18 September 2008

MLex Comment: Smooth regulatory ride expected for Aon Corp's Benfield purchase

Aon Corporation's takeover of UK's Benfield Group is to combine the world number one and three in re-insurance brokerage. The presence of strong competitors, among other factors, predicate in favour of a smooth regulatory ride.

On 22 August global risk management services provider and human capital consulting, insurance and re-insurance brokerage Aon Corporation announced it was going to acquire the UK's Benfield Group, an independent re-insurance and risk intermediary. Benfield will be integrated into Aon's re-insurance intermediary Aon Re Global and the new entity will be known as Aon Benfield Re. The transaction values Benfield at approximately 1.177 billion euros.

 

Chicago-based Aon's global group turnover in 2007 was 7.471 billion dollars. The Benfield Group's total global turnover in the last complete financial year was 339.2 million pounds. Less than 250 million euro of this was achieved in EU countries. So the European Commission has no original jurisdiction to undertake a merger control review of the transaction.

 

Rather, an analysis of where Benfield is most active around Europe indicates that national filing obligations seem highly likely arise in Austria, Germany, Ireland and the UK. France is also a possibility, but it seems unlikely Benfield would have turnovers there of 50 million euro or more.

 

In these circumstances it is certainly possible that Aon might want to try for a 'one stop shop' review and seek an upwards referral to Brussels under the EC Merger Regulation to avoid national filings. 

 

On the other hand, only four national filings around Europe, in only two languages, are not overly burdensome, and it may well be the case that those clearances can be gathered more quickly than one EC clearance decision following the reasoned submission procedure in Brussels, which certainly adds a number of weeks to the regulatory time line. The parties stated on 22 August that they expect the deal to close by the end of 2008.

 

Merger filing obligations most likely arise in a number of non-EU jurisdictions as well. The US and Brazil seem obvious candidates. Given procedural deadlines in Brazil, a merger filing can expect to have already been filed there. As the deal is an all cash offer, the US HSR waiting period is only 15 days. Canada, Switzerland, Turkey and Australia may also require notifications.

 

Horizontal overlaps occur in the field of reinsurance brokerage. There is little regulatory precedent to delve into in this precise area and market definition is not altogether clear. Indeed the EC has never had to examine these specific services before. 

 

However, it is clear from previous cases that ordinary insurance and insurance brokerage are to be considered as separate markets. Using the same logic one can assume that re-insurance will be a separate market to re-insurance brokerage.

 

In the KKR, Willis Corroon case ten years ago, the commission said that “the activities of brokers are different from those of (re)insurers and subject to a different regulatory framework. The latter offer their own services to their clients, whereas brokers act as intermediaries between the supply-side (insurance companies) and the demand side (clients seeking insurance).” 

 

In that case, the parties suggested drawing a distinction between brokerage in respect of life insurance, non-life insurance and re-insurance. In the end, the commission was able to leave market definition open.

 

According to the Brussels regulator's inquiry into the European business insurance sector which reported in September 2007, the provision of re-insurance should be regarded as a single relevant product market covering the provision of re-insurance for all classes of risk, as a re-insurer covering risks of a particular class may readily and quickly switch capital and resources from that class of cover to a different class of cover (supply-side substitutability). 

 

Extending this principle to the reinsurance brokerage market, it would seem fair to conclude that the re-insurance brokerage market should not need to be sub-divided into different sub-markets.

 

In earlier cases, the commission found that the market for reinsurance is global in geographic scope because of the international dimension of transactions and the less extensive control of national authorities. Earlier this year, in Berkshire Hathaway, Munich Re, GAUM, the commission confirmed its existing approach that the geographic market for the supply of re-insurance is global due to the need to pool risks on a global basis.

 

Based on this, it seems reasonable to think that the market for reinsurance brokerage will also be considered to be global in geographic scope. The plain insurance brokerage market mirrors the plain insurance market in geographic scope.

 

Assuming then that the relevant market is the global market for reinsurance brokerage, in global terms, Aon Re Global leads the field with 2007 re-insurance brokerage revenues of 958 million dollars, according to Best's Review. Snapping at its heals is Guy Carpenter & Co with 902 million dollars. Target Benfield realised 656.7 million in re-insurance brokerage revenues in 2007. So on first glance, eyebrows might be raised because the number one player is merging with the number three player.

 

But is this really something to get hot under the collar about? Probably not. There are a plethora of players in the market. Willis Re is number four behind Benfield but not by much, with reinsurance brokerage revenues of 606 million dollars last year. Then come a number of smaller firms, such as Towers Perrin, with 156.1 million dollars, Cooper Gay with 137.9 million dollars, BMS Group with 90.8 million dollars and Collins with 70.1 million dollars, to name just a few of the smaller competitors.

 

It would seem that Aon merged with Benfield is probably not going to have a global market share of much above 30 percent in re-insurance brokerage, and that figure may even be slightly lower.

 

If the national filings route is pursued, data will have to be provided on a national basis to the authorities concerned, but even then it would seem unlikely that market shares could be anything to worry about.

 

Various factors predicate in favour of a smooth regulatory ride. For example, there may be a case to argue that direct placement activities should be included within the re-insurance brokerage market. That would dilute market shares even further although it is not an essential tactic here because even without direct placement, reinsurance brokerage market shares seem innocuous.

 

And market shares can change relatively quickly. Individual brokers can be poached to move firms, and will take key accounts with them. One reason Aon and Benfield want this transaction wrapped up quickly is that delay may make employees jittery. There also seem to be low or no barriers to entry, and a good history of entry into the reinsurance brokerage market.

 

Might anyone be concerned? Certainly, there may be some customers of both Aon Re Global and Benfield out there who won't be happy that they'll have one less option in the future. But whether that unhappiness could be packaged for the regulator as a competition concern of substance is another matter. There are many other companies to turn to for a choice in reinsurance brokerage.

 

By Anne MacGregor and Anna Kerekes

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