09The Fac Report - Aon

COMMENT
CREATING A SEAMLESS
PARTNERSHIP
In soft markets, when insurers and reinsurers are
working hard to maintain underwriting discipline
and profit potential, brokers that really add value
are those that identify ways to boost customers’
ultimate results through the intelligent use of
reinsurance. Against this background, it is gratifying
to note the soft market is serving as yet another
example of how powerful facultative reinsurance
can be as a strategic tool if used seamlessly
with treaty programmes.
For instance, having already proved its
worth in hard markets, the combined capabilities
of Benfield’s Dynamic Portfolio Optimisation
and CatFac analysis are now being used to better
identify ways in which to use combined treaty
and facultative reinsurance to optimise the
structure and cost of outwards programmes
in a downwards spiral.
Similarly, the sharp rise in large, single
risk losses during the first quarter of 2008
has underlined the applications of facultative
reinsurance as sideways protection against shock
losses within treaty retentions. Equally, facultative
cover can also have a role to play in assisting
treaty programmes to reflect changing market
dynamics, one current example being the rise
in potential business interruption costs due
to record commodity prices.
However, using facultative and treaty
protections in this way can only really work
if supported both by the necessary analytical tools
to identify and analyse ‘hot spots’ and by brokers
who have no hesitation about building close
working partnerships which transcend traditional
facultative and treaty boundaries. And all too
often in practice such ‘one team’ thinking
is impeded by both cultural and structural barriers
such as geographical or business profit centres –
hence the Benfield Facultative Solutions approach
of having one global Profit & Loss.
Simply put, if the broking sector is to ensure
its customers are properly positioned to maximise
capital efficiency during soft markets, while also
establishing ‘shelf capacity’ that can be quickly
used following an event-led turn in the market,
it cannot allow the old attitudes to continue.
Otherwise, it will be ignoring a potentially valuable
tool in the sector’s drive to deliver highly tailored
reinsurance strategies that meet the very individual
needs of each and every carrier.
jeremy.goodman@benfieldgroup.com
Jeremy Goodman,
Global Team Leader
SOMETHING
OLD AND
SOMETHING
NEW
2007 was marked by a number of significant
M&As ranging from SCOR’s acquisition
of Converium to the moves both by recent
start-ups and longer-established companies
to take advantage of Lloyd’s to strengthen
their business positions. There were also
signs that the European Union Reinsurance
Directive is acting as a stimulus for
reorganisation in Europe. The Benfield
Research team gives a brief overview.
The acquisition of Converium by SCOR
was perhaps the most important event in the
reinsurance arena in 2007. SCOR took the
market by surprise with its announcement
of a 32.9% stake in Converium and its intention
to launch a public tender offer for the
remaining shares. After initially rejecting
the approach, Converium’s Board of Directors
subsequently recommended an improved offer
to its shareholders. When the tender offer
closed in July, SCOR had acceptances for over
96% of Converium’s shares and the change
of ownership was completed at the end
of August. SCOR has subsequently raised
its ownership to over 98%. The management
of the combined entity moved swiftly
to present clients with a unified approach
at the September Rendez-vous in Monte-Carlo.
Upgrades of the Lloyd’s financial strength
rating to A+ by both Fitch and Standard
& Poor’s, the acquisition of Equitas by Berkshire
Hathaway’s National Indemnity and continued
evidence of structural reform all contributed
to the increasing attraction of Lloyd’s.
For some newly established Bermuda players
(and some not so new), Lloyd’s provides
the obvious benefits of a higher rating, access
to international licensing and distribution, and
diversification of product line and geography.
Deals during 2007 are shown in Figure 1.
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 02
Tokio Marine & Nichido Fire Insurance
Company (TMNF), Japan’s oldest and largest
non-life insurer, made a GBP442mn agreed
offer for Kiln Ltd in December. The deal
was completed on March 11 when Kiln joined
Millea Group as a wholly-owned subsidiary
of TMNF and was delisted from the London
Stock Exchange. Kiln will play a pivotal role
in the expansion of TMNF’s international
underwriting operations and in enhancing
its existing overseas activities.
American Financial Group said its
acquisition of a 67% stake in Marketform
Group Limited “supports one of our strategic
objectives of increasing AFG’s geographic
coverage.” Munich Re’s acquisition of MSP
Underwriting complements its existing Lloyd’s
platform through Watkins. MSP owns Beaufort
Underwriting Agency Limited (which manages
Syndicate 318) and Evergreen Underwriting
Services Limited.
PARIS RE, now headquartered in
Switzerland, emerged in its own right during
2007. The company’s shares were listed on
the Euronext Paris exchange in July. PARIS RE
was awarded financial strength ratings of
A- from both A.M. Best and Standard & Poor’s
and began writing business from the end
of September. The company operates in France,
Switzerland, Bermuda, the USA, Canada,
the UK and Singapore. Other young reinsurers
which made Initial Public Offerings (IPOs) of
their shares during 2007 are shown in Figure 2.
The stream of new reinsurer formations
slowed in 2007. The key arrivals are identified
below.
Ironshore Inc opened its doors to business
at the start of the year. The company
raised over USD1bn through a private
placement of equity securities, with