The recent flurry of M&A and partnership deals among ILS managers has projected a largely positive, forward-focused ILS market, though the deals can also be read as having a defensive edge.
From a tactical viewpoint, the July rush of transactions may simply reflect a desire to get it done before the peak of Atlantic hurricane season.
The timing of the recent Securis-Twelve merger and the management buyout at Credit Suisse ILS (CSILS) suggest an element of seasonal thinking in the mix, with buyers in other circumstances potentially less likely to have signed a mid-year deal.
The recent cluster of M&A and partnership arrangements also includes Ledger Investing handing management of its casualty funds to Fermat Capital Management.
The nature of the Fermat-Ledger and Securis-Twelve relationships suggest they are firms looking for opportunities to leverage the sums of their different elements, including complementary fields of expertise.
The casualty ILS segment presents an entirely new horizon of growth for the industry, bringing with it a competition as to who can grow to dominate it.
With a second strong year of returns and solid fee income under its belt, the industry’s outlook for M&A will be much healthier in the years ahead than it has been for some time.
Investor trauma over the loss years of 2017-2022 is easing since 2023 delivered its turning-point in track record, helping to compensate capital partners and set the foundation for future ILS market growth.
The challenge now will be for ILS managers to achieve scale and breadth, so they can participate in larger, more cost-effective transactions.
The Securis-Twelve merger came with a candid observation from Urs Ramseier, a co-founder of Twelve, who will be CEO of the new entity, that a minimum $10bn-$12bn in AuM is now needed for an independent manager to be competitive.
Ramseier’s comment points to Securis-Twelve having ambitious growth plans, with the combined entity’s current AuM at $7.8bn, of which $6.6bn is pure ILS.
Former CSILS CEO Niklaus Hilti’s buyout of the business, also announced in July, is borne from its own specific set of circumstances, after UBS stepped in to acquire Credit Suisse in a rescue deal in March 2023.
The CSILS platform also provides a jumping-off point for growth and the possibility to build on a profitable two years of track record.
But with none of the recent deals offering an exit for their executives, it suggests that there will need to be a shift of emphasis toward higher-fee mandates before the market moves into a more competitive phase of M&A.
The 2024 returns will be crucial in adding a second year of profitable track record, potentially helping to instil confidence in investors to deploy into higher-fee private ILS strategies. It will also help to bolster income through performance fees.
The rising cohort of independent managers such as Integral ILS, Pillar and Tangency have been steadily adding AuM over the past couple of years, putting them among the firms that may be well-positioned to negotiate in the M&A space in the years ahead.
If casualty ILS truly does have “trillion-dollar potential”, as Ledger CEO Samir Shah has said, it could turn out to be the arena of growth that the ILS market is looking for.
If the risk can be securitised to provide a level of liquidity similar to cat bonds, then even a relatively low-fee manager might anticipate significant fee income if they get big in the space.