Markel CATCo portfolio no loss return rises to 30% on higher rates

Markel CATCo Investment Management Ltd., the retrocessional reinsurance investment manager, has successfully secured higher rates at the January renewal, with its listed retro investment fund no loss maximum net return now forecast at 30%, up from 23% in 2018.

That’s a 30% increase in the maximum net return on a no loss and net of hedging costs, fees and expenses basis for all invested capital currently in the portfolio of Markel CATCo’s listed retrocessional investment fund portfolio, the CATCo Reinsurance Opportunities Fund.

It signals that after the significant losses suffered in the last two years, ILS fund manager Markel CATCo has secured higher rates from its ceding partners at the renewals in January 2019, enabling its no loss maximum return to rise significantly.

Markel CATCo said that the indicative maximum net return for the portfolio of its listed retro reinsurance fund, on a no loss basis, is now placed at approximately 30% after taking into account hedging, fees and expenses.

The current portfolio includes the retrocession transactions underwritten at the mid-year of 2018, which make up around 25% of the portfolio, as well as those retro transactions renewed at January 1st 2019.

The maximum capital exposure to a worst-case single event is now pegged at 10%, which is slightly higher than the forecast for 2018, but the same as was set in 2017 for this listed retro fund.

For 2018 the company puts the net asset value (NAV) return for the C Shares that were issued at the start of the year at -35.7% due to the impacts of catastrophe losses.

A breakdown of the loss reserves by event as a percent of the January 1st 2018 NAV of the C shares shows: Hurricanes Florence and Michael at circa 15.3%; Typhoon Jebi at circa 8.5%; the California Wildfires at circa 35.3%; and attritional losses at circa 1.5%.

The company noted that the above reserves could still be subject to future favourable or adverse loss development.

The increase in the indicative maximum net return for the portfolio through 2019 is significant and shows that despite the issues surrounding losses and loss reserves Markel CATCo has been able to retain clients and secure higher rates from them at the renewals.

Of course, being a no loss return projection there is no guarantee of achieving 30% at this stage of the year, but the figure does show why the Markel CATCo product remains an attractive one for some investors.

In addition, Markel CATCo Investment Management also detailed the current loss reserves it has in place for the listed retrocession fund strategy today.

The company detailed progress with paying claims on some of its reserves and noted that there could be some capital to flow back to investors in the future.

The firm said that any capital (net of Side Pockets) released from its 2018 mid-year underwriting transactions may be returned to investors at the discretion of the funds Board, subject to shareholder consultation.

But for the 2019 portfolio, the C Shares that were issued at the start of 2018 have around 45% of NAV participating in the portfolio, while the Ordinary Shares for this fund have around 16% of NAV participating, which reflects the size of the losses and loss reserves that have been set as well as just how much capital this Markel CATCo fund could deploy at 1/1.

Catastrophe losses suffered by Markel CATCo’s retro reinsurance investment fund strategies over the last two years have been significant.

There remains the potential for investors to look to redeem their allocations from some Markel CATCo funds in the short-term, but as we explained recently owner Markel Corporation said it is planning to adapt the Markel CATCo underwriting and investment strategy based on what it can learn from the catastrophe losses that affected it so severely during 2017 and 2018.