CATCo 2019 deals show 6% H1 return, but new side pockets needed

Despite the fact it is set for run-off it is interesting to note that the 2019 portfolio underwritten for the CATCo Reinsurance Opportunities Fund has delivered a 6% net asset value return in the first-half of the year to one class of shareholders.

The CATCo Reinsurance Opportunities Fund is being wound down and run-off, along with the other operations of retrocessional reinsurance focused investment manager Markel CATCo Investment Management.

The process to wind down the fund has begun, with as much as $43.4 million set to be returned to investors through share buybacks in the coming weeks as the process begins.

But being a listed insurance-linked securities (ILS) fund strategy, Markel CATCo still has to report on the performance of its portfolio and as the first-half of 2019 has been loss free, the performance has been positive from the most recently underwritten portfolio of risks.

But at the same time, the fund has also had to side pocket some additional investments that were made in 2018, as loss creep from catastrophe events continued to impact the managers ILS strategies.

In its half-year report the Chairman of the Markel CATCo fund said James Keyes, “The appreciation on the investments in 2019 portfolio generated a net asset value return of c. 3.58 per cent and 6.01 per cent for the Ordinary Shares and C Shares respectively.”

However, this appreciation, while attractive for investors, was overshadowed by the continuing loss creep from prior year catastrophe loss events and the impact they are having to CATCo’s underlying retro reinsurance contracts.

“The Net Asset Value (“NAV”) return for the first 6 months of 2019 was -14.66 per cent (6 months to 30 June 2018: -17.12 per cent) and -12.49 per cent (6 months to 30 June 2018: 6.31 per cent) for the Ordinary Shares and C Shares respectively. The negative return for both share classes is a result of the adverse development reported in the May NAV on both 2017 and 2018 loss reserves,” Keyes explained.

Explaining performance for the first-half of the year he said, “Catastrophic activity has remained at relatively low levels during the first half of 2019, allowing the 2019 portfolio to deliver an improved performance (compared to the same period in 2018) with no significant insured losses.

“This relatively benign start to the 2019, following 2017 and 2018, the first and fourth largest insured loss years of all time, portfolio year should bring some relief to Shareholders. However, this was offset by the deterioration in the 2017/2018 Side Pocket Investments.”

“No assurances are being provided as to the performance for the remainder of the year, which represents high risk for tropical storm formation,” Keyes added.

No fresh reinsurance or retrocession contracts were underwritten for the mid-year by Markel CATCo for this fund and as a result the focus now is on returning capital to investors.

Since inception, net asset value returns now sit at almost -53% for investors who allocated to the fund since its 2010 launch, while those investing in a C Share issue in 2015 could now be down as much as -72%.

This is all due to the 2017 and 2018 catastrophe loss events, which impacted the Markel CATCo strategy significantly and resulted in ongoing loss creep for the manager to deal with as well.

A significant amount of the fund’s capital remains trapped in side pockets at this stage, with around 51.86 per cent of Ordinary Share NAV and c. 31.87 per cent of the C Share NAV held as of June 30th.

There have been some releases of reserves from side pockets as well, with capital releases on both 2016 and 2018 Side Pockets of 3.24 per cent and 4.87 per cent of 1 June 2019 Ordinary and C Share NAV respectively.

However, there have also been fresh additions to side pockets as well, with the 2018 mid-year deals that have exposure to previous events needing new 2018 Side Pockets to be created on July 1st 2019, representing circa 7.57 per cent and circa 16.86 per cent of 30 June 2019 Ordinary and C Share NAV.

The Chairman said that, “There is still considerable uncertainty particularly in relation to 2018 events Hurricane Michael and Typhoon Jebi and 2017 event Hurricane Irma, which is well beyond what would normally be expected at this point in time following a major loss event occurrence.”

So the volatility in the Markel CATCo portfolio’s legacy deals from the last two years is not over yet it seems, but the 2019 portfolio has performed better as it benefited from a more benign catastrophe environment.

At this stage it’s likely the side pockets are being set at ultra conservative levels, to try to protect investors from any further surprises.