CatCo's capital focus proves a big hit within the reinsurance market
Bermuda-based CatCo Investment Management Ltd. has brought a capital markets approach to the reinsurance industry - and in the firm's early months of operation it has already proved popular with investors and reinsurance buyers alike.
CatCo's chief executive officer Tony Belisle, chief operating officer Jason Bibb and chief underwriting officer Graham Wood told The Royal Gazette their business has got off to solid start since it was incorporated last August.
The firm, which has moved into new offices on the second floor of the SE Pearman Building on Par-la-Ville Road, Hamilton, manages a range of diversified insurance-based investments.
The investment management business oversees the CatCo Reinsurance Opportunities Fund Ltd, which is listed on the London Stock Exchange's Specialist Fund Market. It raised $80 million from investors, before its shares started trading three weeks ago. Its institutional investors include Henderson Global Investors ($16.1 million), Co-operative Insurance Society ($16.1 million), Baillie Gifford ($8 million) and JPMorgan Asset Management ($6.5 million).
CatCo also has substantial financial backing from the Qatari Insurance Company, which according to a report in the Financial Times, invested $25 million in the fund.
The London-listed entity acts as a feeder fund into the CatCo Diversified Fund, a larger open-ended fund for private investors, which will provide the capital for CatCo Re, a class 3 Bermuda reinsurer, to write fully collateralised reinsurance contracts.
The fund will additionally invest in products including insurance-linked securities (ILS) and insurance loss warranties (ILW).
The attractions of CatCo to investors include non-correlation with stocks and bonds, diversification across risks and double-digit returns.
Reinsurance buyers are attracted by the fact that all CatCo's products are fully collateralised, meaning there is no doubt about the company's ability to meet their obligations.
Mr Belisle is a 25-year veteran of financial services, who played a pioneering role in the development of some forms of collateralised reinsurance contracts, when he worked for US hedge fund Citadel. His other previous employers include Goldman Sachs and Oxygen Insurance Brokers.
The CEO did not disclose the total amount of capital that CatCo has managed to raise. However, he did say he hoped to see the London-listed fund double in size this year.
He added that CatCo targets returns of 15 to 20 percent for its investors and offers more capital protection than does direct investment in catastrophe bonds, which are tied to a particular risk, such as US wind, and can wipe out investors' capital if event losses are sufficiently great to trigger the bond.
“We're looking to offer something totally different for investors and they see this as a new asset class,” Mr Belisle said.
“Most catastrophe bonds are tied to US wind or US earthquake and they're heavily exposed to these risks. Nobody knows when a Category 5 hurricane is going to hit Miami.
“We're not saying the models are right or wrong, but we're making sure that we're not too exposed to any single event. For example, a repeat of Hurricane Katrina would not cause us to have negative returns. That is the benefit of diversification.”
The reinsurance market is frequently described as “over-capitalised”, a situation which has resulted in downward pressure on rates. So why bring new capital into the industry now?
“The traditional market is overcapitalised, not the collateralised market,” Mr Belisle said.
He added that the financial crisis had shown up the risks inherent in the traditional reinsurance company model, particularly with the decline in the value of the traditional assets that dominate re/insurers' investment portfolio. Additionally, many re/insurers were exposed to huge losses from a single event.
Mr Wood has more than 20 years of re/insurance experience with Lloyd's of London syndicates and brokers including Benfield and Gallagher Re. He most recently headed up Oxygen Re's Bermuda operations.
Mr Bibb has some 15 years of investment management experience. He was a co-founder of the Bermuda-based Isis Fund Ltd and also served as COO of Citigroup's alternative investments division.
He said CatCo brought a capital markets approach to reinsurance, diversifying its risk exposures like an investor would seek to have a diversified portfolio of stocks and bonds. Catco's ambitions were not to acquire hundreds of investors or customers, he added.
“Our ethos is to focus on five to ten key buyers, who buy significant reinsurance protection from us and to keep them year in, year out,” Mr Bibb said. “We want to make our products a core part of their reinsurance programme and we have seen that happening already.
“On the investor side, it's the same. The minimum ticket is $10 million and our average investment is $15 million to $20 million. These are sophisticated investors.”
Mr Belisle said Bermuda had been an easy choice as CatCo's domicile, not only because it was a global reinsurance hub, but also because of the positive response they got from regulators, Government and legal firms when they proposed their idea for a company.
“Bermuda has regulatory efficiencies that allowed us to set up in business quickly,” Mr Belisle said. “Our investors want to know we are in a legitimate place with appropriate regulation.
“Bermuda has been tried and tested and is well accepted in the reinsurance and investment worlds.
“Most of the lawyers in London were pushing us toward Guernsey, but after we had a conservation with our lawyers here, they really embraced us.”
He said the Bermuda Monetary Authority and the former Immigration Minister David Burch had also been “exceptional” in accommodating the new company's needs. Mr Belisle added that the support services available in Bermuda, law and accountancy firms, were world class.
Mr Belisle estimates he has flown 600,000 miles in the past two years drumming up support for CatCo and now he's happy to have it up and running.
All three men are excited by the prospects for the company and feel that creating a unique type of business has rejuvenated their entrepreneurial spirits.
They hope to expand the firm and take on staff in the future.
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