Validus Gets Nod for “Underappreciated” Sidecar, Joint Venture

Chris Westfall
Chris Westfall

Equity analysts at Credit Suisse initiated coverage of reinsurer Validus Holdings, setting a share-price target of $42, and citing the firm’s creation of AlphaCat sidecar and its PacRE joint venture as the primary reason for the rosy outlook.

“Year to date [Validus] has earned $15m of [joint venture]-related fee income,” the research note released Thursday said. “[We] believe [that figure] will rise as the platform expands due to [Validus] taking advantage of increased investor demand for reinsurance via [joint venture]/Sidecar structures.”

The report argues that – taking into account the joint ventures, excess capital, dividend yield and capital position – the Bermuda based reinsurer’s shares are currently undervalued by 25%.

“[Validus’] investment income run-rate has already incurred much of the downward pressure from the current low interest rate environment,” the report argues. “[We] expect [Validu] earnings to be under considerably less pressure versus peers.”

But it’s the Validus AlphaCat sidecar and the PacRE joint venture that seemed to fuel most of the praise from the Credit Suisse analysts, including an entire section titled “Why We Like the Third Party (“Joint Venture/Sidecar”) Business and Think It Will Grow”

“This provides traditional reinsurers the ability to earn management fees and potential profit commissions, in addition to possible diversification (e.g. enterprise risk management) benefits in cases in which the traditional insurer can participate in business it otherwise did not have a tolerance and/or ability to write on a standalone basis,” the report states.

PacRe was announced in April as a $500 million joint venture with Paulson & Co. Validus put up 10 percent of that capital and acts as underwriter. In June Validus then announced that it re-upped its longstanding collateralized sidecar AlphaCat program with a new $70 million vehicle for the 2012 hurricane season. The sidecar – which has a 37.9% equity interest – focuses on Florida windstorm reinsurance broader retrocession.

The research notes that roughly half PacRe’s capital was “deployed at mid-year renewals 27 September 2012 and the remainder will likely be placed through Jan. 1, 2013”

Validus shares ended Thursday’s trading at $34, up 1.7% on the day.

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