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AlphaCat increases contribution at Validus, PaCRe investment losses weigh


Bermuda domiciled insurance, reinsurance and third-party reinsurance capital management group Validus Holdings announced its results for the second-quarter of 2013 last week. The firms AlphaCat third-party capital management segment increased its share of income created during the quarter, but investment losses from joint-venture PaCRe Ltd. weigh on the results.

In Q1 of 2013, the AlphaCat segment of the business made up 8% of the firms total income for that quarter. In Q2 this share rose, with AlphaCat contributing almost 40% of the net income available to Validus from the quarter. On a net operating income basis that percentage share drops down to just over 10%, still up on the first-quarter.

Meanwhile, the reinsurers PaCRe Ltd. joint-venture reinsurer, which it launched in partnership with the Paulson & Co. hedge fund in 2012, continues to suffer investment losses. PaCRe Ltd. uses the hedge fund backed reinsurer approach, with assets invested by the Paulson hedge fund.

In Q2 2013, net unrealized losses relating to PaCRe were $70.8 million. The amount of PaCRe’s net unrealized losses attributable to noncontrolling (third-parties) interest was $63.7 million for the quarter, leaving a net impact to Validus itself based on its share in PaCRe Ltd. of $7.1 million. PaCRe Ltd. took in $65m of new funds in the quarter, of which Validus contributed 10%.

Despite the issues making the float investment strategy for PaCRe Ltd. a profitable one, the joint-venture reinsurer is part of Validus’ long-term strategy, said CEO Ed Noonan, who said on Validus’ earnings call; “PaCRe is a long-term venture, and we continue to see opportunities for it. The additional capital raise was just kind of an affirmation of the commitment to the long-term business.”

The hedge fund backed reinsurer strategy is not as straight forwards as some might think. Noonan explained why premiums written to date remain low. He said; “The lack of lots of premium today is a function of two things. First, given the investment strategy of PaCRe, rating agencies will only allow us to take on so much underwriting risk, and that amount of underwriting risk translates into a relatively low level of premium. As we take on different types of risks, or if we take on different types of risks, that will change. But the second issue for PaCRe is, it’s basically a new company, and it’s been in existence for a year. And so I wouldn’t judge the ultimate view of PaCRe based on simply what was done in the first year.”

Noonan was clearly keen to stress that Validus sees PaCRe as a core piece of its business architecture for the future, saying; “It is viewed as a long-term venture, and we’re continually looking at interesting opportunities for the company and along with our partners and looking at ways to optimize the returns of it. And if they’re good opportunities, we wouldn’t hesitate to take them on. So that was really the background on the capital infusion. It’s just really the affirmation of the importance of the business long-term.”

How long Validus will tolerate a run of investment losses on PaCRe remains to be seen. At some point you have to think that the third-party investors, and Validus itself, might feel their capital would be better put to work in one of the other AlphaCat vehicles, unless Paulson can turn around the investment issues at PaCRe Ltd. within the next year.

Looking at the AlphaCat segment in a little more detail; gross premiums written from Validus’ consolidated entities, including PaCRe Ltd., for Q2 were $46.8 million compared to $15.2 million for the three months ended June 30, 2012, an increase of $31.6 million, or 208.5%. Managed gross premiums written, including Validus’ non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, for Q2 2013 were $46.3 million compared to $58.5 million for Q2 2012, a decrease of $12.3 million, or 20.9%. Net premiums earned $35.0 million compared to $3.6 million for Q2 2012, an increase of $31.4 million. AlphaCat’s main loss for the quarter was caused by the European floods, which cost the segment $1m and Validus itself $0.1m, as we wrote earlier this month here.

Validus’ AlphaCat ILS and third-party capital management segment continues to demonstrate the value these strategies can add to a large, global reinsurer. The AlphaCat combined ratio remains low, at 25.7% for the second-quarter of the year or 25.1% for the first-half of 2013.

Again, Validus’ results show that the AlphaCat Managers Ltd. business of third-party capital collateralized reinsurance sidecars and ILS funds is a serious contributor to the firms results. Managed gross premiums written by AlphaCat entities, including non-consolidated affiliates, AlphaCat Re 2011 and AlphaCat Re 2012, for the first-half of 2013 now stands at $142.3 million.

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