Capital markets a positive, strong but lumpy contributor to Aon profits

Insurance and reinsurance broking powerhouse Aon plc said that positive growth in capital markets transactions at Aon Benfield contributed to the 3% organic revenue growth across its reinsurance business in Q4 2014.

Aon’s capital markets and insurance-linked securities (ILS) team in the Aon Benfield Securities (ABS) investment banking unit maintain their leading position in our catastrophe bond and ILS structuring and bookrunning leaderboard.

The unit has worked in some capacity on almost $8.5 billion of the nearly $23 billion of currently outstanding cat bond and ILS deals and holds the top position as sole structuring agent, sole bookrunner with a huge 32 deals currently outstanding.

The capital markets business at ABS continues to be a bright spot for Aon across its entire group and has enabled it to make the most of recent reinsurance market trends. The growth of ILS and alternative reinsurance capital has enabled Aon to increasingly leverage its ABS capital market structuring and advisory skills, alongside its traditional broking expertise.

Of course the fees for this work can be higher than commissions on traditional brokerage, reflecting the sometimes long timescale to get an ILS deal to market and the different skills and personnel involved.

During the brokers fourth-quarter earnings call last Friday, CEO Greg Case said that an exceptionally strong quarter in the capital markets business was a big contributor to the reinsurance organic growth.

The capital markets and ILS business and Aon Benfield Securities leading position in that market is also having an incremental impact, Case suggested, saying that new business generation in this area is “exceptionally strong.”

However Case noted the lumpy impact of this business on Aon’s earnings. Transactions can run over quarters and earnings from ILS structuring and advisory business can be driven by the markets renewal cycle.

Case said; “We ended the year with a lot of momentum in that category,” but acknowledged that the organic reinsurance growth also “certainly reflects the lumpiness as you described on capital markets.”

“It’s a tremendously positive business for our clients and for us,” Case explained. “We lead the market in it, it’s something that we’ve built over the last number of years. It’s exceptionally strong and particularly lumpy, sort of up and down across the quarters, and it was quite strong in the last quarter.”

Of course reinsurance brokers face similar issues to reinsurance underwriters, when it comes to the alternative capital and ILS trend. The risk of shifting business to an area where fewer larger transactions take place is one potential issue. The other is the fact that the changing reinsurance market is already bringing new and innovative business models to the fore and disintermediation of incumbents will affect brokers and intermediaries as well as underwriters.

It’s a challenging time for everyone, however Aon is such a force in this area that it will find new services to take advantage of these trends, meaning the impact to it will likely be lesser than to smaller firms.