The fact that insurance and reinsurance companies sold California wildfire related claims to third-parties may ultimately reduce the amount of subrogation recoveries that flow back to reinsurance and retrocessional interests, it appears.
This morning, in an interim financial report for the in run-off CATCo Reinsurance Opportunities Fund, the listed retrocessional reinsurance focused investment fund operated by Markel CATCo Investment Management, the fund’s Chairman warns that PG&E recoveries flowing through to the benefit of some positions in the fund may reduce the amount available.
The CATCo Reinsurance Opportunities Fund holds reserves for losses from prior year catastrophe loss events, including the 2017 and 2018 wildfires in California.
The manager Markel CATCo has been successful in releasing some of its trapped capital recently, as it announced that $37.9 million of trapped collateral from its side pockets that had been set aside for prior year losses can now be returned to investors.
This morning the investment manager detailed how that will be returned, in a compulsory redemption of shares in early September.
Having returned capital to shareholders already as part of the running-off of the retrocessional reinsurance investment fund, Markel CATCo is now left with the majority of its net assets in the fund sitting in side pockets established for loss events through 2016 to 2019.
In total some 93.27% of the ordinary share NAV capital is held in side pockets and 91.65% of the C Shares NAV, which means the returns of capital to investors are now largely dependent on either favourable reserve improvement, as has driven the recent capital release, or a realisation of losses and loss of the side pocketed funds.
Markel CATCo noted that at this stage of loss development it is the reports from reinsurance and retro cedants that drives the positions in the side pockets and any ability to release some of the capital. In addition, there is as well as a chance of favourable reserve development, a chance of adverse loss development as well.
The ILS fund manager is also trying to ensure that its side pocket valuations capture any potential subrogation payments or recoveries made from the California wildfires and PG&E’s $11 billion settlement for insurers and reinsurers.
Markel CATCo is being assisted by external counsel on this issue, explaining that the firm, “continues to liaise with cedants in order to determine the effect (where applicable) of any subrogation payments by PG&E Corporation (“PG&E”), the Californian utility company whose equipment has been linked to several of the 2017 and 2018 California wildfires, initially to primary insurers and, subsequently, to reinsurers, and ultimately, on the CATCo retrocessional indemnity contracts and their reported losses.”
Potential recoveries that could benefit the Markel CATCo strategies will be based on “the reduction in loss to treaty reinsurance and retrocessional reinsurance programs, and on participation levels of each applicable layer,” the manager explained today.
But how extensive the recoveries could be remains very uncertain and adding to that uncertainty is the fact many insurers and reinsurers sold on their rights to claims and as a result the subrogation to external parties, such as hedge fund investors.
On this, Bloomberg reported this week that Baupost Group, a well-known hedge fund run by manager Seth Klarman, took over $3 billion in subrogation payments in July from PG&E, having purchased some $6.8 billion of subrogation claims against PG&E.
The fact large hedge fund investors bought up these claims against PG&E will inevitably mean less of the subrogation available to flow its way through the insurance market, via relevant treaties to reinsurance companies and ultimately onwards towards retrocessionaires like Markel CATCo.
“Estimating recoveries is further complicated by the fact that many primary insurers and reinsurers have sold their claims to third parties during the course of the Chapter 11 proceedings of PG&E at what may have been discounted rates, which may ultimately further decrease the amount available to the Reinsurer,” Markel CATCo’s fund reported this morning.
As of the end of June 2020, Markel CATCo’s reinsurer had not recognised any recovery or benefit from the subrogation to its loss reserves.