In a dramatic about-turn CGNU has agreed to sell-off Marlborough Underwriting, its mainly marine managing agency for less than £10m – just three months after increasing its stake in the firm from 51% to 100%.
Marlborough has been bought by the Berkshire Hathaway Group which is controlled by billionaire US businessman Warren Buffett.
With its ownership of Marlborough, Berkshire Hathaway will be a sizeable force at Lloyd's. It already controls managing agency DP Mann which has a capacity of £257m and with Marlborough it will control 5% of capacity at Lloyd's.
Berkshire Hathaway has net assets of £40bn and also owns the reinsurer General Re.
Tom Bolt, managing director of Berkshire Hathaway's reinsurance division in Europe, says the key factor driving the deal was to help CGNU “draw a line” under its London market activities.
“CGNU was looking for a clean way to make a break from the London market in order to focus on retail life and non-life insurance.”
Bolt says that Berkshire Hathaway will be holding “educated discussions” with Marlborough to ascertain how it will respond to the volatile marine market. However, he stresses: “Berkshire Hathaway is committed to providing capacity up to £150m, replacing CGNU's capacity through its corporate name.”
He adds that his employers prefer to maintain a low profile rather than court publicity: “Berkshire Hathaway operates as a discreet business unit and is not a global organisation but allows its subsidiaries a large degree of autonomy.”
Bob Scott, CGNU chief executive, says the deal will protect the insurer from “any further exposure” related to its London market risks, including Lloyd's.
The sale of Marlborough effectively ends CGNU's involvement in the London insurance market and follows hard on the heels of its recent exit from the corporate risks market in August.
As recently as four years ago one of CGNU's predecessors, Commercial Union, was known as the world's largest marine insurer.
The Marlborough sale means CGNU has now repositioned itself as a personal and commercial lines insurer as Bob Scott, CGNU chief executive, explains: “These actions are consistent with the group's strategy of focusing its general insurance operations on personal and small commercial lines business.”
He adds that its agreement with Berkshire Hathaway will help improve its future earnings by removing the “uncertainties” relating to London market risks and any further exposure it has to the business.
CGNU indicates that Berkshire Hathaway had paid “less than £10m” for Marlborough.
Berkshire Hathaway will replace CGNU as Marlborough's capacity provider for its three active syndicates – marine 62 and 1861 and non-marine 1047.
Its two other syndicates have been put into run-off, marine excess of loss 744 in June and personal accident 1242 in July, following poor trading conditions. Phil Armstrong, 1242's active underwriter, stepped down after the syndicate was placed into run-off and he was succeeded by Tim Humm, underwriter at Marlborough's largest syndicate, marine 1861.
The five syndicates have a total capacity of £285m for the year 2000 account.
In the six months to June 30, 2000, Marlborough wrote £162m worth of premiums with an underwriting loss of £31m.
CGNU director of external affairs Hayley Stimpson says that CGNU had decided to increase its stake in Marlborough from 51% to 100% in August as part of Lloyd's strategy to affect an “orderly exit” from the London market.
She explains that CGNU reasoned it would be easier to sell Marlborough if it owned the business outright than if it only had a partial stake.
As part of the Marlborough sale, CGNU has secured a £1bn package of extra reinsurance cover from Berkshire Hathaway for all of its London market risks.
This reinsurance cover is on top of CGNU's existing claims reserves of £1.2bn for its London market risks.
However, CGNU stresses Marlborough's share of this potential risk exposure is “very small”.
The cost of this £1bn additional reinsurance cover and CGNU's exit from the London market is to be met by a one-off £448m charge before tax against the insurer's accounts for the period ending September 30, 2000.
Stimpson says the insurer's decision to buy the additional £1bn of cover was endorsed by its independent agents.
She says: “Our assessment of the appropriate level of reinsurance cover for our London market risks was reviewed independently and we believe it is a prudent amount.”
However, Stimpson stresses that CGNU did not expect Marlborough to suffer any future heavy losses and that in fact it has net assets of £1.1m.