CATCo retro fund gains again, NAVs now 148% & 231% higher than lows

The CATCo Reinsurance Opportunities Fund Ltd., the listed, retrocession focused insurance-linked securities (ILS) fund strategy managed by Markel CATCo Investment Management, has reported another increase in net asset value (NAV) after loss reserves saw more favourable development.

The retrocessional reinsurance investment portfolio constructed by Markel’s CATCo Investment Management unit has experienced far more favourable development than had originally been anticipated, as the company recovers value for remaining investors.

Over the last year, a number of cases have been reported where a reduction of claims in relation to prior year catastrophe events has been possible, effectively recovering value that was once thought lost, freeing trapped collateral and boosting the NAV’s of the CATCo fund share classes.

This time, the favourable development is related to the 2019 underwriting year catastrophe loss reserves that Markel CATCo had set.

For 2019, side pockets had been established for Hurricane Dorian, Japanese Typhoons Faxai and Hagibis and the Australian bushfires.

As of June 30th 2021, the 2019 side pockets amounted to roughly 8.69 per cent of Ordinary Share NAV and c. 36.22 per cent of C Share NAV for the CATCo listed retro reinsurance fund.

That was improved from the end of 2020 figure of roughly 12.95 per cent and 39.83 per cent of Ordinary Share and C Share NAV respectively, showing that improvements had already been made and value recovered.

This morning, Markel CATCo’s fund reported a further improvement in NAV of 0.5% for the Ordinary Shares and 2.5% for the C Share class, increasing them to $0.3229 and $0.6293 respectively at the end of November, because of the favourable development of loss reserves related to these 2019 catastrophe events.

These improvements will also have positively affected the Markel CATCo private retro fund NAV as well, we assume.

The run-off process continues and the portfolio managers will likely continue to realise positive gains, as losses become clearer from prior year catastrophe events and reserves can be adjusted and in some cases released back, to the benefit of investors.

Some investors that speculatively bought into the CATCo fund when its net asset value was at a low, around mid-2019, may have made a very attractive profit, based on the continual recovery of value seen since.

Both of the share classes of the listed retro reinsurance fund now stand far higher than they did at that stage, with the Ordinary Share NAV now up roughly 148% since mid-July 2019 and the C Share NAV now up roughly 231% since the start of July 2019.

While the CATCo funds suffered severe losses after multiple heavy catastrophe years, the ability to recover value does demonstrate that reserves were set adequately for many of the events the funds investors have been exposed to, which has been a key argument in legal actions seen.

That legal action continues, as we reported last week another investor is suing former CATCo CEO Tony Belisle in a Florida court.

At the same time, the proposed buyout process continues, albeit slightly delayed into 2022.

When the funds eventually get wound down and investors get their remaining capital back, it would be very interesting to see how the capital return stacks up for investors, versus their expectations of the losses they would suffer when reserves were originally set and NAV’s were at a low.

We also recently reported that, the fund’s Chairman is hopeful that further wildfire subrogation related recoveries could be made, so that could adjust prior year loss picks further.