Pension Funds acquiring reinsurance companies:

I am starting to wonder, why don’t we see more news about capital providers like Pension Funds acquiring reinsurance companies.

This seems like the next evolution of value chain compression.

Reinsurers, as capital providers or investment bankers to the insurance industry are very specialized and receive float on their investments.  The reinsurance industry has seen many tough headwinds:  seen a series of years of margin compression, a bad year in 2017 – with volatility and capital losses, tax changes,  and competition from “alternative capital”.

These forces have already caused consolidation in the industry, however, not at the rate or speed many analysts would expect.

The trend may continue, but again has us wondering, why aren’t pension funds and other alternative capital providers considering acquiring reinsurance companies (vs. investing in ILS funds).  Yes, ILS funds may currently have a lower expense ratio, but with the synergies from not being a publicly held company – reinsurers would be more attractive purchases.  Traditional reinsurers have access to more business and larger diversified portfolios.

Once on pension fund balance sheet, reinsurers shrinking margins (low single digits) will be acceptable due to diversification/uncorrelated benefits.  With lower Weighted Average Cost of Capital, these funds would be able to deploy capital cheaper and more efficient to the insurance industry than currently available.

If you follow sites like Artemis, you will see announcements of ILS funds or pension funds investing in this space already, so it is not a new asset class.  Just getting over the hurdle of having the assets and virtual reinsurers now (sidecars, ILS, CAT bonds, etc) vs. having a rated balance sheet which is a premium and float producing reinsurer as part of Fund.

If not pension funds, sovereign wealth funds or other capital with long term return horizons.

Time will tell but its only  a matter of time before someone makes the first move.

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Arnold Smith

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