Markel CATCo hurricane loss reserve hits 20% of listed retro fund NAV

Reinsurance and retrocessional reinsurance investment manager Markel CATCo Investment Management has implemented loss reserves for hurricanes Harvey, Irma and Maria amounting to 20% of net asset value for its listed retrocession strategy, the CATCo Reinsurance Opportunities Fund Ltd.

Markel CATCo had implemented a 6% loss reserve for the impacts of hurricane Harvey in the funds August NAV, but has now added a 14% loss reserve for the additional impacts of hurricanes Irma and Maria, as well as any additional losses from Harvey.

The net asset value of the listed CATCo Reinsurance Opportunities Fund was set as $1.0795 per share as at the end of September, the company said, after taking into account the 20% of loss reserving to segregate affected retrocessional reinsurance assets.

The combined impacts of recent hurricane events was always going to have a significant impact on retro ILS specialists such as Markel CATCo and others, with reinsurance industry losses set to rise towards $20 billion for hurricane Harvey, above that level for Irma and perhaps as high as $40 billion for Maria, the retrocession markets have taken a significant hit.

Of course this is exactly what the Markel CATCo retrocession product is designed to respond to, multiple event impacts that threaten the capital of their reinsurer client base.

Markel CATCo has its own hedging protection in place and stands to benefit from this, with industry loss warranty (ILW) and reinsurance coverage helping the manager minimise its losses.

The company explained; “The loss reserve impact would have been significantly greater except for a significant benefit derived from the reinsurance protections purchased by the Manager for the purpose of hedging the portfolio exposures.”

The retro ILS manager said that it will continue to monitor these losses at each monthly net asset value calculation throughout the rest of the year.

Creating loss reserves by moving potentially distressed reinsurance assets to side pockets so they are segregated from the main fund enables managers like Markel CATCo to better manage its losses as they develop.

It can take time for retrocession claims to develop, especially if they are across a number of catastrophe events. Hence Markel CATCo will have aimed to reserve for the maximum expected impact at this time, while monitoring development closely to ensure any loss creep is also dealt with.

Markel CATCo also said that its September NAV calculation is inclusive of attritional loss reserves of around 15bps per month, which it hopes will be sufficient to absorb the impacts of any other loss activity, including the recent Mexico earthquakes.

Markel CATCo is also in the market raising new capital for the listed CATCo Reinsurance Opportunities Fund, having launched a prospectus recently that gives it significant flexibility to raise new third-party capital over the course of the year.

The company expects to find pricing opportunities in the retrocession market and by raising new capital, while segregating its loss reserves, Markel CATCo will hope to be in a good position to capitalise on these.