We regularly look at how capital markets and use of alternative or third-party reinsurance capital is growing at reinsurance firms, but as the ILS market grows and reinsurance convergence with capital markets accelerates, brokers are profiting too.
Aon plc is the world’s largest insurance and reinsurance broking group, so a good example to look at the impact that insurance-linked securities (ILS) and alternative reinsurance capital work is having at intermediaries.
According to Gregory Case, Aon plc President and CEO, the alternative reinsurance capital work at Aon Benfield now contributes around 5% to 10% of its overall reinsurance broking and advisory income, a very healthy contribution for a niche team at the global broker.
Aon Benfield, the firms reinsurance broking arm has a dedicated capital markets team, Aon Benfield Securities, which is now involved in almost half of the reinsurance markets catastrophe bond and ILS issuance. These capital markets teams at large brokers are involved in structuring, transacting, bookrunning and other capital market type activities where reinsurance risk transfer is ultimately to third-party investors, such as securitization and derivatives.
Gregory Case made a number of comments on the brokers activities within the reinsurance capital markets arena during the firms fourth-quarter earnings call. With ILS and alternative reinsurance capital a hot topic, due to the growth in this area of the reinsurance market and the increasing interest in reinsurance as an asset class, it is no surprise to see it raised as a topic during brokers earnings discussions.
The reinsurance segment is of course under some pressure at brokers like Aon due to the softening market and competition. The same factors which affect reinsurance underwriters will also have an effect on reinsurance brokers, so pricing pressure does have the potential to impact earnings at Aon.
However, Case explained that fourth-quarter reinsurance broking results at Aon were positively impacted by growth in the firms participation in capital market transactions and advisory business. Capital markets units are particularly important at brokers right now, with the increased focus on new sources of capital from third-parties and capital markets risk transfer structures. At Aon the capital markets work makes a positive offset to some pressure caused by the reinsurance pricing environment.
Case explained some of the current market dynamics; “Record capacity continues to be available to meet demand and cedents are retaining more risk, driving expected negative market impact, most notably in the U.S. Absent an event in the industry macro factors will continue to be a headwind in 2014.”
The Aon Benfield Securities segment is one of the areas that can offset some of these macro factors, explained Case; “Against those headwinds we expect results to continue to reflect flat to modest growth highlighted by net new business won, which was positive for the 11th consecutive quarter, growth from investments internationally and capital markets and advisory transactions business.”
Case expects the capital markets and alternative reinsurance capital business to grow in importance at Aon. He said; “We’ve had a relatively light cat year and that’s fully compounded by the continued influx of capital from non-traditional sources, which is at the $45 billion to $50 billion level now. We expect it to grow over time.”
Aon’s position within the catastrophe bond and ILS issuance market is one factor that Case is clearly very aware of, despite it being a small piece of the organisation he leads.
Case commented on this market; “When you think about our leadership position in the alternative capital area, in cat bonds as an example, I mean, there’s clearly an acceleration on that front. If you think about since 2010, give or take, there’s probably been about 90, 93, 94 deals done over that period of time. We’ve been involved in over half of them. Now there’s been an acceleration of the 93, 31 were done last year. Again, we’re involved in over half of them.”
This small piece of Aon’s reinsurance broking business is growing in importance for the firm and Case sees the capital markets and ILS as a key part of the overall product offering in the reinsurance broking and advisory work at Aon.
Case explained; “It’s very small overall, as we said before, but a larger piece obviously of our treaty book. But this is a smaller percentage overall, 5% to 10%, let’s say, but growing. And what I wanted to highlight is, if you think about alternative capital, this we believe is a reality, it’s an option for clients, it’s highly viable. About $45 billion or so in the context of, call it, a $550 billion capital base for the insurance world. We are primary in it, but overall it turns out to be 5% to 10% of our overall book.”
So the alternative reinsurance capital, catastrophe bond and ILS business is clearly providing profits at Aon plc and is significant enough, in the entire corporation, to warrant attention from the CEO. Capital markets broking business can be profitable for reinsurance brokers as there can be traditional brokers and capital markets specialists working on the same placements, with advisory, structuring, broking and bookrunning fees and commissions to profit from.
As the ILS market continues to grow, with third-party capital increasingly leveraged within reinsurance, the income from advising, broking and arranging these deals will be a growing portion of brokers income in years to come. As a result, we are likely to see increased focus on capital markets skills and specialists at reinsurance brokerages.