Validus’ AlphaCat ILS operations account for 8% of Q1 income

by Artemis on April 26, 2013

Bermuda located insurance, reinsurance and third-party reinsurance capital management group Validus Holdings announced its first-quarter 2013 results yesterday. As one of the largest re/insurers which has a capital markets division and has been actively managing third-party capital for some time, it is always interesting to see how the segments of its business which touch on insurance-linked securities and collateralized reinsurance have performed.

Validus’ Chairman and CEO Ed Noonan said that all three of the firms business segments, Validus Re, Talbot and the AlphaCat capital management segment, reported strong earnings allowing it to achieve a record result for the first quarter.

On a net income basis the AlphaCat third-party capital segment, which operates both collateralized reinsurance sidecars as well as the AlphaCat ILS funds, contributed around 8% of the firms total income for the quarter. Net income from AlphaCat was $17.4m for Q1 2013, while net operating income came to $18.2m.

Gross premiums written by the AlphaCat segment were $96.5m for the first-quarter, a $93m increase over the $3.5m written in Q1 2012, helped largely by the new capital inflows of $404m that the firm attracted to the segment in time for the January renewals we assume. Managed gross premiums were also up for the quarter, at $96m for Q1 2013 compared to $77.4m for Q1 2012. Net premiums earned were also much higher at $27.6m for Q1 2013 compared to just $2.7m for Q1 2012.

The combined ratio of Validus’ AlphaCat ILS and collateralized segments helps to explain why reinsurers see third-party capital as a good addition to their business. AlphaCat’s combined ratio for Q1 2013 was just 24.5%, down significantly from 50.3% for Q1 2012. By contrast Validus Re had a combined ratio of 51.5% for Q1 2013 and the Talbot segment had a combined ratio of 71.9%. So it’s clear to see that AlphaCat has proved a very profitable segment of Validus’ overall operations in the last three months.

Interestingly, Validus’ quarterly results show that the joint-venture hedge fund style reinsurance operations PaCRe, Ltd., which it launched in partnership with the Paulson & Co. hedge fund. have not yet contributed significantly to its results. For the quarter PaCRe Ltd. contributed a $300,000 loss on a net income basis but a $200,000 net operating income profit. The results don’t contain anymore details on how PaCRe is doing.

It’s clear from Validus’ results that its AlphaCat Managers Ltd. business of third-party capital collateralized reinsurance sidecars and ILS funds is making a decent contribution to the firms overall results. It is on track to significantly increase its managed premiums under AlphaCat this year, having reported $148m of managed premiums in 2012 and already $96m for Q1 2013.

Validus’ reinsurer platform, which allows it to participate in different types of reinsurance business, with differing attachment points, returns and risk profiles and utilising different sources of capital, is one we are likely to see others continue to emulate as the ILS and third-party reinsurance capital space grows in popularity and profile.

Read more about Validus’ expectation that ILS and third-party capital will play a growing role in reinsurance.

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