Markel CATCo warns Harvey & Irma could erase 2017 performance

Markel CATCo Investment Management has delivered a warning to investors in its flagship listed CATCo Reinsurance Opportunities Fund Ltd. that full-year performance could be erased by the impacts of recent major catastrophe events.

Reinsurance and retrocessional reinsurance investment manager Markel CATCo said this morning that it has already set aside an initial loss reserve amounting to 6% of the funds NAV for losses due to hurricane Harvey. The net asset value of the fund has slipped 3% in the last month on the impact of the hurricanes.

The ILS manager said that “much uncertainty remains at this time with respect to the overall private insurance industry loss impact,” steps the manager typically takes after major catastrophe events to segregate at-risk portfolio assets in order to protect existing and any new investors in the fund.

Markel CATCo said that it will continue to monitor the impacts of hurricane Harvey and will update the loss reserve at the next end of month update for the retrocessional reinsurance fund.

On hurricane Irma, Markel CATCo said that it remains too early to fully assess the impact to the fund and so the impact of Irma to the CATCo Reinsurance Opportunities Fund will be assessed when setting the net asset value for the end of September.

The manager warned that the combined hits from hurricanes Harvey and Irma could severely impact performance, saying that they would be expected to have “a meaningful impact on 2017’s portfolio returns with the potential to fully erode annual returns, or more, for 2017.”

It’s no surprise that these two events, which could create insurance and reinsurance industry losses of upwards of $60 billion combined, will have a major impact on the Markel CATCo strategy. The manager had previously warned that an industry loss of above $10 billion from Harvey would hit the fund, now the estimates are for something nearer $20 billion.

The investment manager specialises in providing retrocessional reinsurance, that protects the reinsurers, and with the losses set to flow throughout the global industry Markel CATCo as perhaps the largest retro market in the world is expected to take a significant hit.

As with all ILS fund strategies, part of the job is paying losses when disaster strikes.

However, the manager is positioned uniquely to be able to take advantage of any increase in retrocessional reinsurance pricing post-event, given its growing dominance as a retro provider. So its investors and the shareholders in the fund should benefit from future renewals.

There is also a chance that Markel CATCo also takes some losses from the Mexican earthquake that struck the capital city region yesterday.

With major reinsurers set to deliver profit warnings it is no surprise that larger players in the retro market will too, including the collateralized markets such as Markel CATCo.