But while it earmarked the cat bond segment as likely to see continued growth, the broker also gestured to some ILS fundraising limitations. These included pension funds hitting allocation limits amid broader market markdowns and marginal investors going in search of higher returns available elsewhere.
Alternative capital rose to its highest level as a proportion of total global reinsurance capital at 16% of $575bn by year-end 2022, as traditional reinsurers were hit by mark-to-market losses, Aon's Reinsurance Market Dynamics report showed.
This was despite the fact that ILS capital fell by $3bn to $93bn over the year, with deployable capacity “somewhat lower” than this due to trapped capital and redemptions.
The broker urged clients to "consider alternative capital" for optimal placement results, marking this as the top of its list of "learnings and opportunities" from recent renewals.
The market share of ILS capital was the highest since 2012, having risen gradually from around 9% of total capital of $505mn since then.
The cat bond market had reassumed its growth trajectory during Q1 with total deal sizes 67% up on average compared to H2 2022.
Collateralized reinsurance remained constrained and in sidecars, existing investors had committed to existing transactions, but the segment had not grown substantially.
In Q1, cat bond investors were "largely successful in their respective capital raises", the report noted. Cat bond spreads fell by about 12% during Q1, reflecting net capital inflow combined with the relatively quiet start to the year, although it said margins were still attractive for investors.
In light of higher margins, floating rate returns, relatively short duration and diversification from cat bonds, "all signs point to continued market growth”, the broker said.
Cat bonds were still increasingly taking on more remote risk, despite the fact that Hurricane Ian's industry loss of $47.9bn in Florida is unlikely to result in significant principal impairment to outstanding bonds.
Aon Securities estimated the mark-to-market loss impact of Ian exceeded $2bn out of $26bn outstanding notional at the time, with the potential for improved valuations and lower losses over time.
April renewals “delicately poised”
Elsewhere in the report, Aon said that the imbalance in property cat reinsurance demand and supply seen at 1 January had eased somewhat at the 1 April renewal, at which point it had placed cat business “albeit at a price and with higher retentions”.
“With mid-year renewal negotiations now underway, the demand-supply balance is delicately poised,” the report said, although Aon added it believes the market is more stable than at 1 January.
In the Asia Pacific region, Aon said cedants experienced “a material hardening” in conditions for cat programmes after having been more insulated from the global cycle in the past, but added that the impact was less severe than in the US and Europe at 1 January.
In Japan in particular – home to some of the world’s largest cat programmes – Aon said cedants benefited from having paid increased prices in prior years following the major typhoon losses of 2018 and 2019.
While new capital formation in the sector is limited due to investor concerns about climate change and inflation, Aon said the prospect of higher returns should bring fresh capital.
In fact, it said there were “some encouraging signs” during the April renewal that reinsurers will deploy capacity “at the right terms”.
2022 returns
Aon’s Reinsurance Aggregate (ARA) index of reinsurers posted a return on equity (RoE) of 5.2% for 2022 based on reported net income, meaningfully below the cost of equity.
Aon stressed, however, that this outcome is misleading as it only includes part of the mark-to-market losses over the year. Based on total comprehensive income, the RoE of the index was -14.7%.
Further, Aon noted that the average combined ratio of the ARA from 2017 to 2022 was 100.3% and the RoE was 5.9%.
“Resultant pressure from investors… is one of the driving forces behind the hard market seen in recent property reinsurance renewal,” it added.
The combined ratio across the ARA for 2022, however, was 96.2%, despite the estimated impact of $52.5bn from Hurricane Ian, due to increases in pricing and tightened coverage terms.
