Markel CATCo sets & strengthens reserves for 2018 loss events

by Artemis on December 18, 2018

Markel CATCo Investment Management Ltd., the retrocessional reinsurance investment specialist, has announced further reserve setting and strengthening related to catastrophe loss events that occurred in 2018 and are expected to hit its listed retro fund portfolio.

Recently the ILS and reinsurance linked asset manager that is owned by Markel Corporation announced a strengthening of its reserves for the 2017 hurricanes and catastrophes, as well as an inquiry into its original loss picks by regulatory authorities.

Now the manager is firming up its reserves for the catastrophes that have hit it in 2018, including the U.S. hurricanes Florence and Michael, as well as the recent California wildfires.

The firm said it will establish specific loss reserves for the 30th November 2018 Net Asset Value (NAV) of its stock exchange listed CATCo Reinsurance Opportunities Fund for impacts from 2018 catastrophes.

Share holders are expecting impacts due to major loss events including Hurricane Florence, Hurricane Michael, Typhoon Jebi and the California Wildfires (Camp and Woolsey) and now Markel CATCo is estimating the potential impacts from these losses.

The firm said it estimates that the specific loss reserves required to cover these 2018 major catastrophe events will be around 23% for the funds Ordinary Shares and around 45% for the funds C Shares. These loss reserves will be set in the funds 30th November 2018 NAV.

These estimated loss reserve impacts are based on the 31st October NAV for the fund and Markel CATCo notes inclusive of the firms announcement on the strengthening of 2017 loss reserves.

On hurricane Florence, Markel CATCo notes that the expectation is that this industry loss will be higher than anticipated, and so the loss will now exceed levels that would normally have been absorbed by the fund’s attritional reserve.

In addition, the firm notes that hurricane Michael is anticipated to creep higher, with the eventual industry loss likely near the top-end of estimates.

As a result, Markel CATCo will use a portion of the 30th November 2018 specific loss reserve to cover any portfolio exposure for both Michael and Florence.

Markel CATCo highlights California wildfire industry loss estimates of around $14 billion, saying that it has assumed that additional loss increases may develop beyond these preliminary estimates, as was seen with the 2017 California Wildfire events.

As a result, it has established a preliminary reserve for the wildfires assuming the combined industry insured losses may increase significantly beyond currently reported levels.

It also assumes that losses from the Camp and Woolsey wildfires will result in material exposure to any cedants that have taken on both first and second event reinsurance coverage for wildfires.

Markel CATCo says that “significant levels of uncertainty will remain on 2018 events,” particularly the California Wildfires.

With formal loss advice from cedants unlikely to be received on 2018 major events until year-end 2018, or further into 2019, the firm notes that estimates can and sometimes do change.

Also today, Markel CATCo has announced some moves to help investors in the stricken listed retro fund strategy, as the shares are priced at such a discount to NAV now.

The Board of the fund said it will conduct share buybacks as early as possible in 2019, as one way to address shareholder concerns about the discount.

In addition, it said it will offer shareholders the chance to convert to redemption shares in 2019, which can continue to participate in reinsurance contracts but not participate in any new investments from that date. As the related reinsurance contracts expire, the firm would likely seek to redeem the redemption shares with the proceeds received from underlying investments, it said.

In addition, the Board said it may approve further capital raising and the issuance of a new C Share class to provide exposure to 2019 mid-year reinsurance contract renewals and that it plans to pay its dividend as normal, as long as liquidity allows.

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