The CATCo Reinsurance Opportunities Fund Ltd. reported a 4.86% return in the first-half of 2016, up on the prior-year despite higher catastrophe loss activity, demonstrating the “highly diversified and significantly de-risked 2016 portfolio.”
The London and Bermuda listed ILS fund, which has just under $450m of net assets and invests in retrocessional reinsurance contracts and is managed by Markel CATCo Investment Management Ltd., the reinsurance and retrocession linked ILS investment and fund manager, reported an impressive first-half performance despite the higher global catastrophe loss activity seen in 2016 so far.
Being a retrocession focused fund and with a number of events impacting this market, it is testament to the work undertaken to diversify the CATCo portfolio and also the acquisition of its own catastrophe protection, that the fund has beaten its H1 2015 performance.
The first-six months of 2015 saw the CATCo Reinsurance Opportunities Fund achieve 4.47%, but in the first-half of 2016 that figure has risen to a net asset value return on the ordinary shares of 4.86%. During the 12 months to 30th June 2016 the ILS fund has increased its net assets by around $125m.
The ordinary share performance benefited from a reserve release related to the 2015 UK flood Side Pocket Investment, the manager explained. The NAV return for its C shares for the first six months of 2016 was 3.81%, which is still impressive in the soft market conditions and after higher catastrophe loss experience.
Chairman of the CATCo Reinsurance Opportunities Fund Ltd., Nigel Barton, commented that; “In spite of the uptick in catastrophe losses around the globe, enjoyed a solid performance over the past six months, reflecting its highly diversified and significantly de-risked 2016 portfolio.”
Barton also explained that deal-flow had been good during recent quarters, and despite market conditions the ILS funds reinsurance vehicle Markel CATCo Re Ltd.; “Maintained its robust book of business and at the same time took advantage of the plentiful capacity available to purchase additional catastrophe protection.”
The manager Markel CATCo has been actively de-risking in recent years. As the portfolio has grown it has been able to maintain attractive return targets while improving the overall risk profile and reducing the chances of major loss to its investors.
“The likelihood of losses being incurred has been significantly reduced, with the portfolio’s average risk profile down approximately 20 per cent compared to the 2015 portfolio,” Barton said.
Barton went on to explain that the prudent capital management of the CATCo Reinsurance Opportunities Fund meant that “any excess capital will be returned to Shareholders if it cannot be effectively deployed.”
Despite that aim, Barton explained that again this year it has not been necessary, as Markel CATCo’s growing profile in the retrocessional reinsurance market means that it saw “an increase in demand from reinsurance clients leading to 100 per cent of the Company’s available capital being deployed as of 1 January 2016.”
Barton said; “The Reinsurer’s success lies in the flexibility of its product enabling it to meet the individual preferences of each client, through a broad selection of geographic risk pillars which in turn provides diversification and reduced exposure to any one event.”
It is this diversification which has helped the Markel CATCo fund to an impressive return despite the heightened level of catastrophes.
“Major insurance catastrophe losses in recent months are unlikely to have a significant impact on the 2016 portfolio, including the Fort McMurray wildfire, which is set to be Canada’s largest ever insurance loss,” Barton said, citing the benefits of the diversified portfolio and pillared approach.
Markel CATCo’s prudent approach to recording loss reserves has helped the manager over the years, with excess reserves able to be released at future dates as seen with the UK flooding.
This year, Markel CATCo has created a side-pocket amounting to 1% of NAV for the Fort McMurray, Canada wildfires. Additionally, the manager is monitoring the developing Jubilee oil field in Ghana FPSO loss of production claim, in case this has any impact on the fund.
The CATCo Reinsurance Opportunities Fund continues to target a 2016 net return of LIBOR plus 9% to 12% per annum, or greater. That does seem achievable now, with the U.S. wind season likely to see greater premium contribution flowing through to the ILS fund’s NAV.