CATCo successful in releasing another $8m of capital from side pockets

The CATCo Reinsurance Opportunities Fund Ltd., Markel CATCo Investment Management’s listed retrocession focused investment fund, has successfully secured another release of trapped capital which will be returned to its investors.

The Markel CATCo managed retrocessional insurance-linked securities (ILS) fund has been successfully unlocking trapped capital that had been set aside for potential losses in recent months.

The investment manager had always said that it reserved prudently for prior year catastrophe loss events, which is being evidenced by the repeated deliver of some of the capital trapped in side pockets being delivered back to the fund on commutation, to the benefits of holders of the fund shares.

Earlier this year $18.8 million was retrieved from side pockets in April and a further $15.8 million in June.

The Markel CATCo returned $37.9 million of trapped capital from the retrocessional reinsurance fund’s side pockets in early September.

Then, a further $25.6 million of capital from side-pockets established for catastrophe loss events was also lined up to be paid back to the fund in October 2020, after which it will be used to carry out a redemption of investors shares.

Most recently, the CATCo Reinsurance Opportunities Fund revealed another $68.9 million release from side pockets established for potential loss reserves, which has also been paid back.

Now, the company has been advised of a further release of side pocket investment (SPI) capital of roughly $8 million, which is expected to be paid back to it in January 2021 and will be used to carry out a sixth compulsory redemption of its shares.

Roughly $2 million will go to Ordinary shareholders and $6 million to the holders of C Shares in the CATCo Reinsurance Opportunities Fund.

Including this new amount, the fund will have returned around $271.3 million to its shareholders through compulsory redemptions, dividends, a tender offer and share buybacks, $59.6 million to Ordinary Shareholders and around $211.7 million to C Shareholders.

In total around $175 million has been retrieved from side pocket investments, or trapped collateral held as potential loss reserves.

Given the size of this listed fund, that is actually a significant proportion of the overall assets it had at its peak.

When capital gets released from side pockets for the listed CATCo Reinsurance Opportunities Fund, it’s assumed some capital is also released for the broader Markel CATCo private retro reinsurance funds and managed accounts as well, suggesting the total recovered could be significantly larger, given the asset manager had more than $6 billion under management at its peak.

The CATCo Reinsurance Opportunities Fund, a stock exchange listed strategy, had a significant amount of its collateral retained and trapped in side pocket investments, related to potential losses and catastrophe events from prior underwriting years.

As the loss picture becomes clearer and reinsurers recognised their ultimates, 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 is in some cases able to be released, where losses prove to not be as significant as the side pocket size or the manager agrees commutations at beneficial terms.

So, clearly losses have developed below where the reserves had been originally set for a number of the key side pockets, resulting in Markel CATCo being able to release and return a portion of the excess capital in the side pockets to its investors.