There’s more value in partnering with alt cap than competing
Although consolidation over the past five years has considerably reduced the potential pool of partners, the pressure on re/insurers to engage in mergers and acquisitions (M&A) remains strong, and companies with strong third party capital management positions are seen as particularly attractive targets, Catherine Thomas, senior director of analytics at AM Best, told Baden-Baden Today.
Traditional re/insurers are seeing more value in forming strategic partnerships with alternative capital rather than trying to compete with it, she added.
“Some insurers are taking advantage of relatively inexpensive borrowing to finance deals, while in other cases, M&A represent a means for cash-rich buyers to deploy excess capital,” said Thomas.
She suggested M&A activity is being driven by the perceived need to build scale and relevance, particularly in the reinsurance sector.
“A larger organisation can benefit from operational efficiencies from economies of scale and capital efficiencies from diversification,” said Thomas.
“In particular, risk-based capital regimes such as Solvency II have increased insurers’ focus on the efficient use of capital.”
She noted that smaller operations have been sold to peers with a stronger presence in a particular market, with buyers seeking to enhance their profile and performance. Companies are also identifying potential challenges to the sustainability of existing markets or business models, for example from technology, as they look to diversify to reduce exposure to these threats.
“Changing distribution practices have made companies with either data-driven technology or a focus on less commoditised specialty business attractive,” she added.
Against a highly competitive market environment where reinsurers are struggling to cover their cost of capital, Thomas suggested that forming a strategic partnership with an alternative capital provider—which has different return hurdles—is attractive as it can enable more efficient use of capital and underwriting resources.
Thomas predicts that a number of different strategies to tap alternative capital will become more prevalent.
“Some are well established, including sidecar vehicles,” she said.
“To date, the majority of alternative capacity has targeted peak perils. But market participants continue to explore the potential transfer of other underwriting risks to the capital markets.”
