Expect more ILS-related M&A, more value-chain compression: Aon

by Artemis on September 11, 2018

The market should expect more mergers and acquisitions (M&) activity surrounding ILS funds or entities as re/insurers look to harness the capital markets, while at the same time efforts to bring the capital markets further along the value-chain are seen as “intelligent”, according to Aon executives.

Speaking at the Monte Carlo Reinsurance Rendezvous, senior leaders from the Aon Reinsurance Solutions and Aon Securities divisions spoke about the prospects for more ILS integration into the traditional business model of the re/insurance market.

Paul Schultz, CEO of Aon Securities, explained that, “The ILS managers have displayed a strong interest to develop relationships with other forms of distribution and we expect that to continue.

“We expect that expanding and continuing going forwards.”

He said that Aon has been having these conversations, about bringing alternative forms of capital into insurance and reinsurance business models, for years, but that the frequency of these discussions has increased.

“Really, this year in particular, as everyone is looking at the strategy to continue to have combined entities and provide more holistic solutions to their customers and clients,” Schultz continued.

“I think everyone’s looking at it from a client perspective, which is how do we harness the capacity or capital that’s available from different markets.

“How do we differentiate our solutions to our customers and clients and then, with that filter with that frame, really saying how do we devise a strategy that’s going to empower us to be able do that.”

This desire to harness the capital markets to deliver on efficiency benefits for the business itself, but perhaps more importantly on the product benefits and efficiencies for clients, is a key driver of market development in 2018 and expected to be so going forwards.

Recent examples of major M&A transactions have all had an ILS component and the tangible benefits of creating efficient access to the capital markets within either an insurance or reinsurance business are increasingly understood, leading Schultz to suggest we will see more ILS related or driven M&A.

He explained, “Some of that I think will involve more M&A around some type of underwriter, be that insurer or reinsurer, continuing to invest in M&A through broadening out their ILS or alternative capital capabilities.

“I would say the frequency or intensity of those discussions with our client base has just increased this year. Given what’s just happened with Markel and Nephila we actually see more of those types of transactions happening in the future.”

On the topic of the value chain and compressing it, in order to bring the ultimate capital further towards the original source of risk, Aon Reinsurance Solutions CEO Andy Marcell said that now most of the brokers reinsurance markets already have meaningful relationships with ILS capacity, so that needs to be acknowledged.

He added that, “In terms of the value-chain, whether it be Markel now with Nephila, who also have State National and Nephila have a partnership with an MGA, trying to go to some of the cat risk direct, that is an intelligent and smart thing to do.”

It seems Aon is expecting that we’ll see more of both of these market trends, of M&A related to or indeed driven by ILS and desire to open a conduit to the capital markets. As well as efforts to bring the capital markets further along the market value-chain, to enhance the margins achievable from catastrophe risks and perhaps in future other lines.

Both of these spell promise and opportunity for some, but perhaps a further ramping up of the pressures felt in the market for others.

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