Increased merger and acquisition (M&A) activity, deal value and deal size during the first-half of 2015, highlights a return of the ‘mega deal’, but what implications might market consolidation have for alternative reinsurance capital and ILS participants?
According to rating agency A.M. Best the average deal value during the first-half of 2015 increased by a huge 290% from the same period in 2014, to a high of $21 billion.
Average deal size grew from $279 million during H1 2014 to $725 million in 2015, a rise of 160%. While the amount of deals taking place in the property/casualty insurance and reinsurance sectors rose by 73%, totalling 76 deals.
Unsurprisingly then, the ratings agency’s special report examining market consolidation is titled, ‘Return of the Mega Deal During First Half of 2015.’
Ample capacity alongside a prolonged period of benign catastrophe losses, and low interest rates, have resulted in an incredibly challenging operating environment for global insurers and reinsurers, leading to a wave of industry consolidation as firms grapple for scale, diversity and relevance.
And while the flood of M&A is likely to create fewer but larger global reinsurers, providing the new entities with larger scale and geographical reach, and greater product access, it does present significant integration challenges, which if not properly executed could create more problems than it solves in the near term.
But it’s not just the traditional reinsurance and primary insurance markets that face implications from the consolidation wave. The effects of widespread consolidation also pose some opportunities for the ILS and alternative capital providers, the same ones that helped drive the spate of industry M&A.
The result of a market featuring fewer but larger reinsurers could signal an opportunity for ILS managers to become increasingly relevant.
As re/insurer cedants continue to look to diversify their sources of risk capital, maintaining a diverse panel of risk transfer partners, ILS managers may benefit. With ILS managers already becoming an increasingly familiar part of the risk transfer landscape, cedants may find them an increasingly desirable member of their reinsurance program panels.
Another factor is that as the big reinsurers get bigger, through M&A, the smaller ones such as Lloyd’s syndicates could find themselves increasingly marginalised.
That could leave an opportunity for the larger ILS fund managers to provide diversification and additional capacity to cedants now lacking choices in terms of reinsurance or risk transfer partners.
It’s possible, should consolidation continue throughout 2015 and into 2016 at a similar pace seen today, that the bigger ILS and alternative capital participants, will increasingly gain a share of the global reinsurance market, and make up a significant portion of the top 50 largest reinsurers.
Furthermore, should ILS and third-party capital providers gain a greater share of the market through consolidation and the result of less larger players, the use of its more typical, fully-collateralized structures, like collateralized reinsurance, catastrophe bonds and sidecars will likely gain some more traction too.
After a successful merger or takeover the resultant sizeable company will likely take on more risk as its capacity to do so grows, highlighting the potential to off load some of this exposure in the retrocession market, an area the ILS sector is very familiar with and capable of providing the skillset and capital to assist. Another opportunity.
A strategy for some companies involved in M&A already, or that will be in the future, might be to gain access to exposures previously out of reach or to develop structures to protect emerging and underserved risks, like cyber, or many catastrophe risks in developing regions of the globe like parts of South America, China and the Asia-Pacific.
As companies look to innovate and provide coverage to a host of new risks, some of which will likely lack substantial data and modelling, the capacity in the convergence markets will be needed, as the exposure of many perils are so vast that capital market capacity may be the only risk transfer solution.
The ILS market and alternative reinsurance capital providers are well positioned to take advantage and benefit from the wave of insurance and reinsurance industry consolidation, providing the products and structures to assist the traditional players, small and large, while at the same time gaining a growing market share.