More ILS M&A consolidation expected in the near term: LGT ILS Partners’ Paul
According to Hilary Paul, Partner and Portfolio Manager, LGT ILS Partners, there will be further insurance-linked securities (ILS) M&A consolidation in 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 are following the most recent M&A activity in ILS with great interest, as we believe that we will see even more consolidation in the near term,” Paul observed in a recent interview with Artemis around the reinsurance conference season.
In this context, Paul shared insights on the optimal structure for an ILS manager in today’s market.
“At LGT ILS, we believe 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 able 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 such as 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 truly benefit from the economics of scale, i.e. from the size 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 various investment specialist groups benefit from cross-selling and referrals across different asset classes.
She went on, “Established asset management platforms such as our parent company LGT Capital Partners offer muti-asset alternative investment solutions where ILS is only a sleeve in a diversified allocation strategy across many alternative asset classes.
“For such products, the sales pitch does not focus on ILS on a stand-alone basis, since investors are interested in the diversification and low-correlation aspect of the product as such.”
Meanwhile, investors who are engaging in a due diligence process with an ILS manager reportedly prefer and appreciate a larger organization.
“Size matters, as the servicing elements such as IT and risk and compliance are professionally managed,” she explained.
Paul added, “This reduces a variety of business risks up to the point where key man risks and succession planning are included as a standard management process within the organization.
“In short, with ILS managers being part of larger organizations, investors do not need to be concerned about changes in ownership during their investment term.”
Elsewhere in the interview, Paul disclosed that access to rated reinsurance paper is another 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 engage in a much broader discussion and negotiation with counterparties; often, these companies are also cat bond sponsors,” she said.
Paul continued, “The preferred access to data and information for an ILS manager that also underwrites private deals with the very same cat bond sponsor allows for the manager to base the investment decision on a much broader information flow, counterparty and deal assessment.
“It also means that the ILS manager becomes a more meaningful counterparty to the sponsor/insurance company, whilst having the ability to offer more attractive, so-called blended funds to investors, where private deals and cat bonds are optimally combined to achieve improved diversification. These blended funds currently generate an attractive pick-up in yield vis-à-vis pure cat bond funds.”
However, access to a rated reinsurance carrier is said to be key to sourcing and underwriting such private deals, and controlling the full value chain from deal sourcing to structuring significantly reduces cost and adds efficiency.
“We would thus expect more M&A transactions and join-venture agreements to occur, as especially stand-alone ILS managers will increasingly seek for economies of scale and access to rated paper,” Paul concluded.
