Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Updated Markel CATCo buyout could deliver 18.5% more to retro investors


Investors in the Markel CATCo Investment Management retrocessional reinsurance investment funds now stand to receive as much as 18.5% more in capital return, on the back of the updated and improved buyout terms.

Markel CATCo logoThe buyout terms being offered were updated last week and made more favourable in response to investor feedback.

This came after one investor, Pension Insurance Corporation plc (PIC), said it intends to try and put together an investor group to challenge Markel CATCo’s proposed buyout scheme, saying it believes it will “drastically undervalue the interests of investors.”

The updated terms, if agreed to, now promise an accelerated return of 100% of the net asset value of the retro reinsurance investment funds on the closing date, with investors also retaining the right to any additional upside generated when the risks are run-off, if reserves exceed what is needed to pay the ultimate claims.

Those tracking the Markel CATCo funds will know that the manager has now repeatedly managed to settle and commute risks in such a manner that additional upside is generated, through recent months. So the chances of additional upside being created do appear quite high.

Originally the buyout terms included a return of capital based on 100% of the 2016 and 2017 side pockets, but 90% of the 2018 side pocket and 80% of the 2019 side pocket.

With the accelerated return of 100% of the capital on the side pockets, investors in the retro reinsurance funds could now receive 18.5% more in aggregate capital return, while also having that potential upside to look forward to as well.

Looking into the details, the original buyout offer published on October 4th promised investors an aggregate accelerated capital return of around as much as $478.4 million would be the amount accelerated to CATCo retro fund investors.

Now, on the terms of the updated buyout, retrocessional reinsurance fund investors could receive as much as $566.7 million in aggregate capital return, an 18.5% increase.

This includes the 100% net asset value (NAV) entitlement from the side pockets from 2018 and 2019, as well as a reduction of approximately $1.5 million in the expenses reserve, as well as $14.7 million out of a $20 million Administrative Expenses Contribution and $25 million out of a $34 million Additional Consideration, under the terms.

It is a significantly improved offer for the investors in the retro reinsurance investment strategies and should garner far more support.

Markel CATCo has already said that more than 90% of investors in the Markel CATCo Reinsurance Fund Ltd., the private fund strategy, as well as investors representing over 95% of CATCo Reinsurance Opportunities Fund Ltd., the public and listed fund strategy, have either said they will support or indicated they will support the buyout transaction.

Another key change in the buyout terms was related to the collateralized reinsurance fund strategy Aquilo, on which the accelerated return of capital to investors has been increased significantly.

100% of the Aquilo Fund closing NAV is now set to be accelerated to investors in the updated terms, where as previously the accelerated distribution was only around 51% of current NAV, with the remainder held in retained interest.

This means that investors will now receive $206.7 million in aggregate capital return from the Aquilo reinsurance investment fund, which equates to around 106% of current NAV. That’s up from just $100 million in the original buyout terms.

The parent of Markel CATCo, Markel Corporation is helping to return additional value to the investors in the CATCo managed ILS funds, through its contributions of cash to help fund the buyout and related transaction costs and make the additional pro-rata distributions to investors.

This has made the improved terms possible it seems, after Markel offered to provide an additional cash contribution of $54 million with the improved buyout terms, which was on top of the original $150 million offered.

So the winding down of the CATCo strategies has not come cheap for Markel, but it has clearly demonstrated its appetite to satisfy investors in the funds and help them recover as much capital as they can, as quickly as possible, from the running off process.

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