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HANNOVER, Germany-Hannover Reinsurance Co. plans to expand its specialty reinsurance business with the acquisition of a large part of Skandia International Insurance Co.'s reinsurance business.

Hannover Re, will pay 1.06 billion Swedish kronor ($139.1 million) to acquire Skandia International's entire portfolio of life and health reinsurance, facultative reinsurance, and aviation and space insurance, strengthening Hannover's presence in those areas. The deal is retroactive to Jan. 1, meaning that Hannover Re will take over Skandia International policies in effect as of that date.

Skandia's U.K. subsidiary, Skandia Reassurance (U.K.) Ltd., which writes life reinsurance, is also included in the deal.

Hannover Re, which holds sixth place in Business Insurance's ranking of the world's largest reinsurers based on 1996 net reinsurance premiums written (BI, Sept. 1), also writes automobile, general liability, property and other reinsurance lines. It reported $3.4 billion in net reinsurance premiums written last year. Hannover had capital and surplus of $1.2 billion in 1996, net income of $50.3 million and a combined ratio of 97.1%

The Skandia International portfolio complements Hannover Re's current business and its growth strategy.

"We have a clear focus. We want to grow in life and health, in facultative and specialty lines, " said Hannover Chairman Wilhelm Zeller.

Stock market analysts said that Hannover likely had been very selective in which Skandia business it finally bought. "It seems as though Hannover Re has cherry-picked the Skandia business and left the rest," said Tom Bennett, insurance analyst at Paribas Capital Markets in London.

Mr. Zeller confirmed this. "We have no appetite to grow in property/casualty business. That is why we are not interested in 95% of the business out there. The problem is to find someone with an interesting portfolio mix. Skandia has a nice life portfolio and a good position in France, where we are not active at all."

Specialty lines acquired from Skandia, such as credit life insurance and long-term care, complement Hannover's existing speciality of acquisition pre-financing insurance, which is coverage purchased by companies that want to insure against any problems with any of the parties that have agreed to finance a deal.

"It is wonderful: We can sell our products in their market and their products in our market." Mr. Zeller added.

The acquisition will add an estimated $367.4 million to Hannover's gross reinsurance premium volume, raising it to more than $4.01 billion. Next year gross premiums written would show an additional increase of $39.4 million in 1998, according to Hannover's statement.

The transaction will give Skandia a capital gain of 250 million Swedish kronor ($32.8 million) and free 4 billion Swedish kronor ($524.8 million) of cash due to loss-reserve reductions, the company said in a statement. Bo Ingmarsson, Skandia executive vp and chief investment officer, would not comment on how the company would use these funds or if Skandia is planning any acquisitions.

The company will focus on its core businesses of Nordic non-life insurance and annuities, Mr. Ingmarsson said. Skandia's solvency margin increased to 136% from 116%, according to the company's statement.

Though Mr. Zeller said Hannover is not interested in Skandia International's P/C business, Hannover would acquire renewal rights to the remainder of Skandia International's property/casualty treaty business from January 1998. The most attractive treaty business acquired is from the Middle East, France and Latin America, while U.K. treaty business is of no interest, he said.

Mr. Ingmarsson said that though Skandia is not selling some of the long-tail business just now, "it has been agreed in other ways to sell it no later than 1998." He gave no further details.

Hannover Re said the acquired gross premium volume in the life and health reinsurance sector, the company's top priority, is $249.3 million, increasing that sector's percentage of Hannover Re's total gross premiums to 23% from 17%. The company hopes to raise that proportion to 30%.

Facultative reinsurance premium, Hannover Re's second strategic priority sector, is set to rise to around $167.2 million after the acquisition. The acquisition boosts facultative premiums to 5.7% of Hannover Re's total premium. The company's long-term aim is to increase that to about 10%.

Skandia's aviation and space business brings in $65.6 million in premium and will boost Hannover Re's income in this sector to $223 million.

Skandia International has 330 employees and various offices worldwide. Hannover will retain 90 of the 199 Skandia International employees in Stockholm.

The company will open two offices in Stockholm, one of which will serve the aviation/space business, which is primary insurance. Hannover has no license to operate as a primary insurer in Sweden, so it will create a Stockholm subsidiary of its London-based primary insurer, International Insurance Co. of Hannover Ltd.

Worldwide, Hannover will retain Skandia International's 73-person staff and offices in Madrid, Paris and Mexico City. The Hannover office in Japan will takeover the work of the Skandia International office there, and the Hannover office in Kuala Lumpur will take over Skandia International's Singapore office.

Mr. Zeller said he believes Skandia International's Beirut office will be closed because the Arab market does not require representation from that city. Hannover Re initially approached Skandia in February, Mr. Zeller said. Hannover knew that Skandia had completed a strategy review in 1996 to determine whether to stay in the reinsurance business. "At the outset, we made it clear we would not participate in an auction," Mr. Zeller said.

Negotiations stalled during the following months. Skandia told Hannover that the talks were not exclusive but that Hannover was in a "super-priority position," he added. Mr. Zeller said he believed there was one other company interested in the assets but was not told its identity.

Mr. Zeller said serious negotiations resumed in July. Hannover conducted a due-diligence review in August and made an offer later that month. The remaining time has been spent in drafting the legal agreement.

The cost of the deal will be reflected in the company's earnings this year, Mr. Zeller said.. Payment is in the form of a commission because lines of business, rather than a company, have been bought.

Hannover Re has no specific growth objectives and is not on an aggressive acquisition trail, Mr. Zeller said. "But if there is a company (on the market) with a facultative premium of one billion in any currency-dollars, pounds or deutsch marks-we will buy it tomorrow. This is the kind of acquisition we will consider," Mr. Zeller says.

Hannover Re, a 32-year-old company, is an affiliate of the Hanover, Germany-based mutual insurer Haftpflichtverband der Deutschen Industrie Versicherungs a.G. (HDI). HDI chairman Wolf-Dieter Baumgartel is the chairman of Hannover Re's supervisory board. In 1994, HDI sold 25% of Hannover Re stock in a public offering to finance a corporate diversification.

HDI could sell up to 25% more of Hannover Re stock in the future in order to finance further acquisition, Mr. Zeller says. "But (HDI's stake in the company) will never go below 50%," he said.

Likewise, Hannover Re would float some of its own stock if it needs funds for an acquisition that is of no interest to its main shareholder.

Meanwhile, last week Standard & Poor's affirmed Hannover Re's double A-plus claims-paying ability rating, claiming the Skandia deal "makes good strategic sense."

However, S&P placed Skandia International on credit-watch because the company is not expected to write any new business and the remaining liabilities will be placed into runoff. Skandia International had a triple-B-plus rating. S&P said once the deal is completed in 1998, it will assign an exit rating to Skandia International and remove it from CreditWatch.