Changes at Global Aerospace – Aviva Exits, R&SA Decreases and Converium Ups Stake

November 29, 2002

Global Aerospace Underwriting Managers (GAUM), the world’s largest managing agent in the aviation market, is undergoing major changes. Aviva and Royal & Sun Alliance both announced that they will drastically reduce their participation, while Zurich-based Converium will up its stake from 9 percent to 25 percent.

The aviation insurance market is viewed as extremely volatile, over the last 10 years many companies have run up huge losses in the sector. Aviva (ex-CGNU) has already mapped out a strategy of reducing its P/C operations, except in personal lines, in favor of life and pension products, where it sees less risk. It plans to sell its entire 50 percent stake in GAUM and will withdraw all of its 28 percent underwriting capacity in the syndicate pool GAUM manages.

R&SA plans to cut its stake in GAUM from 50 percent to 10.1 percent, and will reduce its underwriting capacity to 9.25 percent. Both companies stand to make a profit this year from their underwriting participation in GAUM, but will lose the net premium income next year. According to a report from Reuters News Agency R&SA will give up around £110 million ($172 million) in premium, but will also free up around £45 million ($70.3 million) in capital.

Converium announced that it will take a take a 25 percent shareholding GAUM, and will provide a similar share of capacity to the pools managed by it, commencing January 1, 2003. The company said the move, which is still subject to regulatory approvals, has “further strengthened its long-term strategic position in the aviation and aerospace business.”

It views the investment, which it said is below US$ 45 million, “as an important step in its long-term strategy to be one of the top global leading reinsurance companies and to expand in Specialty Lines.”

The other two major shareholders in GAUM are Munich Re and Warren Buffett’s Berkshire Hathaway. There had been rumors, as there usually are whenever Buffett’s involved, that Berkshire might take over all of GAUM, but at least for 2003 they appear to have been unfounded.

In addition to the 25 percent capacity provided by GAUM’s three major share holders and R&SA’s remaining 9.25 percent, Tokio Marine and Fire provides 9 percent and Mitsui Sumitomo 6.75 percent.

Mario Montelatici, Converium Underwriting Manager & Head of the Global Center of Excellence Aviation & Space, indicated that “Converium’s 25%-stake in Global Aerospace and our increase of our share in the respective pools from 9% to 25% represent important developments for our aviation strategy. Global Aerospace is the leading underwriting agency, Converium one of the leading reinsurers: for me, this is the perfect fit.”

“Based on the very favorable terms and conditions in the aviation insurance and reinsurance market, I am convinced that this investment will result in a substantial improvement of the long-term profitability and the overall risk-return characteristics of Converium’s aviation book,” he added.

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