The CATCo Reinsurance Opportunities Fund Ltd., a London listed retrocessional reinsurance linked investment fund, has hit the upper end of its return targets in 2014, despite lower rates across the reinsurance market and having better protected itself.
The results from CATCo announced to the stock market this morning show that the fund, which is managed and operated by reinsurance and retrocessional reinsurance-linked asset manager CATCo Investment Management, saw net asset value (NAV) growth of 14.08% in 2014 with a share price total return of 9.04%.
The CATCo Reinsurance Opportunities Fund’s stated target is LIBOR plus 12% to 15%, so the NAV return puts it right on target for 2014. This is impressive in a lower-priced reinsurance market environment, especially one where retrocessional reinsurance pricing has seen some of the steepest falls in rates across the market.
It’s also impressive as in 2014 CATCo chose to protect itself by acquiring certain retrocessional protections. With those protections factored in the fund’s maximum return would have been around 18%, so to achieve over 14% is a very good result for the investors.
CATCo has experienced increased demand at the recent January reinsurance renewals for its CATCo Re Ltd. reinsurer. This has led to the manager announcing that 100% of its available capital was deployed for the fund. This is likely a good strategy as rates seemingly could continue to decline at future renewals in 2015, so the business underwritten at January could be more profitable.
In 2014 CATCo suffered a few small impacts from the U.S. severe thunderstorm and convective storm season, but these attritional losses only amount to an aggregate loss reserve of around 1% of NAV. So 2014 has been largely loss free, which has helped the fund to reach its targets despite the difficult market environment.
On the capital deployment for 2015, CATCo says that indicative net returns for 2015, including retrocessional protections that it has put in place, could provide for a maximum, no-loss, return of 19%, so again above target.
In fact, the 2015 portfolio sees greater diversification across the portfolio, with the average risk per pillar for 2015 down to 3.3% versus 4.1% for 2014. CATCo will have 50 risk pillars in 2015, compared to the 42 it had for 2014. This continued effort to diversify helps to protect the overall fund returns.
Additionally, the diversified portfolio, plus reinsurance protections, mean that exposure to a single loss event, no matter the magnitude, would result in net portfolio returns for investors in the current financial year of not worse than -10%.
By establishing broad diversification and putting in place its own retrocessional protections, taking advantage of cheap market rates for instruments such as ILW’s, CATCo is ensuring that even the worst year possible will be manageable by its investors. Investors in these funds are typically holding the stock for long periods, so a maximum impact of -10% in a year can easily be recouped in loss free years. On average an investor in a fund like CATCo will hope to see attractive returns over the long-term.
One side-pocket investment, amounting to 2.8% of NAV at 31st December 2014, for hurricane or superstorm Sandy remains in place, CATCo says. However the manager notes that the remaining liability must be commuted no later than 31st December 2015. CATCo expects that the release of liabilities related to Super-storm Sandy will result in an enhancement to the indicative net returns for 2015.
That suggests that this reserve has developed positively, not negatively, and that some of the side-pocket will be released back into the NAV for investors to benefit from. CATCo has shown prudent side-pocketing of at-risk investments in the past, another benefit for investors.
CATCo also recently announced another return of capital to investors, with a $35m return of value proposed. Again, the manager is demonstrating prudence in returning capital rather than deploying it, to ensure investors benefit from the largely loss free year.
The 14% NAV growth seen in 2014 is, naturally, below that achieved in 2013. With retrocessional reinsurance rates down anything up to 40% over the last year or two it is no surprise that the NAV growth slowed. However, the fund has met its targets, provided its dividends and an extra capital return. For investors looking for an investment which is largely uncorrrelated a 14% annual return is extremely attractive.
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