Assets decline at reinsurer owned ILS units AlphaCat & Mt. Logan Re

Following the losses from third-quarter natural catastrophes, including hurricanes Harvey, Irma and Maria, two of the reinsurance firm owned ILS and collateralized reinsurance investment managers have reported declines in assets under management after paying for losses.

First, AlphaCat Managers, the ILS and collateralized reinsurance investment operations of Validus Holdings, which reported its incurred losses during the last quarter as over half a billion, while its assets under management dropped by 7%, to $2.86 billion at the 1st October, down from almost $3.1 billion at 1st July 2017.

Second, Mt. Logan Re Ltd., the collateralized reinsurance, sidecar-like investment vehicle of reinsurer Everest Re, which saw its assets under management decline more than 12%, from $949 million at the beginning of July, to $833 million at the 1st October 2017.

The declines represent losses paid or reserved for (so trapped collateral), so there could be some room for a little of the assets that have disappeared to flow back into these ILS strategies, but managers are adept at reserving for what is needed so any capital that flows back will likely be relatively minor.

The declines for both of these ILS managers will have been greatest in their highest risk collateralized reinsurance strategies.

For AlphaCat, the majority of its losses fell to the higher risk AlphaCat ILS fund, which is to be expected as this fund underwrites the riskier collateralized reinsurance and retrocession contracts. Assets of that strategy fell by around $200 million in Q3, which represented a 23% decline in third-party assets and a 26% decline in related party assets.

AlphaCat gained assets across its other strategies, which were less affected by the recent catastrophe loss events, helping its overall decline in assets to be lower.

We’d imagine that the higher risk layers of Everest Re’s Mt. Logan Re vehicle will have suffered similarly high levels of losses, and the assets at 1st October may include some capital raised as well.

Everest Re continues to display its shift towards a capital agnostic, multi-balance sheet reinsurance underwriting platform. Following the losses the reinsurer suffered this quarter the one segment of its capital tower that has increased in 2017 is the firms catastrophe bond protection, meaning third-party capital is making up a growing portion of its overall underwriting firepower.

Overall the firm counts its capital base as $12.3 billion, of which catastrophe bonds make up almost 23% now, while Mt. Logan Re is another 7%, so alternative capital and ILS structures make up 30% of this global reinsurance firms capital, a clear demonstration of the importance of the capital markets in 2017.

It’s to be expected that ILS fund managers and other reinsurer owned collateralized reinsurance vehicles and joint-ventures will have suffered similar dips in assets under management, after Q3 2017’s major catastrophe losses. Of course, the majority don’t have to report anything and so a clear picture isn’t always easy to source.

It’s going to be interesting to see how all of these vehicles and ILS fund units come out of January 2018, as there is a good chance the majority will raise new capital and perhaps be larger by the end of the renewals than they are today.