AlphaCat ILS assets hit $2.9bn on new third-party capital growth

by Artemis on April 27, 2017

Insurance-linked assets under management by AlphaCat Managers Ltd., the insurance-linked securities (ILS) and third-party reinsurance capital arm of Validus Holdings, grew once again in the first-quarter of 2017, reaching $2.9 billion as at April 1st.

The growth in ILS assets managed at AlphaCat was driven by new inflows of third-party investor capital, as the manager increased its assets across the range of ILS and catastrophe bond funds that it manages.

At the 1st January 2017 AlphaCat’s ILS and reinsurance linked assets under management had reached a new high at $2.7 billion, but by the end of the first-quarter of the year AlphaCat Managers had raised another $200 million of third-party investor capital, to take the total ILS assets under management to $2.9 billion.

Of the $2.9 billion the majority are from third-party investors now, as Validus has gradually shrunk its share of the ILS funds and vehicles over the years. Now, at April 1st, $2.7 billion of the $2.9 billion under management is from the AlphaCat third-party investor base.

During the first-quarter of 2017 the growth in the AlphaCat segment helped Validus to underwrite more premiums, as it ceded more business to the third-party capital unit which in turn allows it to write more upfront. Interestingly, the primary insurance Western World unit drove premium growth, while AlphaCat helped to increased premiums ceded to reinsurance capital, which perhaps suggests that AlphaCat funds are helping to back a portion of the growth at Western World.

Revenues for the AlphaCat segment were slightly down in the first-quarter, as despite the growth in assets a higher expense burden and higher losses both eroded profits slightly.

AlphaCat generated $5.3 million of revenue for the first-quarter of 2017, of which $4.6 million was from third-party capital, compared to $5.6 million for the three months ended March 31st 2016, with $4.7 million from third parties.

Expenses hit $4.0 million for the quarter, compared to $2.4 million in Q1 2016, which Validus explained was driven by “a higher allocation of costs to the AlphaCat segment.”

As assets under management grow and the number of investors to service also increases, an ILS platform naturally generates higher costs. Add this to a higher catastrophe loss burden, as seen in this quarter, and it has resulted to a slight revenue dip.

Income from the AlphaCat ILS funds and sidecars came in at $1.3 million, compared to $3.2 million in the prior year quarter. Investment income was $4.8 million, down from $5.6 million and as a result Validus’ share of AlphaCat income for Q1 2017 was $6.1 million, down from $8.8 million in Q1 2016.

At the same time it is clear that AlphaCat’s investor base has done well in Q1 2017, with income attributable to AlphaCat’s third-party investors growing to just over $7.5 million, up from $4.6 million a year earlier and also higher than recent quarters.

The AlphaCat unit underwrote gross reinsurance premiums amounting to almost $165 million during the quarter, with the AlphaCat ILS funds (both lower and higher risk) writing the bulk of the quarters business.

AlphaCat raised more third-party investor capital for its BetaCat catastrophe bond tracking fund in the quarter, taking its third-party assets to over $87.3 million and total assets for the strategy to almost $115 million.

The AlphaCat Direct strategy, which manages assets for investors looking to more directly access reinsurance returns through mandates, saw a slight increase in third-party assets to almost $458 million.

The AlphaCat ILS funds lower risk strategy raised its third-party assets to over $1.3 billion, and the higher risk funds increased in size to over $790 million during the quarter.

Losses and loss adjustment expenses for the AlphaCat segment rose to almost $2.1 million during the quarter, up from $1.8 million in the prior year quarter. This is likely a reflection of some of the catastrophe losses hitting the industry during the quarter, such as the U.S. severe thunderstorms, Australia hail etc.

AlphaCat also paid almost $5 million for prior year losses during the quarter, which is another reflection of scale and the fact that, as ILS funds shifted into collateralized reinsurance, reserving and being ready to service prior year claims is vital.

Interestingly, during Q1, the AlphaCat segment wrote a very small amount of workers compensation business, perhaps suggesting a tentative expansion into new lines. The bulk remained property catastrophe excess of loss reinsurance however.

So further growth at the Validus ILS fund and asset manager AlphaCat, with its total assets now nearing the $3 billion mark. The dip in income Validus earned is largely due to higher expenses, which is a reflection of scale and the growing complexity of these strategies, but still the investor base appears to have done well with rising income attribiutable reported.

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