Unlocking capital for M&A through reinsurance

As global economic uncertainty persists, property and casualty (P&C) insurers with businesses in Asia are increasingly faced with the challenge of optimising capital to enable growth. While many insurers have been actively acquiring entities in Asia as part of their growth strategies, costs have been mounting in parallel due to factors such as digitalisation which requires deep technology investment, extreme weather events giving rise to catastrophe claims, and changes to regulatory capital requirements. 

To address these demands, insurers need significant amounts of capital, some of which may be locked in underperforming entities. A non-core portfolio or legal entity with limited growth potential can pose a further drag on resources by incurring expenses and requiring significant management attention. Financing growth into new attractive business, whether organic or inorganic, requires capital that is cost effective and available at the right time. 

Reinsurance represents an effective solution to this challenge. Reinsurers like Swiss Re have been helping Asian P&C clients to free up much-needed capital by providing structured solutions tailored to their specific needs. Two frequently deployed examples are quota shares and retrospective reinsurance that primarily consist of loss portfolio transfers (LPT) and adverse development cover (ADC). 

Structured quota shares are especially popular amongst clients in high-growth Asian markets and are well accepted by regulators. In this pro-rata reinsurance contract, the insurer and reinsurer share premiums and losses in a way that allows the insurer to increase available capital by reducing the amount of capital it is required to hold for regulatory purposes. Quota share reinsurance has been successfully used to boost capital for funding of pending acquisitions, and to reduce capital requirements post acquisition. 

Retrospective reinsurance (LPT/ADC) meanwhile allows the insurer to transfer the economic risk of portfolios of losses that have already been incurred to the reinsurer – regardless of whether the losses have fully emerged. This transfer of uncertainty associated with emerging unpaid losses and the associated reserve development to the reinsurer effectively frees up capital for the insurer.  

Legal finality re/insurance transfers are becoming more common in Asia and have some advantage over European regimes; this is because in some Asian countries, regulators have full authority to review and approve such transfers without involvement of the courts. It is a particularly useful solution for branch entities or runoff portfolios embedded in an ongoing entity that cannot be divested separately or closed quickly. In our experience, we have tailored retrospective solutions for APAC clients that have allowed them to efficiently close non-core entities and release trapped capital within 12 to 24 months. 

In a volatile macroeconomic environment, having a knowledgeable and experienced partner to work with on structured reinsurance solutions can make a difference. As my colleague Peter Liebwein discusses in the following article, Swiss Re’s local structuring experts have gained extensive experience in key Asian markets in assisting clients to optimise capital through the value-creating combination of M&A/strategic realignment and reinsurance.