Markel funded buy-out proposal seeks to speed return of CATCo capital

A new proposal 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.

According to documents filed with the London Stock Exchange this morning, Markel Corporation is preparing to put up as much as $150 million of capital to facilitate the arrangement, which covers both the listed public CATCo Reinsurance Opportunities Fund Ltd., as well as all the other private Markel CATCo Reinsurance Fund Ltd. funds and strategies.

The buy-out proposal would see investors receiving substantially all of the available capital remaining, offering 100% of 2016 & 2017 side pockets, 90% of 2018 side pockets and 80% of 2019 side pockets, while also detailing a proposal to return capital to investors in the Aquilo collateralised reinsurance fund as well, by returning trapped capital to them.

The offer made to investors is for a greatly accelerated return of remaining capital in the CATCo retrocessional reinsurance funds.

Remember, the CATCo funds have been in run-off for over two-years and a significant amount of capital has already been returned to investors in the retro reinsurance insurance-linked securities (ILS) fund strategies.

The running-off of the funds managed by Markel CATCo has continued apace, with good progress made in freeing up as much capital as possible and also a number of cases where losses have continued to develop favourably, allowing more trapped capital to be freed for investors in the funds.

But in today’s announcement, Markel CATCo revealed “threatened and asserted claims by two small investors” which it says has prompted it to launch this buy-out proposal today.

While the claims from these investors are believed to be “meritless”, they have “disrupted the continued timely and orderly return of additional capital to investors,” the investment manager said.

In order to ensure investors are treated equally in the winding down of the CATCo funds, the buy-out proposal will seek to speed the process, ensuring that these claims don’t turn into costly litigation and a liquidation that could take as long as six years.

These claims could “substantially delay, and likely erode, further return of capital to Investors,” the manager said and have been asserted by two smaller investors in the Markel CATCo private fund.

Markel CATCo said that it “strenuously denies any liability with respect to these claims” and in order to avoid significant defence costs, or costs of settlement, or payments of adverse judgments, the manager wants to try and wind things down quickly and equitably for all the investors.

One of the investors that has threatened a claim is the one behind legal action against former Markel CATCo CEO Anthony Belisle, it seems, which we assume was the case with investor vehicle Eugenia II, that we previously covered here.

That case was settled in principle, but Markel CATCo said this morning that, “Although the Manager was not named in the litigation, due to the indemnification obligations asserted by Mr. Belisle against the Manager as a former employee, the Manager facilitated the settlement from available insurance cover after it and the Private Fund determined that it would be in the best interests of all Investors to avoid what might become significant US litigation defence costs that could exceed claimed damages and have a detrimental impact on Investor returns.”

Markel CATCo also explained that, “Importantly, these claims (if successful) and associated indemnification obligations legally rank ahead of, and have priority of payment over, the interests of Investors. This could result in an inequitable distribution of Fund assets as Investors who have asserted claims could be paid ahead of all other Investors. Any claim and indemnification payments in excess of limited available insurance coverage will directly decrease Fund assets available for distribution to all Investors.”

The manager explained that the other investor has threatened similar claims, and this also remains unresolved.

Without clarity on potential costs of claims such as these, Markel CATCo said that, “additional distributions to Investors are unlikely to be made until potential claims are identified and resolved, which could be a significant period of time.”

So, hence the proposed buy-out, which would see investors getting the remaining net asset value (NAV) of the funds back, as well as a possible 1% additional distribution of value funded by Markel for investors that back the proposal in a timely manner.

That’s intended to sweeten things for the remaining investors and get as many onside with this proposal as soon as possible, to move forwards with this buy-out and get the remaining capital distributed before the end of this year, it seems.

In order for the buy-out proposal to be successful, facilitated via two Schemes of Arrangement, it requires 75% of assets under management (AUM) (of those that vote) and a majority by number, or 50% (of those that vote) for both the private and public fund is required.

On top of the return of all available value, plus the potential 1% bonus, investors are also promised that any future upside derived from any further reduction in claims will be passed through to them as well.

In addition, Markel CATCo intends to appoint provisional liquidators which through a “light touch” approach will assist in putting a stay around the funds, helping to prevent any further claims from eroding investors capital.

When backing this proposal, investors will be asked to sign an undertaking that commits their support to it and also confirms they won’t make any claims against the company.

That means the capital will be secured and then protected against claims, enabling its release back to all the investors in the Markel CATCo funds.

Should the proposal fail to gain the necessary support, full liquidation is likely to be required in order to protect the remaining fund capital and the investors value in the funds, but that’s a scenario that could take years, it seems, and would also result in significant costs and so erosion of the funds capital.

Across the Markel CATCo public and private retro reinsurance funds and the Aquilo collateralised reinsurance fund, the remaining capital amounted to $736.2 million, as of August 31st 2021.

Costs will need to be deducted, but overall we understand this could result in the return of as much as over 90% of the investors capital.

As we said at the start, Markel Corporation will fund the $150 million to help in getting capital back to investors and Markel CATCo said that its parent will as a result “bear substantially all the down-side risk from any future reserve strengthening at Markel CATCo Re Ltd.”

Any additional upside that comes through will go to the investors as well, once contracts are commuted, so here Markel is putting its money behind a proposal to wind Markel CATCo’s investment strategies down much faster and give investors the finality so many will be seeking at what seems a reasonable valuation.

Given the progress already made with the winding down and running off of the Markel CATCo funds, plus the improved loss picture on many of its reserves, investors are already receiving back more capital than many assumed possible, we suspect.

So this buy-out proposal, with its additional bonus offer and promise of all additional upside also flowing back to investors is likely to be viewed positively by many.

It needs to receive a certain amount of support, as we said, so this will be critical when it comes to voting and will define whether Markel CATCo is allowed to run-down quietly, with investors paid back what they can be, or whether the process drags out for years through a costly liquidation.