Validus Holdings’ executives have underlined the potential for third-party capital to underwrite more business outside of the U.S. wind catastrophe space, as it grows the assets under management (AuM) of its AlphaCat unit, with flood and crop being discussed as potential growth areas.
The company recently announced that the insurance or reinsurance linked AuM at AlphaCat, Validus’ insurance-linked securities (ILS) and third-party reinsurance capital arm, hit a new high of $3.1 billion as of July 1st, 2017.
Speaking on the Validus second-quarter 2017 earnings call, President of Validus Group and Chief Executive Officer (CEO) of its reinsurance segment Validus Re, Kean Driscoll, said that one way the company is attempting to grow AlphaCat’s AuM is by accessing new lines of business outside of the U.S. hurricane space.
“One of the ways we’re trying to grow AuM is to find new classes of business that generally meet several criteria. One, if it’s not correlated it’s an easier discussion, two, if it’s of a relatively modest duration or tail, then that works, and three, are there acceptable margins to produce the types of returns that our investors are expecting,” said Driscoll.
Specifically, Validus executives were questioned on the potential for third-party, or alternative reinsurance capital to underwrite risks such as flood and crop, or other primary property lines of business.
Ed Noonan, Chairman and CEO of Validus Group, responded; “We actually believe there’s a very good opportunity to do that. Those are both natural peril risks of ILS. Investors see them as non-correlating with other financial assets, and we already do a bit of crop in AlphaCat.
“As we grow our crop business, that will expand, as we grow our flood business, that will expand, and as we grow our U.S. property business, that will also expand.”
Driscoll added that regarding new lines of business that meet the criteria outlined above, crop has worked and so has flood, but not every other class of business has worked, so far.
“We are looking up and down the distribution channel from reinsurance to insurance and across a wide array of classes, and we’ve had a lot of success. And I think that’s one of the components of how we’re able to build out better constrictive portfolios and not necessarily chase U.S. wind cat all the time,” explained Driscoll.
The desire to expand AlphaCat’s AuM by entering new classes of business provides investors in the unit with access to a broader range of perils, which has diversification benefits as well as the potential to increase profits as competition in the U.S. wind space remains high and returns down, although ongoing market pressures are impacting most classes of business.
As Validus looks to expand AlphaCat and therefore its ILS business operations it will be interesting to see how meaningfully it can participate in areas like flood and crop, and also other classes of business that reduce its reliance and focus on U.S. wind risks.