CATCo retro fund returns 4.3% for 2019 underwriting year

For its 2019 underwriting year investments, the retrocession focussed CATCo Reinsurance Opportunities Fund Ltd. managed a 4.3% return, according to its annual report.

The exchange listed Markel CATCo Investment Management retrocessional reinsurance investment fund strategy is of course in run-off, as the other Markel CATCo strategies are. But the investments made in 2019 have delivered a positive return for investors.

The investments made in the 2019 underwriting portfolio held by the strategies Master Fund delivered a roughly 4.3% return on the underwriting year, the company said.

This despite 2019 turning into another active catastrophe loss year, thanks to the impacts of Hurricane Dorian, Typhoon Faxai, Typhoon Hagibis and the Australia bushfires, which were the most significant events of 2019.

On top of the fresh catastrophe losses in 2019, the CATCo fund managers note the continuation of loss creep from prior year events, including hurricane Irma and typhoon Jebi. However these won’t dent the 2019 return, of course.

The “confluence of events” that struck the industry in 2019 resulted in “further trapped capital industry-wide for the third year in a row,” Jed Rhoads, the President and Chief Underwriting Officer, Markel Global Reinsurance and with oversight of Markel CATCo explained.

Markel CATCo established loss reserves for all of the major 2019 catastrophe events, to protect exposed retrocesionnal reinsurance positions it had invested in.

At the moment the loss reserves amount to 6.6% of NAV for typhoon Faxai, 1.4% of NAV for hurricane Dorian, 15.9% of NAV for typhoon Hagibis and an attritional loss reserve of 7.5%.

Jed Rhoads of Markel said the managers will, “continue to review all of the specific loss reserves throughout 2020 and beyond, and reminds Shareholders that the expected portfolio exposure to loss events could change materially, resulting in either an increase or decrease to reserves, after further information has been made available.”

Looking at the size of the Hagibis loss reserve that Markel CATCo established and the way that industry loss is developing, better than expected most agree, there is every chance that this is one loss the manager can release some capital back from.

In addition, Markel CATCo believes that its reserves for 2017 and 2018 loss events, including Irma and Jebi, are sufficient. There remains a chance of some additional benefit flowing back into the fund to be liquidated during the run-off from these and prior year side-pocketed loss events as well, but it could be some time until any return of capital becomes clearer.

The positive return for 2019 is a reflection of the ability of this strategy to sustain a certain level of catastrophe loss aggregation without turning negative and reflects well on retrocession in general as a still positive investment opportunity, although clearly as has been learned the product structuring matters.