Markel CATCo strengthens 2017 reserves. Authorities investigate loss picks

by Artemis on December 7, 2018

Markel CATCo Investment Management Ltd., the retrocessional reinsurance investment specialist, has announced that it is to further strengthen its loss reserves for 2017 catastrophe events, while at the same time it has been announced that the firm has received an enquiry from regulatory authorities over the original loss picks it made.

Late yesterday it was announced by Markel Corporation that the firm was contacted on November 30th regarding an inquiry by U.S. and Bermudian authorities into loss reserves that were recorded in late 2017 and early 2018 by Markel CATCo.

Markel said that outside counsel has been retained in order to conduct an internal review and that the inquiry is limited to Markel CATCo’s operations.

This morning Markel CATCo has announced further strengthening of its 2017 loss reserves for its stock exchange listed CATCo Reinsurance Opportunities Fund.

The reserve update is the result of an inquiry into the need for further reserve strengthening, that had originally been announced on 22nd November.

The investment manager said that it will increase specific loss reserves in relation to the Ordinary Shares of the listed fund for the 2017 loss events.

The impact is significant, amounting to 27.7% per cent of the 31st October 2018 Ordinary Share Net Asset Value (NAV), Markel CATCo said.

The firm explained that on a normalised basis, this equates to roughly a 15.7% deterioration in the Ordinary Share 2017 annual performance, dropping the 2017 NAV return for the fund’s Ordinary Shares to roughly -57.1%, down from the -41.4% previously reported.

Markel CATCo said that it has continued to monitor the 2017 hurricanes, wildfires and other loss events and the ongoing uncertainty related to them.

As industry loss estimates have continued to deteriorate “beyond reasonable expectations” since the manager last reserved for these losses, it now finds it necessary to do so. Markel CATCo notes that the industry loss estimates have increased by more than 12% for these 2017 catastrophes as of December 2018.

The manager said that it has also assessed cedant loss data as of Q3 2018, finding that further reserve strengthening is required.

Markel CATCo also noted the “numerous reports of insurers, reinsurers, and ILS constituents who have continued to report ongoing loss deterioration throughout Q3 2018.”

Based on all of this the manager has found it necessary to significantly harden these reserves so they are aligned with market expectations for the loss events. It also noted that further uncertainty is possible as well, as these losses are yet to settle, which we’ve seen with the ongoing loss creep from hurricane Irma.

In addition, Markel CATCo notes the ongoing assessment of the potential impacts to its portfolio from the recent 2018 California wildfires, saying that “A material impact is expected to be recorded in the 30 November 2018 NAV,” due to these events and that it will update its shareholders in due course.

For Markel CATCo this has been a difficult twelve to eighteen months, with multiple large catastrophe events that have hit its products causing significant impacts to its funds and trapping of capital, as it paid its claims to cedants and reserved for losses.

How reserves are made by each company in the market we will never know. But the task of reserving for these multiple loss events has not been easy for anyone, as evidenced by the consistent negative months faced by some ILS funds as loss creep flowed through the market particularly from hurricane Irma.

Of course this has been made more difficult for collateralized reinsurance and retrocession markets, for who over-reserving in case of loss creep emerging is a difficult option given the fully-collateralized nature of the product.

The inquiry is ongoing and the Board of the listed Markel CATCo fund this morning said that it remains at a preliminary stage.

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