AlphaCat assets hit $1.88B, but PaCRe investment losses weigh

Total assets under management at AlphaCat Managers Ltd., the ILS focused unit of reinsurance group Validus, have reached $1.88 billion according to the reinsurers results, but performance for the unit was hit by investment losses at hedge fund reinsurance joint-venture PaCRe Ltd.

AlphaCat, the insurance-linked securities, catastrophe bond and reinsurance linked investments arm of Bermuda based re/insurance group Validus Holdings, has continued to grow in importance for the reinsurer, providing a valuable source of additional low-cost underwriting capacity and fee income.

The AlphaCat unit manages a number of ILS funds, including the recently launched BetaCat, as well as fully-collateralized reinsurance sidecars, the most recent being the $155m AlphaCat 2015 Ltd. collateralized reinsurance sidecar vehicle. The AlphaCat segment at Validus also manages its PaCRe Ltd. joint-venture reinsurer, which was launched in partnership with the Paulson & Co. hedge fund in 2012.

Earlier this month AlphaCat announced that it had raised $564m of new capital for deployment through 2015, split as $409m added to the AlphaCat ILS Funds and $155m for the AlphaCat 2015 Ltd. reinsurance sidecar. In that announcement AlphaCat announced its assets under management had reached approximately $1.7 billion excluding vehicles in run-off.

In the latest Validus results, announced yesterday, the firm revealed that AlphaCat Managers now has total assets under management of just over $1.88 billion as at 31st December 2014 (including the sidecars in run-off). Of this, $347m is related party, or Validus’ own capital contribution to the various ILS vehicles and $1.534 billion is third-party assets under management.

Across the various AlphaCat collateralized reinsurance sidecars, ranging AlphaCat 2011 to 2015 most of which are running off, the firm reports $60.5m of related party capital and $289.4m of third-party capital, so a total of just under $350m.

For the AlphaCat ILS funds, it is reported that related party capital totals $213.4m, while third-party capital reached $785.9m, giving total assets managed at December 31st across the AlphaCat ILS funds of just shy of $1 billion ($999.3m).

The latest offering from AlphaCat is the BetaCat ILS fund, which is designed as a lower-cost, catastrophe bond market tracking vehicle, so investing across the market. The BetaCat strategy was only launched in the second-half of 2014 and the results show just under $22m of related party capital in this fund vehicle, but no third-party contributions have been reported. AlphaCat likely needs to build a track record with this fund before meaningful inflows from third-parties will be received.

Finally, the PaCRe Ltd. hedge fund reinsurance joint-venture with Paulson, which is reported to have $50.95 of related party capital and $458.59m of third-party capital, giving it a total capitalisation of just under $510m.

Results wise, AlphaCat Managers continues to prove a valuable source of both additional underwriting capital, that Validus can put to work alongside its own balance-sheet, as well as fee income and profit share.

In 2014 AlphaCat as a whole pulled-back slightly on gross premiums written, reporting $135.2m for 2014, compared to $147m for 2013, a decrease of 8%. This reflects the fact that AlphaCat is focused on U.S. and international property catastrophe business and in 2014 the unit found rate declines and competition deserved a slight pull-back on underwriting.

Premiums earned did not decline so much, reflecting perhaps a better use of the capital wielded in 2014. Net premiums earned in 2014 came to $132.4m compared to $137.4m in 2013, so only down 3.7%.

Other income, primarily from management fees, was up for the year at $27.1m, compared to $26,4m in 2013, likely reflecting having more capital under management.

2014 was a good year for investors in the AlphaCat vehicles though, with income attributable to operating affiliate investors reaching $109.4m, compared to $68.8m in 2013, an increase of 59.1%.

A low combined ratio across AlphaCat, reflecting low levels of catastrophe losses has helped in 2014, coming in at 17.5%, compared to a combined ratio of 36.9% in 2013.

In terms of growth of the assets under management at AlphaCat, the assets reported at mid-year 2014 sat at $1.521 billion as of the 30th June 2014. With the total assets under management, including PaCRe now reported as $1.88 billion that is growth of almost 24% in assets managed in just 6 months.

Validus reported its January renewal activities as well yesterday, and AlphaCat increased its premiums written by 17.3%, to $100.9m of gross premiums written.

Interesting, AlphaCat wrote more premiums in both U.S. and international property lines, while Validus Re wrote less which perhaps reflects putting lower-cost and more efficient ILS capital to work instead of the balance sheet as a group strategy. However, reflecting the still challenging reinsurance market environment, Validus Group as whole wrote 6% less premium at January 1st 2015.

PaCRe’s investment results weigh on AlphaCat once again. As we reported earlier this month, rating agency A.M. Best warned that the Paulson investment strategy had seen some losses which would affect PaCRe and as a result the rating agency placed the hedge fund reinsurer under review.

In Validus’ results the size of the loss becomes clear, with a reported $72.1m of unrealised investment loss at PaCRe just in the fourth-quarter of 2014 alone. $64.9m of this investment loss will be borne by non-controlling interests (or investors) and $7.2m by Validus itself. For the full year it looks as if the investment losses at PaCRe amounted to a little lower, at $55.1m.

As we said in our article two weeks ago, the Paulson hedge funds suffered during 2014, with the hedge fund manager suffering his second-worst year ever. It was largely Paulson’s event and credit driven strategies that suffered due to global economic factors and the oil price decline affected holdings over the year, resulting in one of Paulson’s funds, the Advantage Plus, falling by as much as 36% over the course of 2014.

So with the performance at Paulson’s hedge fund in mind, it’s not really a surprise that it weighs on AlphaCat’s results. However, what is impressive is that such a large investment loss doesn’t turn the full AlphaCat Managers segment results negative, showing the increasingly strong contribution from the ILS fund management operations and collateralized reinsurance underwriting.

If Paulson’s hedge fund had turned even a flat performance for the year, the AlphaCat results would have been even more impressive.

With growing assets under management and a growing contribution in terms of management fees from the third-party capital investors and income to Validus, AlphaCat continues to show the important role that an ILS and third-party reinsurance capital unit can play within a global reinsurer.