The decision to put the company into run-off is not down to losses but investors’ desire to withdraw

The surprise move of European reinsurer Glacier Re into run-off was prompted by its owners’ frustration at the depressed state of reinsurance net asset values (NAVs), according to market watchers.

At the end of August, Glacier announced that following a strategic review it would no longer accept new business. It also said it would self-manage the run-off process.

“After several months of effort and strategic review, Glacier’s board has decided to cease underwriting and to seek the orderly wind-down of its operations. This unfortunate step will best achieve our investors’ objectives within a reasonable time,” Glacier Re chief executive Todd Hart said in a statement. The company is owned by the hedge fund HBK Investments and Soros Fund Management, which put the business up for sale as part of a strategic review last year.

Although the Swiss company did manage to sell its direct and facultative arm, Glacier Insurance, to Torus Insurance earlier this year for an undisclosed sum, potential buyers for the reinsurance business have been thin on the ground. In addition, valuations in reinsurance have been happening at significant discounts to NAVs, according to experts.

Last year, Glacier Group cut back business by 17% while delivering a $34m (£21.5m) increase in net profit to $60m. The company scaled back gross written premium to $469m for 2009 from $569m the previous year. HBK and Soros each took a 45% stake when Glacier Group was launched, with Benfield taking the remaining 10%. Equity capital at launch was $300m.

The past couple of years have been notable for catastrophe losses, and whereas a new reinsurer only benefits from the industry’s previous hits, this time around Glacier has absorbed its fair share. In 2008, it was hit by Hurricane Ike, which is expected to cause its Nelson Re catastrophe bond to fall to a loss, and this year by the Chilean earthquake.

Opportunistic by nature

With the advent of significant hedge fund capital in the early to mid-2000s, questions were frequently asked as to how the new carriers would react to a high frequency of loss. Would hedge funds, by nature a short-term source of capital, be capable of sustaining long-term investment and interest in such an unpredictable sector as the catastrophe market?

Glacier Re was founded at the end of 2004 in response to the four major hurricanes (Charley, Ivan, Frances and Jeanne) that hit the USA that year and in anticipation of the hard market that would follow. One reinsurance broker says: “The issue of longevity has always been at the heart of hedge fund-driven reinsurance. Would the capacity they provided be maintained? Hedge funds are opportunistic by nature and if another sector promises better returns, they will want to move on.”

As Glacier Re was a medium-sized player and the reinsurance market is currently well capitalised, the company’s entry into run-off is not expected to have a significant effect on capacity or rates, according to the broker. AM Best noted the loss in Chile when it placed the firm’s ratings under review earlier this year.

The ratings agency said at the time: “As a result of losses incurred from the Chile earthquake, the company is expected to report a technical loss in 2010, compared to the excellent [technical] profit of $51m achieved in 2009. The 2009 result benefited from favourable rating conditions for Glacier Re’s main lines of business and benign catastrophe experience. Overall earnings in 2010 are still expected to be positive, despite the technical loss, due to net investment income and the proceeds from the sale of Glacier Insurance.”

The technical profit calculated by AM Best excludes items such as investment income.

No surprise?

AM Best’s Miles Trotter says that the move into run-off was unexpected, adding: “It is not down to losses, but rather the desire of investors to withdraw. We expected the company to be profitable for the full year.”

Operators in the European legacy market are less surprised by the move. “Some rumours were circulating,” Ruxley Ventures’ chief executive John Winter confirms. There are, however, raised eyebrows at the company’s decision to manage the run-off process itself rather than selling to a specialist legacy operator.

“They are not a run-off operation,” says Winter, although he notes that legacy players may be reticent to take on the business.

He says: “Glacier is very different. Anyone would need to look at them closely. It is too new a business for a lot of people to take on, and it wouldn’t interest Ruxley as we specialise in asbestos, pollution and environmental hazard.”

Winter concludes: “The hedge funds are going to be watched very carefully by regulators, but the hedge funds could really drive an acquisition and lots of people could already be in talks with them.”