Markel CATCo ILS fund reduces side pockets for UK floods, US storms

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Reinsurance and retrocession linked investment and fund manager Markel CATCo Investment Management Ltd. has released a portion of side pocket investments set up in December 2015 for potential exposure to the UK floods and U.S. severe convective storms.

In an announcement related to the retrocessional reinsurance investment focused listed CATCo Reinsurance Opportunities Fund Ltd. the investment manager said that the amount of collateral it needs to hold against potential losses from these events had shrunk.

Typically this happens when counterparties report back an expectation that the final loss from a catastrophe or weather event will likely be lower than initially forecast. There is a chance that this could have been stimulated by the reduction in the industry loss estimate for the UK floods late last week.

Markel CATCo established side pockets amounting to 5.5% of the CATCo Reinsurance Opportunities Fund’s NAV with the manager saying that a “significant proportion” were related to the UK flooding event in December, with the U.S. severe thunderstorms the remainder.

Side pockets allow Markel CATCo to protect newly raised capital from the impact of any already-suffered losses, while also ensuring any impacted investments are segregated from the main fund. The manager said in January that it expected “a significant proportion” of the side pockets would be released as losses from these events would “stabilise relatively quickly.”

Now Markel CATCo has begun that process, saying that the side pocket will be reduced to approximately 4.5% and that the side pocket investment loss reserve would be reduced by approximately 0.90%. This reflects a lower level of collateral that its counterparties require it to hold. 

Investors will benefit from the release of the side pocket investment loss reserve, which will flow back into the fund’s February 2016 Ordinary Share Net Asset Value. This prudent approach to reserving and releasing side pockets has benefited Markel CATCo investors before and the process enables the manager to keep its investors informed while managing reserves effectively.

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