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Aon sees reinsurance pedal backwards

As the major brokers reported their Q3 results Aon was left slightly on the back foot, defending the effect that its $1.4bn purchase of independent reinsurance broker Benfield in Q3 2008 had on organic revenue growth numbers.

All three global brokers cited the economic downturn and soft markets as reasons for the near universal declines in their direct operations, with the crucial North American market of particular concern.

Marsh unveiled a 2 percent decline in underlying revenue to $989mn, while Aon's organic global direct brokerage and fees were down a little further at 2.5 percent. Willis reported a 3 percent decline in organic revenues in North America, contrasting with a 3- point gain in its international operations.

Although there was cheer in 7 percent growth from Asia Pacific and 8 percent growth in Latin America, overall Marsh's international revenues were flat.

All three brokers pointed to continued falling premium rates in the property and casualty marketplace, continuing the trend seen throughout the year, with the US and Europe most to blame. The peer group collectively said that as a result of the global economic recession, demand for commercial insurance has moderated over the last year.

However, it was in the reinsurance segment that fortunes appeared to diverge, with Aon Benfield reporting a 4 percent fall in organic revenues, as its rivals at Guy Carpenter and Willis posted growth figures of 6 and 4 percent respectively.

Aon CEO Greg Case blamed "lumpy" comparison numbers for part of the apparently poor relative performance, explaining that Benfield had hitherto reported every six months and that bolting its numbers onto those of what was Aon Re were bound to throw up statistical anomalies. However, when questioned in a conference call, Case revealed that this effect could only account for 2 percentage points of lost revenue.

Case maintained that Aon Benfield was "becoming every bit, in fact more, of a platform we could have ever hoped for" and that on new business the unit was "winning more than we are losing" and that this was "more than offsetting the leakage at this point in time". However, he added that new treaty business growth of 2 percent with "slightly positive" pricing was "more than offset for us by higher cedent retentions".

"That's really what drove the decline more than anything else," he concluded.

Any woes at Aon Benfield were not shared at Guy Carpenter and Willis' Global unit, which combines Reinsurance with the Faber & Dumas wholesale and Global Specialties divisions.

Guy Carpenter shone in MMC's results and was understandably singled out for praise: "Any way you look at it, Guy Carpenter delivered superb performance this quarter," said MMC CFO Vanessa Wittman at the group's conference call. Wittman pointed to increased business retention rates - which have returned to historical highs despite an overall 2 percent cut in year to date expenses. The savings have also been achieved even after hiring big hitters such as Henry Keeling, Richard Booth and Chris McKeown in recent months.

Willis was also upbeat, reporting "high single-digit growth in reinsurance revenues". This was despite a gloomy market backdrop, in which the broker said that the benefit of rate increases in the reinsurance market and stabilisation in some specialty markets "has been more than offset by the continuing soft market in other sectors and the adverse impact of the weakened economic environment across the globe".

The markets reacted poorly to Aon's results, marking its shares down 6 percent on the day of their release. But Case could take some consolation that the market also took them as a cue to punish MMC with a 5 percent daily fall. Aon shares subsequently regained some lost ground but are yet to recover their pre-Q3 highs of $41.19, closing the first week of November still down 4.3 percent at $39.40. MMC has continued to languish over the same period, down 5.6 percent at $23.32.

Conversely Willis stock was up 4.3 percent over the same timeframe, perhaps proving that markets can be difficult to fathom at times, lumpiness or not.

How organic is organic?

"With regard to comparisons to Willis, look, these aren't GAAP numbers… and so it's hard for us to compare directly… We know they calculate organic growth very differently than we do, at least as we can determine from their footnotes. But you will have to be the judge on that." These were the words of Greg Case, Aon Corp CEO, speaking at his firm's Q3 investor conference call, as he responded to an analyst's question comparing Aon Benfield's (-4 percent) Q3 performance on reinsurance revenue generation to those at Willis (+4 percent).

With broker revenues constantly under the microscope and organic growth in particular the yardstick by which (re)insurance intermediaries are measured, any wrinkles in the definitions could be extremely important.

Organic growth (for which fellow reporter MMC prefers the label "underlying") is classically defined as revenues after the effect of acquisitions, disposals and currencies has been stripped out. So what does a delve into the small print of the Willis 10-Q reveal?

"Organic revenue growth excludes the impact of acquisitions and disposals and year over year movements in foreign exchange from revenue growth"

Incidentally, the Citi analyst's question did also mention Guy Carpenter in passing, but unfortunately the Aon call took place five days before MMC's Q3 results showed organic growth at its reinsurance arm roaring ahead by 6 percent.

As to the organic question, this looks like one for the accountants, as Willis' verbal definition is identical to everyone else's. Perhaps Case was referring to differences that may exist in the way Willis and its peers account for acquisitions, disposals and foreign exchange movements?

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