Swiss Re Insurance-Linked Fund Management

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CATCo’s retro fund to deliver $37.9m more trapped capital back to investors


Markel CATCo Investment Management’ in run-off retrocession focused investment fund, the CATCo Reinsurance Opportunities Fund Ltd., is expecting another significant release of trapped capital, with another $37.9 million from its side pockets set to be returned to investors.

Markel CATCo logoThe CATCo Reinsurance Opportunities Fund has continued to experience positive releases, as its side pockets prove more than adequate to cover certain older loss reserves.

Markel CATCo Investment Management continues to manage the run-off of its retrocessional reinsurance fund portfolios, returning capital to third-party investors where it has been 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 has clarified for a number of those side pockets, effectively 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, in some cases the losses have developed below where the reserves had been originally set, allowing a portion of the excess capital in the side pockets to be released.

This morning, the fund company announced a new side pocket release amounting to $37.9 million, from across side pockets related to 2018 and 2019 catastrophe loss events.

In total, $8.72 million is being released from the 2018 side pocket, with the remaining $29.18 million coming from the 2019 side pocketed loss reserves.

The total side pocket release is split as $7 million from ordinary shares in the CATCo Reinsurance Opportunities Fund and $30.9 million from the funds C share class.

The roughly $37.9 million of released capital is expected to be paid back to the investment manager in September 2020, with the company then intending to use it to carry out a fourth compulsory partial redemption of its issued share capital.

As a result, investors will get back more of their capital that had perhaps been presumed lost to catastrophe events, demonstrating once again that while Markel CATCo had been beset by an aggregation of losses over the last few years that destroyed fund capital and value, the company had still been reserving prudently in many cases, as evidenced by this now third release of capital from side pocket reserves.

Markel CATCo had already delivered one release of side pocket capital back in May 2020, with an $18.8 million return of capital from a range of side pockets.

The company’s investors then benefited from releasing a further $15.8 million from side pockets in July.

These returns of capital from side pockets have in each case been used to accelerate the running-off of the Markel CATCo retro investment fund, with funds returned to investors to redeem their shares.

Markel CATCo always professed that it would find its side pocket reserves had been set prudently, with not all of the capital within them needed to support the eventual losses in many cases.

That has proven to be the case now three times in succession, to the benefit of investors in the strategy who will now get a faster exit from this running-off of the retro fund and benefit from a return of capital that some investors may have already assumed was destined to be lost.

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