Expect more re/insurance & ILS convergence through M&A: S&P

Mergers and acquisitions (M&A) activity is expected to continue driving greater convergence of traditional insurance and reinsurance with the insurance-linked securities (ILS) market, S&P Global Ratings expects.

With conditions in reinsurance in general remaining a little pressured, in terms of earnings, while capital remains abundant, S&P believes that structural changes in the industry will continue, leading to a continuing desire among traditional players to access the alternative sides of the market.

Convergence, of traditional insurance or reinsurance underwriting with the capital markets and ILS fund managers has been a theme for years, of course, but now one of the main drivers of continued convergence is M&A, the rating agency suggests.

As ever, alternative sources of reinsurance capital are one of the factors that pressure traditional re/insurers to look to M&A options, as they seek out relevance and something to sustain their ability to manage the market cycle.

Pressure on the reinsurance sector’s earnings continued, S&P explains, which means re/insurers are still thinking about ways to enhance their positioning in the market.

“Reinsurers want to strengthen their relevance and improve the resilience of their business and financial positions,” S&P explained in its latest report.

“To achieve this, the industry has employed various strategies, including highly tailored reinsurance solutions, pairing up with alternative capital providers, enhancing digital capabilities, and exploring opportunities to close the protection gap,” the rating agency continued.

But sometimes these activities are not enough on their own, leading to mergers and acquisitions (M&A) remaining a hot topic in the market.

“Continued challenging business conditions, coupled with cheap financing in the debt market, will continue to fuel M&A activity for the next few years. In particular, those competitors with a more narrow business profile or limited geographic footprint will likely either consider M&A or become targets themselves,” S&P said.

Adding, “Further, the ongoing convergence of the insurance, reinsurance, and insurance-linked securities (ILS) markets through M&A will continue.”

S&P sees a number of deals that have taken place that provide evidence of this convergence of re/insurance and capital markets through M&A.

The rating agency explained, “We therefore anticipate more deals similar to AXA and XL, and Markel and Nephila (one of the largest alternative capital managers).”

Those two deals in particularly without a doubt demonstrate a desire for bringing efficient risk capital into business models and getting it as close to risk as possible, furthering the convergence of insurance, reinsurance and ILS.

Of course you can add to this the recent investment by White Mountains in ILS manager Elementum Advisors and the acquisition of Coriolis Capital by the investment arm of reinsurance firm SCOR.

Alternative reinsurance capital continues to grow in importance, S&P notes, as a result of which, “Reinsurers and some insurers continue to build their strategies around alternative capital to harness the opportunities pertaining to this area.”

Because of the still evolving use of capital markets in reinsurance, S&P believes its importance is only going to rise further.

“We foresee further convergence in the insurance, reinsurance, and ILS markets in the next few years as structural changes in the industry continue to place pressure on reinsurers, especially considering that capital is still relatively cheap,” the rating agency said.

However, despite the structural trends that point to the very largest of re/insurers being the most secure, S&P does not really expect any of the really big players to engage in meaningful sized M&A deals. However it can’t be ruled out.

S&P said, “A mega deal involving large players that shakes up the market order would be a surprise, but is not totally out of the question.”

Looking ahead, S&P said that, “We believe that reinsurers, insurers, and alternative capital providers will continue their path of convergence, with the potential for more deals among these sectors.”