Markel CATCo further hardens 2017 reserves, redemptions expected

Markel CATCo Investment Management Ltd., the retrocessional reinsurance investment manager, said this morning that following review it has decided to further strengthen its specific loss reserves for the 2017 hurricanes.

The manager highlighted the ongoing uncertainty with regards to the 2017 loss events, for which it had already set up specific reserves and hardened them further as well.

These reserve adjustments are related to Markel CATCo’s listed retrocessional investment fund portfolio, the CATCo Reinsurance Opportunities Fund, but may also read across (in terms of loss experience) to other portfolios the manager has created.

Based on the latest claim information it has received from cedents and a trend analysis of paid losses for hurricanes Harvey, Irma and Maria, Markel CATCo has determined a need to further harden its specific loss reserves related to its 2017 Side Pocket Investments, where the at-risk contracts lie.

As a result of this further hardening of reserves, Markel CATCo said that it had the effect of lowering its 30th November 2018 Ordinary Share net asset value (NAV) by 13%.

Normalised, the manager said this represents roughly a 4% deterioration in the 2017 annual performance of its ordinary shares, which now reflect a 2017 return of roughly -61%, down from the -57.1% previously reported by the manager.

On the 2018 loss events and their specific reserves, Markel CATCo said that its end of year review process has confirmed that the existing reserves are deemed sufficient, based on the latest industry loss data that is available.

As a result of the losses from recent years, Markel CATCo now has Ordinary Share class side pocket investments amounting to 2% of NAV for 2015, 11% of NAV for 2016, 42% of NAV for 2017 and 21% of NAV for 2018.

On the C Shares issued for the 2018 underwriting year, the side pocket investments now amount to 47% of NAV, the manager said.

The continued creep of losses from 2017 continue to hurt the retrocession market, with Markel CATCo the most exposed. There is of course a chance that further loss creep hits other ILS fund portfolios as well, given the length of time it is taking for cedent’s to gain a full understanding of their exposures, especially to hurricane Irma.

The Board of the listed retrocession fund managed by Markel CATCo also said that it is currently asking investors whether they want to convert their holdings in the ILS fund into redemption shares, or continue to hold either Ordinary or C Shares.

Yesterday, Richard Whitt, CO-CEO of Markel Corporation, said that investors had until the end of March to register for redemption opportunities from the Markel CATCo funds.

“Given the circumstances at Markel CATCo, we felt it was appropriate to offer investors a special redemption rate which they can exercise by March 31,” Whitt explained.

“The likelihood is most of the investors will wait until March, or close to March 31, to exercise their option,” he continued. Adding, “My expectation is, just given the uncertainty that we mentioned in terms of the decisions we made around accounting, I would expect most investors to exercise their option that we’ve given them at March 31.”

Whitt went on to explain that there would be no impact to Markel Corporation’s own capital.

He commented on the future outlook for Markel CATCo, “Obviously, if investors redeem, what we are able to do in terms of investing for the 2020 year would be impacted by their decision.”

But he also noted that redeeming investors would have an option to come back into the Markel CATCo strategies later in the year, once the uncertainty surrounding the current portfolio was resolved.

That suggests Markel Corporation itself is expecting significant redemptions from the current Markel CATCo fund strategies, which will have been a factor in its decision to write-down the value of its investment in the manager, as we reported yesterday.