AlphaCat ILS assets shrink slightly to $3.5bn in Q2 2018

ILS assets under management at the AlphaCat Managers Ltd. insurance-linked securities (ILS) and third-party reinsurance capital unit of Validus Holdings (now part of AIG) have shrunk slightly during the second-quarter of the year to $3.5 billion.

AlphaCat’s ILS assets under management passed a new high of $3.66 billion at the end of the first-quarter of 2018, but outflows were slightly greater than inflows during Q2 meaning the overall ILS assets under management at the unit shrank a little.

During the second-quarter of 2018, the AlphaCat team raised $104.4 million of capital, $103.2 million of which was from third parties. But in the same three months $286.5 million was returned to investors, $270.6 million to third-party investors, so the overall assets under management dropped slightly.

At July 1st 2018 AlphaCat counted third-party assets under management of $3.3 billion, down from $3.5 billion as at April 1st 2018.

The slight decrease in assets could be due to many factors, including the effect of last year’s losses the ILS fund industry suffered continuing to reverberate among investors, or the acquisition of Validus by AIG which could have led to some investor churn, or simply a realisation that the AlphaCat unit had more than enough capital for its mid-year deployment and so did not need to raise much more (perhaps a combination of all three factors).

AlphaCat investors did well during the first-half of the year, despite some continued loss deterioration from the 2017 hurricanes.

During the first six months of the year AlphaCat returned over $40.7 million of income to its investors, well up on the $19.3 million during the first-half of 2017.

This will be due to the considerably bigger asset base at AlphaCat, which had raised more capital for the start of this year.

Validus’ own investment income earned from AlphaCat operations was down for the first-half and Q2, as the impact of last year’s losses continues to erode some of the performance of the managers ILS funds, as has been experienced by many managers this year so far.

Validus reported over $6.7 million of investment income from the AlphaCat ILS funds and reinsurance sidecars, down from almost $9 million in the prior year.

Validus explained that this decline was, “Due to losses recognized during the second quarter of 2018 in certain higher risk AlphaCat ILS funds.”

It’s likely this includes loss adjustments due to rising industry estimates for the impact of last year’s hurricane Irma.

However, the AlphaCat unit has been growing its portfolio by underwriting significantly more premiums during the first-half of this year, which suggests that once the losses from 2017 are clearer and dealt with, the income paid back to its parent will increase as well.

In the first-half of 2018 the AlphaCat unit underwrote $389 million of gross premiums, up from only $270 million in the prior year first-half, so reflecting the much larger ILS asset base being put to work this year.

Income will flow from these premiums through the rest of the year and into next, with this enlarged portfolio likely to begin contributing much higher income in time.

It’s worth noting that the AlphaCat Re underwriting vehicle and the AlphaCat Master Fund into which many of the ILS investments are bundled are reported as having total net assets of over $3.83 billion at the middle of 2018, up from around $3.4 billion at the end of 2017.

This figure could be higher than the reported AuM due to the fact the assets in the underwriting reinsurance vehicle and master fund could include some trapped collateral due to the 2017 catastrophe events, meaning AlphaCat’s actual assets are a little higher and there could be a chance of some flowing back if the loss picture improved at all.

We’re not sure how much visibility we will have of AlphaCat assets and performance from now, since the acquisition of Validus by AIG has completed. It will be interesting to see how the unit operates and whether there are any changes, or whether it takes the opportunity to go for further growth now it is part of a considerably larger insurance and reinsurance underwriting machine.