AlphaCat increases third-party capital & ILS contribution to Validus

AlphaCat, the third-party reinsurance capital and insurance-linked securities funds unit of Bermuda domiciled insurance, reinsurance and alternative capital manager Validus Holdings, continues to make a positive contribution to the firm.

In its latest quarterly results Validus reports a big increase in net income for the quarter, reporting $153.4m for the second quarter of 2014, compared to just $30.7m a year earlier. Net operating income was up as well as the reinsurer showed that strong underwriting, a low combined ratio can still bring performance even in a tough operating environment for much of its core reinsurance business.

CEO Ed Noonan commented; “Validus reported another solid quarter delivering $153.4 million of net income and a 16.5% annualized return on average equity. Strong underwriting and good diversification between insurance and reinsurance continued to drive our results as Validus posted an overall combined ratio of 68.6%. Despite competitive pressures in the marketplace and more loss activity than the market may have appreciated, all three of our segments – Validus Re, Talbot and AlphaCat – performed well.”

Validus actually underwrote less premiums in the quarter than a year earlier, $655.6m of gross premiums in 2014 versus $702.3m in 2013, with the biggest decrease being in property treaty premiums written. The firm wrote slightly more direct insurance business, although this did not make up for the pull-back in reinsurance lines.

Despite the pull-back in premiums written the quarter saw impressive income from Validus, although it did miss earnings oer share estimates, largely due to a higher than anticipated core loss ratio and slightly higher expenses. Favourable development and low catastrophe losses during the quarter compensated for this to a degree.

The Validus platform continues to bring returns to investors though and it’s unlikely any disappointment over the missed EPS will be lasting in the market. The combined reinsurance through Validus Re, insurance through Talbot and third-party capital and ILS through AlphaCat appears to provide balanced earnings and attractive income.

During the first six months of 2014 the third-party capital platform AlphaCat made partial returns of investment from its AlphaCat 2013 sidecar vehicle, both to third-party investors and itself. The fact this was not all reinvested into the AlphaCat 2014 vehicle perhaps shows that the firm continues to leverage third-party capital intelligently, only taking capital when it needs it and returning it to investors when opportunities are not conducive to deployment.

The AlphaCat segment as a whole, which includes the AlphaCat ILS funds, the $160m AlphaCat 2014 reinsurance sidecar and its PaCRe Ltd. joint-venture reinsurer, which Validus launched in partnership with the Paulson & Co. hedge fund in 2012, saw a slight dip in gross premiums written to $43.79m for Q2 2014, down from $46.76m in Q2 2013. For the first-half, premiums written in 2014 were $128.137m, compared to $143.276m a year earlier.

After losses and expenses however the AlphaCat quarterly result is up on a year ago as the third-party capital and ILS unit continues to grow its contribution, with underwriting income for the quarter of $28.496m compared to $26.014m a year prior. For the six months underwriting income is even more impressive, with $59.941, reported by AlphaCat for H1 2014 compared to $46.879m for H1 2013.

So even while writing less premiums the AlphaCat unit is contributing more income to the Validus group results, a sign of strong underwriting and risk selection. In terms of the net income attributable to Validus itself, AlphaCat earned Validus just under $15m for the quarter compared to just $5.3m a year earlier for the quarter.

$11.2m of the net income earned by AlphaCat is from the sidecars, writing collateralized reinsurance and the ILS funds, which invest across the spectrum of ILS and catastrophe bonds. The remaining $3.8m is attributable to income earned from PacRe.

AlphaCat experienced favourable loss reserve development of $3.7m from prior accident years, which benefited the loss ratio by 11.5 points, a sign of prudent reserving and side-pocketing of risks, which investors will no doubt appreciate. The combined ratio for the AlphaCat segment is much improved over the first half of the year, coming in at just 5.1% in 2014 compared to 25.1% a year earlier.

AlphaCat assets under management are up slightly to just under $1.5 billion, at $1.492 billion at the end of June 2014. Of this, $1.190 billion is third-party capital, with $164.765m in the AlphaCat sidecars, $450m in the AlphaCat ILS funds and $575m in PacRe. The remaining $303m is Validus capital, as it continues to keep its position in all of its third-party activities. Third-party AuM is down slightly on the end of 2013 largely due to the return of capital from expiring sidecars, as we mentioned above.

AlphaCat continues to be a prime example for how a reinsurer can reap the benefits of managing third-party capital and investing in ILS. Validus continues to receive a positive contribution from the unit, a contribution that has increased even while gross premiums written were down and AuM slightly lower as well. That’s an impressive result and helps to boost Validus’ income while providing attractive returns to its third-party investors, both in AlphaCat and its shareholders.