CATCo gets another $68.9m of trapped collateral back from side pockets

The winding down and running-off of Markel CATCo Investment Management’s retrocession focused investment fund, the CATCo Reinsurance Opportunities Fund Ltd., continues apace, with the manager securing another $68.9 million release from side pockets established for potential loss reserves.

The Markel CATCo managed retrocessional insurance-linked securities (ILS) fund has been successfully retrieving capital that had been set aside for potential losses in recent months.

With this capital having been assumed lost by many, the returning of this capital to investors is generating value for the shareholders in the CATCo Reinsurance Opportunities Fund at a time when they had perhaps expected most side pockets to be utilised in paying for catastrophe losses.

The Markel CATCo returned $37.9 million of trapped capital from the retrocessional reinsurance fund’s side pockets in early September.

Then, a further $25.6 million of capital from side-pockets established for catastrophe loss events was also lined up to be paid back to the fund in October 2020, after which it will be used to carry out a redemption of investors shares.

Earlier this year $18.8 million was retrieved from side pockets in April and a further $15.8 million in June.

Markel CATCo had always stated that its side pocket provisions and reserves had been created prudently and that not all of the capital within them would be needed to support the loss claims associated with many of the catastrophe events, with some return of capital likely.

Now, the return of capital is growing, which is a pleasing result for the shareholders in the loss hit retro reinsurance fund.

The fund’s management expect the $68.9 million of capital from side pocket investments will be paid later this month, after which it will carry out a fifth compulsory redemption of its shares. This will be on top of the $25.6 million of side pocket capital announced in August and so in total Markel CATCo expects to distribute $94.6 million through this compulsory redemption.

That breaks down as $15.9 million for Ordinary Shareholders and around $78.6 million for holders of C Shares.

Since Markel CATCo received the approval to run-off its listed retro reinsurance fund earlier this year it has now returned $263.3 million to its shareholders, through compulsory redemptions, dividend, a tender offer and share buybacks

$57.6 million went to the Ordinary Shareholders and approximately $205.7 million to the C Shareholders.

The CATCo Reinsurance Opportunities Fund, a stock exchange listed strategy, had a significant amount of its collateral retained and trapped in side pocket investments related to potential losses and catastrophe events from prior underwriting years.

As the loss picture becomes clearer, the trapped insurance-linked securities (ILS) capital (or collateral) that the manager had set aside to pay any potential losses on events as they developed is in some cases able to be released, where losses prove to not be as significant as the side pocket size

So, as losses have developed below where the reserves had been originally set for some of the side pockets, Markel CATCo has been able to release and return a portion of the excess capital in the side pockets to investors in the retro reinsurance fund.