A sustained low margin environment, fueled by continued oversupply of reinsurance capacity, has started to weigh on insurers’ yields, particularly in a zero-interest rate environment.
This has led global re/insurers increasingly turning to strategic refocusing and consolidation, including mergers and acquisitions (M&A) in a bid to diversify revenue streams, enhance competitiveness and provide alternative capital access.
As we witness this new wave of strategic refocusing and consolidation activity, boggling deal numbers have captivated the public and captured much of the mindshare from C-Suite executives. The role reinsurance plays in such mega deals is often overlooked despite its strong value proposition in addressing concerns from buyers and sellers and by this facilitating successful closure of transactions.
With heightened M&A activity expected to persist in the near future, the importance of structured reinsurance solutions tailored to typical M&A requirements will continue to grow.
Most commonly, there are two type of retrospective reinsurance solutions in the context of an M&A transactions: Loss Portfolio Transfers (LPT) and Adverse Development Covers (ADC).
LPTs are proportional, "quota share type" reinsurance solutions covering the timing and adverse development risks of reserves. Adverse Development Covers are non-proportional, "Stop Loss type" reinsurance treaties providing protection against adverse reserve development or, in other words, coverage for scenarios where final loss payments exceed current established reserve.
From a seller's perspective, such solutions are typically bought to extract capital prior to a sale, replace seller guarantees, or optimize an insurance portfolio with the aim to increase the franchise value and enlarge the spectrum of potential bidders.
From a buyer's perspective, pre-acquisition reinsurance is usually arranged to reduce transaction risk or choose between core and non-core business. It can also be instrumental in financing the acquisition, by either reducing the capital requirements of the acquired business or by unlocking capital in the existing business. Post-acquisition, reinsurance is predominantly bought to stabilize earnings and provide sleep-easy covers for the new management.
Beyond this, (re)insurance can not only be structured to provide economic protection, but also legal finality by transferring the legal ownership of an insurance portfolio to a new carrier. Such transactions allow insurers to exit a market or business very quickly without maintaining costly operations during run-off.
Swiss Re has market leading experience in structuring and a regional and global track record in successfully closing such transactions. We are keen to hear about your needs. Swiss Re will be at the upcoming Singapore International Reinsurance Conference – pop by our booth to talk to us.