Validus see’s mixed success with sidecars due to hedge fund investment strategies

Bermuda based reinsurance group Validus Holdings which has a number of sidecar and ventures, has announced its second quarter results and revealed mixed success in their sidecar segment. Validus launched a Bermuda Class 4 reinsurer PαCRe, Ltd. in a joint-venture with John Paulson and his Paulson & Co. hedge fund in April and in June announced another edition of their AlphaCat vehicle, AlphaCat Re 2012 Ltd.

Ed Noonan, CEO of Validus said in their earnings call; “Our AlphaCat business continues to demonstrate the economic and strategic value of outstanding research and analytical skills, size and market presence. AlphaCat successfully launch two new vehicles in the quarter, AlphaCat Re 2012 and PaCRe, and generated $58 million in catastrophe premiums.”

AlphaCat contributed $11.8m in operating profit to Validus during the quarter and now has $1 billion in assets under management. Noonan said that Validus feel as though they are just scratching the surface in this segment of their business and reading between the lines it seems likely that they will expand this asset backed reinsurance approach.

On their PacRe Ltd. joint-venture vehicle with Paulson, Noonan said that Validus have not fully deployed the capital that PacRe was launched with. PacRe was said to be capitalised with $500m at launch but to date somewhere around $170m seems to have been deployed with Validus planning to deploy more at the next renewal seasons. Noonan said this is due to the balanced top-layer strategy that PacRe has and said that you cannot achieve that strategy by deploying solely at the mid-year renewals and hence the January renewals remain important for this vehicle.

PacRe Ltd. actually contributed a loss to Validus’ quarterly results. PacRe has been a victim of investment losses across all four of the Paulson hedge fund strategies that it is invested in. PacRe’s investment portfolio suffered around $49.9m of losses on a consolidated basis. Validus take a $5m share of that loss through their participation in the venture. The investments are in four specific hedge fund strategies managed by Paulson, in credit, enhanced, advantage and gold focused funds. Paulson has recently been in the news for a number of losses, including one which saw all of his funds lose in June as a bet that Europe’s financial condition would worsen failed to pay off.

This just goes to show that no matter how attractive the reinsurance sector is right now an asset/investment backed approach to underwriting will always carry financial market risks if the underlying investment strategies fail to perform. 2012 has been a particularly difficult year for this kind of strategy and PacRe has been one of the more obviously impacted thanks to financial reporting, it’s likely that PacRe will not have been the only reinsurance vehicle with an asset backed strategy to have suffered in recent months.