Markel CATCo reserves for Michael & Jebi, warns on wildfires & loss creep

Markel CATCo Investment Management Ltd., the retrocessional reinsurance investment specialist, has set reserves for expected impacts from hurricane Michael and typhoon Jebi for its stock exchange listed CATCo Reinsurance Opportunities Fund, while also warning of exposure to the California wildfires and continued loss creep from 2017 events as well.

The update reflects the experience of the wider insurance-linked securities (ILS) fund market, as all of these events have hit many ILS funds that invest in private collateralised reinsurance or retrocession instruments.

The setting or strengthening of loss reserves has been an almost monthly occurrence for many managers of ILS fund strategies and other collateralised reinsurance investment vehicles and here Markel CATCo is trying to get ahead by warning its investors of the latest impacts due to major catastrophes.

On hurricane Michael’s impacts in Florida and the United States and typhoon Jebi’s impacts in Japan, the manager said that both its Ordinary and C Share holders would be exposed to both events and so it has set up a specific loss reserve causing a 3.7% impact to the Ordinary Share net asset value (NAV) and a 9.8% impact to the C Share NAV as of 31st October 2018.

Markel CATCo said that information on the industry loss from these events continues to develop and cedant loss notifications are not yet available, hence the manager has set its reserves for Michael and Jebi based on early industry estimates.

Currently the market is anticipating an industry loss of high single digit billions to $10 billion for hurricane Michael, while typhoon Jebi looks set to drive around another $8 billion to $10 billion of market-wide loss.

The manager warned that once it has the formal cedant loss notifications the impact from these events could change. Of course it could also prove to be below where the loss reserve has been set as well as higher, so some of the loss reserves may be recovered in time, as has been seen before with Markel CATCo’s side-pocketing strategy for at-risk assets.

Markel CATCo said that it is also monitoring the ongoing California wildfire outbreak, on which it warns that there is the potential for the impact to be bigger than seen with the 2017 wildfires, which caused the manager to take a roughly 17% hit to NAV.

The manager said that a “material loss to the portfolio is likely” perhaps exceeding the size of the reserves set for the 2017 California wildfire outbreaks and the estimated impact will be established once the wildfires have been contained and more solid industry loss information is available.

On top of this, Markel CATCo has also warned of the continuation of loss creep from the 2017 catastrophe events, likely largely driven by the hurricanes and in particular hurricane Irma and claims emanating from Florida.

The manager noted that since it set reserves in April 2018 for the 2017 loss events, the loss creep has seen industry loss estimates for the 2017 events rise by at least 9% above the estimates of April 2018. As a result, Markel CATCo said that “further reserve strengthening is likely to be necessary” and it is currently going through an exercise to assess loss information from cedants and will announce any portfolio impact before releasing its next monthly NAV.

With Markel CATCo having such broad exposure to catastrophe losses through its provision of retrocession to the world’s leading reinsurers it was always going to be exposed to all of these loss events.

The multiple loss events occurring in quick succession can mean multiple hits to the retro pillared protection it provides, as it supports reinsurers in responding to major global cat loss events.

Being now the second year in succession that the managers funds have taken numerous losses, so have paid out to support reinsurers claims, it will be interesting to see how retro pricing adjusts at the January 2019 renewals.

Markel CATCo is one of the largest retrocessionaires in the market, hence has significant pricing power. If it can push through substantial retro price increases it may be supportive of broader reinsurance price increases as well at 1/1.

Again, it’s interesting to note that ILS funds are reporting potential impacts from such recent events much more quickly than any public reporting comes from the traditional reinsurance market. The key is in setting prudent reserves as accurately as possible, so as to capture all of the potential loss.

On the 2017 hurricanes that just hasn’t been possible, as has been seen widely with re/insurers and ILS markets. It will be interesting to see how long those impacts continue and whether hurricane Michael results in a similar situation months down the line.

As at 31st October 2018 the net asset value for the Ordinary Shares and C Shares of the listed Markel CATCo retrocession fund have been set at $0.6969 and $1.0502.