CATCo’s London-listed retrocessional reinsurance linked investment fund, the CATCo Reinsurance Opportunities Fund Ltd., is positioned for another impressive year, with zero losses to date in 2015 and an expectation that, if that continues, it could beat 2014’s annual return.
CATCo has grown its share of the global market for retro reinsurance protection to an estimated 27% in 2015, an impressive figure given the asset manager and reinsurer has only been in operation since January 2011.
Each year Bermuda-based CATCo Investment Management has increased the diversification of its portfolios, including for the listed retro fund, with now 50 pillars of individual peril risks invested in and a growing number of counterparties. The pillared retrocession product that CATCo provides has become a mainstay of many global reinsurers retrocession arrangements.
Nigel Barton, Chairman of the CATCo Reinsurance Opportunities Fund Ltd., commented; “At the 1 January 2015 reinsurance renewals, CATCo once again experienced strong demand for its diversified, multi-pillared product covering 50 perils. A significant proportion of renewals at 1 January were repeat business and 100 percent of capital was fully deployed.
“A disciplined approach to underwriting – with the Manager prepared to turn down unfavourable deals – has ensured the portfolio remains strong and well-diversiﬁed by both geographic distribution and risk peril. CATCo-Re Ltd. is currently retrocessionaire for over 30 reinsurance counterparties, predominantly traditional reinsurers and Lloyd’s syndicates.”
This approach has helped CATCo to better protect its investors in the fund’s, including the listed Reinsurance Opportunities fund, and for 2015 the manager has significantly reduced the chance of suffering loss exposure from catastrophe events, while still maintaining attractive return targets.
CATCo began 2015 with more protection for its portfolios, having taken advantage of soft reinsurance pricing to buy protection for itself.
Barton explained; “These protections include reinsurance products that due to recent pricing pressure have been reducing in price, allowing the Investment Manager to cost effectively offset some of the portfolio’s own risk.”
As a result, CATCo has de-risked the portfolio with both higher average attachment points and also through protection purchased, resulting in the chance of suffering a claim from catastrophic events having reduced by approximately 20%, compared to the 2014 portfolio.
Having got through the first six months of 2015 loss free, with global catastrophe loss activity remaining well below average levels, CATCo now maintains its targets for the year of a return to investors in the retro fund of LIBOR plus 12% to 15% per annum, or perhaps greater.
At this stage in the year, Barton explained that the investment manager expects, if it remains loss free, it will be able to beat 2014’s full year return of 14.08% for the Reinsurance Opportunities fund.
For the first-half of 2015, the CATCo Reinsurance Opportunities Fund has seen a net asset value total return of 4.47%. The share price total return was 4.86%. CATCo compares this to the Eurekahedge Insurance-Linked Securities Advisers Index return of 1.26%, which tracks an average return across more than 30 ILS and reinsurance-linked funds.
Demonstrating the importance of a long-term view when investing in reinsurance and ILS funds, CATCo has achieved NAV total returns since inception up to the 20th June 2015, of its different share classes as follows. The Ordinary Shares issued on 20th December 2010, the C Shares issued on 20th May 2011 and the C Shares issued on 16th December 2011, respectively achieved 51.78%, 73.61% and 56.02%.
Those are impressive figures in the current reinsurance and insurance-linked securities (ILS) market, where opportunities to secure double-digit returns have diminished as the market has softened. With signs that the ILS market has hit a floor and that peak catastrophe risk pricing will also level off soon, CATCo’s loss-free returns are likely to be able to sustain those levels into the future as well.
Also, it’s important to note that with as much as 27% of the global retrocession market coming to CATCo, the manager stands in a very strong position to raise its rates should any major losses be suffered. Something for investors looking for a long-term reinsurance-linked investment opportunity to bear in mind.
CATCo notes that the soft reinsurance market presents a challenge, and notes that these pressures persist in 2015 as an “inevitable result of excess capital and an extremely benign catastrophe year in 2014.”
However, despite the pressure in reinsurance and on rates and pricing, CATCo notes that “it has been apparent from activity so far in 2015 that insurance-linked securities (“ILS”) and ILS funds remain highly attractive to pension funds and other institutional investors.”
CATCo sees an increasing “long-term appetite for this asset class” as investors increasingly learn to appreciate the low-correlated nature of catastrophe risk and its increasing accessibility as an asset class.
CATCo also continues to manage its capital base prudently, having returned almost 10% of NAV or $35m to shareholders in a return of value earlier this year, enabling investors to benefit from premiums earned the year before and to take profits in excess of targeted distribution and the normal annual dividend.
Side pocket investments, where CATCo has segregated assets to pay for potential claims, are also being prudently managed it seems. With a side pocket for Superstorm Sandy now just 0.73% of NAV, with claim payments made almost 65% of the original retrocessional reinsurance loss reserve established in 2012.
CATCo believes that “a meaningful portion of the existing liabilities associated with Sandy, which must be commuted by the end of 2015, will be released by the counterparties over the remaining months of the year.” This could benefit shareholders with the fund’s NAV likely to increase inline with any released capital from the side pocket.
A side pocket related to the 2014 Severe Convective Storms has declined in value and now amounts to approximately 2.65% of NAV at 30th June 2015, compared to 3.5% at 31st December 2014. CATCo expects the positive development of this reserve will continue “as further side pocket releases from reinsurance counterparties are anticipated.”
Prudent reserving for potential catastrophic claims impact is vital at ILS and reinsurance funds and CATCo continues to demonstrate that it is preferable to reserve prudently for claims and then release capital back to investors if the claims end up being lower than expected, rather than to under-reserve and have to seek to claw capital back.
Looking ahead CATCo explains that it thinks positively about the future for its strategy of providing retrocession and reinsurance for peak risks, providing their returns to third-party capital investors.
Barton closed; “We believe that traditional cycles and business models within catastrophe reinsurance are changing irreversibly. We expect investor interest to remain strong.
“Capital is now able to move with great ease into the sector post-event, and this process will ensure catastrophe capacity remains plentiful and cost-effective going forward.”
While CATCo can maintain near 14% loss-free returns, while continuing to better-diversify its portfolios with each year, it will remain a very attractive option for investors looking to benefit from the returns and low-correlation of catastrophe insurance risks.