Pillar Capital investment income drops for Alleghany in Q1 2016

Insurance, reinsurance and financial services group Alleghany Corporation has reported a year-on-year decline of over 50% in the amount of investment income recorded from its equity stake in the results of ILS manager Pillar Capital.

After a 2015 full-year result which saw the profit contribution from its investment and strategic partnership in insurance and reinsurance linked specialist ILS asset manager Pillar Capital grow year-on-year, the first-quarter of 2016 saw the number decline significantly.

In its first-quarter 2016 results, Alleghany reported that Pillar Capital provided it with $3.1m of investment income, from its equity stake, but that is down more than 50% on the $6.6m of investment income reported for Q1 2015 and also down from the $3.9m reported in Q1 of 2014.

The income reported by Alleghany due to profit contribution from its investments in Pillar Capital has been fluctuating in recent quarters, having been up year-on-year in Q1 2015, then down in Q2, up again in Q3 and down again in Q4, but up slightly for the full year.

The fluctuation reflects a number of factors, including the state of the reinsurance market environment and lower returns available due to reinsurance price softening, as well as changes in the deployment cycle of Pillar funds as the manager has, like so many others, shifted even more towards private ILS and collateralised reinsurance.

That can all affect both the amount of income coming through from the Pillar investments for Alleghany as well as the timing of them. It will be interesting to see whether the timing results in more profit contribution coming through later in the year.

Alleghany acquired a stake in Pillar Capital when it purchased Transatlantic Holdings, including the property and casualty reinsurance firm TransRe, in 2012. TransRe was already a strategic partner and had an ownership stake in Bermuda-based specialist ILS and reinsurance linked investment manager Pillar Capital.

The stake in Pillar Capital provides additional income to boost Alleghany’s investment earnings, as well as giving the group a foothold in the collateralised property catastrophe reinsurance space where Pillar Capital operates.

The relationship is also one which Alleghany can hope to leverage even further when the market cycle turns, or hardens at all, providing a platform which can be upsized as and when reinsurance market conditions are conducive.

TransRe invested $175m and Alleghany $25m in Pillar Capital’s limited partnership ILS and reinsurance-linked funds. The latest valuation of those investments is combined as a single figure, and reported as $225.4m, net of capital returns, which is lower than the $238.8m reported at the end of 2015.

That decline suggests that Alleghany may have benefited from a return of capital from the funds at some point in the first-quarter, likely after the release of collateral from 2015 contracts and redeployment into 2016 had been completed after the renewal.

Of course it could also be due to a decline in the value of the investments, due to losses reserved for or suffered, but given Pillar’s focus on property catastrophe risks we find that unlikely as 2015 catastrophe and weather events are unlikely to have caused any more than minor attrition to the managers ILS portfolio.

So it’s likely that the stake in Pillar Capital is worth more to Alleghany than the reported investment income alone would imply.

At the last count, we have Pillar Capital listed as having $370m of ILS assets under management at the end of December 2015.