AlphaCat’s third-party capital contribution to Validus grew in 2013

With full-year 2013 results now in we can see the growing contribution that third-party capital and insurance-linked securities (ILS) is making to Bermuda domiciled insurance, reinsurance and alternative capital management group Validus Holdings.

Validus’ third-party reinsurance capital management, AlphaCat, has been steadily growing the contribution it makes to its parents bottom-line over the course of 2013 and by the end of the year the contribution had grown as AlphaCat’s assets under management increased.

2013 has been a year in which prudence has been required at ILS investment firms and third-party reinsurance capital managers, like AlphaCat. AlphaCat’s third-party assets under management neared $1 billion at the end of the third-quarter of 2013, but Validus acknowledged that it could have raised more and that it had turned capital away in 2013.

The reason for turning away capital is to ensure that existing investors return targets can be met and that capital deployment opportunities are available to make use of the third-party capital effectively. Validus’ fourth-quarter 2013 results are now in and they provide a picture of continued prudence at AlphaCat as well as the growth in revenues from managing third-party capital at the reinsurer.

Gross premiums written by AlphaCat during the full-year of 2013 totaled $147m, which compares to just $21.6m in 2012. For the last quarter AlphaCat only wrote $0.3m of gross premiums, not surprising given it will have been waiting to deploy capital in January renewals, but still up on the zero premiums written in Q4 2012.

Net premiums earned for the full-year 2013 at AlphaCat were $137.4m, which compares very favourably to 2012’s figure of $17.7m. Demonstrating that the AlphaCat book of business in 2013 has developed over the year, the firm recorded net premiums earned of $37.6m for the fourth-quarter 2013, compared to just $5.9m a year earlier.

Income from affiliates for the year was $14.3m compared to $12.6m in 2012, income from operating affiliate investors hit $68.8m, compared to zero in 2012 and net operating income reached $45.2m compared to $43.1m in 2012. AlphaCat’s combined ratio finished 2013 at 36.9%, compared to 54.2% for the 2012 underwriting year.

So AlphaCat as a unit, which includes ILS funds, branded AlphaCat sidecars (the latest of which launched for 2014 recently) and the PaCRe Ltd. joint-venture reinsurer, which Validus launched in partnership with the Paulson & Co. hedge fund in 2012, continues to contribute meaningful numbers to Validus.

However, Validus has continued to show its prudent approach to capital intake and deployment at AlphaCat and the unit actually underwrote 7.5% less in premiums in the January 2014 reinsurance renewals than it had a year earlier. $86m was written in 2014 renewal premiums compared to $93m in 2012, with a slight increase in U.S. property lines of business and a 24.4% pullback on premiums written in international property renewals.

Given the reinsurance rate environment this is no surprise. Validus even saw a slight decline in premiums written at its core Validus Re reinsurer unit in January, compared to a year earlier.

The small decline in premiums written at AlphaCat could mean that Validus has third-party capital available, and could likely raise more from investors, should opportunities emerge during the first-half of the year or should the rate environment in Japanese and Asia-Pacific renewals in April look particularly attractive.