AlphaCat asset growth of $663m drives premium growth at Validus

Growth in assets under management of $630m at AlphaCat Managers Ltd., Bermuda based insurance and reinsurance group Validus’ ILS and third-party capital manager, helped to drive strong premium growth and increased the re/insurers share of AlphaCat net income in 2015.

AlphaCat witnessed impressive growth in 2015, with a significant increase of third-party and related assets under management of around 71% over the course of the year.

AlphaCat added $662.7m of capital during the fourth-quarter of 2015, with $629.2m of it raised from third-party investors. This helped to raise AlphaCat’s assets under management to $2.386 billion by January 1st 2016, compared to $2.239 billion at October 1st 2015. Third party assets under management Reached $2.06 billion as at January 1st 2016, compared to $1.877 billion as at October 1st 2015.

This impressive growth occurred while in the same quarter the hedge fund reinsurance joint venture with John Paulson, PaCRe, was shuttered and taken off risk at January 1st, which resulted in AlphaCat returning $470.3m, including $423.3m to third-party investors.

The increase in assets under management has helped to increase Validus’ share of AlphaCat’s net income, seeing the unit once again growing its contribution to the overall reinsurance group bottom-line. For the fourth-quarter 2015 Validus booked a $7.1m share of AlphaCat net income, compared to $2.2m in Q4 of 2014.

The net income was also helped by the shuttering of PaCRe as there was less negative income to account for in the quarter. With PaCRe now running-off future quarters may see even better contributions from AlphaCat to the Validus results, as the investment losses had been negatively affecting this.

The growth in assets under management has also helped Validus to be expansive at the January reinsurance renewals, underwriting significantly more premiums with AlphaCat capital on a collateralized basis, while also growing its balance-sheet underwriting a little as well.

Overall Validus increased its premiums underwritten at January 1st 2016 by 12.9% to $610.5m, but AlphaCat contributed the majority of the growth as Validus Re’s premiums written only grew 0.5% while AlphaCat’s collateralized premiums underwritten increased by a huge 67%.

AlphaCat wrote 140% more U.S. property reinsurance premiums at the renewal, compared to a year earlier, while pulling back on international property by -13.8%, a sign of the much lower pricing available in many international property catastrophe treaties as the diversifiers of the world become so thinly priced many ILS managers pull away. In total AlphaCat underwrote $168.5m of premiums at the January renewal.

The increase in AlphaCat assets under management helped to increase management fees earned in Q4 2015, with the firm booking $6.3m, of which $1.3m were earned from related parties, compared to $5.9m for Q4 2014, of which $1.4m were from related parties.

Impressively expenses at AlphaCat were down in Q4 2015, despite the fact all the capital raising was going on. The unit reported $3.4m of expense in Q4 2015, compared to $4m a year earlier.

Income before investment income from AlphaCat ILS funds and reinsurance sidecars for Q4 2015 was $2.9m, compared to $1.9m a year earlier. However investment income was down in the ILS funds and sidecars, at $5.9m, compared to $7.4m in Q4 2014. This is likely a reflection of rates but also due to the sidecar which saw the greatest percentage decline.

For the full-year 2015 Validus booked $22.155m of income from the AlphaCat unit, which is down from $33.587m, largely due to a halving of the income from sidecars as well as higher expenses across the full-year 2015.

It will be interesting to see how the added scale in assets under management affects the income Validus can generate from its AlphaCat ILS and collateralized reinsurance activities in 2016. If the loss environment remains benign it could see a significant increase.

In terms of where the asset growth at AlphaCat was seen, the increase in capital from third-party investors was fairly evenly split across the sidecars, ILS funds and AlphaCat Direct initiatives.

At January 1st 2016 the sidecars had more than doubled their third-party AuM from$153m at October 1st 2015 to $319m. The ILS funds had grown from $1.12 billion to $1.373 billion. AlphaCat Direct had grown from $166m to $368m. Meanwhile the BetaCat catastrophe bond market tracking fund remains solely capitalised by Validus at this time, with $61.7m in that strategy.

The growth of assets under management at AlphaCat should have a meaningful effect on Validus’ results over the course of 2016. As well as this the run-off of PaCRe should also help the AlphaCat contribution to Validus’ income grow, as it had been held back by losses in the Paulson investment portfolio.

As Validus grows the contribution that ILS, collateralized reinsurance and third-party capital makes to its business, it is cleverly using the impact of lower-cost capital to help it to navigate the market, as evidenced by the strong growth in catastrophe premiums being underwritten using third-party capital, while its balance-sheet is increasingly balanced across primary insurance and reinsurance.

This has the effect of benefiting Validus as it becomes a hybrid insurance and reinsurance underwriter, while allowing it to target the property catastrophe market using AlphaCat. For as long as that are of the market remains softened this is a strategy we will likely see continue and be adopted by other re/insurers which have third-party ILS capital management units like AlphaCat.

The additional income from third-party capital management will become increasingly important, as was evidenced by the group result that saw profits slip for the full-year.

With the market softened, which is perhaps the new normal, leveraging the right type of capital for the right underwriting opportunities will become an increasingly vital piece of the re/insurance strategy for successful companies. The premium growth at Validus driven by AlphaCat’s capital is a clear demonstration of this.