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Aergo Capital Limited incorporating Safair Insurance Report March 2010

A need for change





Aergo Capital Limited incorporating Safair (Pty) Limited

Contents: Executive summary

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Local RSA insurance arrangements

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Section (8) (2) (d) application 1. General Risk SA 2. Marsh South Africa 3. Regent Insurance What do we recommend? Our service team solution

International insurance arrangements – the HSBC proposition

1. Aergo/Safair – insurance market re launch to bring back the ‘sparkle’ Market re-launch 2. GH Insurance Services Limited 3. Chartis Aviation – securing your future relationship 4. War Quotes –‘hot spots’ 5. Negligent Entrustment 6. Review of Evidence of Cover documents 7. Safair maintenance facility – majority owned by 1 Time 8. Terms of business agreement (TOBA)

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Proposed time line for change

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Proposed remuneration

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A final word

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Appendices

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EXECUTIVE SUMMARY This report is prepared in response to a request from Aergo Capital Limited incorporating Safair (PTY) Limited; hereafter refer to as “Aergo”.

During the HSBC – Aergo, Aviation Seminar held in RSA on 6th February 2010, Mr Derik Smith and Mr Christo Kok outlined the fleet composition and usage of both the operated (Safair) and dry leased fleet (Aergo); as well as providing a detailed overview of the current Aergo business model and future ambitions. The Aergo insurance programme – both locally in South Africa and internationally – was also discussed in detail. This report will identify and comment on the various local South African insurance options as well as demonstrating the advantages of appointing HSBC Insurance Brokers Limited; hereafter referred to as “HSBC”. It was also agreed that HSBC should conduct a formal coverage review for Aergo – across all insurance lines. The relevant Evidence of Cover documents have been provided by Aergo under a Confidentiality and Non Disclosure Agreement dated 19 Feb 2010. In 2009 Aergo/Safair re-branded using an innovative Dublin based marketing company. The successful result presented you as a modern, innovative and uniquely progressive airline/ lessor. It was agreed that this exciting and positive message should be communicated to the world wide insurance market, in order to re-launch the Aergo/Safair brand and give Safair, specifically, back its distinctive ‘sparkle’.

Aergo identified insurance as their fourth largest cost. The HSBC team appreciate the significance of this statement – and would approach every insurance renewal negotiation with this foremost in mind – we will never loose sight of the significance of insurance costs within your costs structure.

HSBC Group have entered in to a global insurance partnership with Marsh Inc. Part of this deal involves the sale of HSBC Insurance Brokers to Marsh. Subject to due diligence and regulatory approval, it is expected that the sale will complete on the 31 March 2010. The integration of the HSBC aviation team in to Marsh Aviation will instantly give us unrivalled market power and influence; as well as access to the best intelligence and resources of any insurance broker world wide. We believe the above presents Aergo and HSBC with a unique opportunity to decisively take advantage of the energy surrounding this market changing deal. Thereby establishing a clear message with your insurers. That Aergo/Safair are not satisfied with the ‘status quo’ and are effecting strategic change by appointing HSBC/Marsh to manage their aviation programme with immediate effect.

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LOCAL RSA INSURANCE ARRANGEMENTS The ‘new’ Financial Services Board Directive 149.A.ii (ST), part of The Short-term Insurance Act 1988, came into force effective 1 January 2010. Application for approval to place insurance with underwriters other than South African short term insurers and/or Lloyd’s underwriters in terms of section (8) (2) (d) also came into force for usage on this date Section (8) (2) (d) application

Shaun Scanderling – Service Manager

The prescriptive nature of the requirements (and penalties applicable to those who fail to complete the application form correctly and within the required time deadline), are such that we recommend Aergo uses a local insurance professional to navigate though this process thereby ensuring full compliance.

Graeme Grifiths – Support Service Manager

We include the following within this report for your information: Appendix A – Financial Services Board Directive 149.A.ii (ST) Appendix B – Section (8) (2) (d) Application for approval

Mike Dickinson – GRSA, Managing Director Shaun Scanderling would propose to visit Safair’s Bonero Park offices weekly for client service meetings and at short notice depending on your specific ongoing needs. For the avoidance of doubt the (proposed) insurance chain would operate as follows:

Aergo operates in a fast moving global environment and needs a responsive and dedicated local insurance service solution. We have identified the following three options for your consideration: 1. General Risk SA GRSA is a wholly owned subsidiary of Super Group and operates through five distinct business units – one being Aviation. The GRSA Aviation Unit is fully compliant with the required RSA insurance authorities (FSB) and act as the juristic Aviation Underwriting Agency for Chartis Global Aviation. Martin Stevens personally instigated the formation of this aviation underwriting agency agreement with GRSA (Mike Dickinson). The focus of GRSA’s aviation service would be to act as your local administrator (appointed by Aergo) to manage and service your local RSA insurance needs/requirements. Although not an insurance company, they would in effect take over the servicing/administrative role currently performed by Regent Insurance. The dedicated GRSA aviation team that would look after you would consist of:

As part of Shaun Scanderlings service manager role he would co-ordinate the following activities on behalf of Aergo and HSBC: • Arrange the Annual Aviation Seminar (including venue, accommodation, meals, sundries etc) • Organise, in conjunction with HSBC, the annual London renewal visit • Collate fleet status reports for insurers • Prepare the final adjustment information (additions/ deletions/lay ups/monthly spares values at risk) • Special insurance/risk projects as required from time to time Although GRSA Aviation would primarily act as your aviation insurance administrator, they would also be able to provide guidance and act as a conduit for alternative general insurance quotations via Hollard Insurance (Simon Gootboom). GRSA are also keen to give continuity to the historical ‘special domestic type cover’ that Mike Dickinson facilitated during his time at Regent. Additionally they have also intimated that they would

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consider investing a proportion of their fee (circa R100,000) to cater for the excesses, small personal claims, non standard losses etc that arise from time to time as part of the Safair Executive Insurance Programme.

3. Regent Insurance It was acknowledged that Aergo are no longer ‘tied in’ to Regent as part of a wider Imperial agreement. Whilst you felt that Regent provided a useful (adequate) service for your general insurances requirements, it was clear that their aviation service levels were fundamentally inadequate.

2. Marsh South Africa This local broking solution would offer three distinct possibilities:

Given the above, two obvious possibilities present themselves for consideration:

(A) Chartis Global ‘non aviation’ Programme Use Marsh SA to access the Chartis Global Network for quotes across all general insurance classes, as part of a holistic global Chartis Programme

(i) Retain Regent to front for the aviation programme and provide the general insurance services – but – get a formal undertaking from them where if they fail to meet certain prescribed service levels their fee is systematically reduced.

Benefit = given the excellent aviation relationship

between Chartis/Aergo this should produce a positive approach by other Chartis divisions – as well as allowing Chartis Aviation to be seen to be ‘cross selling’ internally. Which in turn should further strengthen the existing corporate Aergo/Chartis relationship; possibly resulting in more competitive aviation pricing. (B) Local RSA general insurance programme – Mash SA to source local and/or international quotations as required.

Benefit = Marsh SA is a leading broker in South Africa

and also has access to the Marsh global network. So all possible local options as well as all possible international options would be explored and presented to Aergo. It may transpire that a mixture of Chartis policies and various others offer the best overall solution.

Or (ii) Retain Regent for the general insurance only and terminate their aviation appointment

Benefit = if Regent agree to continue with Aergo’s

general insurance arrangements on a stand alone basis this allows continuity and frees you to arrange the aviation programme to suit your needs. A possible re-appointment on the aviation can also be used as a ‘carrot’ to maintain their general service levels and enthusiasm.

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Multi-leverage Local markets = Competition and lower pricing


What do we recommend? 1.

GRSA be appointed to administer Aergo’s local aviation service requirements and deal with the Financial Services Board Directive 149.A.ii (ST) which highlights the changes to the process of dealing with applications for approval to place insurance with underwriters other than South African short term insurers and/or Lloyd’s underwriters in terms of section(8) (2) (d) of the Short-term Insurance Act, 1988. Whilst it is technically possible for you to apply for section (8) (2) (d) approval yourself, we recommend you use a local insurance professional to manage this for you. This will save management time and provide a buffer to ensure that no penalties for incorrect applications are raised against you directly.

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Marsh South Africa be engaged to investigate and quote on the basis ofoptions (A) and (B) identified above Regent be de-appointed as Aergo’s aviation fronting company and invited to continue to compete for your general insurance requirements

Direct placement of insurance business offshore by insureds Where no intermediary is involved The SA Reserve Bank (“SARB”), in terms of the exchange control regulations, must approve the direct placement of insurance cover (not through an intermediary) with offshore insurers. The SARB and its authorised dealers refer these applpications to the registrar for a recommendation. The insured must also confirm that he is aware that the foreign insurer does not have assets available in SA to cover its liabilities. SA subsidiaries of international groups, who are required to participate in the insurance programme of the international group, must provide proof of such participation, in which case they will not be required to canvass the local market for placement of the business. All other applications must be accompanies by a response from the local market or a satisfactory reason for the local market not being canvassed.

Our service team solution Even with these recommendations made, we still advise that Aergo should retain the right to deal directly with HSBC/Marsh London on any aviation matters which require specialist advice or which are time sensitive i.e. hull war ‘hot spot’ quotations.

Shaun Scanderling Graeme Grifiths Mike Dickinson

Michael Moran Peter Mills Adrian Acres Graham Hersey Simon Bredin

Hollard Insurance Simon Grootboom

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INTERNATIONAL INSURANCE ARRANGEMENTS During the recent aviation seminar it was agreed that HSBC would include the following eight issues in this report. We proppose that HSBC/Marsh be appointed immediately to allow swift action on these matters

1 Aergo/Safair – insurance market re launch to bring back the ‘sparkle’ Whilst Aergo have continued to adopt a highly professional and disciplined approach to aviation insurance buying – always involving their key executives at renewal – the presentation process to insurers arranged by the London broker has become routine, pedestrian and stale.“Safair has lost it’s sparkle”. This needs to change.

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Aergo has historically captured the insurance markets attention and imagination – due to the unique and highly specialised work that they do – and their acknowledged world class operational standards. The most senior underwriters in the market have personally been ‘brought in’ to the Aergo story and given their individual attention to the business. Crawley Warren began this ‘Safair story’ in the 1990’s and sowed the seeds for Aergo to be recognised as a benchmark for operational excellence in the Hercules and relief arena, as well as bespoke ACMI contracts.

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Examples demonstrating why Aergo deserved their reputation and enjoyed the advantageous support of leading aviation insurers including Chartis, Global Aviation Underwriting Managers and Munich Re include. • East Timor/Darwin Hercules incident – thanks to the pro active intervention of Mr Derik Smith and Mr Wimpie Davidson in negotiating a lower repair price from Singapore Technologies, insurers saved USD 500,000 on the repair costs. Sharing this saving 50/50 with Safair • Air Liberty bankruptcy – the efforts of Mr Derik Smith in providing certain strategic information and preparing a detailed report for insurers, allowed Safair to collect extra (non standard) claims monies which would not normally be collectable.

The appointment of the HSBC team will immediately inject focus, direction, animation and passion in to the Aergo insurance account –

thereby winning back the interest of the insurance market and bringing back the sparkle! The key word here is passion. Aergo needs to be presented to insurers by a broking team who not only understands the company and it’s people, but who can bring the uniqueness and excitement of the business to life. This will ultimately translate in to superior long term pricing from insurers. We use this opportunity to raise the issue of a revitalised, fresh insurance presentational approach for 2010 – which was a specifically raised by Chisto Kok and Derik Smith. This makes complete sense. The benefits are obvious and will achieve the desired results of re-awakening the markets interest in the ‘Aergo story’.

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2 GH Insurance Services Limited We have met with Christopher McGowan on several occasions and have a well balanced relationship with him and his company. Clearly, the involvement of GH Insurance Services as part of the aviation broking process is a decision for Aergo. With this said, HSBC are well positioned to support Aergo with the management and integration of this potential new broking partner. Thereby ensuring the smooth running of the transactional and servicing aspects of the Aergo account – without the need for excessive Aergo management time to be expended.

3 Chartis Aviation – securing your future relationship


Martin Stevens, Global Head of Chartis Aviation,

has personally rated and managed the Aergo account on behalf of Chartis for over eight years. This has put Aergo in a uniquely advantageous position. Not only have you enjoyed the prestige of having a principal aviation insurer leading your account, but you have also had one of the world’s foremost aviation insurance professionals personally endorsing your business – year after year. This has undoubtedly translated in to lower headline and vertical market pricing. Whilst your relationship with Martin Stevens remains strategically vital – it’s important that Aergo (and your broker) look forward and begin to plan an equally beneficial relationship with Chartis in the future. As discussed, the best way to achieve this objective is to bring Martin Stevens in to the process; working closely with him to build a relationship with his eventual successor.

Martin Stevens 2010

Andrew Trundle has been identified as the most likely

candidate to succeed Martin Stevens. It’s important to understand that Andrew Trundle was in fact the underwriter at Chartis who first quoted against RWS Syndicate 960 and won the account for Chartis some years ago. So engaging with him is more of a re-engaging process as opposed to a fresh start. In addition to the relationship with Martin Stevens, you also have a qualitative long term relationship with

Robert Sage. This offers a useful alternative approach

difficult/sensitive situations that will inevitably arise from time to time. So it’s important that this relationship continues to be valued, managed and indeed developed.

Andrew Trundle Robert Sage

2013

We appreciate your concerns that this is a sensitive matter. But can assure you that working closely together we will manage the process carefully towards a positive outcome – that positions Aergo for a successful insurance future.

4 War Quotes –‘hot spots’ During the seminar it became evident that Safair were unhappy with the additional war premiums being applied to their Afghanistan operations – a figure of USD 10,000 per month was mentioned. Direct action/intervention by Mr Derik Smith during the renewal negotiations with Martin Stevens resulted in this being reduced to circa USD 900 per month. Whilst this is an excellent outcome for Safair, the following questions must be asked. Why were your brokers not alert to this high cost and pro actively negotiating to reduce it? For how long have you been over paying? Why are you employing a broker if you have to negotiate ‘hot spot’ additional premium discounts yourself? The 2006 Heston (Afghanistan) contract example was also raised during the seminar. This involved a Hercules and a B737 and is a good example of how a difficult war premium situation should be managed. There was a dispute between Safair and Heston over an additional war premium invoice of circa USD 1.2 million. Ultimately this bad debt situation was resolved to Safairs benefit. As the USD 1.2 million was

negotiated down to circa USD 700,000 through articulate and determined negotiations with AIG/Wellington Syndicate (saving Safair USD500,000).

We are fully aware of how critical insurance pricing is to Safair when competing for contracts in the aid/relief market. If appointed we would not

allow ‘pricing drift’ to occur; instead we would constantly be challenging the market tariff rates, seeking to negotiate more competitive pricing for you relative to your competitors. We would be alert to pricing discount opportunities involving: • Hull war Market movements – structural • Actual exposure reductions • Perceived exposure reductions • Volume discounts • New safety/security information Safair needs to be confident that their appointed broker will remain alert to war risk pricing and not have to rely on their own endeavours – the

HSBC team will always challenge the market on your behalf.

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5 Negligent Entrustment This issue was discussed during the aviation seminar and as an experienced aircraft lessor, Aergo are well informed of their exposure here. With the above said, we confirm the availability of Adrian Acres, our ex British Airways Risk and Insurance Manager, to provide professional advice to Aergo as and when it may be required. You may also find it informative to know that Adrian Acres acts as the advisor to HSBC Bank plc on the insurance aspects of their aircraft financing transactions – involving 350+ aircraft.

6 Review of Evidence of Cover documents Based on the information provided, we make the following comments/observations.

Hull/Liability policy • Whilst the policy currently provides Contingent Hull and Liability on the aircraft that are “leased out” there are a couple of additional coverages that are very important to a lessor that could be included: a) Loss of Technical Records. This would pay for the cost of replacing the technical records if they are destroyed or not return with the aircraft. Limits of around USD2,000,000 are available. b) Repossession Expenses. This would pay the legal expenses incurred in trying to repossess an aircraft. Limits of around USD2,500,000 are available. • There is no Hull Total Loss Only cover. It is possible to cover approximately 10% of the Agreed Value as a Total Loss Only amount that would pay automatically in the event that the aircraft suffers a total loss. There are two benefits to having this cover: a) It provides an immediate source of cash that can be used to pay for things such as chartering/leasing a temporary aircraft to fulfil a contract, loss of contract, the cost of crew salaries even when the crew has no aircraft to fly, and crew repositioning costs. b) It can help save premium cost as the premium applicable to the TLO amount is usually only 80% of the “All Risks” rate. The saving can be made by splitting the current Agreed Value 90% “All Risks” and 10% “TLO”. Whilst on the subject of Total Loss we can see no evidence of the point at which a total loss can be declared, although this may be contained in the policy wording. We would expect a loss that exceeds 75% repair cost to be declared a total loss.

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These comments apply equally to the Hull War Risk policy. • Lay-Ups are included per AVN26A but this does not allow taxying of the aircraft as both flight and taxying cover are suspended. The clause could be amended to include taxying. • There is a provision to allow the spares deductible to apply to any aircraft that has no engines fitted. It is not clear if these aircraft also enjoy the spares premium rate. • There is no mention of Fly-Away Spares kits or Engineers Tools in the Spares section. Both of these could be included and the deductible would be USD1,000 for Fly-Away and USD100 for tools. • The is no mention of cover for Crew Baggage/Personal Effects. These could be included for a limit of USD10,000 and with a deductibles of USD100. • There is currently a provision to automatically increase the Agree Value in the event that a leased engine is attached. We would propose that this be amended to also apply to “owned” engines that are attached to a leased aircraft.

Hull War Risks • The Supplementary Payments Clause does not match that of the Hull All Risks Policy.

Hull Deductible • It is not possible to tell without seeing the policy wording if cover for hot/hung starts is included.

Excess War Liability • There is no provision for the policy to “drop-down” to cover Passenger Liability in the event that AVN52 cover is cancelled under the primary liability policy.


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b. Continue to provide coverage under the Aergo programme. This option has two benefits

Safair maintenance facility – majority owned by 1 Time

• Aergo retain control ofthe quality of coverage – insurers and liability limits

Due to certain complications surrounding the ‘quality of cover’ arising at renewal, it was agreed that coverage for this jointly owned maintenance operation would remain under the Aergo insurance programme. From discussions during the seminar, this was clearly not an ideal ‘fix’ from an Aergo perspective. Having considered the matter further, we propose two options for your consideration:

a. Enforce the purchase of a separate insurance policy on

1 Time subject to express conditions on the quality of insurers to be used and liability limit to be purchased. HSBC can assist Aergo with appropriate guidance/advice here. Premium costs would then be split proportionately to ownership.

• Competitive pricing can be achieved and split strategically to benefit Aergo i.e. the premium allocation within the Aergo Hull, Spares & Liability Programme can be adjusted to achieve an advantage for Aergo (but still provide a competitivey priced product for 1 time)

8 Terms of Business for Clients (TOBA) We include a copy of our Terms of Business for Clients (TOBA) in Appendix C

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PROPOSED TIME LINE FOR CHANGE We advocate the Aergo appoints HSBC/Marsh to take over your insurance programme in accordance with the the below time line. The appointment of HSBC/Marsh will been seen as decisive; delivering the numerous benefits identified throughout this report – as well as harnessing the ‘energy’ surrounding the two companies as they merge – all for the benefit of Aergo.

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Note: (1) HSBC will provide Broker of Appointment letter. (2) The Above deals with London, but not the RSA arrangements. We would recommend a face to face meeting with you in either RSA or the UK to strategise on the best course of action.

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A final word Aergo Capital Limited incorporating Safair is a truly unique organisation within the aviation industry. It enjoys a proud insurance heritage having delivered many millions of US dollars of positive premium flow to the global aviation insurance market.

There remains a core of senior aviation insurers who have truly ‘bought in to’ the Aergo business model and therefore support you willingly each insurance renewal. However, this privileged situation will not last forever. New relationships need to embraced – succession plans must be put in motion and your brand perception has to be carefully managed as your business model and ownership transforms. To position optimally for the future, you must work with a broking team who understands your unique business – it’s people – it’s culture and it’s extraordinary need to adapt and react swiftly to every changing times. The HSBC team lead by Michael Moran and Peter Mills have the knowledge, professionalism and most importantly the passion to deliver for Aergo. We would be proud to act for your company.

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Š Copyright HSBC Insurance Brokers Limited 2010. All rights reserved HSBC Insurance is a trading name used worldwide by the insurance businesses of the HSBC Group, including HSBC Insurance Brokers Limited, which has issued this brochure. HSBC Insurance Brokers Limited is a Lloyd’s broker and is authorised and regulated by the Financial Services Authority, Firm reference number 310240. Registered in England number 149013. Registered Office: 8 Canada Square, London E14 5HQ Produced by Aura Design Limited, London 03/10 AD1781


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