In accordance with Hilary Paul, Partner and Portfolio Manager, LGT ILS Partners, there will likely be further insurance-linked securities (ILS) M&A consolidation within the near term, with more transactions and join-venture agreements, especially as stand-alone managers increasingly seek economies of scale and access to rated paper.
“At LGT ILS Partners, we’re following essentially the most recent M&A activity in ILS with great interest, as we imagine that we are going to see much more consolidation within the near term,” Paul observed in a recent interview with Artemis across the reinsurance conference season.
On this context, Paul shared insights on the optimal structure for an ILS manager in today’s market.
“At LGT ILS, we imagine what matters is organizational size and access to rated paper. When teaming up with LGT Group over a decade ago, we acknowledged that a manager is in a position to achieve significant economies of scale when joining a well-established organization.,” she explained.
This strategic approach, Paul added, allows underwriters and portfolio managers to focus entirely on the investment process.
She continued, “Areas equivalent to fund structuring, legal and compliance, human resources, finance and accounting, infrastructure, technology and facility management are outsourced to the servicing entity of the organization and allows to really profit from the economics of scale, i.e. from the dimensions and a broader experience across various asset classes.”
Paul observed that distribution and sales in organizations with a broader product offering can generate more leads as the assorted investment specialist groups profit from cross-selling and referrals across different asset classes.
She went on, “Established asset management platforms equivalent to our parent company LGT Capital Partners offer muti-asset alternative investment solutions where ILS is simply a sleeve in a diversified allocation strategy across many various asset classes.
“For such products, the sales pitch doesn’t deal with ILS on a stand-alone basis, since investors are considering the diversification and low-correlation aspect of the product as such.”
Meanwhile, investors who’re engaging in a due diligence process with an ILS manager reportedly prefer and appreciate a bigger organization.
“Size matters, because the servicing elements equivalent to IT and risk and compliance are professionally managed,” she explained.
Paul added, “This reduces a wide range of business risks as much as the purpose where key man risks and succession planning are included as a typical management process inside the organization.
“In brief, with ILS managers being a part of larger organizations, investors don’t have to be concerned about changes in ownership during their investment term.”
Elsewhere within the interview, Paul disclosed that access to rated reinsurance paper is one other key challenge for ILS managers, which is an area that LGT ILS Partners innovated on with its own affiliated Bermuda-based rated reinsurer Lumen Re.
“Engaging in private reinsurance transactions allows ILS managers to have interaction in a much wider discussion and negotiation with counterparties; often, these firms are also cat bond sponsors,” she said.
Paul continued, “The popular access to data and data for an ILS manager that also underwrites private deals with the exact same cat bond sponsor allows for the manager to base the investment decision on a much wider information flow, counterparty and deal assessment.
“It also signifies that the ILS manager becomes a more meaningful counterparty to the sponsor/insurance company, whilst having the power to supply more attractive, so-called blended funds to investors, where private deals and cat bonds are optimally combined to realize improved diversification. These blended funds currently generate a sexy pick-up in yield vis-à-vis pure cat bond funds.”
Nonetheless, access to a rated reinsurance carrier is claimed to be key to sourcing and underwriting such private deals, and controlling the complete value chain from deal sourcing to structuring significantly reduces cost and adds efficiency.
“We might thus expect more M&A transactions and join-venture agreements to occur, as especially stand-alone ILS managers will increasingly look for economies of scale and access to rated paper,” Paul concluded.