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Hannover Re Ready to Give Up Trade-Credit Market Share

Hannover Re, the world’s fourth-biggest reinsurer, said it’s prepared to give up trade-credit and surety business next year as claims costs rise and industry capacity increases.

“The economic outlook for Europe is far from good with half of the region in trouble; that will be felt in our market,” Jan Mueller, head of the Hanover, Germany-based company’s trade-credit and surety reinsurance unit, said in an interview. “If profitability requirements over the cycle are not being met we are also ready to give up business.”

Trade-credit insurers, which protect payments to sellers when buyers can’t meet their obligations, help cover more than $2 trillion euros of trade receivables worldwide, according to the International Credit Insurance & Surety Association. They seek protection by passing some of the business on to reinsurers in return for a share of the premiums.

“The market for trade-credit and surety reinsurance is seeing a massive inflow of capacity since 2011 with a number of new entrants,” Mueller said. “We didn’t further expand our presence in 2011 and 2012 and we don’t plan to increase our market share in 2013.”

Hannover Re, led by Chief Executive Officer Ulrich Wallin, has expanded its credit and surety reinsurance unit over the past four years when rivals such as Munich Re and Swiss Re Ltd. were cutting down. The unit’s premium income rose to 579 million euros ($762 million) last year from 337 million euros in 2008.

Record Bankruptcies

Primary trade-credit insurers were hurt by a record number of bankruptcies during the economic slump in 2009, which boosted claims at insurers including Paris-based Euler Hermes SA, the world’s largest trade-credit insurer and majority owned by Allianz SE.

“Primary trade-credit insurers should have almost succeeded in stopping the price erosion in 2012 and the same should go for reinsurers,” Mueller said. “Our goal is to keep prices more or less stable; in some areas price increases could become necessary.”

The Hannover Re division, which renews about 70 percent of its trade-credit and surety reinsurance business in January, expects “a good result” for 2012, “despite higher loss activity on the surety side,” which makes up about a third of the operations, Mueller said.

Surety insurance, or surety bonds, are typically bought by contractors such as construction companies or ship-builders to cover their principal in case they can’t fulfill contract obligations because of bankruptcy.

Claim Sizes

While Hannover Re hasn’t had a single claim that exceeded 5 million euros at its trade-credit and surety reinsurance unit this year, the size of claims is increasing, Mueller said.

“Our largest single claim in history was related to the collapse of Enron Corp. in 2001, which cost us about 15 million euros,” he said. “The size of claims is definitely on the rise and the credit quality of a number of large accounts has deteriorated.”

The insolvency of German retailer Schlecker won’t be on Hannover Re’s major claims list, meaning it will cost the company less than 10 million euros, Mueller said.

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