CATCo retro fund releases another $25.6m of trapped capital for investors

Markel CATCo Investment Management’ in run-off retrocession focused investment fund, the CATCo Reinsurance Opportunities Fund Ltd., is to release a further $25.6 million of its trapped capital back to investors, as more positions in its side-pockets see positive reserve development.

The news follows a $37.9 million return of trapped capital from the retrocessional reinsurance fund’s side pockets recently, with that capital set to be returned to investors early in September.

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

The CATCo Reinsurance Opportunities Fund continues to see positive reserve development against side pockets it had established for prior year loss events. With these side pockets proving more than adequate to cover certain older loss reserves, the manager has been able to recover capital to the benefit of investors in the fund.

Markel CATCo Investment Management is managing the run-off of its retrocessional reinsurance fund portfolios, returning capital to third-party investors where it is able to through a reverse tender offer and a series of share buy-backs.

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

As the loss picture clears up, 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.

As losses have developed below where the reserves had been originally set, allowing a portion of the excess capital in the side pockets to be returned to investors in the retro reinsurance fund.

$5.1 million of the latest release is relevant to holders of the Ordinary shares in the CATCo Reinsurance Opportunities Fund, while the remaining roughly $20.5 million is relevant to holders of C shares.

The manager continues to demonstrate a prudent reserving strategy, in terms of having reserved more than adequately for some of the prior year catastrophe loss events it had been hit by.

These returns of capital will satisfy those investors who bought into the Markel CATCo managed ILS fund after its initial wind-up was announced, as a number of hedge funds circled the fund hoping to profit from any improvement in the loss positions it had set capital aside for.

Those investors may find themselves rewarded, as the returns of capital that is then distributed will result in profits above where the NAV of the fund had sat at the time they bought into it.

Of course, this also benefits all investors in the strategy, who will now get a faster exit from the running-off of the retro fund and benefit from a return of capital that many had assumed was destined to be lost.