AlphaCat Managers Ltd., the insurance-linked securities (ILS) and third-party capital management arm of Validus Holdings, increased its income contribution to its parent in 2016, despite greater catastrophe losses towards the end of the year.
The Bermuda domiciled reinsurer noted a challenging operating landscape in 2016 as competition remained and an abundance of capacity and benign loss experience further pressured rates.
Artemis reported earlier this year that AlphaCat grew its assets under management (AuM) as at January 1st, 2017 to $2.74 billion, compared with $2.61 billion at the end of Q3 2016, and $2.38 billion as at January 1st, 2016.
Now the reinsurer has reported its fourth-quarter and full-year 2016 financial results, which reveals a dip in revenue for the company and also a decline in both profits and contribution of its ILS unit, AlphaCat in the fourth-quarter, driven in part by higher catastrophe losses.
During the fourth-quarter Validus’ share of AlphaCat income totalled $6.3 million, down from $11.1 million in Q4 2015. However, the solid performance of AlphaCat throughout 2016 saw Validus’ full-year share of AlphaCat income increase to $31.1 million, from $22.15 million in 2015.
Despite notable pressures, Validus reported that its gross written premiums increased by $29.8 million in Q4, driven by increases in Validus Re and Western World, but offset somewhat by a decline in its Talbot and AlphaCat units, with the latter underwriting an extremely low volume of new business in Q4 as it deployed most of its capacity at the key January and June/July renewals.
Revenues earned by Validus from the AlphaCat unit in the fourth-quarter were $4.6 million, of which $3.9 million came from third-party investors. For the full-year Validus earned $22.1 million from AlphaCat, of which $18.7 million was from third-party investors. This compares to revenue of $25.1 million a year earlier, of which $19.6 million came from third-party investors.
Validus explains that the decline in revenues earned from third parties in Q4 was driven by a dip in performance fees, which was a result of notable losses in the quarter that impacted the AlphaCat vehicle.
Hurricane Matthew resulted in losses and expenses of $39.1 million for Validus, with net losses attributable to AlphaCat investors of $8.9 million. The November, New Zealand earthquake resulted in a net loss attributable to AlphaCat investors of $9.1 million, which resulted in a loss of $31.4 million for Validus Group.
Historically, as AlphaCat has grown its AuM the revenue and income returned to Validus Group has increased, but in the fourth-quarter of 2016 this wasn’t the case as soft market conditions and losses impacted the reinsurer’s ILS unit.
Investment income attributable to Validus shareholders from AlphaCat funds and sidecars in Q4 fell to $4.5 million, compared with $5.9 million a year earlier. For the full-year 2016, however, investment income earned by Validus shareholders from AlphaCat increased to $20.5 million, compared with $19 million in 2015.
Income before investment declined to $1.8 million in Q4 2016 when compared with the previous year but increased for the full-year, to $10.5 million compared with $2.9 million in 2015.
At the same time expenses within AlphaCat declined in both Q4 2016 and the full-year when compared with the previous year, to $2.8 million and $11.5 million, respectively.
So despite a challenging fourth-quarter that saw the profitability of Validus and AlphaCat decline, for the full-year 2016 Validus continues to benefit from its ILS and third-party capital management unit.
It’s also worth pointing out that just this week AlphaCat has issued a ground-breaking private cat bond, which is believed to be the first to feature Latin American perils.