Reinsurance group Validus Holdings reported its third-quarter earnings yesterday, providing an insight into the impact that insurance-linked securities (ILS) fund managers have experienced from recent catastrophe events and the support that ILS capital will give to pay hurricane losses.
Validus owns the AlphaCat Managers Ltd. insurance-linked securities (ILS) and third-party reinsurance capital unit and breaks out the ILS managers results in its quarterly reporting, which provides an opportunity to see how recent events have hit a diversified ILS fund manager.
AlphaCat operates a range of strategies, from pure catastrophe bond funds to higher risk collateralized reinsurance and retro focused strategies and as you’d expect it is the latter which has taken the bulk of its losses.
One headline number that comes to light is the fact that the AlphaCat segment has suffered incurred losses of $574 million for the quarter, which is even higher than the reinsurers Validus Re unit ($395m).
It’s important to note that this is the figure reserved for by the AlphaCat unit and the segments gross reserves for losses grew to $676 million by the end of Q3.
It’s reasonable to assume that a significant amount of this will be paid out to ceding companies as valid claims, but also that a decent chunk will likely become recoverable as the true claims figures become clearer. AlphaCat will have reserved based on best available information and industry loss projections, meaning it could be some months until the final bill is understood.
Validus reported that its share of AlphaCat losses amounted to $27.6 million, while its share of net losses and loss expenses was $35.7 million.
Almost $7.3 million of the shared losses come from hurricane Harvey, almost $21 million from hurricane Irma and the remaining almost $7.4 million from hurricane Maria, showing that Irma was the biggest hit for the AlphaCat unit.
The AlphaCat unit fell to an underwriting loss of $479.4 million for the quarter, $376 million of which was attributable to non-controlling interests (third-party investors) in the AlphaCat ILS funds and strategies.
The majority of the losses appear to have fallen to the higher risk AlphaCat ILS funds, which is to be expected as these funds underwrite the riskier collateralized reinsurance and retrocession contracts so would be the ones most likely to be triggered by the recent major catastrophe events.
Validus provides a picture of where the losses fell by reporting its income (or loss) from each AlphaCat strategy.
The lower risk AlphaCat ILS funds saw Validus take a loss of just over $7.5 million, the higher risk ILS funds a near $22 million loss and the BetaCat strategy, which approximates an index of the catastrophe bond market, just short of a $1 million loss.
It’s also clear where the losses largely fell by looking at the assets under management of each strategy, with the higher risk ILS fund assets having fallen by over $200 million, as reported at the end of Q3, which is likely due to paid losses or trapped collateral.
Overall AlphaCat’s ILS assets under management have fallen by around $200 million as well, reflecting the decline in the higher risk ILS funds, to just under $2.9 billion at the end of the quarter, compared to just under $3.1 billion at the end of the previous period.
During the quarter AlphaCat raised $176.5 million from third parties, while $90.5 million was returned to investors, $83.2 million of which was to third-party investors. That doesn’t explain the dip in overall assets in the higher risk ILS funds, hence we assume it’s due to loss activity and collateral flow.
These figures are all to be expected and with the loss largely coming from the higher risk ILS and collateralized reinsurance fund AlphaCat’s strategies are responding as would be expected from major catastrophe events such as those seen in Q3 2017.
Validus continues to grow its book through, with the help of AlphaCat and in the third-quarter the company underwrote gross premiums of $523.9 million, up from $372.4 million for the Q3 2016, an increase of $151.4 million, or 40.7%.
During the quarter Validus earned $5.6 million of fees from AlphaCat activities, $5.1 million from third parties, compared to $8.4 million in the prior year quarter.
The decrease in fees is due to lower performance related earnings from third-party capital as a result of recent loss events.
Expenses fell for the AlphaCat segment as bonus accrual declined for the quarter, which again is likely performance related.
Validus reported $2.5 million of income from the AlphaCat ILS funds and sidecars, but an investment loss of -$30.1 million, due to the impacts of catastrophe losses, driving the unit to share losses of -$27.6 million with the parent, compared to a profit of $11.2 million in Q3 2016.
Overall, Validus Holdings reported a combined ratio of 200.5% for the quarter, but when AlphaCat’s losses are subtracted from that it comes down to 138.8%, which shows just how significant the loss has been for AlphaCat and its strategies, compared to the parent.
The AlphaCat Managers team will be assessing the impact to specific contracts at this stage and the unwinding of the large amount of incurred losses and reserves set will take some time to achieve.
However the figures show that the manager is reserving prudently, is prepared to pay its losses by setting capital aside to do so and also demonstrates the significant support the unit provides to its parent and to its cedents at a time of severe market stress due to catastrophes.
AlphaCat’s experience from recent loss events will be very similar to many other ILS fund managers with higher risk collateralized reinsurance and retrocession strategies. These strategies are designed to protect their ceding clients against losses from exactly these kinds of catastrophe events, meaning the payouts are likely to be substantial.
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