London market participants are competitive but disciplined, Validus Holdings’ CEO said on Friday. But one pocket of “excessive competition” is coming from Berkshire Hathaway’s Lloyd’s sidecar—a deal he called “unseemly” during an earnings conference.
Edward Noonan, chairman and chief executive officer, included the description during a generally upbeat report on specialty insurance and short-tail reinsurance market conditions—and stressed that the Berkshire deal is having little impact on Validus’ Lloyd’s insurance operation, Talbot.
On the reinsurance front, he also took issue with executives who are predicting lower property-catastrophe reinsurance prices at midyear renewals, in part because of an upcoming model change from catastrophe modeler RMS.
Like other Bermuda-based insurers and reinsurers who reported first-quarter results earlier in the week, Noonan had good news to share about his company’s bottom-line net income and top-line growth. At Validus, net income soared to $223.2 million in first-quarter 2013, compared to $124.2 million in first-quarter 2012. And Noonan reported that gross written premiums jumped 31.9 percent to $1.1 billion, in the quarter.
While all three segments of Validus’ business contributed to net income—its short-tailed reinsurance writer Validus Reinsurance, its London-based specialty insurer Talbot, and AlphaCat, which manages third-party capital in insurance linked securities—Talbot was the only segment that did not grow its top-line in the quarter, Noonan reported.
Noonan chalked up Talbot’s flat level of premiums to “market conditions overall,” and while he said that a sidecar deal involving Berkshire Hathaway, Aon and Lloyd’s is having very little direct impact on Talbot, he took time to criticize the arrangement during his prepared remarks on the earnings call—”speaking as an owner of a Lloyd’s syndicate” and on behalf of the Lloyd’s franchise generally.
“The idea of blindly accepting all risks with no underwriting whatsoever is certainly not a deal that any Lloyd’s underwriter I know would enter into,” he said, referring to the deal that Aon announced late in the first quarter.
In March, Aon Risk Solutions announced that it had signed “a unique coinsurance agreement” with Berkshire Hathaway International Insurance Limited, which Aon said “provides clients fast and efficient access to AA+ rated capacity for all eligible business placed by Aon Risk Solutions where the Lloyd’s market participates.”
Aon continued: “The first of its kind in the insurance industry, this innovative Aon insurance sidecar is globally available across all industry segments, bringing benefits usually exclusive to reinsurance markets to retail clients.”
“This additional capacity provides dedicated Berkshire Hathaway International Insurance Limited capital through a fixed participation structure on a full follow-form basis.”
Reacting to the deal last Friday, Noonan said, “Berkshire Hathaway has done a lot of business with Lloyd’s over the years and I’d suspect they have made a lot of money doing it.”
“To turn around and free ride on the 325-year-old franchise, its underwriting expertise, claims handling and professionalism is frankly, unseemly,” he added.
Turning to the impact on Talbot, he said: “If we were signed down fully and wrote no new business, it would only amount to a 1.3 percent impact on our premium.”
“We lead a very high percentage of the risks we write in key classes and we have long-term continuity on the business. Consequently, we feel good about our ability to defend our book.”
“Frankly, if Berkshire wants to take a 7.5 percent line in every risk we decline, they’re welcome to it,” he added, referring to the reported terms that put the coinsurance percentage at a 7.5 percent share of Aon’s subscription through Lloyd’s.
Drilling down on Talbot’s results, he said $55.6 million of first-quarter profit reflected low levels of losses in a severity-driven book. From a pricing perspective, he said Talbot’s aviation business saw rate decreases of 5 percent, cargo and onshore energy had single-digit jumps, but all other classes were unchanged.
RMS, ILS Impact On Re Market
For Validus Re, a 31.9 percent jump in first-quarter gross written premium was fueled, in part, by the recent acquisition of Longhorn Re, a crop reinsurer, and last year’s deal for Flagstone Re, specializing like Validus in short-tail lines.
Looking ahead to midyear renewals in Florida, Noonan agreed with executives at Everest Re and Montpelier Re, who reported earlier in the week, saying that they believe both demand and supply are increasing, but that they’re companies are well-positioned to take advantage of both traditional reinsurance market and ILS market opportunities
Everest’s Chairman & CEO Joe Taranto said he expected to be renewing business at “healthy rates,” in Florida in spite of brokers’ predictions about price declines. Taranto reported that Everest has concluded some 6/1 Florida deals already—at similar rates to last year—and noted the prospect of sharing in underlying homeowners and commercial property insurance rates on pro-rata deals.
For other deals that Everest might see in the coming months, “we have no interest in participating in those portions of the business where there are meaningful declines,” he said.
Noonan, who said Validus Re mainly participates on excess-of-loss business, put a number on the potential midyear increase in demand, suggesting that it could be as much as an additional $2 billion.
“Our sense is that clients are generally looking to spend the same amount on reinsurance, but hope to be able to purchase more limit,” he added. “We’re confident that rates in Florida will remain adequate or better through the renewal season.”
“Florida is the best-paying marketplace in the world. So even with more competition, I don’t think that we’re particularly concerned about Florida rates becoming inadequate.”
Pressed further by an investment analyst to address talk of price declines by other executives, Noonan said, “I have no understanding why anybody talks about rates going down. You’re basically talking down your own business.”
“I refuse to do that, as a matter of principle.” On the other hand, “if I was talking [about] rates going up, you might conclude I was a fool.”
“We know that there’s a lot more demand in Florida. But we also know that Florida is ground zero for ILS investors. So we just need to [wait and] see the pull between the two.”
Noonan also rejected the idea that a slated revision in RMS’s U.S. wind model will drive sharp rate declines, even though he does foresee a roughly 20 percent drop in exposure for some insurers, with actual risk changes varying by territory and storm intensity.
“Frankly, there wasn’t anybody paying up to the old RMS model,” Noonan said. “So the idea that suddenly, there will be significant double-digit rate decreases because of the upcoming model changes isn’t realistic,” he said.
“The market never moved to the RMS standard. So the reduction… will be significantly less than that” 20 percent, he said.
“We do see customers citing this [model change] frequently as a reason for broader renewal discussions,” he said, adding, however, that the forthcoming changes from RMS actually align with the view of risk Validus already has had in place since RMS made its last model change (a generally upward loss cost revision) in 2011 “Given that RMS is adopting our view of risk, it doesn’t change our pricing parameters very much.”
Commenting further on the new capacity from the ILS market, Noonan had some predictions beyond midyear 2013. “It feels to me like we’re in the early-to-middle stages of the ILS era in our business.”
“Given the size of pension funds around the world, we expect to see significantly more assets enter the market. This type of this disruption has been a catalyst for change in other financial sectors and may well be the case in our industry.”
Still, Validus is poised for the change, he said. “Our clients tell us that they want access to institutional investors and a lower cost of capital, but they also want the analytics and continuity that we bring as a large, traditional reinsurer,” he said.