AlphaCat grows to $3.1bn ILS assets, delivers higher income to Validus

Insurance or reinsurance linked assets under management at AlphaCat Managers Ltd., the insurance-linked securities (ILS) and third-party reinsurance capital arm of Validus Holdings, jumped by another $338 million in the second-quarter, growing its total ILS assets to $3.1 billion as of July 1st.

AlphaCat is just the latest of the larger group of ILS fund managers to record an increase in assets under management during the second-quarter, with this increase placing them firmly at the upper end of ILS managers featured in Artemis’ Insurance Linked Securities (ILS) Managers & Funds Directory.

AlphaCat increased its assets under management by 7% during the quarter, from $2.9 billion at the 1st April to $3.1 billion at the 1st July. Of the $3.1 billion, $2.9 billion is from third-party investors.

During the quarter AlphaCat raised $338.2 million of capital, with $330.2 million coming from third-party investors. In the same period $195.4 million was returned to investors, $135.8 million of which was handed back to third-party investors.

AlphaCat’s ILS business delivered fees of $6.2 million for the quarter, a significant increase from the $3.4 million earned in Q2 2016. As the ILS unit has scaled at Validus the fee earning potential has risen significantly, another sign that reinsurance company owned third-party capital units really need to achieve a certain level of scale to make a significant contribution.

During the quarter Validus reports that AlphaCat had total expenses of $3.8 million, up 28.7% compared to $3.0 million for the prior year period, but the reinsurer explained that the increase was due to a higher allocation of costs to the AlphaCat segment.

Income from the AlphaCat ILS funds and sidecars came in at $2.4 million for Q2 2017, compared to $0.5 million in the prior year quarter. Investment income was $4.1 million, down from $4.4 million, so Validus’ share of AlphaCat income for Q1 2017 was $6.5 million, up almost 34% from $4.9 million in Q1 2016.

AlphaCat’s third-party investor base has once again done very well this quarter, with income attributable to AlphaCat’s third-party investors hitting $11.83 million, up from $6.114 million a year earlier and this is the highest figure reported in five quarters, again reflecting the increasing scale achieved in terms of assets at AlphaCat.

As a unit, AlphaCat underwrote gross premiums of almost $106 million in the quarter, up on the almost $99 million a year earlier. The majority of the premiums underwritten in Q2 2017 were property catastrophe excess-of-loss, as you’d expect, but a small amount of agriculture and composite business were also written.

The lower risk AlphaCat ILS funds underwrote the largest share, at almost $54 million, with the higher risk ILS funds writing almost $44 million and the AlphaCat Direct strategy $8 million.

Validus reduced its stake slightly in the lower and higher risk AlphaCat ILS funds and the BetaCat ILS fund in the quarter, while all of the AlphaCat strategies added new third-party capital during the period.

The higher risk ILS funds added almost $107 million of third-party assets in Q2 2017, the lower risk funds added just $7 million, AlphaCat Direct added around $77 million and the BetaCat strategy, which seeks to track the cat bond market index, added $31 million.

In terms of losses and loss adjustment expenses for the AlphaCat segment, the second quarter of 2017 resulted in a loss ratio of 7.3%, down from the 14.2% reported in the prior year quarter. But after taking into account prior year development the net loss ratio for the quarter was just 1.6%, which is particularly low and will have helped to boost income and earnings from the AlphaCat activities.

So with scale and a less heavy catastrophe load it’s clear that AlphaCat’s third-party reinsurance capital and ILS fund activities can deliver a healthy income return for parent Validus.

It will be interesting to see how the results continue to compare across the rest of the year, particularly if the wind season passes by without any major U.S. hurricane impacts.