Markel to adapt CATCo strategy based on learnings from 2017/18 losses

Markel Corporation plans to adapt the Markel CATCo underwriting and investment strategy based on what it can learn from the catastrophe losses that affected it so severely during 2017 and 2018, the re/insurers Co-CEO said.

Catastrophe losses suffered by Markel CATCo’s retro reinsurance investment fund strategies over the last two years have been significant, resulting in Markel electing to write-down the value of its investment in the manager recently.

But despite the losses the value of the Markel CATCo business is clear, given its unique role as one of the largest retrocessionaires in the marketplace and the level of revenues that it can drive for Markel when loss activity is lighter.

As such, it’s an attractive business for Markel to be in and the company continues to confirm its commitment to insurance-linked securities (ILS) generally and the Markel CATCo team.

During the recent Markel fourth-quarter earnings conference call, Co-CEO Richard Whitt reaffirmed this commitment to the ILS business.

“We remain confident in the future of ILS, and we believe ILS will be a valuable important component to Markel’s overall strategy in the future,” Whitt explained.

He said that Markel has been working “very hard” top develop its ILS business and sees the combination of this with its other re/insurance businesses and program services offering as key.

“We see significant synergies possible between our insurance, reinsurance, ILS and program services businesses,” he explained.

Part of this is the Markel CATCo offering, which remains a unique and sought after protection product for the largest reinsurers, hence if Markel can find a way to improve on this and effectively relaunch it, even after all of the recent issues and losses, it stands to reason the company will.

Whitt went on to explain the measures being taken, which includes the installation of new management oversight for the Markel CATCo unit.

He also said that Markel was providing additional resources to Markel CATCo as needed, while the issues created by the losses are worked through.

While there is the potential for investors to look to redeem their allocations from the Markel CATCo funds in the short-term, it seems Markel is keen to ensure that the retro focused investment manager returns with a strategy that can attract investors back again in the future.

Reflecting the potential for this, Whitt said the goal of the review and oversight is that, “We expect to learn from the cat events of 2017 and ’18, and we’ve planned to adapt our Markel CATCo strategy accordingly.”

There will likely be a lot to learn.

The catastrophes of 2017 and 2018 have been both historic in terms of impacts and costs, as well as the way certain losses developed and crept upwards, plus in how they ultimately affected the reinsurance and ILS market.

With somewhere around $200 billion of insurance and reinsurance market losses occurring all within an 18 month period, reaching around $225 billion in the two full calendar years, both traditional reinsurance and ILS companies have experienced one of the most testing periods for the market.

Exacerbating the sheer volume of losses was the impact to aggregate coverages and also the loss creep, particularly from hurricane Irma.

Given the pillared protection approach of Markel CATCo’s collateralized retrocession product it was always going to be hit particularly hard, but the aggregating of losses across two years and the still-ongoing loss creep on top of this are likely what made it such a damaging period for the firms funds and investors.

There have been negative months right through 2018 for some collateralized reinsurance focused ILS funds, with managers also upping estimates for Irma as the year progressed as well. So it wasn’t just the CATCo strategies that suffered from this aggregation and build-up of catastrophe losses.

In fact, Whitt made a very astute comment during the call, saying that, “If 2017 & 2018 levels of catastrophe activity were to continue nobody’s business model works that writes property. Just period, end of statement. Everything’s going to have to change if that level of activity continues.”

That all leaves a lot to learn from though and if Markel and the CATCo team can come up with a way to adapt the retrocession strategy to better insulate it against periods of losses such as this, while still offering the coverage its ceding partners desire and sufficient returns for its investors, there is perhaps a future ahead that sees a healthier Markel CATCo product return to market.