Evolution among ILS funds could jeopardise buyers’ attraction

The evolution of the ILS funds’ business model to look more like traditional reinsurers is diluting the differentiation of these structures which originally attracted interest from primary buyers.

According to the findings of the 1st View renewals report from Willis Re, ILS funds are not immune to the pressures currently being faced by reinsurers.

Peter Hearn, global chairman, Willis Re said: “ILS fund managers evolving into more traditional reinsurer models and reinsurers expanding their own fund management activities appear best placed to trade through this difficult period; they can manage investors and access business more effectively.

“But while this convergence trend is both logical and anticipated, it is creating a conundrum: as ILS funds evolve their business models to look more like traditional reinsurers, they are diluting the differentiation of the very offering which has proved so attractive to date for major primary buyers.”

The report highlights that Insurance-linked securities (ILS) funds are facing reduced returns and the downward pressure on fees is placing the business models of some smaller standalone ILS managers under duress.

Other significant factors outlined by Willis Re included the growing transparency of major buyers around their core partner strategies, and their reluctance to deal with smaller following markets.

According to Willis Re, M&A activity amongst reinsurers also continues to gather pace, with three major M&A transactions announced since January 1, 2015.

John Cavanagh, Global CEO of Willis Re, said: “The April 2015 renewal season has reinforced current trends and the market continues to favour the buyer. There are no signs that the current tide of falling rates and widening terms and conditions will be reversed. Diversification is now the key competitive advantage in this increasingly consolidated and converged reinsurance industry, and the ability to deliver a differentiated service offering is critical. Everyone should be broadening their horizons.”

Cavanagh also spoke of the involvement of the investment banks in orchestrating the new model reinsurers of the future.

“As investment banks rush to orchestrate the new model reinsurers of the future, previous views about possible M&A transactions are being challenged, including any thoughts that size may be an obstacle. As ever, the key to a successful transaction is demonstrating that the combination of two entities is greater than the sum of the two parts. Perversely, this imperative is likely to increase competition in the short-to-medium term, which may prolong the current soft market. Analysts are increasingly concentrating on the portfolio make-up of any potential new entity – and reinsurance is being seen as less attractive than specialty insurance business,” he said.