Greater attractiveness to third-party capital an M&A driver: A.M. Best

Increasing your attractiveness to third-party capital investors has become a key driver for mergers and acquisitions in reinsurance, as access to efficient capital becomes increasingly important for reinsurers, according to A.M. Best.

Speaking at the rating agencies 2015 Insurance Market Briefing, Europe today in London, Matthew Mosher, Senior Vice President – Global Rating Services at A.M. Best, highlighted the increasing importance of third-party or alternative capital and ILS in reinsurers quests to remain or increase relevance.

Mosher explained that of the key drivers for M&A in reinsurance, alternative capital is “the newest piece to that.”

“To have that ability, that solid base of business and maintain control of business that alternative capital would be interested in,” he said.

But to attract third-party investors reinsurers need to have the expertise and results, as well as access to risk, that the investors are increasingly looking for. That means investors now have questions, which are beginning to drive some M&A discussions.

Reinsurers are being forced to consider, “Are you a source that they’d want to do business with. Do you have a strong underwriting shop that they want to come to and that they look to do business with you and take on the risk from your balance-sheet,” Mosher explained, “So it’s really starting to be a driver of M&A.”

While no M&A transactions in reinsurance to-date have made a big deal of third-party capital, they have almost all had relevance to ILS and investors.

Mosher believes that behind the scenes, ILS and third-party capital ability is becoming a key consideration for those involved in M&A.

He continued; “You’ve seen it in some of the transactions, I think. I haven’t seen a lot of discussion in  that being a major driver from the participants, but when you look down the road where’s that taking things, I think it really is one of the strong considerations in the M&A we’ve seen already.”

The panel discussion that Mosher was part of discussed the fact that the lines are increasingly blurring, between alternative capital and ILS managers, and the traditional reinsurance business.

Niklaus Hilti, who leads ILS at Credit Suisse Asset Management and is responsible for roughly $6.5 billion of insurance and reinsurance linked assets, said that “These days everyone is looking at everything,” as the reinsurance market becomes increasingly converged.

Hilti went on to explain that as this reinsurance convergence continues there is risk on both sides, as ILS managers have fiduciary responsibility to their investors and reinsurers, who are increasingly running asset managers will also have to deal with this.

Mosher then asked how can the reinsurance market, with its traditional relationship based approach, come together with the investment management style of ILS. He implied that there will be a need for reinsurers to decide whether they want to stick to the relationship based approach, as the use of third-party capital increases.

Mosher went on to explain that differentiation will still matter, as convergence continues, but that “Reinsurance companies need to be able to embrace these other avenues and the ability to access capital in different manners.”

“For me the differentiator comes back down to, if I’m a capital markets person investing in this, I’m looking for somebody who’s a good underwriter. I want to partner with the better underwriter. That’s really what it comes back to, who are the best underwriters, who are going to provide the best business,” Mosher continued.

This is yet another sign of the increasing importance of efficiency in reinsurance and particularly the efficiency of capital, which can give traditional reinsurers an edge in terms of a few points benefit for their combined ratios.

Becoming attractive or increasingly attractive to third-party capital is now a key trait for reinsurers. With ILS investors looking for access to risk, scale, platforms, underwriting performance and an efficient place to house their capital, as a drive of M&A this could actually increase over time.