Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

AlphaCat ILS operations ‘well ahead of the curve’: Validus CEO


Bermuda headquartered insurance, reinsurance, insurance-linked securities and third-party reinsurance capital management group Validus Holdings recently announced its first-quarter earnings and announced the net income contribution from its AlphaCat ILS operations as $17.4m for the quarter. On its earnings call third-party capital was discussed by the groups CEO Ed Noonan, who said he felt that with AlphaCat Validus is ‘well ahead of the curve’.

Validus has been involved in ILS and the management of third-party capital for collateralized underwriting of catastrophe and reinsurance risk for some years now. Its AlphaCat third-party capital management and ILS segment, which operates both collateralized reinsurance sidecars as well as the AlphaCat ILS funds, is well-known and this year helped Validus attract new capital inflows of $404.4m. The capital was invested into its AlphaCat 2013 sidecar and also its AlphaCat ILS funds.

The AlphaCat operations are a growing part of the Validus business and becoming ever more central to the firms business model, positioning Validus as a reinsurer able to respond to different clients with different types of capital depending on their needs. In the last quarter the AlphaCat segment grew its gross premiums written by $18.6m, or 24.1%, over Q1 2012 to $96m.

Chairman and CEO of Validus Ed Noonan discussed the AlphaCat ILS and third-party capital management operations at some length on the recent earnings call. He said that with AlphaCat continues to be successful and expects to see more growth in funds under management.

Noonan said that with AlphaCat Validus offers a different model to other ILS managers, leveraging the firms expertise and resources to offer a different type of investment proposition to third-party capital.

Noona said; “We offer a different model than other ILS managers and that we bring Validus’ global distribution, underwriting expertise and a research team with truly unique insight to the cost of risk.”

Interestingly, Validus has a different approach to capital raising and deployment to the more typical ILS fund or collateralized reinsurer, who may raise capital first then look for opportunities to deploy it. Noonan explained; “Unlike pure ILS managers, we won’t take in new money without first identifying the specific clients and contracts where we will put to work.”

Noonan continued; “This is one of the things that differentiates us from other ILS managers. We don’t have to place premium anywhere if the market isn’t there. In fact, we’re not interested in doing it.”

Noonan sees Validus’ ILS and third-party capital operations as a type of hybrid, between the pure ILS and alternative reinsurance capital firms and the traditional reinsurers. The way Validus approach third-party capital gives it a unique edge when raising capital and investors clearly appreciate the fact that they can discuss where their money is to be deployed and know that Validus is leveraging its internal resources to ensure capital deployment is aligned with investors appetites for risk. Noonan also commented that the pure ILS players who raise capital first and then have to find opportunities to deploy it is also a very valid model and one which makes good counterparties for Validus to hedge risk with.

In fact Validus has been using the collateralized reinsurance providers for retrocession this year, CFO Jeff Sangster explained that it bought a multi-pillar catastrophe excess of loss contract as well as some additional industry loss warranties (ILWs) which was incremental to the amount it purchased a year earlier. He said that this retro cover was entirely from non-traditional reinsurance players and fully collateralized, adding that he continues to see that market as a good coverage buying opportunity.

Noonan said that this resonates well with investors and allows interests to be more tightly aligned. It’s an interesting way to approach it and perhaps one that works well for a well-known reinsurance brand such as Validus. For smaller, newer ILS focused operators it makes more sense to raise funds first where as Validus can perhaps attract capital a little more easily allowing it to operate in this way.

Noonan said that he sees the AlphaCat operations at Validus as in the early to middle stages of the ILS era within its business. He said that given the size of pension funds he expects to see significantly more assets come into the market. Noonan sees the third-party capital in reinsurance trend as something with the potential to be disruptive, he commented; “This type of disruption has been a catalyst for change in other financial sectors and this may well be the case in our industry.”

Noonan said that Validus’ clients want access to institutional and capital markets investors with lower cost of capital but also want access to Validus’ analytics and the continuity of a relationship with a traditional reinsurer.

Noonan clearly feels Validus is well positioned to service clients across different types of capital and that AlphaCat has put Validus ahead of the curve, saying; “We feel we’re very well-positioned between our size, scale and expertise in the traditional catastrophe reinsurance market and the strategic development of AlphaCat, which is well ahead of the curve.”

The mid-year Florida renewals are important to Validus and Noonan commented that even with more competition, some of which is from third-party capital, he doesn’t think Validus is concerned about rates in Florida not being adequate and he expects Validus to deploy a typical amount of capacity at the renewals. He said; “As always, Florida is a fascinating market. We see a significant increase in demand as high as an additional $2 billion. However, we also see the ILS sector bringing significant additional capacity into the market.”

Jeff Sangster, CFO at Validus also commented on the upcoming Florida renewals and said that while Validus knows there is a lot more demand for cover in Florida it is also ‘ground zero’ for ILS investors so there is also more supply. He said that he expects the renewals are going to be affected by the pull between supply and demand, as well as issues such as risk model changes , but he wouldn’t like to predict a direction for rates at this time.

Sangster also commented on how the ILS market stands to benefit from the Florida renewals. He commented that he expects the ILS players to be involved wherever there is a good price opportunity and that he expects people to buy cover from ILS players whenever they are looking for a lower cost of capital. In the Florida market some of the new start-up insurers may be too small to suit ILS though. Sangster also commented that some of the index based products used in the past have so much basis risk in them that he would be concerned about relying on them, particularly if it was for a smaller company.

Noonan closed the call by saying that AlphaCat continues to gain in importance at Validus, in the marketplace and in terms of net income. It’s clear that Validus intends to maximise the third-party capital opportunity and will attempt to stay ahead of the curve while continuing to operate its ILS and collateralized underwriting in the more hybrid style that it feels its clients want.

You can listen to the full earnings call via Validus’ website.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis ILS NYC 2023 - Insurance-linked securities conference in New York City

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.