Validus’ efficient use of ILS and retro mitigates Q2 losses

Validus Holdings’ efficient and comprehensive retrocession reinsurance program benefited the firm during the second-quarter of 2016, helping it recover $81 million of losses from the Canadian wildfires and the Jubilee oil field loss event.

Bermuda-based insurance and reinsurance company Validus Holdings revealed near the start of the year that it utilised efficient insurance-linked securities (ILS) capital to secure its most “comprehensive & affordable” retrocession program.

According to its Q2 earnings press release, Validus experienced a gross loss of $73.5 million from the Fort McMurray, Canada wildfires and a gross loss of $59.4 million from the Jubilee oil field, energy market loss, combining to a total loss of $132.9 million from the two events.

However, thanks to its extensive use of third-party backed retrocession reinsurance capacity secured at January 1^st, 2016, the re/insurer recovered $36.6 million of the wildfire loss, and $44.2 million of the Jubilee oil loss.

This represents a total reinsurance recovery from the two events of $80.8 million, meaning that Validus’ retro program helped reduce the firm’s exposure to these two events by just over 60%.

“We were pleased with how the program responded to events this quarter, reducing our net loss position from both midsize industry events like the Canadian wildfires and larger non-elemental losses like the Jubilee marine plant.

“We only eroded a very small amount of our property retro protection from second quarter events and thus have significant capacity remaining on our cover to protect us during the remainder of the year and we have replenished any eroded retro limit on our marine and specialty portfolios,” said Kean Driscoll, Chief Executive Officer (CEO) of Validus’ reinsurance arm, Validus Re.

Driscoll explained that two programs responded to the wildfire loss in the quarter, the significant worldwide aggregated retro cover and an underlying program the firm secured that is more focused on protecting earnings and removing volatility from non-peak exposures.

Specific to the Jubilee oil event, Validus purchased non-elemental industry loss warranty (ILW) protection, which Driscoll says resulted in its gross and net losses being highly aligned, adding that “our net loss position was very satisfying relative to our gross loss position and the size of the overall industry loss.”

The overall insurance industry loss for the Jubilee event is expected to be between $1 billion and $1.25 billion.

During the second-quarter Validus continued to utilise third-party reinsurance capital via its ILS investment management unit, AlphaCat, which Artemis has reported also took a hit from catastrophe losses in Q2, including the Fort McMurray wildfires.

Embracing the efficient and ample supply of third-party reinsurance capital for its property catastrophe business and also its comprehensive retrocessional needs is clearly working for Validus, helping the firm mitigate exposure to losses at the same time as providing value to its investors.

The firm has spoken before about utilising ILS and retro to “optimise” its risk position, and despite reporting a decline in operating income to $54.9 million (in a challenging market that witnessed an uptick in catastrophe losses along with experiencing a large non-elemental loss – both of which impacted the majority of carriers), the firm is pleased with its performance in Q2.

Ed Noonan, Chairman and CEO of Validus Holdings highlighted that despite losses in the quarter the firm is “really pleased” with a combined ratio of 89.9%.

“This is due to strong underwriting, excellent risk management and effective use of reinsurance, retrocession and third-party capital to protect our balance sheet,” said Noonan, during the Validus Q2 2016 earnings call.

A view echoed by Validus Re CEO Driscoll who said, “Our performance in the face of the second-quarter events is a result of both our ability to identify the best price risk and utilise retrocession protection and third-party capital to optimise our net portfolio.”

Retrocessional reinsurance protection is clearly a working benefit to Validus, which, along with AlphaCat, which itself has retro focused sidecars and invests in retrocessional contracts, enables the re/insurer to utilise efficient, alternative reinsurance capital to mitigate exposures, and ultimately support the strength of its balance sheet.