Pillar Capital investment value up for Alleghany in Q4, but return drops

The carrying value of insurance, reinsurance and financial services group Alleghany Corporation and its reinsurer TransRe’s ownership stake and investments in specialist ILS manager Pillar Capital and its ILS funds increased in the last quarter of the year.

The value of Alleghany and reinsurance subsidiary TransRe’s investments in ILS manager Pillar Capital and its stake in the ILS funds the manager operates increased in the fourth-quarter, reflecting returns made. TransRe took an ownership stake in Pillar back in 2012, also investing $175m and Alleghany $25m in Pillar Capital’s limited partnership ILS and reinsurance-linked investment funds.

The total value of these investments does fluctuate a little, but in recent quarters has risen. At the end of Q2 2016 the carrying valuation of those investments combined as a single figure was reported as $227.6m, net of capital returns. At the 30th September 2016 that figure had risen by 1.4% to $230.8m.

By the end of 2016 the figure stood at $233.7 million, an increase of almost 1.3% in the final quarter of the year. However, the value of these investments remains lower than it was at the end of 2015, when the figure had hit $238.8 million, however returns of collateral and capital from the funds is likely the cause of the year-on-year decline and the main story is that the value steadily keeps increasing each year.

The other reason the figure is not as high is perhaps linked to lower returns in the ILS funds managed by Pillar, which is reflected in Alleghany’s equity in the results of its Pillar investments.

With the insurance-linked securities (ILS) and collateralised reinsurance market facing generally lower returns, in-line with the softened pricing available in global reinsurance markets, 2016 saw the equity results earned by Alleghany take a dip, compared to the previous year.

Net investment income reported by Alleghany from its equity stake in the results of insurance and reinsurance linked specialist ILS asset manager Pillar Capital was $15.8 million for the full-year 2016, lower than both the $23.3 million reported for 2015 and the $22 million reported for 2014.

With no look through to the Pillar ILS fund returns available, we can only make an assumption as to why, but it seems reasonable to assume that this is due to lower returns, as the plethora of catastrophe and weather events that hit ILS managers in 2016, as well as the impacts of lower pricing, reduced the available returns.

This figure, net investment income earned from the Pillar equity stake, sat at $12.9 million after the first nine months of 2016, and so the final quarter of the year saw only $2.9 million earned, which could be due to the impacts of hurricane Matthew and the New Zealand, Kaikoura earthquake loss events.

It could of course also be a timing issue. However the fourth-quarter has typically seen a decent injection of investment income from Alleghany’s Pillar investments, so a lower return due to losses seems a distinct possibility in this case. Both Q4’s in 2014 and 2015 saw $9.5 million and $8.4 million of investment income earned respectively.

2016 has been a loss heavy year for the ILS fund managers of the world, with many having to reserve and pay some losses on an almost monthly basis throughout the year, as we detailed recently here.

So it’s no real surprise that the return related figures Alleghany reports are down on the prior year. The main story really is that they remain positive, reflecting positive returns in the Pillar ILS funds, while the overall value of the investments Alleghany made in Pillar continued to rise through 2016.