ILS manager Pillar Capital’s contribution to Alleghany slows in 2014

The contribution that an investment and strategic partnership in insurance and reinsurance-linked specialist ILS asset manager Pillar Capital provided to re/insurance holding company Alleghany Corporation’s results slowed in the second-half of 2014.

Having begun the year strongly, with a doubling of investment income received thanks to its equity stake in insurance-linked securities (ILS) manager Pillar Capital in the first-quarter, followed by another increase in Q2 2014 compared to the prior year, the numbers then dropped off in the second-half.

In Q1 2014 Alleghany reported that Pillar Capital provided it $3.9m of investment income, compared to $1.6m in Q1 2013. In Q2 2014 the number was $3.6m, up from $2.7m in 2013. In Q3 2014 the reported income was $5m, which dropped significantly from $9.4m in Q3 2013. The same was evident in Q4 2014, when income from the Pillar Capital share came in at $9.5m, down from $13.5m in Q4 2013.

So for the full-year 2014, despite the strong start, Alleghany reports investment income from its equity stake in Pillar Capital of $22m, down from $27.2m for the full-year 2013.

It seems likely that the decrease in income, from Alleghany’s equity stake in Pillar Capital, may be due to the lower reinsurance rate environment. With returns on ILS and collateralized reinsurance investments generally lower in 2014 than the year before it stands to reason it would hit the equity shares return. It’s not clear at this time whether any attritional losses suffered could also have hit Pillar results to contribute to the decline.

Alleghany gained its stake in Pillar Capital thanks to its acquisition of Transatlantic Holdings, including the property and casualty reinsurer TransRe, in 2012. TransRe became a strategic partner in specialist ILS and reinsurance linked investment manager Pillar Capital later in 2012.

TransRe, which also has an ownership holding in Pillar, invested $175m and Alleghany $25m in certain limited partnership funds operated by Pillar Capital. Alleghany consolidates the investments in Pillar and funds as a single figure and said that its “Carrying value in the Pillar Investments, as determined under the equity method of accounting, was $235.2m.”

In 2014 alternative reinsurance capital and ILS activities stepped up at the firm, as Alleghany said that “TransRe has been quietly expanding its capabilities. Actions taken to date include a significant expansion in the company’s sidecar facilities and the growth and development of Pillar Capital Management, Ltd.”

The sidecar expansion is not detailed, however we know that TransRe registered a Bermuda domiciled special purpose insurer Pangaea Reinsurance Ltd. in January, which is likely used to share access to risks with third-party investors in the same way as its previously numbered range of Pangaea vehicles, the last of which, Pangaea Reinsurance IX Ltd., it registered in June 2014.