German reinsurance giant Hannover Re demonstrated today that even the largest firms need to continue building out platforms to provide efficient access to risk business, and that markets also remain a key piece of the reinsurance puzzle.
Hannover Re announced the acquisition of the Argenta business at Lloyd’s of London today, involving buying its managing agent and private capital vehicle, while also taking a pro-rata share of the Argenta Lloyd’s syndicate 2121.
It’s a clear sign of two things. One, how important it is to build broader platforms for efficient distribution of capital and capacity. And two, that the Lloyd’s of London insurance and reinsurance market still really matters.
These are two facts that the insurance-linked securities (ILS) market is only too aware of and we’ve seen many of the largest ILS fund managers taking steps very similar to those Hannover Re took today, over the last few years.
Of course Hannover Re has the luxury of excess capital to help make this acquisition, although some may consider it a curse, to have capital but often have to return it as it cannot be put to use profitably.
Where as the ILS fund managers can usually get the capital, but need the platforms to put it to work through first, which it seems is actually a relatively similar strategy to Hannover Re’s.
Hence we’ve seen the ILS fund managers trying to expand their reach, through Lloyd’s as one avenue, but also through fronting arrangements, MGA programs, partnerships, and a growing array of activities that make some of their platforms increasingly re/insurer-like.
But it all comes down to an efficient way to deploy capacity into underwriting business that can drive a profit, excentuating and maximising margins, and if that underwriting business can be sourced from a little closer to the risk then all the better.
Hannover Re has been a capital provider to the Argenta syndicate at Lloyd’s for some time, while also providing reinsurance capacity to it Now as owner of the platform and a much bigger capacity providing entity in the syndicate it steps right to the front of the line, in terms of securing extra margin from the risk underwritten via Argenta’s syndicate and operating vehicles.
It’s a strategy very similar to the one we see employed in the ILS fund market. Securing a position further up the value-chain, closer to the source of the risk, making your reinsurance or risk capital work harder, by extracting a greater margin from every unit of risk underwritten.
It will also allow Hannover Re to control how much of the risk goes out to the broader reinsurance market at renewal time, with the proximity it gains through the new relationship with Argenta bound to secure it as much of the risk to retain as it may want.
Again, this is what we see in the ILS market, with many of the steps up the value-chain being partly about securing access to risk outside of the highly competitive reinsurance renewal process.
Hannover Re’s move to acquire Argenta is like an offensive defensive play. It’s striking out at competitors, making a clear sign of its intentions to become a larger player in Lloyd’s while securing that risk for itself and being able to choose how much to retain.
At the same time it is securing this risk away from the renewal process, sourcing fees from the managing agent and private capital entities, while ensuring it has the best position in the syndicate as well (we’d assume).
It’s the kind of move we’d expect to see much more of over the coming months, as the traditional reinsurance market becomes increasingly impacted by ongoing softness, the influence of efficient capital and new business models, and as ILS players show no sign of their appetite for large chunks of that market slowing down.
Everyone in reinsurance is going to have to double down on two things. Capital efficiency and access to risk. Hannover Re’s taken a step with this Argenta deal that plays to both of these needs.
It’s going to be interesting to see what other deals come to light, as the major reinsurers look to secure their futures.