Markel CATCo remains committed on 2019 portfolio: Rhoads

Markel CATCo Investment Management is committed to the delivery of its 2019 portfolio to shareholders in its listed retrocessional reinsurance fund strategy, signalling an intention to trade forwards once loss affected portfolios are dealt with.

Markel CATCo continues to deal with the impacts of major catastrophe losses from 2017 and 2018 that significantly dented the portfolios it had underwritten, resulting in heavy losses for investors.

In the annual report for its listed retrocessional reinsurance investment strategy, the CATCo Reinsurance Opportunities Fund, Jed Rhoads, President and Chief Underwriting Officer of reinsurance for Markel, and now also with oversight of Markel CATCo, explained that after a difficult two years the Markel CATCo investment fund aims to deliver on the portfolio underwritten for 2019.

Rhoads explained that for 2019 the Markel CATCo investment management team has underwritten “a fully diversified 2019 portfolio with an illustrative maximum net return (assuming no losses) of 30 per cent.”

That’s a significant improvement on no loss return potential from the 23% that the 2018 underwritten book had promised.

It’s thanks to the much improved retrocessional reinsurance market conditions experienced in 2019 so far, that saw rates rise at January 1st and continued to harden into April.

Better retro reinsurance returns are also on the cards for the mid-year renewals as well, while at the same time, and as we reported recently here, industry-loss warranty (ILW) indicative pricing has been on the rise for some key peak peril regions.

As a result, many ILS fund managers and collateralized vehicles are writing portfolios that promise the best return potential in years, despite the significant sector impacts from the last two year’s of catastrophe losses, Markel CATCo being one of them.

Rhoads continued, explaining that Markel CATCo continued to experience “strong buyer demand for its unique reinsurance strategy for the 1 January 2019 renewals.”

Markel Corporation has demonstrated its willingness to back Markel CATCo all the way through recent testing months, which led the firm to say that it would aim to adapt the Markel CATCo underwriting and investment strategy based on learnings from the catastrophe losses suffered in 2017 and 2018.

Those catastrophe losses severely dented the capital base of the retrocessional ILS specialist, which is evident in the report of the listed retro strategy.

The CATCo Reinsurance Opportunities Fund saw its total net assets shrink by almost 46% over the course of 2018, falling from $884.6 million at the end of 2017 to $479.8 million at the end of 2018.

A significant amount of the fund’s capital remains trapped, as it awaits clarity on catastrophe losses from events both from 2017 and 2018, which hampered its ability to underwrite new business at the renewals, we understand.

We also understand that Markel Corporation assisted Markel CATCo to ensure the investment manager could write a renewal portfolio, taking some of the pillars of risk from its unique product onto their own paper.

This effectively helped by making Markel CATCo’s remaining capital go further at renewals, ensuring it could provide greater levels of client continuity in response to the demand Rhoads said it experienced.

The product remains in demand as well, we’re told by sources, with some suggesting that if Markel CATCo could raise fresh capital at this time it could easily be deployed, as reinsurers still value the pillared product it can provide.

Which brings the conversation down to pricing and whether the current rebounded retro rates are now as high as they should be to enable a strategy like Markel CATCo’s to sustain profits and investor returns over the cycle.

Markel Corporation clearly believes it can sustain the strategy, as it works to adapt and evolve the offering, likely with a focus on making it more robust to the impacts of repeat catastrophe years, such as was seen in 2017 and 2018.

Having recently received shareholder approval to put the existing portfolios of the CATCo Reinsurance Opportunities Fund into run-off, which will allow the firm to help its investors recover capital back through an orderly portfolio redemption process, the focus must now be on the 2019 underwriting portfolio and delivering returns to those investors backing it.

Markel CATCo “remains committed to delivering the 2019 portfolio to the Company’s Shareholders,” Rhoads said, referring to the stock exchange listed retrocession investment fund.

Looking ahead, Rhoads explained how Markel CATCo sees the market currently, “With 2017 and 2018 being two of the four worst insured loss years on record, the retrocessional reinsurance market has entered into a period of hardening market conditions with reduced capacity compared with previous years, leading to stronger product demand.

“As a result, the Investment Manager has been able to build a globally-diversified 2019 portfolio with improved reinsurance terms and an enhanced return profile that is attractive to investors seeking an alternative, non-correlated investment opportunity.”

At the same time he explained, the ILS sector itself faces unprecedented levels of trapped capital, loss creep, not to mention course the higher frequency of catastrophe events experienced over the last two years.

“Specifically as it relates to trapped capital, the Investment Manager will continue to work closely with its reinsurance counterparties in 2019 in the proactive management of the side pocket investments in place and will seek to release capital back to shareholders in a proactive, timely and orderly manner,” Rhoads said.

Markel CATCo does have a track record of being able to release some capital back to its investors from side-pockets and there remains the potential for this to occur over the coming months, to the benefit of those invested.

After the challenges faced, it’s encouraging that the commitment to deliver remains, for both those who have come to rely on Markel CATCo’s retrocession products and those investors who still find the potential returns attractive.

It’s clear Markel Corporation will do its best to continue the Markel CATCo strategy and ensure the investment manager can trade forwards, with an adapted (perhaps evolved and improved?) product for 2019 and beyond.

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