Is the pension consultancy Redington being bought for its pension expertise or for its capacity to model risk- specifically climate risk?

The insurance market reckons that despite its acquisition of Buck for £543m and AHC in 2019, Gallagher’s core business continues to be insurance, this is how Artemis, the insurance blog announced the deal.

Arthur J. Gallagher, the insurance and reinsurance broking specialist, has announced the acquisition of an investment consultancy with expertise assessing managers in the insurance-linked securities (ILS) space, Redington Ltd
Terms of the acquisition of London-based Redington Ltd. have not been disclosed, but it is a notable addition for the AJG and Gallagher business entities.

Now, like rivals Aon and MarshMcLennan, AJG will have its own investment consultancy arm, working with institutional investors largely in the UK.

Redington provides investment, research and technology services to pension funds, wealth managers and institutional investor clients primarily in the UK, including advice on manager selection in niche asset classes, such as insurance-linked securities (ILS).

AJG said that Redington’s Sylvia Pozezanac and her team will remain in their current location under the guidance of David Piltz, head of Gallagher’s UK employee benefits and HR consulting operations.

“As a leader in the investment consulting space, Redington brings exceptional talent and represents a fantastic cultural fit. Their deep capabilities in modeling and investment market research will enhance our existing consulting services and help our clients achieve superior financial security outcomes,”

explained J. Patrick Gallagher, Jr., Chairman and CEO.

The best-known part of the ILS market is probably catastrophe bonds or “cat” bonds. These instruments are more conventionally tradeable and normally have a life span of between three and five years. This is the area for which most data is available. However, of the overall ILS market, which is estimated at around $103 billion, only around one third is comprised by cat bonds

The other two-thirds consist of non-tradable, “over-the-counter” contracts, mostly with a 12-month lifespan. This market gives investors access to a wider range of insurance perils than those available in the cat bond market, including marine, aviation and specialty risk and a broader range of investment structures.

Cambridge Associates claim that ILS provide an attractive inflation hedge for insurers and a sensible diversifier. Reinsurers are keen to issue these bonds as they have been hit by recent catastrophies and need to replenish their capacity to write business. UK insurers need reinsurance capacity to write buy-out business.

There is a need for investment consultancy to model the risks for pension funds and to market the product into occupational pension schemes.

Artemis tell us

These instruments also require managers to model the risks themselves rather than using a third party, and there is no secondary market. Their non-tradeable nature means there is an additional “illiquidity premium” for managing this segment of the ILS market.

It’s an intriguing addition, as for years rivals Aon and MMC have had client touch-points throughout the ILS market value-chain, from originating risk, to structuring and selling the securities, to working with the institutional end-investors and specialist managers through their investment consultancy arms, Aon Hewitt and Mercer.

Now, AJG has an investment consultancy that has a track-record in helping UK pension funds access ILS investment manager services, which is a potentially helpful addition for the firm, as under Gallagher Re and Gallagher Securities it already has origination, structuring and investment banking expertise for ILS.

Just how much demand there is among UK pension funds there is for Insurance Linked Securities is open to question. Although it’s a diversifier, taking bets against the climate doing its worst looks like a big ask for trustees.

But then if you’d been explaining to trustees at the end of the last century , that they’d be queueing up to borrow from banks to buy gilts, you’d probably get a similarly funny look.

Rob Gardner is now promoting the power of natural capital to deliver returns to pension schemes by averting catastrophy.

In the light of this , Redington’s new parentage makes a deal of sense.