Anticipated acquisition by Aon Corporation of Benfield Group Limited

Affected market: Reinsurance distribution

No. ME/3884/08

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 18 November 2008. Full text of decision published 28 November 2008.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

Aon Corporation (Aon) is incorporated in the US and listed on the New York Stock Exchange. It acts as an intermediary (or broker)  for primary insurance, reinsurance and retrocessional reinsurance products. It also provides corporate financial services, and consulting services in a number of areas . Aon carriers out all its principal activities in the UK and globally.

Benfield Group Limited (Benfield) is a company incorporated in Bermuda and listed on the London Stock Exchange. Benfield's main business is as a broker for reinsurance products ([  ] per cent of global revenues). It also offers actuarial consulting, catastrophe modelling and rating agency consultancy. A large part of Benfield's reinsurance broker (or 'distribution') services are generated by property catastrophe reinsurance. The remainder of Benfield's business comprises Benfield Corporate Risk (primary insurance distribution), Benfield Advisory (general corporate finance consulting services), and Paragon (providing consulting services to property and casualty insurers and reinsurers in the US and Bermuda). Benfield's UK turnover in 2007 was [  ] million, representing [  ] per cent of its global revenues.

TRANSACTION

Aon proposes to acquire the entire issued and to be issued stock capital of Benfield for a purchase price of approximately £847 million. The offer was publicly announced on 22 August 2008.
 
The transaction has also been notified and cleared in Germany, Ireland, Norway and Austria and is also currently being considered in Brazil and the US.

The parties notified the transaction to the Office of Fair Trading (OFT) by means of a Merger Notice under section 96 of the Enterprise Act 2002 on 7 October 2008. The extended statutory deadline for the OFT to decide whether to refer the merger to the Competition Commission expires on 18 November 2008.

JURISDICTION

As a result of this transaction Aon and Benfield will cease to be distinct. The share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met on the basis that the parties' combined share of supply in reinsurance brokerage services in the UK is more than 25 per cent. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

The OFT received comments and views about the merger for a large number of third parties, including competitors and customers of the merging parties.

No third parties, including customers and competitors, raised any concerns regarding the primary insurance distribution market.

Regarding reinsurance distribution, the majority of customers stated that post-merger the three major reinsurance brokers would be enough for competitive placements. In addition, a large number of customers and competitors claimed that there were a number of alternative reinsurance brokers to choose from and some customers confirmed that their negotiation strength would not be harmed. One customer raised concerns about the reinsurance distribution market, stating that the merger would eliminate one of the top four reinsurance brokers and therefore reduce the choice of broker.

One competitor raised concerns, stating that the merging parties would have a very strong position in the property and casualty reinsurance brokerage market post-merger and that their combined market share of Lloyd's placements in the UK will be high as well. In addition, the same competitor raised concerns regarding the ability of the merging parties to exercise leverage in the reinsurance segments to foreclose competitors offering retrocessional reinsurance. Finally, the same competitor claimed that the merging parties will have the ability and incentive to set prices in the capital market solutions segment. Another competitor also raised concerns regarding the combined entity's size in capital market solutions. All of these concerns have been dealt with above.

ASSESSMENT

The parties overlap in the supply of brokerage services for primary insurance, reinsurance distribution (including capital market solutions), and retrocessional reinsurance distribution. They are both active in the UK and globally.

In the primary insurance distribution market the parties' combined market shares are small and third parties did not raise any concerns. Therefore, the OFT believes that the merger does not raise any competition concerns in that market.

Taking the market for reinsurance distribution as a whole, the parties' combined market share is less than 20 per cent, and there are a number of large and small providers active in the market. In addition, on a narrow basis, considering reinsurance distribution via brokers separately, the parties' combined market share is between [30-40] and [  ] per cent. However, brokers are to a certain extent constrained by reinsurance companies who place contracts directly with insurance companies without the need for brokerage services. The majority of customers stated that they could cover their reinsurance needs through the remaining three large reinsurance brokers post merger and that their tendering processes allowed them to choose suppliers and switch away to alternative brokers or reinsurance firms. In addition, some customers thought that smaller firms would be able to expand and grow to offer competitive reinsurance brokerage services.

One competitor highlighted the merging parties' strong position in retrocessional reinsurance and capital market solutions. However, the OFT considered that suppliers of brokerage services for retrocessional reinsurance are constrained to some degree by the wider market for direct placement of retrocessional insurance, and that therefore its shares on the narrower basis would tend to over-state the parties' competitive strength. In capital market solutions, two competitors claimed that the merging parties will have a strong position in the field. However, the parties' combined market share is below 25 per cent, with a number of alternative suppliers of similar size. In addition, their capital market solutions activities in the UK seem to be limited.

Third parties were largely unconcerned about the impact of the merger on competition.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

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