Noonan: Don’t write off traditional reinsurance
Don't be too quick to write off traditional reinsurance — it has some important advantages over the new wave of alternative capital.
That is the view of Validus Holdings Ltd CEO Ed Noonan, speaking in an interview with The Royal Gazette, after the Bermuda company last week announced a second-quarter profit of $153.4 million.
“In the catastrophe market, traditional reinsurers have some significant advantages,” Mr Noonan said. “It's a product that's been tried and tested over 150 years and it's proved to be a very reliable product.”
The growth of insurance-linked securities (ILS), including catastrophe bonds, in recent years, has been fuelled by capital market investors keen to gain exposure to the reinsurance market. Investors receive an attractive return with the risk that they can lose their capital if a specified loss from a specified event occurs and triggers the bond.
The ‘alternative capital' is claiming an ever-increasing market share and has dampened pricing. The situation prompted one speaker at the Insurance Day Summit in Hamilton last month to suggest that “the traditional reinsurance model is dead”.
Mr Noonan said there was potential for uncertainty in the terms of some ILS products, because they are still relatively new. “People are still feeling their way through the language,” he said.
And in the case of an event so large it causes a reinsurance industry dislocation, the results for ILS remain to be seen — some investors might choose to get out, he said — but the insurance companies who are the buyers of reinsurance know that the traditional reinsurers will remain in the market.
Traditional reinsurance had also proven to be “evergreen”, he added, providing coverage even when claims took years to surface — such as after the 2010 Canterbury earthquake in New Zealand — while coverage from ILS products tended to expire quicker.
“The most important day in our business is the day after an event,” Mr Noonan said, referring to the company being ready and able to pay claims, but also able to take advantage of the higher rates that follow an event.
Validus entered the market in 2005 in the wake of Hurricane Katrina. With the acquisitions of IPC Holdings in 2009 and Flagstone Reinsurance in 2012, it grew its book of short-tail reinsurance, but these days Mr Noonan is very keen to extol the virtues of diversification in his business.
While the Validus Re unit in Bermuda is a major reinsurance player, the company's Talbot Underwriting operation in the Lloyd's of London market writes specialty insurance around the world. The Validus business mix is now about half and half, reinsurance and insurance, Mr Noonan said.
The company will further diversify its business with the pending $690 million acquisition of Western World Insurance Company, a US insurer.
Validus' underwriting operations proved highly profitable in the second quarter, with a combined of 68.6 percent, meaning that only a little over two-thirds of premium dollars were spent on claims and expenses. Mr Noonan said the drivers of that result were “strong underwriting and good diversification between insurance and reinsurance”.
Diversification between reinsurance and primary insurance allowed Validus to take advantage of the “different competitive dynamics” of the two markets, Mr Noonan said. At times when reinsurance was relatively cheap, it was an advantage to be a direct insurer, for example. Validus also boasts geographical diversification, as it writes business in 140 countries.
The diverse book also allowed Validus to take advantage of opportunities popping up in certain lines of business — for example, Mr Noonan said events in Ukraine and Libya were having a “significant effect on pricing in the war reinsurance market”, while a series of plane crashes this year would have an effect on the price of aviation insurance.
Mr Noonan has always voiced strong support for Bermuda as an international business jurisdiction. Asked whether the recent marches on Government House and the Cabinet Building by members of the People's Campaign had raised concerns about stability, he said not.
“Democracy can be a messy and noisy business,” Mr Noonan said. “The fact that people are expressing different points of view is the sign of a healthy democracy, so we are not concerned about the stability of Bermuda.”