CATCo listed fund has major loss free first-half, to raise more capital

The CATCo Reinsurance Opportunities Fund Ltd., a listed fund vehicle operated by reinsurance and retrocession linked investment manager Markel CATCo Investment Management Ltd., has reported a first-half of the year free of major losses and now looks to raise more capital in order to take advantage of opportunities.

For the first-half of 2017 the CATCo Reinsurance Opportunities Fund has reported a net asset value return of 3.94%, which is down on the first-half of 2016 when the fund returned 4.86%.

Returns since inception now amount to nearly 82% for the funds ordinary shares and as much as 108% for one class of C shares.

“The Company has enjoyed another strong first half of the year with no significant insured losses,” explained Chairman James Keyes.

“The Investment Manager has not set up any specific Loss Reserves related to 2017 events as the Investment Manager expects the attritional loss reserve to be sufficient to cover any loss activity incurred to date during 2017,” he continued.

With catastrophe and man-made loss activity coming in well-below average in H1 2017, ILS and reinsurance linked investment managers like Markel CATCo are reporting attractive returns, despite the softened state of reinsurance and retrocession markets.

The returns are below 2016’s, largely due to a release of trapped capital from 2015’s UK floods that boosted the first-half of 2016 result, but also likely reflect the ongoing decline in reinsurance pricing to a degree. The specific area of the market the CATCo fund operates in is pressured by the weight of capacity seeking underwriting opportunities and so prices may have declined somewhat.

The softened state of the global reinsurance and ILS market has also assisted manager Markel CATCo, as it looks to protect its portfolios against any major loss impact.

The manager has been acquiring industry-loss warranty (ILW) protections to achieve this, and Keyes said that the cost of those protections remains attractive.

“The persisting low price environment and continued growth of the ILS market during 2017 has allowed Markel CATCo Investment Management Ltd. to continue purchasing balance sheet protections, mainly in the form of Industry Loss Warranties (“ILWs”), at price levels similar to that of recent years,” Keyes explained.

Demand for Markel CATCo’s products remains abundant, with 100% of the funds available capital deployed at key January and mid-year renewals and new capital raised during the second-quarter.  Markel CATCo continues to target a full-year 2017 net return of between 9% and 12% per annum, on top of LIBOR.

The fund continues to manage any exposures prudently, using side-pockets with which it segregates any at risk contracts and assets in order to protect the rest of the fund and any new investors. These can then be commuted as agreed, or released back into the fund if losses do not manifest.

Gradually the manager has been releasing portions of its side-pockets from across all underwriting years and this strategy, which is employed by many ILS fund managers, is proving a prudent way to manage any exposures as they develop.

Markel CATCo is going to seek approval from its shareholders in this fund to raise further capital, likely in advance of the end of year reinsurance renewals.

The manager will seek approval to issue up to 20% of the number of shares in issue without having to issue a new prospectus and on a non-pre-emptive basis.

This will allow Markel CATCo and the fund’s board to issue shares at any point that demand from investors allows, or when it sees opportunities to deploy more capacity. The first opportunity to do so would be at the end of the year, for the January 2018 renewals, when the manager is likely to see further strong demand for its reinsurance and retrocession products.

While returns are depressed, as seen across reinsurance and ILS funds, the listed Markel CATCo fund continues to enjoy performance that its investors likely find very attractive and opportunities to deploy more capital are clearly available, as the manager considers further capital raises.