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Noonan: alternative capital has temporarily plateaued

Intense competition for limited property catastrophe risk has started to deter fresh alternative capital from entering the reinsurance sector, Validus CEO Ed Noonan told The Insurance Insider.

"If you walk around Bermuda today, what you hear from everybody in the space is: 'We can't put the money to work'.

"And so I sense that for the moment we're reaching a bit of a plateau."

He continued: "Even the pension funds are saying this doesn't feel like a great time to enter the sector - it feels like everything is in a squeeze.

"My expectation is that the capital is going to get choked off because there isn't the supply of available deals with adequate returns."

Earlier this year The Insurance Insider reported that $9bn sector-leading asset manager Nephila had closed a number of its funds.

The traditional reinsurance sector has spent much of the year fretting about the influx of capital from pension funds and other non-traditional sources into catastrophe reinsurance, which has encouraged a significant uptick in cat bond issuance and accelerated the decline in pricing on cat treaties.

Noonan acknowledged that cat rates were likely to soften in 2014, although the Validus executive was sanguine about margins. "Rates aren't going to be bad next year, they're going to be less good, but there will be more programmes that are bad from a pricing standpoint.

"So the real issue is going to be the fight for signings on better programmes and we've built the entire company to win that fight."

Noonan pointed to the size of Validus's balance sheet, the additional capital on offer via its AlphaCat funds, its ability to commit to hefty line sizes, its leadership capabilities and its dedicated research team as factors that helped it win business.

"In terms of signings we do really well and fight our corner very hard," he concluded.

With the lower cost of capital and expense advantages that cat funds enjoy, there has been some chatter about traditional carriers aggressively shedding capital to approximate the model.

But Noonan said that the hybrid model of reinsurer and third-party asset manager continued to offer the best returns.

"The problem with being a fund is that the returns for underwriting catastrophe reinsurance - at least in our portfolio - are still pretty attractive."

"So we're happy to let the business that needs a lower cost of capital go out to AlphaCat, we're happy to buy retrocession from catastrophe funds that have a lower cost of capital, but our core portfolio is still really good and our position in the market is excellent."

The Validus chairman and CEO said that some of the retrocession cover on offer from alternative capital providers at present was "absolutely stunning" in terms of pricing and coverage.

He explained that Validus had "filled its boots" with lower-cost-of-capital retro earlier in the year and was already setting about the same process for 2014.

With such intense competition in the cat space, Noonan said that he expected AlphaCat to evolve to write non-catastrophe risk.

"We will take in more capital in places where we can use it, but it may not be very cat driven at all."

"AlphaCat is an interesting vehicle and it gives us a lot of flexibility. I think AlphaCat's future is cat and lots of other things."

Last week Validus reported third quarter operating profits of $155.2mn, or $1.50 per share. This was less than the $170.6mn or $1.74 a share earned in Q3 2012, but ahead of analysts' consensus of $1.38 a share.

In a period without catastrophe losses, Validus was able to report a combined ratio that improved from 69.9 percent to 68.6 percent for the quarter.

The improvement was driven by a bigger contribution from reserve releases, which boosted the combined ratio by 12.2 percentage points compared to 10.5 percentage points in Q3 2012.

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