CATCo fund shares take hit as loss reserves & loss creep factored in

by Artemis on November 22, 2018

Unsurprisingly the share prices for the stock exchange listed CATCo Reinsurance Opportunities Fund, which is managed by Markel CATCo Investment Management Ltd. the retrocessional reinsurance investment specialist, have taken a hit today as investors digest today’s news of the impacts from recent catastrophes and ongoing loss creep from 2017.

The Ordinary share class of the retrocessional reinsurance investment fund have dropped by around 25% since yesterday’s close. It seems that trading has been brisk, as the London Stock Exchange has set a price monitoring extension on the share class, which can often suggest higher demand.

This was triggered by this morning’s news of the setting up of loss reserves to pay for claims from typhoon Jebi and hurricane Michael, as well as the expectation that the current California wildfires could be as large a loss for the fund as the 2017 wildfires, and the fact that further loss creep impact from the 2017 hurricanes is also expected by the investment manager.

The same funds C share class, which is not exposed to the loss events of 2017 having been established to support fresh investor inflows for this year, has also declined but only by around 4.5%.

This is the market pricing in its expectation of the impact of these loss events and interestingly, given it is the Ordinary shares that have declined the most (which are exposed to last year’s hurricanes) it seems shareholders may be most concerned by the potential for further loss creep from 2017.

Where as holders of the CATCo C shares seem more comfortable in the loss reserves set for recent events and the ability of the fund to also handle the impacts of the wildfires.

This is normal behaviour for an ILS fund, just that being listed we get to see the impacts of catastrophe losses on the funds valuation in real-time, as defined by the markets sentiment.

It also provides a picture of where other ILS fund strategies can expect their valuations to be heading, if they invest in similarly at-risk layers of reinsurance or retrocession programs.

Finally, it’s important to remember that this is just one fund strategy operated by Markel CATCo and its other funds and private mandates often provide different return profiles to investors, so while the manager will clearly have exposure to all these catastrophe events, the amounts will differ across funds.

It’s also worth considering the fact that Markel CATCo hedges this fund and so may be able to claim some support from other capital providers to pay some of the eventual claims burden.

Also read:  Markel CATCo reserves for Michael & Jebi, warns on wildfires & loss creep.

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