Lodgepine launch timing hit by Covid-19, Markel houses retro portfolio

Timing of the full launch of Lodgepine Capital Management Limited, the recently established retrocessional reinsurance ILS fund management unit of Markel Corporation, may be impacted by the effect of Covid-19 on global investor allocation decisions, the company said recently.

In reporting its first-quarter results, Markel said that Lodgepine Capital Management and its first product offering the property catastrophe retro reinsurance focused Lodgepine Fund Limited strategy is still being prepared for a targeted launch sometime this year.

But, “This timing may be impacted by the recent downturn in global market conditions, and corresponding impact on prospective investor capital allocation decisions,” the company said.

Discussing this further during the Markel earnings call recently, co-CEO of the company Richie Whitt, explained that the Covid-19 effect on global investor demand may affect the ability of the firms insurance-linked securities (ILS) operations to raise fresh capital at this time.

He began, “On the ILS side, the exposure to actual losses from COVID-19, we believe, is fairly minimal. But there’s obviously been significant disruption in the broader financial markets and whenever that happens people tend to seek liquidity.”

Specifically on the Lodgepine capital raising and launch Whitt said, “Our expectation, and we’re still out there talking to potential investors, we sort of, in our own minds, are assuming that the process could take longer as people deal with the uncertainty in the markets right now.”

During times of broad financial market dislocation and disruptions, such as we see from the coronavirus pandemic, investor priorities change and often their focus is on managing existing portfolios of assets, rather than new allocations.

But still, some investors will continue to look for opportunities in the current market environment and with reinsurance rates firming, especially at the retrocession end of the chain, the Lodgepine proposition of a focus on global indemnity retro may still prove an attractive one.

Whitt said that capital raising efforts will continue across the Markel ILS platform.

“We would still hope to raise capital, both at Nephila and Lodgepine, but we’re trying to be realistic in terms of what the situation is and in our own minds thinking that could be a longer path to getting those additional subscriptions.”

On the Nephila Capital side, Whitt further said, “We’re at about $10 billion of assets under management, that’s been pretty stable. We haven’t seen a lot of redemptions and we are working to see if we can add subscriptions.”

On Lodgepine he explained, “Timing of COVID- 19 was not good to Lodgepine, just talking about that disruption. It’s going to take longer to raise capital there.”

Markel’s expansion into retrocession has continued though, with the underwriting of the book that was destined to be capitalised and collateralised by funds under the management of Lodgepine still progressing.

Whitt said, “We have written most of the portfolio for Lodgepine for the year and that’s being warehoused at Markel Bermuda.

“So the portfolio is written, Markel is housing that portfolio on our balance sheet and as we raise capital we can cede some of that business to Lodgepine.”

Which means the strategy is ready to go as soon as either capital raising conditions improve, or investors show interest in allocating to Markel’s new retrocessional reinsurance investment fund.

For potential investors this approach is a positive one as well.

With the retrocession portfolio being underwritten and warehoused by Markel, the pool of risks generated is effectively being seasoned to a degree.

When Lodgepine is ready and capitalised, all it has to do is collateralise an arrangement between its underwriting vehicle, the first collateralized insurer vehicle to be registered in Bermuda Lodgepine Reinsurance Limited, and Markel Bermuda to source its first fund portfolio.

Which means the retro portfolio has already been actively selected and had Markel underwriting eyes on it, but will do so again as it transfers to the Lodgepine fund and is being seasoned on Markel’s balance-sheet as it expands as well.

While the Covid-19 pandemic brought timing issues to the fore for many ILS capital raises at this time, Markel wasn’t the only company to experience this, for Lodgepine it is positive that progress towards the launch is still being made and when it does take on its first third-party investor capital it will be ready to hit the ground running.