Markel CATCo Investment Management Ltd., the reinsurance and retrocession linked ILS investment and fund manager, has set up a loss reserve specifically for its exposure to the Fort McMurray, Canada wildfire event for its stock exchange listed ILS fund.
In an announcement about the London and Bermuda listed CATCo Reinsurance Opportunities Fund Ltd., the ILS investment manager said that after discussions with reinsurance clients regarding the Canadian wildfires impact it had been decided that a loss reserve amounting to 1% of net asset value (NAV) should be established.
Markel CATCo has a prudent approach to reserving, setting up side pockets and loss reserves whenever a reasonably major event is still developing in order to segregate any potentially affected investments and to protect the funds existing and any new investors.
The impact of the 1% NAV loss reserve has been included in the published June NAV calculations and Markel CATCo said that while it will continue to monitor the impact of the Canadian wildfires it believes that any further adverse development should be absorbed by its monthly attritional loss reserve arrangement, which amounts to around 15bps of NAV.
Initially Markel CATCo had thought that the impact from the Canadian wildfires would be attritional, but as time has passed and the exposure to reinsurance and retrocession contracts become clearer the manager now feels a reserve is prudent.
Development of losses such as from the Fort McMurray wildfires can take time and for Markel CATCo, which is often the retrocessionaire rather than reinsurer, sometimes a loss can manifest later on as it takes time for its reinsurer clients to calculate their own exposures, before reporting any potential claim to the manager.
Given the size of the Canadian wildfire loss, it is not surprising to find that ILS funds are being impacted. The loss is expected to be largely borne by reinsurance providers, meaning that retrocessionaires and reinsurance quota-share sidecars are mostly set to take a hit.
Typically, an ILS fund manager would hope to reserve more than the eventual loss amount in order to cover the risk that a loss escalates, so it is possible that some of the reserved NAV could flow back into the fund once the final total is understood.