AlphaCat Managers Ltd., the ILS and third-party capital focused unit of Bermuda headquartered insurance and reinsurance group Validus, has passed the $2 billion mark for the first time, reporting $2.08 billion of assets under management.
During the second-quarter the AlphaCat unit raised an additional $224m of capital, $213.9m of which was from third-party reinsurance investors. Also during the quarter, $52.4m was returned, $19.3m to third-parties.
At the end of Q1 AlphaCat counted its total assets under management at $1.88 billion, the same number it had reported at the end of 2014. So the insurance and reinsurance-linked investments unit has had the opportunity to seek out further growth during Q2, enabling it to grow AuM by almost 11%.
Third-party investor assets under management at AlphaCat hit $1.72 billion as at July 1st, up nearly 12% from the $1.525 billion reported at April 1st. So Validus very slightly reduced its share of the assets in the AlphaCat ILS funds and reinsurance sidecars during the quarter.
Further growth in assets under management at the AlphaCat ILS unit has helped Validus to benefit from a further increase in gross written premiums supported by third-party capital.
Validus has seen a decline in premiums written across its traditional reinsurance unit of Validus Re and its Lloyd’s unit Talbot, while increased premiums written at the ILS unit AlphaCat, as well as offsets from the more recently acquired Western World insurer.
A growing AlphaCat unit, driven by increases in assets under management in the ILS and collateralized reinsurance fund operations, helps Validus by making lower-cost underwriting capital available, offsetting some of the pull-back in other areas due to softening reinsurance market conditions.
The AlphaCat unit, which includes the John Paulson backed joint venture investment-oriented (or hedge fund strategy) reinsurer PacRe Ltd., underwrote gross premiums totaling $64.1m during the second-quarter, up 46% compared to the prior year period when the unit underwrote $43.8m.
In terms of premiums earned, AlphaCat reports $38.5m of net premiums earned, compared to $32.5m a year earlier.
The AlphaCat unit saw a combined ratio across the ILS funds, reinsurance sidecars and PacRe of 19.5%, up slightly from 12.2%, with the increase driven by lower positive prior year developments.
Underwriting income for AlphaCat came in at $31m for the quarter, compared to $28.5m a year earlier, while net operating income was down at $7.1m (compared to $13.9m) and net income down at $23.6m, less than half the $50.2m reported a year earlier, largely due to a halving in investment returns, greater expense deductions, but with higher income returned to investors as well.
That resulted in net operating income available to AlphaCat for the three months dropping to $4.9m, with Validus’ share reported as $3.1m, compared to $9.4m for the prior year period.
It’s clear that the reduction in returns in the reinsurance market in general is reflected in the AlphaCat results, however the growing scale and greater premiums written ensure that capital returned to investors remains attractive and the unit remains positioned for any firming in market pricing.
Validus’ share of AlphaCat’s net income came in at $4.9m for the quarter, down from $13.1m a year earlier. However management fees earned remained static at $4.3m for the quarter.
The AlphaCat sidecars and ILS funds brought $5.6m of income to the group for the quarter, compared to $8.1m in Q2 2014. Expenses were up slightly at $3.1m, compared to $1.9m, however these included $2.5m of financial expenses from the raising of new third-party capital.
The AlphaCat results also included a $1.8m accounting loss due to the de-consolidation of one of the units ILS funds.
Also worth noting is that AlphaCat’s market tracking catastrophe bond fund, BetaCat, remains funded solely with related party capital so far, as it seeks to build up a track record. The BetaCat fund currently has $50.2m of under management, all from Validus itself, a slight increase in the quarter as it builds traction.
The AlphaCat ILS funds segment now counts over $1 billion of third-party investor capital for the first time, with $1.066 billion from investors and $214.18m from Validus under management in the funds.
The collateralized reinsurance sidecar piece of AlphaCat remains relatively static, with $147.6m of third-party investor capital and $34m of Validus’ money under management in these vehicles.
The John Paulson joint-venture reinsurer, which follows an investment-oriented strategy, saw $17.1m of unrealised investment gains during the second-quarter, with Validus benefiting from $1.7m of this. In Q2 2014 the unrealised investment gains earned by PacRe were nearly double at $31.3m.
The increased capital base at AlphaCat should help it to maintain reasonable returns on capital for investors in the more challenging underwriting environment. As the market adapts to the lower rate environment, leveraging third-party capital for management fees and a share of underwriting profits becomes an increasingly important strategy.
Having passed the $2 billion mark, the AlphaCat unit at Validus now sits in the 10th spot in our Directory of Insurance-Linked Securities Fund Managers, which reflects assets of almost $60 billion in total.