CATCo retro fund gains 8% as wildfire claims reduce (possible subrogation)

The CATCo Reinsurance Opportunities Fund Ltd., the listed, retrocession focused insurance-linked securities (ILS) fund strategy managed by Markel CATCo Investment Management, has gained roughly 8% in the last month thanks to a further reduction in claims from 2017 and 2018 wildfire loss events.

It’s the second time this has happened for the manager and its investors, the first having been in December 2020, when the CATCo Reinsurancde Opportunities Fund’s ordinary share class rose by around 7%.

As we explained at the time, this is likely due to the effects of wildfire related subrogation recoveries flowing through the market to reach the retrocession level, to the benefit of the Markel CATCo strategies.

In reporting its latest net asset values for the still in run-off retrocessional reinsurance investment fund, the CATCo strategy explained it had experienced a circa 8% increase in NAV for both its Ordinary and C Shares during May 2021.

The increase in NAV “predominantly reflects a reduction in claims associated with the 2017 and 2018 California wildfires,” the fund’s announcement explains.

It’s a further recovery of value that was previously thought to be lost, which alongside releasing trapped capital related to the fund, due to reductions in estimates for other catastrophe loss events (which has happened a number of times), means the investors continue to get back more value than they would have originally expected through this running-off process of the CATCo retro reinsurance fund.

The previous wildfire, likely subrogation related, return of value to the CATCo fund was based solely on the 2017 wildfires in California, so we assumed was related to utility PG&E’s subrogation settlement.

Wildfire subrogation recoveries have been seen across reinsurance and insurance-linked securities (ILS) from utility Pacific Gas and Electricity’s (PG&E) massive $11 billion settlement payments.

As we’ve explained before, the benefits for insurance-linked securities (ILS) funds from the flow of wildfire subrogation recoveries were expected to take as long as a year to be fully accounted for in the valuation of their exposed ILS and reinsurance assets.

For those on the retrocessional reinsurance end there was no guarantee subrogation would ever reach that far, but in CATCo’s case it does appear that the manager has benefited from the gradual reduction in insurer ultimates, the subsequent reduction in their reinsurance recoveries and that this has meant some recoveries against its pillared retro contracts that had been hit by the event.

This latest recovery of value, accounted for in May 2020, is related to both the 2017 and 2018 wildfires, CATCo said today.

That suggests some continued reductions in claims due to the PG&E settlement and subrogation, but also perhaps some benefits related to the later  $2.2 billion agreement from Southern California Edison and flow of related subrogation recoveries, which was related to 2018 wildfires in California.

Markel CATCo Investment Management would typically report a reduction in side-pocket capital as being a release made possible by a reduction in estimated claims reported by its counterparties.

Where as, Markel CATCo words it as a reduction in actual claims in this mornings announcement.

Suggesting at least one of its counterparties on the retrocession side has continued to benefit from subrogation recoveries that have flowed through from reinsurance counterparties and reduced their own ultimates for the 2017 and also 2018 wildfire loss events, reducing the CATCo funds liabilities at the same time.

This has a positive read-across for other retrocession focused ILS fund strategies and sidecars, as it shows subrogation flowing all the way down the market risk transfer chain. As a result, we could see some other recoveries of value by ILS funds over the coming weeks, which may become evident in reporting under the Eurekahedge ILS Advisers Index.