The value proposition of an ILS and third-party reinsurance capital manager operated from within a global insurance and reinsurance group, such as seen with AlphaCat as part of Validus, is attracting investors to change their ILS manager, according to CEO of Validus Ed Noonan.
Noonan, speaking during the firms fourth-quarter 2015 and full-year earnings call last week said that much of the impressive growth in third-party assets under management at Validus’ ILS and third-party capital manager AlphaCat is down to this trend, something Noonan expects will continue.
Discussing the impressive growth in ILS AuM, which saw AlphaCat reach $2.4 billion of assets by year-end, Noonan explained; “We don’t mirror the inflow of funds into the ILS market. In fact, one of things that’s happening is existing ILS investors are moving allocations from other managers to AlphaCat.”
“We are taking money from other managers,” Noonan continued, going to on to explain that the rapid growth seen in the final quarter of 2015 should not be expected to continue though, as the ILS sector as a whole is expected to remain relatively stable in terms of capital as investors manage their allocations versus the available returns in the space.
Noonan continued; “We don’t expect the inflow of ILS funds to be nearly as robust into the industry this year. They are very rational investors and right now they are seeing returns that are at, or even slightly below, the bottom of their acceptable range.”
However Noonan explained that Validus and AlphaCat do not expect investors to leave the sector, rather to keep allocations steady and wait out the softer reinsurance market.
“We are not seeing people fleeing but we are also not expecting to see inflow in a lot of cases,” he said.
Noonan went on to discuss why he felt AlphaCat has had a successful few months, in terms of raising new capital inflows from third-party investors.
“I think the biggest reason that AlphaCat has had the success it has, is fundraising takes time,” Noonan began. “We’ve got a really good following amongst institutional investors. Then second, the performance has been outstanding.”
Noonan also believes the model, of reinsurer operated ILS asset manager has benefits which has been helping AlphaCat to attract investors away from other, perhaps smaller, ILS fund managers.
“Its linkage with Validus Re, and its ability to source business, use our research function and our analytical capabilities, is it’s truly competitive advantage. I know we’ve been saying that for a while but I think that’s one of the things you are seeing in the growth of AlphaCat. It’s viewed as a smarter, more effective and better returning manager,” Noonan commented.
The debate over which strategy is right, the reinsurer operated ILS manager, or the specialist, independent shop is one that will run and run. Both sides have their benefits and also potential drawbacks.
For some investors the access to reinsurance business that a reinsurer operated ILS manager can provide is too attractive to pass up, for others the independence is attractive, as some investors still feel conflicts exist in the reinsurer operated model.
In reality both have their benefits and neither business model is without its detractors. For AlphaCat and Validus though, the business model is clearly working and providing meaningful benefits to the overall insurance and reinsurance group strategy.
During the call Noonan also explained how the multiple strategy approach of AlphaCat, having retrocessional reinsurance focused sidecars, lower and higher risk ILS fund strategies, all complement Validus as a group and help it to optimise its capital, particularly for the capital intensive higher risk segments.
He also explained how AlphaCat engages with clients, both on its own or through underwriting services provided by Validus.
“AlphaCat does directly engage where we introduce them and leverage our relationships,” Noonan said, continuing “There are times where we write the business on behalf of AlphaCat, and that’s really where we are able to optimize our net portfolio, meet the investor return hurdles, source business, maintain a bigger footprint in the marketplace and be more relevant to our customers, but ultimately be able to leverage the AlphaCat capital base.”
As that capital base grows more meaningful in size, contributing and taking an increasing share of premiums in the Validus reinsurance portfolio, it will be interesting to see how its contribution grows to the Validus bottom-line and also how it impacts overall revenues.
Clearly, underwriting business on your own balance-sheet and retaining as much of it as you can is the most profitable way to underwrite risks. By writing them on investor capital and sharing the rewards of that business, how will that ultimately affect the bottom-line, despite the growing contribution from fees and returns?
It’s going to be a very interesting strategy to watch play out over the coming years. It’s clearly working at Validus right now, making the firm a very good example to watch over the coming years.