Validus marks ten years of growth
Bermuda-based Validus Holdings Ltd is celebrating its tenth birthday this year in a markedly different reinsurance market from the one in which it was born.
To mark a decade of strong growth, the company is holding a party for clients at Pier 6 on Front Street this evening and another party at the same venue for employees tomorrow night.
Validus was formed on the Island in the wake of Hurricane Katrina, the storm best known for causing much of New Orleans to flood with deadly and devastating consequences. Katrina was the most expensive US hurricane of all time and racked up well over $40 billion in insured losses.
The firm was one of the ‘Class of 2005’ companies formed to replenish the reinsurance capital so severely dented not only by Katrina, but also by a string of storms that hit the southern US in 2004.
Kean Driscoll, now the chief executive of Validus Re, the firm’s reinsurance arm, was involved from the start. He said there were several key reasons why 2005 was an opportune time to launch a reinsurer.
“One, capital was depleted because of the size of the loss,” he said. “Two, risk appetite changed because people were questioning some of the baseline assumptions they had going into that period. Three, the cost of capital to support catastrophe risk had gone up. And four, the belief, at least from the vendor-model perspective, that hurricane risk was more frequent and thus, more costly.
“As you put all this together, there was a meaningful supply-demand imbalance and it was a perfect opportunity to bring new capital into the marketplace.”
The new company started out with about $1 billion of private-equity capital and an A- rating from AM Best.
“We had roughly 12 people in Mintflower Place [in Par-la-Ville Road, Hamilton], jammed into a tiny office, sharing desks and really struggling to handle all the business that was flying through the door,” Mr Driscoll recalled.
“Today the company has more than 800 employees worldwide and about 140 in Bermuda [85 of those are Bermudian or spouses of Bermudians], so it’s been a great success.
“The ideals were in place from the earliest days, in terms of how we approach our customers and partners, how we manage and price risk, our commitment to analytics — none of that has changed.
“Now we have a dozen-plus overseas offices and we’re now well over $4 billion in capital. We’ve managed, through share buy-backs and dividends, to return several billion dollars to our shareholders, so the value creation over the ten-year period has been exceptional, but it’s still rooted in the same principles on which we founded the company.”
Validus has grown strongly, through acquisitions as well as organic growth, aided by what has been a relatively quiet period in terms of catastrophe activity. Last year, the company wrote $2.36 billion in gross premiums, generated net income of $481 million and ended the year with shareholders’ equity of $4.05 billion.
The reinsurance market has undergone huge changes since then, particularly with the influx of alternative capital seizing market share from the traditional operators. Validus has its own alternative capital platform, AlphaCat, as well as underwriting for PaCRe, a joint venture with hedge fund Paulson & Co.
“I think the biggest changes are the capital flows and the technology around them,” Mr Driscoll said. “The ability for the capital in the global markets to access a non-correlating pool of risk has made tremendous progress in the last few years.
“We are the forefront of that with PaCRe and AlphaCat and we’ve tried to leverage as much of that capital as we can to the benefit of our customer base. In a very principled way, I think the purist ideal of being a solution provider for our customers is not different today than it was 2005, but how a company goes about that can be quite different.”
Validus’ success has allowed it to be acquisitive. In 2007, it gained Lloyd’s of London access through the purchase of Talbot Underwriting. In 2009, it bought out Bermuda rival IPC Holdings, after successfully derailing its proposed merger with Max Capital.
Fellow Class of 2005 reinsurer Flagstone was acquired in 2012 and US insurer Western World was the latest addition last year.
Mr Driscoll said the integrations had worked out well. “Talbot has great people and an incredible market position in Lloyd’s speciality classes,” he said. “Almost to a person, everyone who was at Talbot in key leadership positions at the time of the acquisition is still there.
“IPC and Flagstone both provided strategic benefits in that they were an opportunity to acquire a quality book of business and to expand our size and scale, particularly in the property-catastrophe space, gave us added capital flexibility and gave us a footprint in markets that we found attractive.
“Western World gave us access to the US excess and surplus lines space. The US is the largest and most profitable insurance market in the world, so this was a natural transition for us to get closer to the original risk. And the team at Western World is world class. They have relationships they’ve built over 50 years, something you couldn’t create organically.”
A smaller acquisition, Longhorn in 2013, allowed Validus to build up its agricultural insurance premiums to more than $250 million a year.
With a wave of consolidation sweeping the reinsurance sector, many in the industry are saying that size matters more than ever. But size alone should not be the focus, in Mr Driscoll’s view.
“Discussions with our customers suggest that scale is not the panacea,” he said. “What they really want is solutions to their problems. That’s what motivates us. If they need additional capacity, we have a big balance sheet and we can also utilise AlphaCat to leverage additional capacity.
“We sell a wide variety of specialty, marine and energy, and property classes, so we’re able to provide broad solutions to our customers.
“The key differentiator for Validus is our use of analytics and our commitment to sharing our analytics with our customer base. We have a team of 40 people in our Validus research department, and that’s both cat modellers and scientific researchers — that’s meteorologists, seismologists, climatologists and statisticians. We push a significant amount of their research out to our customers, so they too can benefit from the investment we’ve made in our business.
“Size is important but it’s probably not a significant enough reason for entering into an M&A. We look for strategic reasons as to why we would consider M&A activity.”
He said companies in the $1 billion-$2 billion size range may struggle to some extent, “but above that it’s about what type of solution you can provide”.
“We don’t feel a pressing need to pursue M&A activity for its own sake,” he added. “Right now, valuations are at a point where making an acquisition for financial reasons is more challenging.”
The pricing peaks and troughs that have characterised the property-catastrophe reinsurance market in the past and encouraged waves of new companies to set up after major events are likely to be smoother in the future, as a result of the new capital supplies and the mechanisms built to enable them, Mr Driscoll said.
“Capital flows are such, that we would expect market cycles to be shorter,” he said. “The existing participants in the market are likely to be the beneficiaries, in the sense that because the market cycles are so short, new capital inflows, such as occurred in 2002 and 2005, may be inhibited. I’m not saying that there won’t be capital inflows, just that it’s likely to be to a lesser degree than it has been in the past.
“The mousetrap that’s now been built with the traditional rated balance sheets, coupled with alternative capital platforms, is going to make new capital inflows more challenging.”
Bermuda remains home to Validus and there are good reasons why.
“There’s an incredibly dense concentration of really talented people in all aspects of the business, whether it’s finance, accounting, underwriting or actuarial,” Mr Driscoll said. “When we have a need, we’re confident that it can be met in Bermuda with a high level of professionalism.
“We’re also a global organisation. Our group supervisor is the Bermuda Monetary Authority and we’re really proud of the fact that Bermuda is going to achieve the impending Solvency II equivalence. That certainly helps our ambitions on a global basis.”
Validus also takes pride in its community support and involvement. In the past year alone, the company has supported around 60 local organisations and has key relationships with some, including Beyond Rugby, WindReach and the Bermuda Overseas Mission.
It also takes employee training and development seriously. Mr Driscoll estimated that close to ten full-time staff had come through its internship programme and Validus will offer its first scholarship this year. Bermuda is proving to be a significant talent pool, he added.
“There’s an acceptance in the community that this is a really attractive industry,” he said. “We always want to access the best possible talent and to be able to do so in Bermuda is very appealing and it helps us to look past some of the near-term volatility that the economy may be experiencing.
“The infrastructure is well built out. I’ve got four kids here and we love living in Bermuda. It’s got great education. great social aspects and it’s a wonderful place to raise a family. That helps to attract expatriates — which sometimes we need to do for certain roles.”
As for Validus’ next ten years, Mr Driscoll sees as major themes the expansion of US business through Western World, growth in emerging markets, especially Latin America and Asia, and a continuing commitment to analytics.
He also believes private reinsurers could and should be shouldering more of the risk currently borne by the public sector.
“We look at a variety of areas where there are government subsidies or support around the transfer of insurance risk and that’s where Validus wants to be the leader in helping the reinsurance industry to increase the private market role in public-private partnerships.
“We need to find ways to make the pie bigger. We can look at areas like the National Flood Insurance Program in the US and we’re working on a project right now to work out a private-market solution for residential flood and we believe that’s an area with fantastic growth potential.
“We were vocal supporters of shrinking TRIA [the Terrorism Risk Insurance Act], but unfortunately they extended it for another seven years with what we think was minimal expansion of private-market solutions.”
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