Markel CATCo boosts reserves for 2017 catastrophes by 19.5% of NAV

by Artemis on May 8, 2018

Markel CATCo Investment Management Ltd. has strengthened loss reserves considerably for its listed retrocessional reinsurance fund, the CATCo Reinsurance Opportunities Fund, bolstering the reserves for 2017 catastrophe losses by another 19.5% of net asset value.

The impacts of the 2017 hurricanes and other catastrophe losses continue to impact reinsurance and retrocessional linked investment strategies and ILS funds, with Markel CATCo just the latest to strengthen its reserves as the outlook for losses, particularly from hurricane Irma, worsens.

This morning, retro and reinsurance investments specialist Markel CATCo said it would be further bolstering its loss reserves from last year’s catastrophe events, as the firm is clearly expecting the impact to some of the retrocessional covers it provides to its clients to increase.

The manager said that it would be adding approximately 19.5% of the fund’s ordinary share net asset value as at March 31st 2018  to the loss reserves, which represents roughly a 14% dent to the 2017 annual performance of the ordinary shares.

With the addition of this new increase to loss reserves, this is now equivalent to a net asset value return for 2017 for the ordinary shares of roughly -41.4%, down from the -27.6% that had previously been reported.

It’s a significant increase in reserves and worsening in the 2017 performance for the Markel CATCo managed fund, reflecting the ongoing nature of the impact of hurricane Irma and other events on the reinsurance and ILS market and also reflects the negative performance other private ILS and collateralized reinsurance funds have been reporting in recent months.

Explaining the hit to its net asset value, the manager said it has “continued to monitor the ongoing uncertainty related to these loss events,” referring to hurricanes Harvey, Irma and Maria, as well as the California wildfires.

“Recent market information has indicated that industry loss estimates are expected to rise for Hurricane Irma following reports of significant increases in loss adjustment expenses, late claims reporting and an increase to loss exposures in the Caribbean,” the manager explained.

Markel CATCo also said that a number of reinsurance counterparties have reported increases to their ultimate losses related to Hurricane Irma in late April, which has reinforced its belief that industry loss estimates for Irma will increase further.

As a result, Markel CATCo decided that material increases in loss reserves for 2017 events would be required, mainly attributable to Hurricane Irma, hence this strengthening of reserves announced today.

Alissa Fredricks, Chief Executive Officer, Bermuda, of Markel CATCo Investment Management Ltd., commented, “Following the impact of the 2017 loss events, we have maintained extensive monitoring of industry trends and the inherent uncertainty with regards to counterparty ultimate loss exposures. Until very recently, all trends were in line with expectations, providing evidence that the 2017 loss reserves would likely be sufficient to support our remaining loss exposures.

“However, in late April, we received updated notifications from our reinsurance counterparties indicating a material loss creep in Irma could occur. This further supports market information suggesting that abnormal levels of loss adjustment expenses and late claims have resulted in further deterioration in Irma losses, which has become the consequence of multiple catastrophic events occurring in a short period of time.

“As a result of the information received in late April, we believe an increase in the Company’s loss reserves is appropriate in order to mitigate any further loss creep in Irma and to reduce the Company’s potential exposure to other 2017 loss events.”

Markel CATCo said that further uncertainty remains and it expects to receive updated industry loss estimates for hurricane Harvey and Irma at the end of May 2018.

“Some level of uncertainty remains with regards to the final industry insured loss impact of the 2017 loss events,” the manager explained.

The experience that many ILS funds have had in recent weeks, with respect to the increases to loss estimates from 2017 catastrophe events, serves to demonstrate the uncertainty that complex catastrophes can create.

It can take time for the ultimate exposure to such major losses to be understood and with counterparties increasing their estimates, industry loss estimates still rising, ILS fund managers have no choice but to boost their reserves in-line with these increases.

It will be interesting to see how the ILS market as a whole performs for April, as this strengthening of reserves is likely to read-across to numerous other strategies, particularly where retrocession makes up a considerable component of a portfolio.

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