Having announced this morning that a proposal has been made to investors to speed the running-off and return of capital of the Markel CATCo retrocessional reinsurance investment funds, the half-year report of the manager’s public fund suggests further wildfire subrogation related recoveries are possible.
The proposal announced this morning from Markel CATCo Investment Management and Markel Corporation seeks to speed the return of capital from the CATCo retrocessional reinsurance investment funds to investors, while avoiding any complications to the ongoing running-off from legal claims made.
With Markel itself set to fund $150 million to make this buy-out offer possible and a 1% bonus payment available, another key benefit of the proposal for investors in the insurance-linked securities (ILS) funds is that any future upside derived from a further reduction in claims will be passed through to the investors as well.
The running-off of the retro reinsurance funds managed by Markel CATCo has continued apace over two years, with good progress made in freeing up as much capital as possible for investors and a number of cases where losses have continued to develop favourably, allowing more trapped capital to be freed from the funds and be returned.
Wildfire subrogation recoveries have made up part of this, as Markel CATCo’s strategies benefited from some return of value as ultimate losses of its counterparties declined after they received subrogation related flows from California utilities.
Back in June this year, the CATCo Reinsurance Opportunities Fund Ltd., the listed, retrocession focused insurance-linked securities (ILS) fund strategy managed by Markel CATCo, gained roughly 8% in one month thanks to a further reduction in claims from 2017 and 2018 wildfire loss events.
That was related to the flow of subrogation recoveries through the market, eventually getting down to the level of retrocessionaires, such as Markel CATCo.
In its half-year report today, the Chairman of the CATCo Reinsurance Opportunities Fund, James Keyes, explained that, “The Investment Manager continues to liaise with cedants in order to determine the effect of any remaining California wildfire subrogation recoveries (where applicable) on reported losses on indemnity contracts.”
That suggests additional wildfire subrogation recoveries could be made in the future, which would further enable Markel CATCo to reduce reserves against the 2017 and 2018 side pockets it has established for losses from the severe California wildfires of those seasons.
Which would then drive a further return of value to investors in the retro reinsurance funds, likely across both the public listed fund and the private fund strategies Markel CATCo manages.
Thanks to the buy-out proposal making it clear investors would benefit from any future reductions in losses and reserves, investors in the public and private CATCo funds would stand to recoup further value should wildfire subrogation flows enable the manager to release more trapped capital from these side pockets.
This could have a positive read-across for other collateralised reinsurance and retrocession managers funds, as if subrogation continues to flow through the industry there could be some additional recoveries to be made for other ILS strategies as well.