ILS capital helps Validus secure most “comprehensive & affordable” retro

Providing evidence of the accessibility of attractively priced reinsurance capital for retrocession Validus Re CEO, Kean Driscoll, says the firm has purchased its “most comprehensive and affordable program”, with the majority of the capacity coming from the ILS market.

During the Validus Holdings fourth quarter 2015 earnings call executives discussed the firm’s activity in the retrocession market. For its 2016 retro program the firm significantly utilized the growing base of ILS market capacity to secure its placement, explained Validus.

Commenting on the retro market, Driscoll, CEO of the firm’s reinsurance unit Validus Re stressed, “we were able to purchase the most comprehensive and affordable program in our history. The capacity predominately originates from the collateralized market.”

“We purchased worldwide aggregate protection in addition to protection on a marine and specialty portfolios,” continued Driscoll.

The core of the program, says Validus Chairman and CEO Ed Noonan, attaches at $275 million, exhausting at $600 million.

“This is a significant amount of limit covering our natural peril exposure from a marine energy portfolio, or our global property portfolio, as well as some other sources of cat risk that come into the group,” explained Noonan.

Furthermore, outside of the group’s worldwide aggregated retro cover, explains Noonan, Validus has marine and energy specific protections, specialty specific protections on its terrorism program that attach at varied levels and, “have a structure that is pillared by peril and by territory that attaches significantly lower than the $275 million.” Highlighting just how comprehensive the company’s retrocession protection program is.

When questioned on the affordability of the retro program placed at 1/1, Noonan advised that the firm actually bought a little less coverage, spending around $10 million less on retro at this renewal. Adding that for the full-year there wasn’t much difference, apart from “the rate improvement” that Validus was able to achieve.

Underlining that Validus was able to purchase a greater volume of retrocessional protection for more or less the same price as last year.

Driscoll also explained that its retro purchases “are accretive to expected return on equity (ROE),” suggesting that the firm feels its more affordable and comprehensive placement will actually benefit its ROE, rather than erode it.

During its earnings call Driscoll underlined that the capacity for its retro program mainly originates from the collateralized reinsurance marketplace, further supporting the growing appetite of insurance-linked securities (ILS) investors to assume the risks.

Along with the increased appetite for the risks from ILS, and traditional investors, helping the firm secure its most comprehensive and affordable retro placement to date, was likely the supply/demand imbalance that still engrosses the global insurance and reinsurance landscape.

Despite some reinsurers noting signs of a slight increase in reinsurance demand at 1/1 2016, and with market forces perhaps signaling further growth in demand as the sector moves further into 2016, a significant supply of capacity from both alternative and traditional sources continues to outweigh demand.

International insurers and reinsurers have witnessed declining rates for a prolonged period now, with some business lines experiencing more severe declines than others owing to heightened competition and a lack of catastrophes events, among other factors.

Validus, along with other global insurers, reinsurers, and ILS market players feel that 2016 could well be the bottom of the pricing cycle for U.S. property cat, as returns are no longer meeting cost-of-capital requirements, even for some of the larger reinsurance market players.

In response to this, Noonan highlighted how the firm utilizes its ILS and third-party capital manager AlphaCat, and retrocession to “optimize” its risk position.

“We’ve weathered the worst of rate decreases in the U.S. catastrophe market, which is our biggest source of earning. And while we benefit from the lack of major events, we’ve also spent a good deal of money to protect the portfolio and based on our returns I think our model works,” said Noonan.