Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Markel CATCo paid $400m+ claims in 2017 in response to catastrophes


While 2017 with its major catastrophe loss events resulted in significant impacts to reinsurance and retrocession providers, the experience served to, “demonstrate the importance of the global reinsurance market and highlight the ability of collateralized vehicles… to respond to global catastrophic risk,” according to Markel CATCo.

In a clear reflection of the robustness of the collateralized reinsurance and retrocession model, Markel CATCo Investment Management Ltd., the collateralized reinsurance and retrocessional investment fund manager, paid out more than $400 million in claims to clients during the year from its listed retro fund strategy, but still grew its overall assets under management to $6.1 billion and secured a 43% uplift in the no-loss target return of its retro portfolio for 2018.

The ability of ILS fund managers and collateralized reinsurance or retrocession players to deal with the extreme level of losses suffered in 2017, manage their distressed assets and side-pockets, pay claims quickly to clients and then raise fresh capital, trade forwards and come out of the year larger and with an improved return outlook is testament to the business model of the ILS market and demonstrates the importance of it, within global reinsurance and retro markets.

In the latest annual report for Markel CATCo’s stock exchange listed strategy, the CATCo Reinsurance Opportunities Fund, the Chairman and investment manager explain the heavy impact of loss events in 2017, particularly hurricanes Harvey, Irma and Maria, as well as the California wildfire events.

The impacts of the loss events are clear, Chairman of the company James Keyes explained, saying, “Due to the number of severe catastrophic events that occurred in 2017 and the nature of the underlying multi-pillared reinsurance deal structures, more Side Pocket Investments (SPIs) have been established in 2017 than any other previous year since the Company’s inception. Historically, the SPIs contained within the Company’s investment portfolio have amounted to approximately 5 to 15 per cent of Ordinary Share NAV. However, following the 2017 catastrophic activity, the SPIs represent 65.9 per cent of Ordinary Share NAV as at 31 December 2017.”

In fact, the aforementioned hurricanes and wildfire loss events led to SPIs totalling 55% of the Ordinary Share net asset value of the CATCo Reinsurance Opportunities Fund being set aside during 2017, resulting in a decrease of 27.60% in the net asset value of the funds Ordinary Shares for the full-year.

Keyes continued, “Despite the challenges that 2017 has presented, the Company remains well-positioned to implement its investment policy and to meet its reinsurance clients’ needs, having taken advantage of the expected increase in reinsurance premiums to raise significant further capital. This further capital, together with the existing available capital, has been fully deployed in the 2018 reinsurance renewals. Furthermore, the Company’s ability to raise $546 million in a short period of time to capitalise on this market opportunity further highlights the unique structure of the Company and the capability of the Investment Manager to respond quickly to a rapidly changing market environment.”

The renewals saw Markel CATCo deploying more capacity into the market to create a book of business that it says has projected net portfolio returns (on a no loss basis) of 23% for the 2018 year, which represents a 43% increase over 2017’s illustrative maximum net return.

Markel CATCo has secured significant rate increases for its loss affected portfolio at the renewals, helping it to offer investors an enhanced return over the year ahead.

Following the major losses of 2017 rates were always going to rise, but it is by being responsive and paying out quickly that reinsurers and ILS managers can demonstrate their ability to serve their clients even when the worst happens and by paying out its $400 million plus in claims during 2017, then raising new capital to trade forwards at the renewals, Markel CATCo has demonstrated its ability to provide the continuity that retrocession buyers need to see.

The response to 2017 events also resulted in better protection for Markel CATCo’s investors going into 2018 as well, with the newly underwritten, higher return potential portfolio, having secured improved terms and conditions related to the underlying reinsurance contracts in order to reduce the amount of capital now exposed to a single event.

Tony Belisle, CEO of Markel CATCo Investment Management, explained, “The maximum capital exposed to a worst-case single event is limited to 8 per cent (net) for the 2018 portfolio, which represents a 20 per cent reduction over the 10 per cent worst-case single event net return for the 2017 portfolio. In addition, as a result of the reduction in the worst-case single event net return, the 2018 portfolio required the purchase of fewer ILW protections, leading to further cost savings for investors.”

Belisle said that, “The large losses of 2017 translated into more favorable opportunities for those in the ILS market,” but importantly the fact Markel CATCo demonstrated its importance to clients, by swiftly paying claims and having plentiful capacity available at renewals, it has also secured enhanced terms for its investors and better protected them against extreme loss events for the coming year.

Belisle continued to explain the 2018 portfolio, saying, “With a broad geographic spread, a balanced exposure to differing risk perils and portfolio protections in place, the Investment Manager has successfully built a stronger investment portfolio for 2018, with a return and risk profile significantly improved compared to the 2017 portfolio.”

With a significant amount of assets also trapped in side-pockets, the company will have to wait for final loss determinations to be made and will continue to pay claims through the coming year and beyond. Side-pockets still exist for loss events from as long ago as 2014, showing how long it can take for claims to be finalised and reserves to get released.

Markel CATCo expects that it will be able to release approximately 4% of 2014-2016 side-pockets during the first-quarter of 2018, returning capital to the fund which is no longer required to pay for claims.

With such a large amount of side-pocketed assets now trapped due to the 2017 catastrophe losses, investors should likely expect a steady flow of releases over the coming years, as the managers practice of reserving conservatively will likely mean some NAV flows back from these events in time as well.

Overall, 2017 was a difficult year for ILS and collateralized players like Markel CATCo, but in coming out the other side tested, reloaded and trading forwards, the market has clearly demonstrated its robustness and ability to provide continuity, both to reinsurance clients and to investors.

The next test for managers such as Markel CATCo will be in how effectively they manage the side-pockets, pay out claims and release assets that prove to be unaffected over time.

Here Markel CATCo has form, having been hit by a range of major loss events over the years and demonstrated its ability to manage the reserves effectively. The 2017 catastrophes just provide a test on a much larger scale for the managers internal processes.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis ILS NYC 2023 - Insurance-linked securities conference in New York City

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.