The appetite of the Canada Pension Plan Investment Board (CPPIB) to invest in insurance and reinsurance linked assets remains strong, with reports suggesting the $287.3 billion pension fund is in talks to acquire AIG’s Lloyd’s of London assets.
Insurance giant AIG has been selling some of its assets in insurance and reinsurance markets in recent months, as part of its mission to satisfy its own investors by selling lower return legacy units, with the firms stake in Lloyd’s of London insurer Ascot the latest to be slated for sale.
The Wall Street Journal first reported yesterday that AIG’s stake in Ascot is involved in a sales process, with the Canada Pension Plan Investment Board (CPPIB) said to be first in the queue to snap up the London specialty insurance and reinsurance operations.
According to the WSJ, Canada’s largest pension fund is deep in talks to acquire the AIG stake in Ascot and a related Bermuda reinsurance company, which will no doubt be AIG-Ascot Re where Ascot Underwriting Bermuda underwrites business on behalf of American International Reinsurance Company Ltd.
At Lloyd’s Ascot underwrites a broad range of specialty insurance classes, from marine, to energy and terrorism, plus treaty and casualty reinsurance. The Ascot group also includes operations in Asia, Houston Texas and China, although it is not clear whether the whole Ascot business is in play, or simply AIG’s investment in it.
AIG funds back the Lloyd’s syndicate, providing a significant amount of Ascot’s funds at Lloyd’s we understand, although it is a minority stake holder in the firm itself. Additionally AIG’s backing of the Bermuda reinsurance unit also means that even if it is the stake, rather than the whole Ascot business, that CPPIB is looking at, there will still be opportunities to put capital directly to work in underwriting risk.
The Insurance Insider suggested that the entire Ascot business is for sale and the management may be looking to cash out at this time as well, although it’s not yet clear whether the CPPIB is looking at the whole business or just AIG’s stake. If a sale process for the entire business is underway there will likely be other bidders.
It’s the latest sign that pension funds are not just attracted to directly backing insurance and reinsurance risks through ILS fund and catastrophe bond investments, but are also increasingly attracted to investing in whole re/insurance businesses.
This despite the point in the cycle at which the market finds itself currently, perhaps demonstrating that even an equity or ownership stake in re/insurance is considered diversifying to a degree for pension funds. As well as the fact that capital flows through re/insurance premiums likely match well with a pensions other sources of liability and return.
The Canada Pension Plan acquired 100% of the shares of life insurance and reinsurance firm Wilton Re Holdings Limited for $1.8 billion in March 2014, and then made a 10% investment in specialist legacy insurance and reinsurance management firm Enstar Group in June 2015.
Large pension funds and sovereign wealth funds continue to target the insurance and reinsurance sector as a source of stable long-term returns, as well as diversification for their overall portfolios.
Recent financial market conditions have pushed pension funds to look to new areas of private equity and also direct investment in re/insurance through insurance-linked securities (ILS), with the sector an attractive option despite the softened market environment.
As large pension funds like the CPPIB continue to focus on re/insurance, it will result in more capital being made available to insurance and reinsurance firms, either through direct investment or third-party capital vehicles.
The question is whether direct investment in re/insurance companies, such as AIG’s Ascot business at Lloyd’s is really as attractive as direct investment into risk through insurance-linked securities (ILS) for pension funds.
If the ILS market were much larger and opportunities existed for investors like the CPPIB to deploy much more capital into the space, to gain direct returns from insurance risk, would that be considered a more attractive option compared to taking on the corporate risks associated with investing into a business instead?
The CPPIB has shown a liking for ILS and the direct returns of insurance underwriting before. Perhaps it is treating its investments in re/insurance businesses in a similar way, as having a lower correlation with broader financial markets than other areas of its equity portfolio.
But investing in a business will always have a higher correlation than investing in insurance risk. Hence if the ILS market could supply the opportunities it stands to reason that more of this pension fund attraction to the re/insurance business would be directed its way.