Pillar Capital ILS related income continues to rebound for Alleghany

Financial services insurance and reinsurance group Alleghany Corporation has reported a continuation of the rebound in income earned from its stake and investments in specialist insurance and reinsurance linked ILS asset manager Pillar Capital and its funds.

Insurance-linked securities (ILS) fund manager Pillar Capital was, as you’d expect, hit by the 2017 and 2018 natural catastrophes which in turn dented its profits and reduced the investment income Alleghany was earning from the Pillar Capital funds, as well as the value of its investment in the ILS fund manager.

Over the course of 2019 so far, the investment income earned by Alleghany from Pillar Capital has recovered somewhat.

Still likely slightly dented, due to the influence of any additional loss creep booked in the period and perhaps a lower level of profit related commissions, the Pillar Capital related investment income reported by Alleghany for the second-quarter of 2019 was $3.3 million, up from the $1.9 million reported for Q2 2018.

For the first-half of the year, Alleghany reported $4.4 million of income from its investment in Pillar Capital and the managers ILS funds, up from just $1.9 million for H1 2018.

This signals a recovery underway and the figures should continue to build over the coming quarters, perhaps returning to the levels seen prior to 2017.

Alleghany earned over $20 million of investment income per year from its Pillar Capital stake and ILS fund investments in 2014 and 2015, then $15.8 million in 2016.

It’s going to be interesting to see how the investment income bounces back through the remainder of this year, as ILS manager Pillar Capital will be proactively dealing with any remaining trapped collateral issues and seeking to move forwards from the last two severe loss years, like the rest of the ILS industry is attempting to do.

In time this should result in increased income and profit shares to be earned, as long as catastrophe activity remains at more normal levels.

The other factor to consider in Alleghany’s results is the current carrying value of its investments in Pillar Capital.

Alleghany and its reinsurance subsidiary TransRe both made investments in ILS manager Pillar Capital. TransRe took an ownership stake in Pillar back in 2012. The reinsurer also invested $175m and Alleghany invested $25m at the time, into Pillar Capital’s limited partnership ILS and reinsurance-linked investment funds.

The carrying value of those investments, which was after any returns of capital made, had reached levels as high as $230 million or so in previous years.

But after the catastrophe losses the value naturally fell, but has recovered somewhat since then to reach $198 million, net of returns of capital to Alleghany, by the end of Q2 2019.

That’s up from the $193.6 million reported at the end of 2018, reflecting the recovery as Pillar Capital trades forwards out of the two severe catastrophe years that knocked the ILS market.