Validus Looks for Growth in Emerging Markets

Source: Source: A.M. Best | Published on August 9, 2012

Validus GroupLike Lloyd's, which provides about half its business, Bermuda-based insurer and reinsurer Validus Holdings Ltd. is looking increasingly to the emerging markets of Asia and Latin America for its growth.

According to Ed Noonan, its chairman and chief executive, Validus is building that strategy around two hubs Miami and Singapore. "There's a trend in the world toward business being placed in local markets rather than being exported to places like London," Noonan said in a telephone interview.

Validus' Miami office is completely focused on Latin America, Noonan said. Singapore, he added, offers good access to the insurance market for Asian oil rigs.

The group's world view closely resembles Lloyd's own stated ambitions. In its Vision 2025 strategic plan, released this year, Lloyd's said it will strive to become "the major global hub for specialist insurance and reinsurance." This will involve developing its presence in emerging markets (Best's News Service, May 11, 2012).

"We're big supporters of Lloyd's obviously, and we're very pleased with the strategic direction of the market," Noonan said. Some of Lloyd's newer markets, such as China, will be of a long-term nature, he said. Others, such as Singapore, "are moving very quickly." In providing roughly 50% of Validus' revenue, Lloyd's is "terribly important" to the group, he said.

Validus Holdings was formed in October 2005 in Bermuda to take advantage of opportunities created by the large claims of 2004 and 2005. Starting with capital of about $1 billion, the group targeted such lines as accident and health, aviation cargo, construction, marine and energy and reinsurance.

With its capital base now at $4 billion, Validus also has offices in New York; Chile; Dubai; Hamburg, Germany; Miami, Waterloo, Canada and Singapore. The group is built around three segments: Validus Reinsurance Ltd., Talbot Holdings Ltd. and reinsurer AlphaCat.

Validus Re, which was formed with initial capital of about $1 billion, has targeted such short-tail reinsurance lines as property catastrophe, marine and energy, and retrocession.

Bermuda-based Talbot Holdings Ltd., which writes business through Lloyd's Syndicate 1183 and Talbot Underwriting Risk Services Ltd., was acquired in 2007. Validus has said the Talbot acquisition brought "access to the lucrative Lloyd's insurance market and provided a strategic complement to Validus Re's business."

AlphaCat also encompasses two new ventures, PaCRe and AlphaCat Re 2012, which concentrate on property catastrophe risk.

In the view of Robert DeRose, vice president at A.M. Best Co., and Gale Guerra, an A.M. Best senior financial analyst, the short-tail risks on which Validus is focused would include such lines as property, marine, aviation, energy and aerospace. DeRose and Guerra spoke in a telephone interview.

According to DeRose, growth within individual lines will depend on events. "It is important to understand how that market ebbs and flows," he said. There is likely to be growth opportunities in the United States after a hurricane, while last year's catastrophes in Japan and Thailand have created market openings in Pacific Rim countries.

More than two years after the Deepwater Horizon oil platform disaster, Guerra sees opportunities for underwriters in the Gulf of Mexico. "They are seeing more drilling activity," she said.

Noonan spoke in the wake of Validus' second-quarter results, which benefited markedly from a favorable catastrophe climate. Validus Holdings reported $167.6 million in net income for the second quarter of 2012, up 52.5% from $109.9 million for the same period in 2011.

Net income for the first half of 2012 rose to $291.9 million from a loss of $62.5 million in the same period in 2011. "The company's firing on all cylinders," Noonan said.

Validus' Miami office has performed "very nicely," successfully weathering the Chilean earthquake of 2010 and continuing to build market presence, he said. The Singapore and Miami offices serve territories "where the economic development of the world will be disproportionate, I suspect, for the rest of my lifetime."

The Latin American insurance market "is actually much more developed than people realize," Noonan said. The broader economic expansion of the region, he added, offers "tremendous long-term potential" for insurers.

Citing the "event-dependent" nature of Validus' business, Noonan declined to offer long-range premium predictions. Nor would he hazard one-year forecasts for the individual offices.

He added the group is not overly concerned with market share, in either Latin America or Southeast Asia. "We don't feel that we have to own either market," he said.

Noonan does not see the development of the newer insurance markets as likely to alter the nature of Lloyd's. Rather, he sees complementary relationships evolving, with such local markets as Dubai, for instance, focusing on risks deemed too small for London.

Oil rig risks in Asia are so big, they are unlikely to be absorbed locally in the foreseeable future, he said. "They need global capacity and the expertise that Lloyd's brings."

Lloyd's continues to generate growth opportunities in London and in such markets as Latin America and Asia, "where the Lloyd's license and brand are a huge asset," Noonan said.

Validus attracts business from all over Southeast Asia into its syndicate in Lloyd's of Singapore, which Noonan described as one of the largest in the Singapore market.

Noonan doesn't see the second-quarter results as a turnaround. "Last year we had big catastrophe losses in Asia, which is an important parcel of our business," he said. "This year what we're seeing is a complete absence of any notable losses in the quarter."

Validus' main concern for the rest of this year is wind. "When I look ahead, I mostly see weather charts of the Atlantic going all the way over to the coast of West Africa," Noonan said.

Noonan is largely optimistic about the group's prospects. Apart from how the hurricane season may unfold, he pointed to expectations of continued stability, and even increases, in pricing and the short-tail bias of Validus' business.

"We feel we're in a good environment and that will continue until 2013 even if there's a bit more competition," he said.

Noonan also is confident about the future of AlphaCat Re and PaCRe. Both entities, whose investors include pension funds and university endowments, benefited from inward flows of funds during the second quarter. "Investors in this asset class are seeing returns in the high single digits, which is hard to find anywhere else in the world," he said.

Guerra believes Validus' instincts were correct on AlphaCat Re and PaCRe. "They can bring in more premiums," she said. "They can bring in third-party capital. I think it was a win-win for both sides and the market as well."