CATCo’s return of capital continues apace, but Jebi & Michael creep hits 2018

The CATCo Reinsurance Opportunities Fund Ltd., the stock exchange listed retrocession focused strategy managed by Markel CATCo and in run-off at this time, has now seen $271.3 million of capital returned to its investors since its run-off began.

The $271.3 million of capital has been returned to shareholders in the CATCo retro fund through means of dividends, tender offer, share buybacks and compulsory share redemptions, with $196.3 million returned to its investors in 2020 alone.

As of the end of 2018, the listed CATCo retrocessional reinsurance investment fund had total assets of $479.81 million.

By the end of 2020, that figure had fallen to just $111.8 million still held trapped in a range of side-pocket investments, for underwriting years from 2016 through 2019.

So, as well as the $271.3 million returned to its investors, it seems that so far the Markel CATCo managed ILS fund has paid somewhere just under $100 million in losses over the period as well, accounting for the delta.

Which overall is seemingly a better position than had likely been hoped for by many at the time the running off of the portfolio began.

The CATCo fund has been helped in this by some favourable development on a number of its loss reserves over the run-off period, as once again its reserving strategy looked robust in the majority of cases.

Subrogation from the 2017 year of account California wildfires has helped the fund in recent months, with (as we explained at the time) a significant boost from PG&E subrogation to the net asset value of the ILS fund’s ordinary shares in December 2020.

In addition, Markel CATCo has also been able to lower its reserves for 2018 wildfire claims a little, although it’s not clear if this is due to subrogation or just lowered ultimates from ceding companies being received.

However, the 2018 underwriting year has also seen some adverse development, as Japanese typhoon Jebi’s loss esimate worsened and also hurricane Michael’s, both of which events have driven some reserve strengthening across reinsurance and also ILS markets.

Markel CATCo said that it continues to liaise with cedents on potential California wildfire subrogation, which perhaps suggests there is a chance of some more benefits flowing through from SoCal Edison’s subrogation as well, or some remaining benefits to come from PG&E’s.

The California wildfire subrogation has taken years to flow through to ILS funds, particularly those at the retrocession end of the market chain.

Over the course of 2020, the ordinary share class saw its net asset value (NAV) increase by 6.4% during the year, while the C share class NAV declined by almost 1.7%, likely due to the loss creep experienced from the 2018 events that these shares were exposed to.

The ordinary share performance, which is of course not taking into account the return of capital recovered, reflects the impact of the subrogation from the wildfire losses and a relatively stable loss picture for prior period and more recent events, as the 2016 and 2019 side pockets were unchanged.

Chairman of the fund James Keyes commented, “The amount of capital successfully distributed to date demonstrates the Investment Manager’s commitment to ensuring cedants release trapped capital and that, accordingly, the Company is able to return that capital to Shareholders in a timely manner.”

Alongside returning capital to its investors and remember, this is just the listed retro fund strategy, so the rest of the Markal CATCo investment funds will also have been able to return capital in similar proportions for the events covered by the portfolios, the CATCo reinsurance entity continued to pay its claims in 2020.

In 2020 the reinsurer Markel CATCo Re paid almost $628 million in claims to cedents, although this has slowed considerably from the over $1.3 billion paid in 2019.

2020’s $628 million of cedent loss payments were split as almost $8.7 million related to the 2016 events, $164.2 million related to the 2017 events, $412.8 million related to the 2018 loss events and $42.2 million from 2019’s loss events.

The pace of running-off and unwinding the CATCo fund may slow a little, now its remaining share capital has shrunk so much, but investors will continue to recover what they can and given the significance of the catastrophe loss events suffered the percentage returned actually appears better than had originally been anticipated by many.