AlphaCat assets hit $2.62bn, revenues for Validus grow with ILS scale

Insurance and reinsurance group Validus has reported continued growth in assets under management at its AlphaCat Managers Ltd. third-party reinsurance capital and insurance-linked securities investment management unit, reaching $2.62 billion at the 1st October 2016.

As AlphaCat has been increasing its scale, in terms of own and third-party capital assets managed, the revenues flowing back to Validus have been increasing steadily and the third-quarter of 2016 saw another year-on-year boost.

AlphaCat Managers assets under management have increased by almost $400m in the last year and rose by just over $100m in the last quarter.

At the 1st October 2016, AlphaCat’s total assets under management reached $2.6151 billion, up from $2.5105 billion at the 1st July. Third-party investor assets under management reached $2.2926 billion at 1st October, compared to $2.1869 billion at the end of the prior quarter.

As the AlphaCat ILS funds have grown, which is where most of the increase in assets under management has been seen, the revenue and income returned to Validus Group and also to the third-party investors has been increasing, which has offset the inevitable decline seen over recent years due to softening rates.

For the third-quarter of 2016 Validus has reported an $11.2m share of AlphaCat income, which is up by over 49% on the $7.5m reported for Q3 2015.

Revenues earned by Validus from the AlphaCat unit in Q3 2016 were $8.4m, with $7m coming from third-party capital, compared to $7.5m for Q3 2015, when $5.8m were earned from third-party investor capital.

Validus explained that this revenue boost from its third-party reinsurance capital acitivity is primarily due to the increased and expanded capital base of the AlphaCat ILS Funds.

Reflecting the growing profit return being seen from AlphaCat’s ILS business, Validus explained that income available to the firms common shareholders before investment income from AlphaCat ILS Funds and Sidecars for Q3 reached $5.1m, up from $0.9m in the prior year quarter.

Investment income earned by Validus shareholders was slightly down though, $6m compared to $6.5m a year earlier, possibly reflecting the lower returns possible in ILS funds as the softening of the global reinsurance market has persisted.

However that is largely due to the discontinuation of one of the collateralised reinsurance sidecars run by AlphaCat and if you analyse just the AlphaCat ILS funds you can see that investment income was up in Q3 2016 for the AlphaCat lower risk, higher risk and BetaCat ILS funds.

Underwriting income attributable to AlphaCat investors neared $5.6m during the quarter, up from just $1.4m a year earlier.

For the first nine-months of 2016 the scale of the AlphaCat ILS funds really shows, in terms of income earned by Validus Group, with a reported $24.8m share of AlphaCat income compared to just $15m in the first nine-months of 2015.

For all reinsurance firms operating third-party capital vehicles there comes a point in scale where the contribution to the bottom-line becomes really meaningful and when if consistency can be maintained the benefits of a lower-cost, efficient third-party capitalised balance-sheet can really be seen in their results. Validus has reached that stage with AlphaCat.

Overall, Validus Group continues to manage the cycle, as reinsurance rates soften and competition remains high. But the third-party capital vehicles at AlphaCat is one area of ongoing growth for the firm.

CEO Ed Noonan explained; “Given current market conditions we continue to reduce exposure in areas under the most competitive pressure – notably marine and energy and certain property classes – while continuing to expand our profile in U.S. insurance and the management of third-party capital.”

Premiums written by the AlphaCat Direct segment, where a third-party investor makes direct investments in AlphaCat Reinsurance Ltd., reduced during the quarter, perhaps reflecting timing and multi-year deals.

We suggest timing as the assets managed under AlphaCat Direct increased slightly in the quarter and are almost double that seen in the prior year. Aside from that premiums written grew across the AlphaCat ILS funds.

Validus Group continues to demonstrate the benefit of a growing third-party capital business, with different ILS investment offerings to suit a range of investors.

The benefits will ramp up, as the scale will no doubt continue to grow, the income returned by AlphaCat should increase as well and the size of the third-party pool of underwriting capital will assist Validus in the open market.

The growth of AlphaCat in the last two years has reflected a transition for Validus into a hybrid insurance and reinsurance underwriter, using its own balance-sheet and third-party reinsurance capital to target the property catastrophe market and areas where capital market’s money can be more efficient. Results show that this is benefiting the firm and its investors.