Lumpy capital market deal-flow hits Aon reinsurance revenue

by Artemis on July 31, 2015

Insurance and reinsurance intermediary Aon plc has again cited the uneven deal-flow in the reinsurance convergence space, where its Aon Securities unit is the leader in ILS and capital markets transactions, as a reason for lower reinsurance revenues.

It seems that Aon has to explain something related to the uneven nature of capital markets transactional revenue at nearly every quarter. The broker today reported that its reinsurance unit saw revenues down by 1%, with “a decline in capital market transactions” one of the reasons.

Aon’s capital markets and insurance-linked securities (ILS) team, in the Aon Securities investment banking unit, continued to top our catastrophe bond and ILS structuring and bookrunning leaderboard. However, with ILS and cat bonds not following a typical annual renewal pattern, it is to be expected that the contribution from this business will be ‘lumpy’.

Also, the ILS, cat bond, collateralized reinsurance and other capital market transactions are perhaps more prone to ‘lumpiness’ due to the market being affected by capital availability, inflows, pricing of traditional reinsurance and other factors.

Hence, while the second quarter saw another strong level of catastrophe bond issuance and there is more alternative capital in the reinsurance market than ever before, Aon still noticed a decline.

Of course the uneven nature of the large transaction ILS business is not the only reason for a slight reinsurance revenue decline at Aon, the soft market conditions, restructuring of programs and also likely the effect of mergers and acquisitions, are also effects it will have felt in its Aon Benfield unit.

The broker explained; “Reinsurance organic revenue decreased 1% compared to the prior year quarter due primarily to an unfavorable market impact globally and a decline in capital markets transactions.”

It’s important to note here that compared to the prior year quarter, reinsurance total revenue declined by 8% in Q2, although 7% of that was currency impact. Total revenue across Aon was down 6%, again the FX impact here was the main driver of that and the firm reports some organic growth in most areas.

Aon did benefit from some bright spots as well, on the traditional side of its reinsurance broking. Some of this will likely have included collateralized placements, as well as the winning of the Florida Hurricane Catastrophe Fund’s reinsurance program, some of which went to ILS investors.

The broker explained that the decline in revenue was “partially offset by strong new business growth in treaty placements, as well as strong growth in facultative placements.”

It’s important to note that collateralized reinsurance placements with ILS funds are likely accounted for under the traditional reinsurance treaty business a lot of the time, despite them technically being capital market transactions. So Aon’s share of reinsurance capital market placements is much higher than the big, securitized capital markets transactions alone, which is more the big-ticket cat bond type deals.

It was Aon CEO Greg Case who coined the term ‘lumpy’ for capital market, ILS and cat bond deals last quarter, having explained that “It’s exceptionally strong and particularly lumpy, sort of up and down across the quarters.”

Despite the capital markets and ILS decline in Q2, the firm remains the leader in the ILS broking and investment banking space. Aon Securities has worked in some capacity on almost $9 billion of the nearly $25 billion of currently outstanding cat bond and ILS deals, putting it in top position with 34 ILS or cat bond deals currently outstanding.

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