Aon CEO Case says Berkshire Hathaway sidecar at Lloyd’s a net positive

Global insurance and reinsurance intermediary Aon held its first-quarter 2013 earnings conference call last Friday and one of the topics discussed was the brokers recent agreement with Warren Buffett’s reinsurance firm Berkshire Hathaway bringing sidecar reinsurance type capacity to Aon’s customers at Lloyd’s of London. The agreement has come up against some criticism but Aon CEO Greg Case said the agreement is positive for all.

The sidecar agreement was a ground-breaking move by Aon which some have seen as a threat to traditional Lloyd’s players. The agreement between Aon and Berkshire created the first sidecar of its kind in the industry bringing new capital to the Lloyd’s market and enabling Aon’s retail clients at Lloyd’s to access Berkshire Hathaway backed capacity.

The facility operates almost like a quota share agreement between the broker and reinsurer and will see Warren Buffett’s reinsurer take as much as a 7.5% share of all of Aon’s subscription business running through the Lloyd’s insurance market. As we wrote in our article on the initiative when it first launched, the sidecar style deal is said to involve Aon brokered business with a retail premium in excess of $2.5 billion.

Greg Case, President and CEO of Aon plc, commented that the broker has been driving forwards initiatives to better match client needs with insurer appetites for risk.

These initiatives are sensible at this time and an ability to accurately match clients with the right sources of capacity is something which is becoming increasingly important with the growing contribution of third-party capital in the reinsurance market.

Case said that the Berkshire Hathaway sidecar facility agreement is an example of this, helping Aon’s clients to efficiently access a new and highly rated source of capacity. He commented; “Clients are expressing considerable interest in this facility, especially in traditionally capacity-challenged sectors, as a way to augment capacity for products within those sectors.”

As the earnings call moved on to questions from the analysts taking part, the subject of the Berkshire sidecar at Lloyd’s was raised again in two questions asking whether Aon feared any backlash from Lloyd’s syndicates or Lloyd’s participants who may feel squeezed out by the deal.

Greg Case said that Aon sees the agreement and sidecar facility as a client solution, first and foremost, bringing AA+ rated capacity into the Lloyd’s market in a manner never seen before. Case said that the client reaction has been positive, adding that for clients in an area where capital is perhaps constrained this is a new source of capacity which wasn’t there before. The facility is designed to be focused on client needs and maximising client benefits, he said.

Case said that Aon believe that the facility will help to bring positive momentum into the Lloyd’s marketplace overall, adding that Lloyd’s is a very important partner for Aon and so they will be continuing to discuss it with them and work with them to serve clients. However he stressed that at its core this facility is a truly client-focused effort and its beginning to play out like that.

Case explained to the next analysts question that as a client focused initiative and with Lloyd’s also being very client-service focused, Aon see the Berkshire Hathaway sidecar at Lloyd’s as a net positive overall. He continued to say that Aon are likely the largest single partner of the Lloyd’s market, accounting for roughly 22% to 23% of Lloyd’s business overall, but that with this initiative Aon would be remaining focused on delivering client benefit.

It’s not surprising that Aon see this facility as a positive for the Lloyd’s market given their strong position. For Aon clients it is certainly positive as it brings new capacity to a market that is sometimes in need of more diversified sources of capital.

For some other Lloyd’s players there is no doubt that this will be seen as a negative, but as third-party capital such as in Nephila Capitals move into Lloyd’s, and large rated sources of capacity like Berkshire Hathaway, both begin to play larger roles in the Lloyd’s marketplace some of the incumbents will need to adapt and play to their strengths.

Lloyd’s management team recently commented on the Berkshire deal in response to questions we asked on the markets annual results conference call. Lloyd’s said that it sees it as a complement that Berkshire Hathaway want to participate so strongly in, and back, the Lloyd’s underwriting market. The panelists also commented that Aon intend to use the Berkshire deal to bring incremental business into Lloyd’s, rather than purely seeing business exit the market, which has been one of the concerns raised.

An initiative as large as the Aon – Berkshire Hathaway sidecar facility at Lloyd’s was always going to be controversial and no doubt we won’t have heard the last of the concerns.

You can access the full earnings call transcript via the Aon website.