Following the specialist intermediary's auspicious launch on the London Stock Exchange, Nigel Allen assesses what are the secrets behind Benfield's success.

Speaking at a press conference following the initial public offering of Benfield on 13 June, Grahame Chilton, the group's Chief Executive, announced: "We have written the third chapter in our history and now we are looking forward to starting the fourth." When asked what that chapter might contain, he replied: "I don't know... we haven't written it yet!" The successful launch of the IPO concluded the third chapter in Benfield's recent history. The first two chapters documented the acquisitions of Greig Fester in 1997 and EW Blanch in 2001. However, while Benfield may be yet to put pen to paper on the fourth chapter, one can safely assume that each page has been outlined, and that chapters five and six are already beginning to take shape.

It is a rare occurrence to be able to brand something as 'unique' without fear of contradiction. Benfield is one of the world's largest reinsurance intermediaries, ranking third in terms of reinsurance brokerage revenues behind Aon and Marsh McLennan's reinsurance intermediary subsidiary Guy Carpenter. However, unlike its rivals, the group maintains a unique position within the market in that it is wholly independent and the only 'pure reinsurance intermediary'. While unable to exploit the opportunities afforded by operating out of such substantial pockets as its competitors, Benfield's independent status removes any risk of a conflict of interest arising when placing reinsurance business.

In terms of people on the ground, the group incorporates an international network of 37 offices located in 23 countries, encompassing the US, UK, Continental Europe, Bermuda and the Pacific Rim. The core reinsurance business is divided into two geographical divisions, a US division and an international division. The international division comprises three territorial units and three global units, and represents approximately 60% of Benfield's annual turnover, accounting for £168m in 2002. The territorial units - Europe, Pacific Rim and Latin America - each service a specific geographical location, while the global units - global specialty, specialist lines, and global ReMetrics and advisory - each focus on particular lines of business. The US division, headquartered in Connecticut, comprises three business units, customer origination, customer development and customer solutions. Supported by a network of eleven regional offices, plus a London office placing business on the London markets for US-based customers, the US division generated approximately £115m of the group's 2002 turnover.

As continued hardening of the reinsurance market sees a decrease in the volume of reinsurance cover being purchased, Benfield maintains an extremely stable customer platform, with the top ten business relationships having existed for an average of 24 years, while 85% of turnover in 2002 stemmed from existing customers.

A key factor is its ability to work across disciplines and territories, combining local knowledge with specialised skills. In 2002, Benfield successfully tendered for the appointment as sole reinsurance intermediary for Santam Ltd, South Africa's leading insurer, in an effort which brought together representatives from the Australasia, Asia and Africa team, ReMetrics, corporate and facultative and Wildnet teams. Similarly, when invited to tender for the role of risk advisor to the Province of British Columbia's risk management branch, Benfield was able to demonstrate expertise and practical experience across a wide range of areas including financial modeling, financial solution structuring and counterparty risk analysis, coupled with reinsurance market knowledge.

However, a bare-bones analysis of the current standing of the group provides only a partial explanation as to how Benfield was able to generate over £180m from its IPO when investor coffers were reportedly empty.

An investor's perspective
The Benfield IPO provided investors with an alternative to investing in an insurance broker or an underwriter. "What we offered investors was a unique story which could be well told," said Mr Chilton. In purely financial terms, the group was a solid proposition, having recorded an underlying compound growth rate of 10% annually for a number of years. However, its dramatic global expansion through strategic acquisitions in recent years has resulted in the group establishing itself as perhaps the leading reinsurance intermediary outside the US and securing a solid foothold in the US from which to develop its market share.

Prior to acquiring Greig Fester in 1997, Benfield had approximately 100 employees based in London and Hamburg. "While possessing the ability to place business," Mr Chilton explained, "we lacked the global positioning to exploit it." By acquiring Greig Fester, Benfield not only acquired an extensive international office network, but also a well-established reputation - one which has enabled the group to gain a number one or number two position in all international regions outside the US.

It is difficult to underestimate the importance of Benfield's acquisition of EW Blanch to its current success. The group's expansion into the US market began in earnest with the acquisition of Bates Turner Intermediaries LLC, a reinsurance broker owned by Employers Re at the end of 1999. Prior to this, the group's turnover from US activities was a mere £5m for the year.

Following hard on the heels of the Bates Turner acquisition, Benfield announced the appointments of Rodman Fox and Paul Karon, former employees of EW Blanch, to their North American operations. At the time, Grahame Chilton said of the appointments: "Their arrival heralds the next phase of our development in the North American market, where we are building a substantial presence."

Benfield's operating revenue has more than doubled between 2000 and 2002, from £138.2m for year ended 31 December 2000 to £291.5m for year ended

31 December 2002. While the increase also reflects general growth in the company's reinsurance intermediary business, it is primarily due to the Blanch acquisition, with US operating revenues up more than £90m in the last two years, from £26.7m in 2000 to £118.2m in 2002. Global trading results have also risen from £48.1m to £62.8m for the same period.

A market perspective
Benfield launched its IPO when, according to a report issued by PricewaterhouseCoopers IPO Watch Europe for the first quarter 2003, the European IPO market was virtually dried up, with only 14 IPOs recorded on European exchanges, down some 61% on the first quarter 2002, with a total offering value of only ¤74m. Tom Troubridge, head of PricewaterhouseCoopers London Capital Markets Group, said: "Given the weak state of market confidence and uncertainties over the Iraq war, we would expect a fall in activity but the extent of decline is much worse than anticipated. The main European IPO markets are effectively closed for business."

"Our timing was brave but impeccable," said Mr Chilton, quipping that such a description might make a suitable epitaph for him. Benfield had considered launching an IPO 18 months previously in the US, but a combination of factors, including restrictions placed on the issuing of stock to employees under US security laws, plus, some have suggested, the potential impact of the Sarbanes-Oxley Act, ruled this out. "We knew that the capital markets post the Iraq war would be eager for a quality offering" he explained, a fact reflected in the market response when the offering was taken on the road, recording a 96% investor hit rate in the UK, with a 90% rate for the rest of Europe. The offering was 11.7 times over-subscribed.

Benfield's shares began trading on 13 June at 290p per share, 16% up on the offering price of 250p, recording a high of 298p, and raising approximately £157m - a figure which valued the company at around £575m. On the 19 June, Benfield announced that Merrill Lynch, sole sponsor of the admission and joint bookrunner with Morgan Stanley, had informed it that it had exercised the over-allotment option, generating a further £23.5m for the company at the offer price of 250p. According to KPMG Corporate Finance, the launch accounted for over 56% of the total revenue raised by IPOs on the UK market pre-26 June, with a final figure in excess of £180m.

While the purpose of any IPO is to generate funds, the launch has had other beneficial effects. "It is not just a question of making money," Mr Chilton commented at the recent press conference, "but more of wanting to build long-term relationships with our investors." Unsurprisingly, this remark failed to be quoted in much of the commentary around the IPO. The launch has also allowed the group to further its policy of linking its employees directly with the performance of the company through the use of employee shareholding schemes. "Everyone who has been working for the company for more than six months will now become a shareholder," said Mr Chilton, explaining that the IPO has resulted in the creation of 999 new employee shareholders. "We are keen to align the interests of our external shareholders with those who work within the company."

There is little doubt that each page of the fourth chapter in Benfield's growth has already been earmarked for a specific event or stage in the group's development.

Despite the rapid development of its US operations following the acquisition of

EW Blanch, Benfield's US market share remains relatively low, a situation which the group is keen to address, and one can fully expect to see the group strengthen its market position through further acquisitions of reinsurance intermediaries and brokers. Benfield has also made remarkable inroads into Eastern Europe and will be keen to capitalise on its market penetration, while also seeking to exploit increased interest in the use of reinsurance intermediaries in Continental Europe. Following China's entrance into the WTO and the removal or scheduled removal of many of the barriers to outside investment, Benfield is in the process of obtaining a licence to establish an office in Shanghai. A review of its investment strategy would also appear to be on the cards following the recent sale of almost two-thirds of its common shares in Montpelier Re, adding a further $27.7m in net proceeds to its already substantial earnings from the IPO.

While Benfield has firmly established itself amongst its big hitting rivals in the insurance intermediary sector, it would seem that the group has no intention of settling for a bronze-medal position.

By Nigel Allen

Nigel Allen is the assistant editor of Global Reinsurance.