the portfolio set, [assess] how we could tier our business and better understand the quality of the risk. We took advantage of seeing business from larger corporates that we didn’t previously, as capacity tightened across the market,” says Bach.

Hard market legs?
The big question facing carriers, brokers and customers is whether or not this more disciplined market has legs or whether fresh capital and capacity will inevitably force a softening. Bach believes the market is behaving itself and does indeed have legs.

“Time will tell but I would say that there is at least another 12 to 18 months of these conditions across The Hartford’s book and across the market in general. Inevitably, some lines will approach negative territory and other lines will continue as now. Overall, I would say there has been a recent 5%-7.5% reduction of rate but it remains above loss-cost trends,” he says.

“New entrants are not broadening coverage and are more focused on rate than in the past, so not causing harm. Retentions are flat and in some cases still increasing. The quality of underwriting, coverage and terms remains pretty good too,” continues Bach.

One thing is for sure, the future expansion of The Hartford’s London business will not be driven by handing the underwriting pen over to delegated underwriting operations such as managing general agents (MGAs) while Bach is in charge, unless the economics change significantly.

“We as Navigators and now The Hartford Syndicate 1221 have never been a big player in the delegated underwriting space. Recent analysis of the open market and delegated underwriting market shows, disappointingly in my view, that some 40% of business is now delegated. Our distribution spread is very different to this and of course we do not write a lot of North American business, which typically accounts for a lot of the delegated excess and surplus lines business,” he explains.

“Where we did write this business, we rarely gave full authority away. We pulled back further over the last two years because we wanted to control the pen more during the hardening phase of the market. If you are pulling back your own limits, it is only natural to pull back from such a small base,” continues Bach.

“The MGA market has been robust over the last couple of years. We continue to look at it and ask whether it makes sense but this is an open question. One key thing is access to data, which needs to be as close to real time as possible because you want to react rather than get the bordereaux three months late! Data and pricing are critical,” he says.

“The economics are tough. While investing in technology and people, we have managed to bring our expense ratio down, which is great. But it is tough to do that when you are paying 40% commission in brokerage plus profit commission, which adds another couple of points,” adds Bach.

Lloyd’s boost
What will help profitable growth for Hartford and the wider Lloyd’s market is a continued effort to “de-mystify” it, make access easier for brokers, cut costs and raise transparency, according to Bach.

“Demystifying Lloyd’s is something that the corporation has always worked hard on because this is a complex market and system for many. I, for one, have worked hard to demystify how the market works internally for the past two years,” he says.

Digitalisation of the market is clearly one of the cornerstones of the effort to raise efficiency and improve transparency and access. The ‘Blueprint 2’ plan published by Lloyd’s in November 2020 and updated in January of this year is an important element of that.

Bach is impressed by the market leadership’s commitment and approach. “I think it’s really significant that the leadership team at Lloyd’s is instilling real confidence through the exciting Blueprint 2 programme. This modernisation plan has to be executed and will help tackle the expense problem and raise margins,” he says.

“Let’s face it, investment in PPL – the London market’s electronic placing platform that enables brokers and insurers to quote, negotiate, bind and endorse business digitally – will be hugely important, benefiting Lloyd’s’ European, Asian and North American markets,” explains Bach.

“All our investment in technology has been carried out to make sure that we have connectivity to the market and can capitalise on the benefits of reduced costs and ease of placement. We are doing great things today which, if the market can adapt across the board, could lead to significant new business. I feel really confident that the Lloyd’s market is moving in the right direction. [But] execution will be critical,” he adds.

It is never easy to make the big shift from defensive to offensive mode, and such a change in strategy will always carry risks. But if the market retains discipline as Bach predicts, and Lloyd’s follows through on its ambitious Blueprint 2 project, then The Hartford should be an increasingly significant player in the specialty space, which can only grow in importance for risk managers over time as the risk landscape becomes ever more complex.