Two important pieces of insurance-linked securities market merger and acquisitions (M&A) news came to light last week, both of which provide signals for those watching of the health of the sector and investor appetite. But there is also a signal of the desire for scale, to be competitive in offering a broad suite of risk transfer and reinsurance investment solutions.
First, the news from Tuesday 23rd July that the Credit Suisse Insurance Linked Strategies management team led by Niklaus Hilti is buying the business out from owner UBS.
While this suggests UBS does not see the ILS management business as a core piece of its own future offering, it demonstrates the support the buy-out team has from its investor base and the opportunity they see to sustain that business and grow in the currently attractive reset ILS and reinsurance market environment.
Secondly, the news from Thursday 25th July that specialistILS managers Twelve Capital and Securis Investment Partners are set to merge, creating a much larger firm with close to $8 billion in assets.
This represents a recognition of the broader opportunity set, across ILS instruments and reinsurance investment opportunities. As twoILS managers with compatible cultures and that have been investing for future growth, see a chance to solidify their positions and propel their businesses up the league tables together, believing that independence, expertise, advanced systems and importantly scale may be needed to effectively address the opportunities they see.
Together, we believe these are strong signals for the ILS market and could trigger a renewed wave of interest in ILS managers as acquisition targets, or in the ILS sector itself as a place to launch start-up ventures, within or linked to larger entities, or standalone with full independence.
The signals from these news stories are strong both for the potential for additional consolidation within the ILS sector, as well as for interest from outside entities to increase, such as from asset managers looking to acquire or launch new and specialized alternatives divisions, or from private equity players and investors looking for new management level holdings in investment markets they see as representing an attractive growth opportunity at this time.
We’ve reported numerous times that capital is again increasingly interested in reinsurance right now. This interest keeps growing, from our vantage point, but perhaps more so in ways of operating that are seen as asset manager oriented, than in traditional reinsurance business models.
Since these news stories broke, we’ve already fielded a number of enquires from interested investment groups that have been watching the ILS market closely over the last few years. Conversations reflect that interest in the sector remains strong, but how best to get into it and do so meaningfully, is still the question we’re hearing most.
Holding company stakes are seen as attractive right now and this is something that has been experienced over the last year or more, across a much broader swathe of the alternative investment markets.
Expertise, connections and the ability to originate investment opportunities are seen as key, while teams that have made the effort to modernize and develop their own systems and tools for measuring and managing portfolios and risk are deemed particularly attractive, it seems to us.
How and whether this interest results in more transactions, or new entrants to the catastrophe bond and insurance-linked securities (ILS)market, remains to be seen. There is, of course, a very current question of timing, given the Atlantic hurricane season.
As ever, scale, in terms of assets under management (AUM),comes into focus when M&A activity resurges in the ILS market, or any sector of asset management.
In ILS, there is still a perfectly viable route to building an attractive investment management business without being in the multi-billion dollar AUM range. There are plenty of examples of businesses at, to pick a number, sub-$3 billion in AUM, who run very successful ILS management businesses today and we don’t expect this opportunity or size of market participant to go away.
But, with catastrophe bond fund strategies having faced pressure on fees in recent years, resulting in strategies with much lower fee levels than we would have seen five or more years ago, for larger businesses focused on cat bonds scale in assets can become more important.
For the diversified ILS managers, also offering private ILSand collateralized reinsurance or retrocession strategies, scale is perhaps more important from an operational standpoint, if they want to develop a meaningful position in the reinsurance market.
To be a meaningful player, the ability to put down large lines at reinsurance renewals is important. Which can be a way to strengthen partnerships with cedents, get onto the programs of the largest and often best performing companies, and to compete with the biggest traditional reinsurers.
So, yes, scale can certainly be a driver for M&A, although it isn’t the only one and we’d say likely isn’t the most important driver in either of these two cases seen last week.
But, to offer a broadly diversified investment offering in cat bonds, ILS and reinsurance, backed by all the expertise and advanced systems institutional investors often expect to see, it’s easy to see why it’s definitely an important consideration.
For us though, the most important signals from these two deals are of the health of the market, the attraction investors and capital have to it at this time, as well as for the recognized permanence of and increasingly critical role of ILS capital in the reinsurance market.
That will attract attention, which ultimately is good for the market.
While, at the same time, refreshed or renewed approaches to doing ILS business, as well as enlarged operations, increasingly specialized back-offices, and ultimately more meaningful and long-lasting footprints in the market, are good for everyone in it and bode well for ILS as an asset class going forwards.
Finally, it would be remiss to not also mention another piece of news, this time from two weeks ago, that also speaks to the health of the market opportunity in third-party reinsurance capital and ILS.
Here we’re referring to Everest Group launching Mt. LoganCapital Management, Ltd. (MLCM), which was announced on Thursday July 18th.
While there isn’t an M&A transaction behind this news, it is a further reflection that major global insurance and reinsurance companies recognize the important role third-party capital management and ILScan play within their own operations.
ILS has cemented its role as a permanent, efficient, flexible and supportive third-party funded balance-sheet for the insurance and reinsurance industry.
With interest in the asset class high and rising, we look forward to watching as new businesses form or combine, and differentiated ILS investment management strategies emerge.
We don’t expect a mass-wave of consolidation, but we do expect a select additional deal or two over the next couple of years, as well as some startup ventures.
Any unlocking of the reinsurance market chain, or significant democratization of the way risk and capital are matched along it, could stimulate faster ILS market expansion and that would be a driver for even more startups and larger asset managers to enter, we believe.
