ILS manager Pillar Capital’s profit shared with Alleghany drops in Q2

For the first quarter in a while the profit contribution made by insurance and reinsurance linked specialist asset manager Pillar Capital to Alleghany Corporation declined year on year, with Q2 seeing just $1m booked.

Over recent quarters the profit shared by ILS manager Pillar Capital to Alleghany has been growing steadily, as the insurance-linked securities (ILS) manager scaled and its results were positive.

In Q2 2015 Alleghany’s investment and strategic partnership in Pillar Capital has reaped lower returns, with just $1m of profit contributed, compared to $3.6m in Q2 of 2014.

In Q1 2015 Pillar returned $6.6m of profit to Alleghany, up from $3.9m in Q1 2014. That strong first-quarter helps the half-year result to stay ahead of the prior year, with $7.6m of profit passed from Pillar to Alleghany in H1 2015, compared to $7.5m in H1 2014.

Alleghany took a share in Pillar Capital when it acquired Transatlantic Holdings, including the property and casualty reinsurance firm TransRe, in 2012. TransRe had become a strategic partner in Bermuda-based specialist ILS and reinsurance linked investment manager Pillar Capital that year.

TransRe, which also has an ownership holding in Pillar, invested $175m and Alleghany $25m in some of Pillar Capital’s limited partnership ILS funds. Alleghany bundles the value of these investments in Pillar and its ILS funds as a single figure, with the value of its investments in Pillar reaching $243.3m at the 30th June 2015, up from $242.3m at the end of Q1.

As we noted when the Q1 profit was significantly higher than the previous year, this could be due to a change in the Pillar Capital portfolios making the profit share flow through earlier in the year than previously. That could explain the dip in profits shared to Alleghany in the second-quarter.

That said, there is likely to be a decline in the profit shared due to the reduction in reinsurance rates in many of the catastrophe lines that Pillar Capital will be underwriting for its portfolios. The collateralized reinsurance return potential has dropped, due to the decline in reinsurance pricing and this will result in a hit to profit commission at some stage.

It may be hard to see though, as Pillar Capital builds scale in terms of assets under management. At the last count, we had Pillar Capital listed as having just over $351m of assets under management at the end of April, a figure which may have grown in the last quarter.