AlphaCat third-party assets under management approach $1 billion

The AlphaCat third-party reinsurance capital management unit of Bermuda domiciled insurance and reinsurance group Validus Holdings grew investor contributions slightly during the third-quarter bringing its AlphaCat third-party assets under management to just shy of a billion at $995m.

It’s the highest level of third-party assets under management that Validus has had in its AlphaCat unit, with the capital split between sidecars and ILS funds. At the beginning of 2013 Validus raised over $404m for the 2013 edition of its AlphaCat sidecar and the AlphaCat ILS funds, but as the year has gone by Validus has also turned capital away to ensure it can meet investors return needs and deploy capital effectively.

CEO of Validus Ed Noonan, commented during the firms recent third-quarter earnings call; “Our third-party asset manager AlphaCat had another solid quarter with net income of $9m. Third-party assets under management were $995m, a 7% increase in the quarter.”

Validus see’s the AlphaCat ILS and third-party reinsurance capital management unit as a core piece of its diversified approach to running a large insurance and reinsurance group. Approaching the $1 billion mark makes AlphaCat a sizeable piece of the Validus operations now and judging by comments made by its execs in recent months the contribution it makes is becoming increasingly useful as a way to help Validus operate at a lower cost of capital, thus competing more effectively with other ILS players.

Noonan said later on the call; “The last piece of our diversification is AlphaCat, our third-party asset manager. AlphaCat has had very good success and generated $9m in net income this quarter. We’ve turned away money in AlphaCat this year, however we have still grown third-party assets under management to just under $1 billion. Our goal is to align third-party investors with the return criteria they seek and to deliver a seamless product to our customer.”

Noonan also said that Validus is not seeking to become the biggest ILS manager around, preferring to use AlphaCat as a real differentiator and point of benefit to investors.

“AlphaCat has written $147m in premium this year, a good indicator of not only its strategic importance but success as part of our integrated strategy. Our goal is not to be the largest asset manager in this sector, but rather to deliver true alpha to investors and the right cost-of-capital to cedants,” commented Noonan.

When asked what Validus intended to do if competition continued to increase in the property catastrophe reinsurance space and capital markets inflows continued to bring down pricing, Noonan suggested it would turn even more focus towards its AlphaCat unit.

“If we can’t get paid for the risk we take then we’ll just sit on our hands. Or maybe reflect it in more business flowing through AlphaCat where the lower cost of capital is advantageous to customers, versus the cost of capital on our balance sheet,” he stated.

One of the AlphaCat ILS and reinsurance-linked investment funds suffered a loss during the quarter, which Noonan explained had come from the high-yield, therefore higher risk fund. He said that despite the loss the fund is still performing above expectations for the year to date.

Validus CFO Jeff Sangster commented on it, saying that the loss was; “A loss on a single contract. It was an aggregate contract that got hit for $15m so we take our share of that as we own a piece of that vehicle. And then in addition to that our performance fees are impacted as well.”

Noonan said that this loss was a good example of Validus’ AlphaCat strategy, commenting; “We have various funds that we generate business for. We have one fund that likes to take the riskier end of the spectrum, very low-layer risk, and there’s a lot of premium that goes into that fund. This claim went into that fund. We are an investor in that fund as well, but we don’t want to skew our portfolio by writing all of it ourselves, and so working with third-party investors makes sense. Despite this particularly claim to the fund the performance this year is still excellent, outstanding and well on track. So not everything we do in AlphaCat is higher layer. There are times where we have funds that are targeted towards the riskier end of the spectrum.”

Noonan went on to explain that the loss on this contract was from a single global insurer counterparty which, judging by his comments, had been hit by losses from the flooding in Canada, flooding in Germany and hailstorms in Germany as well. AlphaCat would not be the only ILS fund to be hit by losses from some of those events, another fund saw a loss from these events in its September results.

Noonan said that the contract had a low attachment point and that the return on writing that type of contract were worth the risk. He said that AlphaCat got paid a lot for that risk and that had the layer seen real catastrophe events it would have been exhausted entirely, which gives you an idea of just how low the attachment for the layer must be.

Looking ahead, Noonan wouldn’t rule out raising more funds for AlphaCat next year, but cautioned that there would need to be the deployment opportunities to make it worthwhile for investors allocating additional capital to the funds and sidecars.

An analyst asked whether the fact that AlphaCat had stopped raising capital in 2013 and the high levels of capital in the ILS space meant that AlphaCat may continue to decline capital in 2014.

Noonan answered; “AlphaCat is an interesting vehicle, and there are lots of other things that AlphaCat has the capability to do. So I wouldn’t rule out the possibility of growth in AlphaCat that may not be purely catastrophe risk or maybe structured catastrophe risk in some other form.”

His answer suggests that Validus is already thinking about new avenues for growth in its third-party capital management unit AlphaCat and that if the ILS and third-party reinsurance capital market can create new avenues and opportunities for growth AlphaCat would be keen to move into them.

Read our other recent article on AlphaCat: AlphaCat third-party capital unit continues to grow contribution at Validus.