AlphaCat hits $2.24bn, sidecar & ILS fund earnings grow for Validus

AlphaCat Managers Ltd., Bermuda headquartered insurance and reinsurance group Validus’ ILS and third-party capital manager, added $163.8 million of third-party capital in Q3 2015, taking its total assets under management to just under $2.24 billion.

The increasing scale of the AlphaCat insurance-linked securities (ILS) funds and sidecar vehicle are beginning to pay dividends, with earnings from ILS and sidecars up significantly year-on-year.

For ILS managers and third-party reinsurance capital units, in a market where returns have been squeezed, it becomes increasingly necessary to have scale in order to access business and also to generate the earnings necessary to run operations.

AlphaCat has grown its ILS assets under management significantly in the last year, having closed out Q3 2014 at $1.521 billion. That’s around 47% growth in assets under management in just a year, which is particularly impressive given the challenging reinsurance rate environment. Just recently AlphaCat won another new ILS mandate from an Australian investor.

AlphaCat benefits from the relationship it has with parent insurance and reinsurance group Validus, which can assist with access to business and underwriting oversight. It seems investors appreciate this too, hence AlphaCat has managed to grow assets at a time when some other ILS managers have not.

But it is all about reaching a point of scale where by the ILS funds and sidecar business can generate the earnings necessary to make the unit profitable and a viable contributor back into Validus. AlphaCat has been generating increasingly good earnings, despite lower rates, and this latest quarter shows the benefits of reaching even greater scale in assets managed.

In Q3 2015 the AlphaCat segment underwrote gross premiums of $9.448 million, up from $6.936 million a year earlier. Premiums earned in the three months are reported as $44.724 million, again up on Q3 2014 which saw $35.138 million.

Losses were lower than a year earlier, at $2.076 million in Q3 2015 compared to $3.738 million in Q3 2014, and total underwriting deductions were lower as AlphaCat controlled expenses.

That resulted in an underwriting profit of $33.175 million for the unit, compared to $20.124 million in Q3 2014 and an operating profit before tax of $39.875 million, compared to $26.556 million.

The unit as a whole actually fell to a loss in the quarter, due to investment losses suffered at the John Paulson backed joint venture investment-oriented (or hedge fund strategy) reinsurer PacRe Ltd. PacRe suffered realised investment losses of $40.7 million and unrealised of $38.8 million. That wiped out the ILS and sidecar profits, resulting in a net unit loss to Validus of $481,000.

But the Paulson venture would always have been expected to see an investment loss in the last quarter, given the global financial market volatility that has hit both traditional and hedge fund style reinsurance firms, so that is no surprise.

The ILS and sidecars managed by AlphaCat were the bright piece of the unit, delivering positive gains and demonstrating the value of increased scale in assets under management.

The AlphaCat sidecars and ILS funds contributed $6.5 million of income to Validus during the quarter, compared to $3.7 million in Q3 2014. That gave Validus a share of AlphaCat net income for the latest quarter of $5.7 million, compared to $3.9 million a year earlier.

For the first nine months the contribution to net income was $17.2 million, down slightly from $18.5 million for the first nine months of 2014. That shows that the latest quarter has been a big contributor, with the additional scale in assets that could be deployed at the mid-year renewals clearly bringing in better income contribution to Validus.

Third-party assets under management at AlphaCat now sit at $1.8774 billion, up from $1.724 billion at the first of July.

Breaking down AlphaCat ILS related assets at 1st October 2015, the sidecar vehicles, AlphaCat 2015 and previous editions, had $153.124m of third-party and $35.349m of related party assets, giving total assets of $188.473m.

The AlphaCat ILS funds had just under $1.12 billion of third-party assets and $224m of related party, giving total ILS fund assets of $1.344 billion.

AlphaCat Direct, which we assume to be a managed account as it only as third-party assets with no related party contribution, had $166.3m of assets.

The BetaCat ILS funds, which follow a beta approach of buying a spread of the catastrophe bond market, remain solely capitalised by Validus with $53.2m of related party assets.

At $2.24 billion of total assets, including PacRe’s contribution, AlphaCat is growing steadily. The ILS funds and sidecars are delivering the income contribution to Validus right now, as PacRe has suffered from investment side losses.

Going forwards the additional scale of the ILS funds should help AlphaCat to continue to grow its earnings contribution to the Validus results. AlphaCat is a good example of a reinsurer owned ILS and third-party capital unit that is making a meaningful contribution to earnings.