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Benfield warning likely to focus attention on Corporate Risks

Benfield Group’s unexpected profits warning today (16 October) is likely to focus attention on the firm’s new Corporate Risk division which has found the going tougher than expected.

Fuelled by the firm’s strong US performance in the post-Katrina rating environment, Benfield’s share price has been strong all year reaching a high of 394.5p in May despite some concerns over the firm’s strategy of building a primary operation.

Benfield Corporate Risks – headed by the former Marsh executive John Lapsley – was launched in early 2005 with the remit of focusing on areas such as power and energy.

However, last month the firm admitted the division would no longer break-even by year-end as initially planned. Although revenues in the unit doubled from £3.7mn to £7.6mn, net costs climbed to £17mn “reflecting the growth of the business which now comprises 168 staff operating from 11 offices worldwide”.

Ironically, the hurricanes from last year which have created so many opportunities for Benfield’s reinsurance operations, were cited by the firm as the reason why growth in Corporate Risks has been lower than expected.

“The severe impact of last year’s hurricane losses on the pricing of and the capacity for Gulf of Mexico energy risks has led to less movement of business between brokers and in some cases has discouraged buyers from entering the market. This has curtailed short-term growth opportunities in this key target market and slowed anticipated revenue generation,” said the broker. 

Keefe, Bruyette & Woods Ltd analyst William Hawkins said the profits warning highlights a concern over the firm’s growth strategy. “There is no direct connection between this issue and the creation of Benfield Corporate Risks. However, we have long warned that Benfield's expansion strategy was not without risks and that the market was paying too high a multiple for what may be a tougher and higher risk strategy that superficially seemed the case last year. We believe today's announcement supports this view,” he said today.

KBW reduced its 2007 earnings estimate by 11 percent to £108mn following today’s announcement. “This reduction is slightly more than the £10mn expected by the company in 2006 from today's announcement as we have also factored in a slightly slower take-off of Benfield Corporate Risks,” explained the investment bank.

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