Bermudan reinsurer Validus had to fight hard to acquire Talbot, but in winning the Lloyd’s managing agent, for a reported $400m, it increased financial security through diversification, as well as its global distribution. Mairi Mallon looked into the background to the deal.

When Validus Holdings put its hat in the ring to buy Talbot Underwriting, it entered a fierce bidding war for what was seen as the cream of Lloyd’s of London.

Bermudians, flush with cash after two years of high pricing and no major catastrophes, were looking to diversify into new lines and markets. For the ‘Class of 2005’, who set up in Bermuda during the high pricing environment that followed Hurricane Katrina in 2005, the lure of diversification was strongest. And market reforms over the past couple of years, plus the top ratings and second-to-none distribution channels, made Lloyd’s syndicates the must-have purchase in 2007.

Among those on the prowl were ArielRe, Ironshore and Tokio Marine. But Talbot’s management was wooed by Validus Re CEO Ed Noonan and his team.

Noonan said theirs was not the highest bid, but the best fit. The deal was worth $400m (£200m), according to reports, and was the first significant purchase of a Lloyd’s syndicate by a Bermuda-based reinsurer.

“If I could find a deal like that every couple of years I’d be the smartest man on the planet,” Noonan told Global Reinsurance.

In the wake of Katrina

Validus Holdings likes to be first. It was one of the first off the starting blocks back in 2005 when Hurricane Katrina hit the United States and capacity contracted. Sisters Rita and Wilma caused the prices in property catastrophe and marine & energy to soar even further. A canny few knew that there was a lot of money to be made in providing reinsurance, and Bermuda was awash with start-ups. Poor stock market returns had hedge funds and other capital markets lining up to throw money at these ventures. In all, about a dozen companies were set up, and nine made it - Amlin Bermuda Ltd, Ariel Reinsurance Ltd, Flagstone Reinsurance Holdings Ltd, Hiscox Insurance Co (Bermuda) Ltd, Harbor Point Reinsurance Ltd, Lancashire Holdings Ltd, New Castle Reinsurance Co Ltd, Omega Specialty Insurance Co Ltd, Validus Holdings Ltd (Amlin, Hiscox and Omega differed from the other 2005 companies and the earlier Class of 2001 in that they were fed in part by business emanating from their sibling Lloyd’s syndicates). These nine companies of the Class of 2005 wrote $3.3bn of gross premiums during the opening year.

When Hurricane Katrina hit, Noonan was running a US insurance company - United America Indemnity Ltd - on an interim basis and immediately saw the potential – but not in insurance or for the company he was with.

Almost simultaneously, other heavy hitters such as Jeff Greenberg and George Reeth, were thinking the same thing. Jeff is the son of Maurice ‘Hank’ Greenberg, who was at one point being groomed to take over AIG. Jeff is now the managing principal of Aquiline Holdings, but also served as chairman and chief executive officer of Marsh & McLennan Companies, Inc. from 2000 to 2004. From 1996 to 2004, Jeff Greenberg was the chairman of MMC Capital, the manager of the Trident Funds, which have backed numerous start-ups. He started his career at AIG where he climbed the ranks from 1978 to 1995. Reeth was a senior executive with Willis Group Limited from 1992 to 2005 and was chairman & chief executive officer of North American Reinsurance Operations for Willis Re Inc. from 2000 to 2005.

Noonan, who had served as president and chief executive officer of American Re-Insurance Company from 1997 to 2002, having joined American Re in 1983 and is also a Swiss Re veteran, knew both men well for many years, and together they hatched a plan which ended up forming Validus.

“We all saw the same opportunity and so within probably 10 days of Hurricane Katrina, we were sitting down putting together a business plan to start a company,” said Noonan. “Our view was there would be significant dislocation in the market and the existing players would have challenges in replenishing capital and would be likely to pull back and take less risk going forward. Subsequent to that, Rita and Wilma struck, and that pretty much made the argument for us.”

Within 10 weeks they raised $1bn, hired 12 people, found office space in Bermuda, got licensed, rated by AM Best and opened their doors on 1 December 2005 to begin accepting business – mainly in short-tail lines.

Whirlwind time

“We were really out ahead of other start-up companies in that regard,” he says of this whirlwind time. “We thought being in the market for January 06 would be critical, and I think that has been a big asset for us. We hired an excellent team of underwriters, who also brought with them their relationship with brokers and ceding companies. We augmented that with George Reeth’s relationship with ceding companies and my relationships with ceding companies – it is a very experienced team of people.

“I don’t want to say light heartedly that it wasn’t a challenge to attract business… but frankly it wasn’t really much of a challenge to attract business. There were so many companies that weren’t responsive because they were trying to total up their losses from Katrina, Rita, Wilma and so many companies that were reducing their US catastrophe risk going forward that it wasn’t hard to attract business.”

There were other areas where they started up – they hired a top international underwriter and even Noonan confesses he was “surprised” by how well he was able to attract business, particularly out of Europe at Jan 1 2006.

But after two years of full coffers and few catastrophic losses, Noonan knew it was time to grow and diversify – and in 2007 went shopping.

“Having gotten through the wind season of 2006 with no events, we looked at our business and said, ‘great business’. But writing predominantly catastrophe reinsurance portfolio is an extremely volatile business, and our view of it was we need a bit of diversification,” said Noonan. “We looked at the US market, we were weighing up if we should we buy a US company or explore Lloyd’s. We felt that Lloyd’s was by far the better vehicle. Lloyd’s offered us global distribution, particularly in the short-tail lines that we like.

“It gave us the ability to write a broader array of short-tail risk business that you don’t see in Bermuda. Certainly the infrastructure, the capital advantage and the rating, were all very attractive elements of it to us. We put together the criteria of what we were looking for in a Lloyd’s syndicate and we identified four that met them. Top of our list was Talbot, so we focussed on going after Talbot.”

Big fight

When asked if it was a big fight to secure the deal, Noonan said: “Oh, absolutely. There was an open bidding process. At the end of the day we weren’t the highest bid, but we were the best fit for management and it was just a great fit for us. Our portfolio was, prior to Talbot, very heavily weighted towards the US, whereas at Talbot, 76% of their business is non-US. So it instantly gave us global diversification. Validus was exclusively reinsurance, Talbot is predominantly an insurance franchise. Overnight we went to a 55/45 reinsurance/insurance weighting. The diversification of that is important for us. They had very little US catastrophe risk which was also attractive, and they have some lines of business in which they are acknowledged leaders in the market, they are fairly specialised and very attractive.”

He pointed to their marine & energy portfolio, and in particular their war risk and terrorism business. Talbot came into this market straight after 9/11 and established themselves as one of a small group of leaders in that business.

“Talbot are extremely good at it. They write in 146 countries around the world and it is a very, very profitable portfolio for us. So all of that allowed us to go from being a kind of a one trick pony to a broadly diversified insurance, reinsurance short-tail specialist. Much less volatility, higher ROE [Return on Equity] – a great deal for us.”

The deal was sealed in July 2007. Since then, the two companies have been learning to work together, streamlining their operations. Now they are facing the same challenges as everyone else, but Noonan is bullish about the future – although he says they are not actively looking for more M&A activity in the future. But they are stopping writing business that they see as unprofitable – but Talbot has given them a much more solid platform.

“We are knocking stuff back,” he said. “We are in the global market, so you are not immune to competition at any level. One of the things that Talbot gave us is diversity. They have about 12 different business segments they operate in. In Validus, we break our business into four different segments, but with 16 different business segments you have the ability to shrink some with pricing and continue to push ahead with others. And so, all things considered, I think it gives us a much better ability to manage in a softening environment.

They have been following the Lloyd’s franchise, and when Lloyd’s opened up in Asia, they followed and went to Asia and Singapore. He said: “That is a great market, particularly for Talbot’s products, certainly the marine and energy, the war risk and terrorism, construction business… Asia is one of the few growth markets on the planet. So that is an intermediate term development opportunity for us.

“We have the people and infrastructure in place, and we are beginning to write business there.”

The company is also weighing up the Middle East, looking at North Africa and have recently opened a Latin American office based out of Miami, so they are still looking at growing the Talbot/Validus businesses.

“We spent a lot of time this year learning to work well together between Bermuda and London and I think that is going extremely well for us,” said Noonan. He added laughing “There are a whole bunch of us with name plates on seats to London.”

But for him the biggest benefit to both companies is being able to attract some business that they would not have been able to before the buy-out.

“It is very encouraging,” he said. “I think beyond to obvious financial benefit of the acquisition, we are seeing the business combination benefits as well.”

Mairi Mallon is a freelance journalist.