Former CATCo CEO Tony Belisle is back in court after another investor vehicle filed a fraud lawsuit in Florida alleging that he misrepresented the risks of an investment in the Markel CATCo retrocessional reinsurance investment strategy.
The lawsuit, which is brought on behalf of HWH Realty Holdings LLC, an investment business owned by the well-known German billionaire and one of the co-founders of tech firm SAP, Hans-Werner Hector, alleges that the “seismic losses” suffered by the Markel CATCo funds in 2017 were far beyond where the risks attached to the strategies had been explained to them.
Interestingly, HWH Realty Holdings LLC is affiliated with investor vehicle Eugenia II Investment Holdings (BVI), which settled a lawsuit with Belisle earlier this year.
The complaint raised is much the same, as the lawsuit alleges that “Belisle’s representations, particularly regarding the funds’ risks, were misleading.”
It states that Belisle had explained that losses of the magnitude suffered by Markel CATCo were unlikely due to its pillared approach to portfolio construction and the hedging it had in place.
But, despite those assurances, the strategy that Hans-Werner Hector’s investment vehicle had allocated to, which was Markel CATCo’s Limited Diversified Arbitrage Fund, one of the managers’ retro reinsurance strategies, lost more than 42% after the 2017 hurricanes and other catastrophe losses.
HWH Realty Holdings, LLC, the investment vehicle owned by SAP co-founder and billionaire Hans-Werner Hector, is seeking to recover damages from former Markel CATCo CEO Tony Belisle, after it lost nearly $20 million from an investment made in June 2017, according to documents seen by Artemis.
The lawsuit states, “HWH made its investment based on Tony Belisle’s representation that an investment in the LDAF—which collateralized Markel CATCo’s reinsurance business—would be low-risk due to the fund’s proprietary risk-mitigation structure. Belisle personally provided HWH with marketing and offering materials that touted the low-risk structure. Belisle also personally made specific misrepresentations to HWH that the fund would either realize a gain or, at worst, suffer a small loss.”
HWH alleges that Markel CATCo said its retro reinsurance investment funds were managed so as to avoid any over-concentration of risk and to limit exposure to any single event.
Of course, as has become clear, unprecedented levels of catastrophe losses, as well as aggregation across multiple events and perils, caused severe impairments to Markel CATCo’s strategies and to many other writers of retrocessional reinsurance.
The losses were not unique to Markel CATCo, they were widely felt across the insurance-linked securities (ILS) fund market and in reinsurance.
Neither was loss creep unique to Markel CATCo, this was again experienced widely across the industry.
But what is being alleged here, is that the marketing of the fund’s underplayed the potential risks attached to making the $20 million investment in them, so HWH is seeking damages for its losses, which could amount to as much as the $20 million lost plus damages and costs.
However, there does seem to be more at play here than just alleging fraud or misrepresentation against Belisle, HWH is also one of the investors that will not back Markel CATCo’s buy-out and bankruptcy plans for the retro reinsurance funds.
“Markel CATCo is seeking to compel investors, like HWH, to release all of their claims against managers like Belisle as part of the company’s reorganization plan,” the lawsuit states.
Continuing, “HWH and several other investors have objected to the overbroad and plainly improper third party releases contained in the company’s proposed restructuring.”
The lawsuit goes into some detail to explain that HWH, its affiliate Eugenia and its investment advisors were not experts in reinsurance and so relied on the advice of Belisle.
“Belisle’s representations, particularly regarding the funds’ risks, were misleading. Neither the presentations nor the offering memoranda he provided Hurdle contained risk curves, which would have illustrated the probabilities of multi- event years and the resulting outcomes HWH could expect,” the lawsuit claims.
It’s also said that data was withheld on this and insufficient information was supplied, alleging a general posture of “secrecy” from Markel CATCo, when it came to further information about how performance could be impacted by challenging catastrophe loss years.
“What is now clear (but which Belisle deliberately obscured then) was that if just one more triggering event occurred during the same coverage period, the claims paid on those events would cause investors to lose significant amounts of principal. With third and fourth triggering events, investors’ annual losses would become disastrous,” the lawsuit states.
Going on to also allege that the hedging strategy that was described by Belisle actually provided little protection.
“Belisle and Markel CATCo surely understated the “single event” risk for HWH, but it virtually ignored the most concerning risk for investors: multiple catastrophic events in one year. Instead, the materials focused single-mindedly on the risks of a single natural disaster on investors’ returns. For instance, Markel CATCo represented that the LDAF was “hedged to not worse than minus 10% net” following “a single worst case loss event.”,” it continues.
The major hurricanes of 2017 “exposed the weakness” in the Markel CATCo strategy, HWH claims in the lawsuit.
The lawsuit claims misrepresentation of the facts, supplying false information and fraud, which induced HWH to invest and ultimately caused harm.
Like the previous Eugenia II lawsuit, there’s a chance that if Belisle settles his indemnification as a fund manager for Markel CATCo may end up covering any settlement costs.
However, the lawsuit is critical of the process being followed, stating, “Faced with an underperforming portfolio and the fallout from massive losses to its investors, Markel CATCo has determined that a bankruptcy is all upside. Markel CATCo can use the automatic stay and the slew of third party releases to tie up any loose ends that risk exposing its affiliates to damages awards for their wrongdoing. What Markel CATCo calls “resolv[ing] the uncertainty around further investor litigation” is just a euphemism for ensuring that no court ever hears the merits of the claims its managers are now facing.”
It seems possible investors are now directing legal action at Belisle, as a way to apply further pressure against the ongoing buyout process being undertaken by Markel CATCo.
It will be interesting to see whether legal proceedings like this end up affecting the ability for Markel to wind-down what remains of the Markel CATCo strategies more quickly, and whether they could ultimately drag the process out further into 2022 than currently envisaged.
It certainly seems, at this stage, that they could make the whole process more costly for the company.