Markel to launch new retro ILS platform, wind down CATCo funds

Markel Corporation said it is launching a new retrocessional reinsurance insurance-linked securities (ILS) fund platform, while at the same time announcing a winding down of the existing Markel CATCo fund operations.

For Markel this is a chance to wipe the slate clean, by shuttering the old CATCo retrocessional reinsurance investment operations while launching a new insurance-linked securities (ILS) operation to target the retrocessional reinsurance market.

This will allow Markel to capitalise on the expertise it has acquired in the retro market to offer a new bespoke fund management operation that meets ceding company and investor needs.

Filling a gap in the market that currently exists after the legacy Markel CATCo funds had to stop offering new capacity to clients while prior year losses were dealt with and the future of the operations decided.

Markel Corporation said that it intends to set up a new retrocessional insurance linked securities (ILS) fund management platform.

This new ILS management operation will be based in Bermuda and consist of a reinsurance company, fund entity and investment manager, Markel explained.

Markel said this will allow it to “expand on its current range of ILS capabilities, drawing on the deep talent and resources from across the Markel organization.”

After the acquisition of CATCo and also now owning Nephila Capital, Markel has deep expertise in running such an operation. The company has also inherited specific expertise after its 2013 acquisition of the Bermuda-based Alterra Capital Holdings Ltd. which also operated ILS and collateralized reinsurance vehicles.

Markel further explained that it believes investors backing the new retro ILS venture will benefit from access to risk through the broader Markel Corporation and the firms deep underwriting and analytical capabilities and reinsurance market positioning.

The new retro ILS platform will be overseen by Jed Rhoads and Andrew “Barney” Barnard, both experienced business leaders from the firms Markel Global Reinsurance unit.

The company expects that to begin it will offer ILS investors and cedants a product focused on property catastrophe retrocession investment in advance of the 2020 renewal period.

Targeting those renewals provides the firm with plenty of time to tap into the latent demand for retrocession that has been created by the gap left by CATCo’s pillared product.

Markel said the ILS fund will offer cedants a range of property retrocession products and also provide them the ability to have their coverage on a collateralized basis, underwritten by the new reinsurance company, or on a rated paper basis underwritten by Markel Corporation’s existing Class 4 Bermuda-based licensed insurance company, Markel Bermuda Limited, or even a combination of both.

That suggests a significant move into the retrocession space by Markel, with both collateralized and rated offerings, as well as a mix, which will satisfy many more buyers than just the collateralized offering alone.

“Markel is tremendously optimistic about the future of the ILS market. Over time we expect this new platform to broaden Markel’s capabilities and provide institutional investors access to further opportunities in insurance risk, complementing our existing Nephila and State National operations,” Richard R. Whitt, Co-Chief Executive Officer at Markel, commented.

So the new retrocessional reinsurance investment product will target the January 2020 renewals and beyond, exploring the opportunities that will come available to create better retro product protection at a time when cedants demand it.

Whitt explained, “The 2020 Retro Fund is expected to provide investors with access to property catastrophe retrocession exposure via a single-entry point and platform, and we expect it will additionally present a convenient and compelling offering to both our cedants and brokers.”

The companies investment manager Markel CATCo Investment Management Ltd. said that it will stop accepting new investments in its Markel CATCo Reinsurance Fund Ltd. and will not underwrite any new business through its reinsurer Markel CATCo Re Ltd. going forward.

The ILS manager said it will begin an orderly run-off of Markel CATCo Re’s portfolio, which it said could take around three years to complete.

As part of this run-off and winding down of the CATCo operation, the fund will return its capital to investors, including from the stock exchange listed CATCo Reinsurance Opportunities Fund through a reverse tender and buybacks, as it becomes available to do so, noting that this will be subject to side pockets still as losses develop and loss payments continue to be made.

It’s encouraging to see that Markel recognises the business opportunity in retrocession and intends to continue in the sector, but it will be interesting to see how the new opportunity is implemented and the specifics of the new product offering.

The company has a team of people adept at running this kind of business and intends to make good use of them it seems.

As yet, the company hasn’t mentioned the Aquilo Fund, the collateralized reinsurance investment strategy, so its future remains unclear at this point in time.

Markel has a clear opportunity to create a full suite of ILS offerings, leveraging its extensive expertise in reinsurance, retrocession and investment management, to deliver protection products that cedants need and funds that investors want to allocate capital to.

The company always said it had a desire to be a meaningful player in ILS. It will be interesting to see exactly what emerges from Markel towards the end of this year.