The War for Independents.

Independent reinsurance brokers are touting their personal service in the battle for market share against the industry's behemoths.

This year's merger of independent reinsurance brokers E.W Blanch and Benfield Greig Group has created new competition for the gorillas of the reinsurance broker world--Marsh & McLennan's Guy Carpenter unit and Aon.

The new company, Benfield Blanch, unified the once-mighty U.S. broker E.W Blanch, whose fortunes turned in the last two years, with the British reinsurance broker Benfield Greig Group, which had been searching for a secure business foothold in the United States.

Blanch was open for a merger as it suffered from sagging profitability, lawsuits over its role in the Unicover workers' compensation pool and a drop in stock price. In late May, Benfield Greig paid $164.3 million for about 94% of E.W. Blanch's common stock. The combined entity tallied $410 million in combined annual revenue with more than 1,700 employees.

While some equity analysts and industry experts view the merger as advantageous to insurers, independent reinsurance brokers are split in their reactions, with some reveling in the super-charged competitive landscape and others musing about Benfield Blanch's ability to overcome its new debt. "Reinsurance is an intellectual contest. It requires a great deal of intellectual capital. In order to be a major competitor in the marketplace, reinsurers and reinsurance brokers have to bring their expertise to the table," said Clint Harris, vice president of Conning & Co. "It would be difficult to argue that [Benfield Greig and E.W Blanch] didn't have that to some degree before, but this is a matter of having more and being larger."

Adam Klauber, managing director of equity research for Cochran, Caronia Inc., said insurers will benefit from having another strong broker in the market. "It helps keep the market on its toes and helps keep the competition up," he said.

But as the remaining independent reinsurance brokers assess the altered landscape, they also are focusing on the challenge to offer more services to clients and competition from direct reinsurance writers.

A Global Reach

Steven Bolland, senior vice president of independent reinsurance intermediary Gill & Roeser, says the transatlantic setup of Benfield Blanch will be to their advantage. "Both companies are equally large in disparate geographic zones," he said. "You've got one big in the States and one who is big in Europe."

Benfield Blanch Chief Executive Officer Rodman Fox, who joined Benfield Greig after leaving E.W. Blanch last year, said the new company's first order is "to look externally as quickly as possible. We've taken two entirely different companies and molded them together to a much larger company with the thought processes of a larger group." From his unique position as having been a member of both entities, Fox described the "skills, creativity and tenacity" of his recent and former employers that he feels will be the foundation for the success of the new company.

E.W Blanch, Fox said, has already proven it has talent and expertise to handle the hard and soft markets. In fact, it made its mark in the hard market of the 1980s placing difficult business. And during the hard market following Hurricane Andrew, when placement was scarce, Benfield Greig's then-CEO Matthew Harding took the business bull by the horns and created several facilities to place business.

U.S. Re's Executive Vice President Joseph Fedor views the merger as inevitable and as an opportunity. Because U.S. Re is a smaller company, he said, it can respond more quickly to clients' needs. "We can move more quickly, and provide more personal attention to our clients. They are becoming more demanding, because they are consolidating and need broader and more professional advice in the financial area. They are asking their partners, the reinsurance intermediaries, to provide them with that," Fedor said.

John Gilbert, president of independent reinsurance intermediary Holborn Corp., said the new Benfield Blanch may lose some independence as it works to get more business on the books. "There is a feeling the Benfield Blanch organization may ultimately lose some of their independence, because they have taken on considerable debt. They are going to have to truck very hard to put on a lot of business, which could also present servicing challenges, in order to generate revenues to cover a hefty payroll and debt service obligations. There is speculation that they will eventually do an IPO, and if that happens they may well encounter the same demands that confronted the Blanch organization," Gilbert said.

By all estimates, the independent reinsurance broker market writes less than 50% of the brokered reinsurance business. The other half is dominated by the behemoths--Guy Carpenter, which garnered about $526 million in gross revenues in 2000, and Aon. Independents such as Tillinghast-Towers Perrin, Holborn, U.S. Re, Gill & Roeser and John P. Woods, which is part of the Arthur Gallagher operation, compete for the remaining slice of business.

But according to Conning & Co., reinsurance brokers also are facing competition from reinsurers that write business directly, like AmRe and GenRe. Brokers wrote 55.7% of the reinsurance business in 1992, 63.6% in 1997 and 59.8% in 1999. But reinsurance brokers say the decrease in market share from 1997 to 1999 does not represent a downward trend.

"Shrinking? Not particularly," said Gill & Roeser's Bolland. "One of the big differences I noticed is there used to be direct-market reinsurers and the broker-market reinsurers. Now I can call up any of the direct markets and they will deal with me, and there isn't this wall between the two of them anymore."

Industry experts Frank Nutter, president of the Reinsurance Association of America, and Chris Swift, national industry director for KPMG LLC, are divided in their view of the market share. Swift said a lot of insurers are turning to alternative financing instead of the reinsurance market. "Numbers don't lie. Business is going to the capital markets. Wall Street is funding risks now. The Lehman Bros. and Goldman Sachs are coming to reinsurers. In fact, I think that life reinsurance securitization is ready to explode," Swift said.

Nutter said his association's numbers show a turnaround in the amount of business going to brokers, both publicly held and independent. Although there has been a trend in direct writers dominating the business, about 55% of the U.S. reinsurance market is now written by brokers, he said. In addition, he said, with about 40% of U.S. risk being written offshore or not in the United States, much of that is written in the broker business. "That is over and above the business written in the United States," he said.

Independent Minded

Independent reinsurance brokers see their independent status and smaller size as advantages over their much larger competitors. "Primary companies should be happy there is an alternative to the 1,500-pound gorillas," said Holborn's Gilbert. Independent reinsurance intermediaries often use large animals to describe their biggest competitors.

The independents also believe Aon and Guy Carpenter leverage their primary and reinsurance broker status to persuade clients to place their business with them. "Aon and the Marsh Macs are the 2-ton elephants that charge around the landscape. They push a lot of the leverage they have with clients, because they are primary brokers as well as reinsurance brokers and they can control the premium dollar from soup to nuts, so to speak, as it goes up the chain," Bolland said. "They try to vertically integrate their company. The small independents don't have that and probably have lost a little bit on the larger national accounts where they say our guys deal with your guys on the primary side--therefore we should have a reinsurance relationship," he said. Gilbert also points out that because independents don't have leverage, "every piece of business has to be negotiated on its own merits. Therefore, there has to be a very good working rapport between the broker and the underwriters of the reinsurers."

Independents say they can offer personalized customer service and they do not have to worry about quarterly earnings, which gives them an edge over the competition. Holborn, a New York-based reinsurance broker established in the 1920s, prides itself on its independent status and being employee-owned. Holborn trades business with more than 250 reinsurers, insurers, syndicates and pools worldwide.

Gilbert said the reinsurance intermediary business interplays more evenly with an independent setup, rather than a publicly held one. Given the ebb and flow of the reinsurance business, independents don't have the added burden of scrambling for business to present the quarterly earnings to shareholders. "Our business comes in dumps; sometimes you see large growth and sometimes you see a reversal of growth. When you are an independent, you can absorb those changes more easily. We have but one constituent to serve, the client, You don't have to spend your time looking to the left or the right or over your shoulder. You take care of the needs of your customers and if that is done successfully, the derivative of that will be success within your own organization," Gilbert said.

Gill & Roeser makes no bones about the fact it wants to remain independent. It is unique in the reinsurance broker market, because the New York-based broker also specializes in merger-and-acquisition transactions and restructurings, and focuses on property/casualty deals valued at less than $200 million. "We are small and want to stay small; we don't want to become a large company. We want to remain personal, the type of company where you get a client talking to a principal, not the kind of company where accounts are handed over to an account executive who manages a house account," Bolland said.

Personalized Service

Gilbert said that smaller independents with full-service capabilities are the ideal business partners for the large insurance companies which are not "leveragable" as well as medium and smaller accounts, because their needs won t get lost in the shuffle. "If you are a medium- to smaller-sized account, there is the general feeling that you won't get the top-line senior executive attention that smaller independent firms routinely provide," Gilbert said.

With consolidation, a hardening market and more global players, the reinsurance market is challenging independent brokers to offer clients more sophisticated expertise and services. "The day of being an intermediary are gone. The smart ones also help to mitigate risk. The books of business are shifting," said KPMG's Swift. Clients are looking for value-added services such as actuarial, catastrophe modeling and risk analysis. Nutter says it's up to the independent reinsurance brokers to decide which roles they want to play in nontraditional reinsurance, including services such as securitization or derivatives.

Intermediaries are increasingly filling a more complicated role in the reinsurance world, one that is much different than taking a client out for dinner and drinks and expecting the business." It's a lot more technical and a lot more professional. You need to be able to prove to people that you can do the work and go a few steps beyond what was required 10 to 15 years ago," Bolland said.

The added services are at the forefront of the Benfield Blanch organization, which combines the E.W. Blanch-developed catastrophe model with the Benfield Greig financial-impact model. U.S. Re uses both in-house staff and outsourcing for catastrophe modeling, alternative reinsurance transactions and the ability to compare one program to another from an alternative structure standpoint.

However, Bolland acknowledges that certain clients require reinsurance intermediaries that have thousands of employees and don't mind dealing with a team, where 10 different people call the client, depending on what their function is. "There are thousands of insurance companies in the United States and each has different needs and different requirements. There is room for everybody."