Markel CATCo expects any Canadian wildfire loss to be minor

Bermuda headquartered reinsurance and retrocession linked ILS investment and fund manager Markel CATCo Investment Management Ltd. said in an update on one of its funds that it does not expect any material impact from the recent Canadian wildfires.

Markel CATCo said in a stock exchange filing related to its flagship retrocessonal reinsurance investment fund, the CATCo Reinsurance Opportunities Fund Ltd., that it is “monitoring” the ongoing situation with the Canadian wildfires which hit the Fort McMurray region so hard over the last fortnight.

However, the reinsurance linked investment manager believes that any possible impact will be immaterial and likely covered and absorbed by a special loss reserve that was set up for the fund in January for just such eventualities.

Markel CATCo established a 15bps per month attritional loss reserve since January, as a way to prudently ensure that reserving for smaller loss events would not be as frequently necessary. This new monthly attritional loss reserve will also help to “offset a possible concentration of losses impacting the NAV towards the end of the year resulting from a loss reporting lag” Markel CATCo explained.

That’s a shrewd approach and this proactive setting up of a special loss reserve to deal with attrition to the portfolio is an interesting strategy, one that we may see adopted more widely as the ILS market matures and portfolios contain increasing exposure to attritional events.

The changing nature of collateralised reinsurance and retrocession, as the product has become increasingly sophisticated, does mean that more frequent smaller losses are expected to hit some of the larger reinsurance linked funds, due to their growing footprint in the market.

By prudently establishing this loss reserve up front Markel CATCo can ensure it doesn’t have to establish new reserves as frequently, and any smaller losses will simply be dealt with by the 15bps of NAV set aside every month.

This regular monthly reserve is also a useful tool for Markel CATCo as managers of the fund, as it will provide them a better view of true performance, given smaller events will largely be contained by this small, regularly topped-up side pocket.

Markel CATCo said that based on current information the manager “does not expect any further negative NAV impact” from the Canada wildfires and currently it does not foresee having to set up any separate loss provision specifically for this event.

At this stage the manager has not alluded to a definite exposure, calling it “possible” but by being transparent with investors in the fund the Markel CATCo is ensuring there are no surprises for them.

Given Markel CATCo’s broad retrocessional reinsurance exposure, as one of the largest providers of retro products globally, the firm will likely have some level of exposure to the wildfires in other strategies and mandates.

This information is purely related to the listed fund, but it shows that any exposure is likely to be relatively immaterial, most probably due to the fact that such covers often attach quite high up and the ultimate size of the industry loss from the Canada wildfires is perhaps not going to be sufficient to trigger this type of pillared retro product in a meaningful way.

Of course this information from Markel CATCo also shows that we should expect to see some minor loss reserving across a number of ILS funds investing in collateralised reinsurance or retrocession, as well as many of the main reinsurance sidecar vehicles.

Also read:

– Reinsurance to take at least 50% of Canada wildfire loss: S&P.

– Reinsurance & retro to take significant share of Canada wildfire loss.

– Japan quakes, Canada wildfire to take nat cats over budget in Q2: JPM.

– Fort McMurray wildfire a “reinsurance event”, maybe ILS: Deutsche Bank.

– Fort McMurray wildfire could cost insurers up to C$9bn: BMO Capital Markets.