AlphaCat assets hit $2.51bn at Validus, takes share of large losses

AlphaCat Managers Ltd., the third-party reinsurance capital and insurance-linked securities investment management unit of Validus Group, raised another $206.3m of capital in the second-quarter to take its total ILS assets under management to $2.51 billion.

However the ILS and third-party capital management unit has taken its share of losses during the catastrophe heavy second-quarter, suffering an impact due to the Fort McMurray, Canada wildfires and the Texas hailstorms.

During the second quarter, the AlphaCat unit raised $206.3m, with $190.2m coming from third-party investors, which alongside some return of capital saw the units overall ILS assets under management rise by 5% from $2.386 billion at January 1st 2016 to $2.51 billion at July 1st 2016. Assets were increased across the lower and higher risk AlphaCat ILS funds, as well as its AlphaCat Direct offering.

Given the size of AlphaCat’s business and its broad access to global underwriting markets through working alongside Validus, it is no surprise that some losses have been suffered due to the major events seen in Q2 2016.

This quarter will provide ILS investors with a reminder that their capital is at risk and ultimately they are being rewarded with returns as they will be called on to pay claims when major weather or natural disasters strike.

AlphaCat third-party investors and non-controlling interest took a $6.4m loss from the Fort McMurray wildfires and a $5.5m loss due to the hailstorms and severe convective weather in Texas during the quarter. However, the AlphaCat ILS vehicles had no exposure to the Kumamoto, Japan earthquake or the Jubilee oil field loss, both of which parent Validus had exposure to.

Despite the losses, which are to be expected given AlphaCat’s scale and underwriting reach, the unit still reported positive revenues and a profitable quarter for its investors, albeit at a lower level than the prior year which had been largely loss free.

Validus’ share of AlphaCat income was $4.9m for the second quarter, compared with $5.6m a year earlier, so only a slight decline due to the impact of losses and income available to Validus’ shareholders, from AlphaCat ILS funds and sidecars was actually up slightly at $0.5m, compared to $0.4m a year earlier.

Validus continues to find that AlphaCat is making a meaningful contribution to its overall reinsurance bottom-line, utilising third-party investor-backed capacity to help it navigate the softening landscape and to augment income.

All the AlphaCat ILS funds and sidecar reported positive gains during the quarter, with third-party investors benefiting from investment income of $6.114m for Q2 (up from $4.6m in Q1 2016), and $10.714m for the first-half of 2016.

The losses appear to have largely been attributable largely to the higher risk AlphaCat ILS funds, which invest in higher expected loss layers of reinsurance business. This is to be expected, and the balanced platform AlphaCat has built means that even when losses hit, its lower risk ILS funds and the BetaCat ILS funds have both reported gains, in terms of income earned by Validus, year-on-year.

CEO of Validus Ed Noonan explained that the meaningful loss activity experienced at the firm were “squarely in the Validus wheelhouse” and so it is no surprise that AlphaCat investors have paid their share of claims.

However, given the firms impressive underwriting track record, Noonan explained; “Validus generated an 89.9% combined ratio and a 10.2% annualized return on average equity despite natural catastrophes in North America, Europe and Asia and international marine and energy losses. These results speak to our disciplined underwriting, leading edge analytics and robust risk management, all well-honed skills that are critical to our success in the current market environment.”

For investors in ILS vehicles it is important to align themselves with underwriting teams they feel they can trust, the experience of AlphaCat and others in the second-quarter can only help to promote their offerings as they have continued to manage to drive profitable results even in a more challenging loss environment.

In terms of gross premiums written, the AlphaCat unit underwrote $98.9m in Q2 2016, up significantly from the $62.8m written a year earlier. This demonstrates the increasing scale of the ILS assets managed and will bode well for investor returns through the coming quarters.

For the first six months of 2016 GWP at AlphaCat was an impressive $266.3m, again significantly higher than the $164.6m written in the first-half of 2015.

AlphaCat and the use of third-party capital continues to pay-off for Validus, and the investors in AlphaCat continue to see profits even when larger losses strike as seen this quarter.

Validus’ transition to a hybrid insurance and reinsurance underwriter, using AlphaCat and third-party reinsurance capital to target the property catastrophe market and areas where capital markets money is more efficient, is clearly benefiting the firm and its investors.