Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Investors circle CATCo shares on increases & potential subrogation benefit


Investors are circling shares in retrocessional reinsurance investment manager Markel CATCo’s listed insurance-linked securities (ILS) fund, partly due to share price increases experienced in recent weeks, but also over the potential for subrogation to benefit any holdings they have.

Markel CATCo logoEvidencing this, one value investor, Almitas Capital LLC based in California, has taken a 6.1% stake in the shares of the stock exchange listed, currently in run-off, retrocessional reinsurance focused investment strategy, the CATCo Reinsurance Opportunities Fund Ltd.

As a value oriented investor, Almitas Capital specialises in identifying undervalues equities and investment opportunities, where it feels it can buy in at a lower valuation than it expects the share price to actually be worth. We can’t confirm exactly when these share acquisitions were made, but it appears to be relatively recently that the investor triggered the 5%+ disclosure level of holdings.

In the case of the Markel CATCo listed retro reinsurance fund, the shares have been severely depressed by subsequent years of major catastrophe loss activity, which have driven down the price of the shares to very low levels.

But some investors have been circling the CATCo fund for a while, believing that the ultimate valuation at run-off of the shares could be better than at the time they analysed the price, or bought in.

In fact, looking at the two share classes of the Markel CATCo retro investment fund, the ordinary shares were priced as low as $0.12 back in July 2019, but this week rose to $0.23, almost 100% higher.

The C Share class, which was issued later and so wasn’t exposed to all of the 2017 hurricane losses, saw their share price as low as $0.155 in July, but this week they were more around 150% up at $0.387 per share.

That’s quite the increase over a six month period, if you bought into the shares at the right time and held them.

Buoying the price may well have been the ongoing share buy-backs, which are part of the running off process for the retrocessional reinsurance fund, but also buoying them is investor perception.

There are a number of reasons behind this, that help to explain why investors are circling and some are so interested in the CATCo fund shares at this time.

Clearly the increase in share price since the middle of 2019 is a key driver for investor confidence in finding a profitable opportunity in the CATCo Reinsurance Opportunities Fund shares.

But value investors tend to do their homework, with research a key component of their arsenal of tools to help them understand shares and identify opportunities.

Investors will have noticed the changing market perceptions and expectations related to the industry losses from this years typhoon Hagibis and also 2018’s typhoon Jebi.

Both of these storms are now expected to see their industry losses settle some way below where the market had at one stage pegged them, suggesting that anyone who reserved conservatively for them could have releases to come from sidepockets.

There’s also the chance of some reserve releases relating to other industry loss events, as side pockets and positions unwind, the managers of the CATCo fund may get to release some more capital back into the fund, which could further buoy the share prices.

Some investors have also long held an opinion that these listed ILS and reinsurance fund shares were underpriced, as the valuations fell some way below net asset value (NAV). In recent months the discount to NAV has declined significantly for the CATCo shares, reflecting the buy-backs, some level of recovery and continued premium flows, increased interest and perhaps confidence from investors perhaps.

Finally and this could be the decider for many, there is a hope among investors (and the industry) that the $11 billion insurance subrogation settlement from Pacific Gas and Electricity (PG&E) related to the California wildfire losses of recent years could actually flow to the benefit of some ILS funds, even at the retrocessional end of the market.

As we explained before, this subrogation payment may eventually provide some benefit to reinsurance providers including some insurance-linked securities (ILS) funds that were exposed to losses from certain 2017 and 2018 California wildfire events.

Some investors are watching this listed ILS fund as a potential value investment that could benefit from the subrogation, if Markel CATCo’s ceding clients benefit from the PG&E payout and as a result reduce their ultimate losses associated with the wildfires.

In an ideal world any subrogation payments should flow through the different tiers of the re/insurance market, eventually ending up with capital providers such as retrocessionaires and ILS funds. It’s yet to be tested though and determined whether the subrogation benefits really do flow that far down the risk to capital chain. There’s also no timetable for this process to begin currently.

But all of these factors are adding up to some investors becoming increasingly attracted to shares such as those of the listed Markel CATCo fund.

An interesting factor to watch over the coming months, as its run-off continues and elements such as the PG&E subrogation perhaps come into play.

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