Bushfires trap Markel CATCo retro fund capital as Irma creeps again

The Australian bushfire disaster has caused some capital to be trapped within the listed retrocessional reinsurance investment fund strategy operated by Markel CATCo, while continued loss creep from hurricane Irma also hit exposed positions at the end of 2019.

The 2019 portfolio of stock exchange listed and in run-off retrocessional reinsurance focused investment strategy the CATCo Reinsurance Opportunities Fund Ltd. managed an estimated annual return of 4.3% last year, the manager said today.

But the 2019 portfolio received a bit of a hit towards the end of the year as some collateral was trapped on positions exposed to the Australian bushfire disasters.

Markel CATCo said that it is monitoring the impacts of the Australian wildfires, but said it’s still too soon to know if the listed retro ILS fund’s 2019 portfolio would see losses from these events.

But the bushfires have had a negative effect, as the manager explained, “This has resulted in higher levels of trapped capital on the 2019 portfolio due to the proximity of the event to year-end.”

Catastrophes occurring close to year-end can drive trapped collateral, as cedants want to retain it in case of development and losses triggering their protection under the retrocessional reinsurance contracts.

Markel CATCo said that it hopes this will become clearer in due course, expecting further clarity on this potential impact to its 2019 portfolio later in the first half of 2020.

The potential for a hit to retro from the wildfires is interesting, as it had been widely assumed the losses would largely fall to primary insurance and some reinsurance providers.

But the way the Markel CATCo product is structured, into risk pillars of peril/region, heightens the potential for some attritional claims we suspect.

It seems likely this is more a case of a cautious cedent holding collateral at year-end, in case of development occurring.

Whether the losses faced by reinsurers from the bushfires would ever reach high enough to result in significant retro market claims though is very uncertain at this time.

The manager also explained that hurricane Irma losses continued to creep in the last quarter of 2019.

Markel CATCo said that there was a roughly 3.6% reduction in ordinary share net asset value in December, “driven by further claim settlements in relation to 2017 events, predominantly Hurricane Irma.”

It’s equivalent to another roughly 1% deterioration in 2017 net asset performance for the ordinary share class of the fund.

Good news for investors on the 2018 portfolio though, as Markel CATCo said that the side pockets established for 2018 catastrophe losses are stable and considered to be sufficient to pay claims, based on the latest industry loss information.

Also positive is the fact that the 2019 side pockets, which account for 26% for the Ordinary Share NAV and 39% of the C Share NAV at the end of 2019, are both expected to reduce in time as cedents release capital and therefore some capital can flow back to investors as well.

Markel CATCo is also working to release capital from its 2019 investment portfolio that has not been trapped, seeking to get this back to investors as quickly as it can.

This process would previously have been undertaken as part of the renewal negotiation process, but now being run-off these discussions have to happen outside of this.

The company said that roughly 17% of the investment in the 2019 portfolio (equivalent to $4 million for Ordinary Class shares and $17 million for C Class shares) could be released by the Master Fund to the listed retro fund as soon as mid-February 2020.

Capital releases from prior year side pockets are also expected to occur in Q1 2020, as available, with 2016 and 2018 investments in particular hoped to see some funds flow back and be released in due course to investors.

Finally, Markel CATCo has agreed to reduce its management fee on side pocket investments significantly, by 50% of the original 1.5% fee for 2020, while the 2019 fee was dropped a third to 1%.

So, while the cleaning up and running off of the Markel CATCo retrocessional reinsurance portfolio is progressing, the manager continues to have to respond to recent catastrophe loss events and also deal with ongoing loss creep.

Now into 2020, no further catastrophes can affect these portfolios, so it is all down to loss development on prior year events defining just how much capital can flow back into the funds and be distributed to investors.