The retrocessional reinsurance investment focused listed CATCo Reinsurance Opportunities Fund Ltd. achieved a net asset value return of 11.58% in 2015, despite having to set up side-pockets for potential catastrophe events such as the UK flooding and U.S. tornadoes in December
2015 has been another successful year for this fund, achieving an attractive return to the retrocessional reinsurance fund’s NAV despite some catastrophe events resulting in a need for side-pockets and prudent reserving.
The 11.58% NAV return far exceeds the average of the insurance-linked securities (ILS) and reinsurance linked investment fund market, which the Eurekahedge ILS Advisers Index records currently as 4.3% (based on 80.65% of the ILS funds reported December 2015 returns as at 25th Jan 2016).
As of the end of the year the CATCo Reinsurance Opportunities Fund Ltd. had side-pockets amounting to 5.5% of NAV set up, of which the manager Markel CATCo Investment Management Ltd. said a “significant proportion” were related to the UK flooding event in December.
However, despite having to set up a side-pocket for the UK flooding event, the manager clearly doesn’t feel it very likely that the event will turn into a loss for the portfolio, saying that it is “not expected to result in loss payments diluting the value of these side-pockets.”
Reserving for the UK flooding and also for U.S. tornado events in December meant that Markel CATCo had to adopt a prudent approach to reserving at year-end 2015, which adversely impacted the NAV of the fund by 175 bps. However, the manager believes that a significant proportion of this reserve will be released during 2016, which would be to the benefit of the investors.
Over the course of 2015, Markel CATCo released reserves relating to Superstorm Sandy, which is now fully commuted, and events from years prior to 2014. This resulted in a boost to fiscal year 2015 NAV of around 1%.
This conservative reserving and releasing process protects investors from any potential for loss creep from a catastrophe event and allows losses to fully crystalise without being able to impact on the main fund NAV. Markel CATCo has a track record for reserving prudently, often resulting in an ability to release side-pockets to the benefit of the fund’s NAV in later years.
Other side-pockets set up for potential losses from 2014 severe thunderstorms and tornadoes in the U.S. have been reduced in size, now down to approximately 1.5% from 3.5%.
At the January renewal Markel CATCo reports increased demand for its products underwritten by its reinsurance firm Markel CATCo Re Ltd. This has led to 100% of the investable capital having been deployed at the January renewals.
As a result of the deployment, this fund’s portfolio could provide an indicative net return of around 16% on invested capital, but with a lower risk portfolio versus the one underwritten in 2015. For investors that is again a very attractive proposition, with a maximum return of 16% a high target for the ILS fund space in the current lower-priced reinsurance world.
In fact, Markel CATCo said that the average risk of the 2016 investment portfolio is approximately 20% down on the portfolio risk from 2015. The maximum investable capital exposed to any one worst case event is now not more than 10%.
So 2015 has been another successful year for the retrocessional reinsurance investment fund operated by Markel CATCo, with an attractive full-year return on NAV and further prudent reserving which could lead to side-pocket releases in 2016 and beyond.
With the risk coming down on the portfolio again, while a loss-free year could still result in a high double digit return, the CATCo Reinsurance Opportunities Fund Ltd. remains a very attractive option for ILS investors seeking an exchange listed investment.