Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Alternative capital’s growth sparks re/insurance consolidation: Swiss Re


The growth of alternative, or third-party investor-sourced, reinsurance and insurance capital, is sparking consolidation and M&A in the market, and this trend is expected to continue as the influx of new capital continues, according to reinsurer Swiss Re.

In its latest sigma research report Swiss Re, one of the world’s largest reinsurance firms, highlights alternative capital as one of the driving forces behind recent and ongoing mergers and acquisitions activity.

M&A activity has increased over the last year, which Swiss Re believes is mainly due to changes in regulation, new distribution trends and the influence of a growing pool of alternative reinsurance and insurance-linked securities (ILS) capital.

M&A levels had previously peaked before the financial crisis, but soon tailed off as the impact to insurance and reinsurance markets waned. Now, M&A activity is back on the rise but the number of deals actually being completed remains well below levels seen back in 2007.

Swiss Re’s latest sigma report shows that in 2007 there were 674 completed M&A deals, while in 2014 there were just 489. The recent upswing in M&A activity, particularly among specialty insurers or reinsurers and insurance intermediaries is lifting levels again, but they have far to go to reach pre-crisis activity.

Largely, Swiss Re believes that the current upswing in consolidation is due to a squeeze on the middle-tier of insurers and reinsurers, as specialists are finding themselves squeezed by regulatory capital requirements and new competition from alternative reinsurance capital.

As a result Swiss Re highlights that many of the deals coming to the fore currently are defensive or strategic in nature and these are the deals featuring middle-tier players seeking to gain scale or diversification through M&A.

“The emergence of alternative risk-absorbing capacity from hedge funds, investment banks and pension funds has put downward pressure on prices in some property and casualty lines, prompting some specialist re/insurers in Bermuda and Lloyd’s to combine their operations to take on wider and emerging corporate risks and reduce operating costs,” Swiss Re explains.

Incumbent firms are responding to heightened competitive pressures, which for many have been amplified by the competition posed by ILS and alternative capital. This has ramped up the merger activity in specialty insurance and reinsurance markets, a trend expected to continue.

“What’s happening, is a squeezing out of the middle-tier specialist re/insurer,” commented Kurt Karl, Chief Economist at Swiss Re. “Some firms do not have the scale or the breadth of services to differentiate their offering from more commoditised reinsurance capacity. Going forward, we expect to continue to see a certain shakeout in the sector as companies join together in search of revenue and cost synergies.”

There have also been M&A deals completed to acquire expertise, distribution capabilities or geographical reach, something that is working both ways now as emerging market re/insurers look to gain global capabilities.

Swiss Re does not believe we are heading back to pre-crisis levels of M&A activity, in fact it does not believe it will become an industry wide trend either. However the reinsurer does believe that consolidation and M&A will remain a factor among specialist re/insurers, particularly while competition remains high and the influence of alternative capital and ILS remains strong.

“There will likely be a continuation of recent trends of increased M&A activity in certain segments as firms respond to cyclical and structural changes in the industry,” Swiss Re explained.

The inflow of alternative and ILS capital is destined to drive ongoing M&A activity, Swiss Re believes, saying; “The influx of alternative capital will continue to stimulate deals, especially if financial investors become active sellers as well as buyers.”

Incumbent players are likely to use M&A in an effort to boost their capacity, or increase their market reach, as well as to achieve cost savings and enhance efficiency, Swiss Re explained.

Interestingly, the M&A wave we see today, stimulated by alternative capital and ILS, is similar to one seen in the mid-2000’s, when the same factors also drove a desire to merge or acquire.

Swiss Re explained on the M&A wave in the mid-to-late 2000’s; “In particular, the adoption of new risk transfer techniques and products attracted alternative capital into insurance markets. This intensified competitive pressure and prompted some consolidation among insurers seeking increased scale and international diversification.”

The current wave of M&A coincides not just with growth of ILS and alternative capital, but also a particularly soft reinsurance market.

“During soft markets, capital is abundant and M & A activity tends to rise because declining rates and premiums make acquisitions an attractive alternative to organic growth,” Swiss Re said.

The impact of ILS and alternative capital has specifically “motivated defensive consolidation among specialist wholesale re/insurers in Bermuda and Lloyd’s of London, as these smaller re/insurers have sought to combine risk-bearing capacity to take on wider and emerging corporate risks and reduce costs through operational synergies,” Swiss Re continues.

As ILS grows, and perceived “permanent” sources of capital provided by alternative or institutional investors also grow in reinsurance, the desire to merge or acquire to attain relevance, scale or expertise will likely continue to be prevalent.

At the same time the additional pressure that is felt by small to mid-sized reinsurers as a result of changing reinsurance buying habits is likely to further drive this motivation.

And as alternative capital and ILS expands its reach into reinsurance markets the pressure on incumbents will not lessen.

Swiss Re said; “The expanding presence of investors as providers of alternative capital in wholesale re/insurance markets is intensifying pressures on incumbents. The influx of alternative capital is changing the competitive landscape in insurance and this could have important implications for firms’ appetite for M & A.”

Continued ambition from ILS and alternative capital players “could prompt renewed consolidation,” Swiss Re continues.

“This is most obvious in wholesale re/insurance markets where risks are more commoditised and can be reasonably assessed using public information, which facilitates the deployment of third-party capital,” the reinsurer explains.

And Swiss Re notes that many sources of alternative or ILS capital are likely to remain permanently in the reinsurance market, which means the pressure will not dissipate and is only likely to be amplified as others join them.

“Some new re/insurers are backed by investors with multi-generational investment horizons and potentially, therefore, a genuine long-term commitment to the asset class. Likewise, PE backers have formed strategic partnerships with other institutional investors in reinsurance which could signal their longer-term commitment to the sector,” the report states.

Finally, not all M&A deals create shareholder value the report notes. In fact some deals can erode value instead. “Those deals that seem to most consistently create value are ones where companies are from the same country and those that combine firms on different parts of the insurance value chain,” said Darren Pain, a co-author of the sigma report.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.