CATCo retro fund portfolio return target rises 43% for 2018

Due to the impacts of catastrophic events in 2017, the subsequent industry losses across reinsurance and retrocession and then the higher rates achieved at the January 2018 renewals, Markel CATCo’s listed retrocessional reinsurance fund, the CATCo Reinsurance Opportunities Fund, has a maximum portfolio return target 43% higher than it did last year.

For 2018, Markel CATCo reports that the fund portfolio has an indicative maximum net return of roughly 23% on invested capital, which is 43% higher than the 2017 portfolio maximum net return of 16%.

That’s a significant increase in return potential for the CATCo Reinsurance Opportunities Fund in 2018 and shows that Markel CATCo’s underwriters have secured attractive rate increases for its multi-pillared retro product at the renewal season.

The figures above are including the costs of hedging the portfolio, which Markel CATCo achieves with its own retrocessional reinsurance protection.

In fact, the portfolio has a lower maximum possible draw-down for the year ahead as well, with the maximum capital exposed to a worst-case single loss event limited to 8% for the 2018 portfolio, down from 10% for the 2017 portfolio.

The manager said that it has deployed 100% of its capital for the year ahead, thanks to, “Continued increased demand for Markel CATCo Re Ltd. products.”

Markel CATCo’s retro fund strategies were hit hard by loss events in 2017, with the full-year net asset value return coming in at -27.6%.

The manager established loss reserves for the listed CATCo Reinsurance Opportunities Fund due to the hurricanes amounting to 28.6% of NAV, net of recoveries on its own hedges, 17% for the California wildfires and around 2% for a range of other major catastrophes during the year (the Mexico earthquakes, Cyclone Debbie in Australia and U.S. severe convective storm activity).

As a result the listed fund has side pocket investments amounting to 41.5% of Jan 1st 2017 NAV for its ordinary shares for 2017, 6.1% left from 2016 losses and 1.2% from 2015 losses.

Because of this and after allowing for the 2017 side pockets and loss reserves, the fund has approximately 35% of ordinary share NAV (post dividend) available for reinvestment in the 2018 portfolio.

Still the strategy has paid its dividend this year and Markel CATCo said that since inception the listed retro fund has returned $234 million of capital to Ordinary and C Share holders through dividends and return of value distributions. In fact Ordinary shareholders from December 2010 have now received roughly 75% of their original investment through these types of distributions.

These figures and the higher maximum potential returns are all for the listed CATCo Reinsurance Opportunities Fund. But it’s safe to assume that the other retro strategies Markel CATCo operates have a similarly improved return potential for 2018, thanks to the manager achieving impressive rate increases at renewals.