CATCo retro fund rises 7% on reduced 2017 wildfire claims (subrogation?)

Some shareholders in the CATCo Reinsurance Opportunities Fund Ltd., Markel CATCo Investment Management’s listed retrocession focused investment fund, have benefited from a reduction in claims related to California’s 2017 wildfires, perhaps suggesting a subrogation recovery has made its way through to the portfolio.

The in-run off retrocessional reinsurance focused investment fund’s manager Markel CATCo said that the price of its Ordinary Shares had risen by around 7% in December 2020.

The manager explains the rise in its shares as reflecting “a reduction in claims associated with the 2017 California wildfires.”

This doesn’t then sound like a reduction in a side-pocket due to improving estimates, rather a reduction in the actual level of claims from the 2017 wildfires in California that the CATCo fund strategy now faces.

Which makes it sound like it could be more to do with the subrogation of wildfire claims payments, likely following utility PG&E’s subrogation settlement.

Wildfire subrogation recoveries have been seen across reinsurance and insurance-linked securities (ILS) from utility Pacific Gas and Electricity’s (PG&E) massive $11 billion settlement payments, the flow of recoveries will now continue thanks to a new $2.2 billion agreement from Southern California Edison.

As we’ve explained before, the benefits for insurance-linked securities (ILS) funds from the flow of wildfire subrogation recoveries were expected to take as long as a year to be fully accounted for in the valuation of their exposed ILS and reinsurance assets.

For those on the retrocessional reinsurance end there was no guarantee subrogation would ever reach that far.

But it seems this may be the reason of CATCo’s fund shares rising in December.

The investment manager behind the retrocession fund, Markel’s CATCo Investment Management, would more typically report a reduction in side-pocket capital as a release made allowable by a reduction in estimated claims from counterparties.

Where as, in this morning’s announcement, Markel CATCo word’s it as a reduction in actual claims.

Which suggests one of its counterparties on the retrocession side, has benefited from subrogation recoveries that have flowed through from its reinsurance counterparties and reduced its own ultimate for the 2017 wildfire loss events.

The potential for subrogation to boost the CATCo fund share price is something we discussed with a number of investors and hedge funds well over a year ago and some of these investors bought into the CATCo fund expecting this to occur, while also anticipating that some of the other side-pockets would be reduced.

The reason being they had confidence in the manager’s reserving practices and believed that the loss picture would improve, rather than worsen.

Those investors may now be profiting from the improving valuation of the running-off retrocessional reinsurance fund.

Markel CATCo also said this morning that it will maintain its reduced management fees on the remaining side pockets from the fund.

As ever, when this listed retro fund strategy moves in this way, we expect the broader retrocession portfolio in run-off at Markel CATCo will have experienced similar benefits, with the listed fund being a subset of a much larger portfolio.

So the investor benefits of subrogation, if indeed that is what’s caused the reduction in wildfire claims, will have a broade effect than just holders of the listed fund shares, flowing to investors in Markel CATCo’s closed-end and private mandate investment strategies as well, we expect.

Note: We cannot confirm this is down to subrogation recoveries, but it does seem likely to be the reason for a reduction in CATCo’s wildfire claims.

If it is, this has a positive read-across for other retrocession focused ILS fund strategies and sidecars, as it shows subrogation flowing all the way down the market risk transfer chain.