Markel Corporation has decided to wind down its retrocessional reinsurance focused insurance-linked securities (ILS) fund manager, Lodgepine Capital Management, citing retro market headwinds and a challenging fundraising environment.
The move comes on the heels of significant catastrophe losses in 2021, which have particularly affected some retro reinsurance products, driving a significant amount of trapped capital for some ILS fund managers with retro strategies.
Of course, Markel has also had its negative experience with the CATCo retro strategies before, which may have coloured its perception of the retro market opportunity.
Markel said last night that it will wind down the Bermuda based ILS fund manager, Lodgepine Capital Management Limited.
The company said that, “Despite best efforts and in light of headwinds in the retrocessional ILS market, including a challenging fundraising environment, Lodgepine will cease to write any new business and commence the orderly run-off of its existing portfolio and the return of capital to investors.”
It’s interesting timing, given that it is only a few weeks since the Markel leadership were citing their success so far in transferring the company’s retro reinsurance book to Lodgepine.
During the firm’s third-quarter earnings call, Co-CEO Richard Whitt explained that Markel intended to continue ceding retrocessional reinsurance business to its Lodgepine Capital Management ILS investment manager, with the goal being to transfer the full retro book to the ILS business model in time.
While that’s still possible of course, Markel could elect to collateralize the business and manage it under another brand or unit. It perhaps seems more likely now that Markel intends to back away from the retro business for the time being.
Which is intriguing, given there is a clear opportunity in the retro market at this time, as capacity is seen to be lacking in some areas and the product itself is ripe for reimagining, as underwriters look to make it more predictable and less prone to the effects of loss aggregation.
It’s also true that right now there are some institutional investors looking opportunistically at retrocession, as one are of the reinsurance market where returns are expected to rise significantly, while terms and conditions are likely to be hardened, putting greater predictability around the performance and behaviour of the retro product itself.
However, retro can be an opportunistic buy as well and major reinsurers may elect to buy far less if pricing rises considerably, or the product changes to deliver fewer benefits.
So Markel has no intention of persisting with retro ILS, at this time, it seems, which may also suggest that the current Lodgepine portfolio it had constructed had been impacted by the major catastrophe losses and given its relatively small size is now untenable.
Markel launched Lodgepine in late 2019, which was a new insurance-linked securities (ILS) fund strategy for the company, focused on the retro space.
During the build-out of Lodgepine, the platform had a portfolio of retro contracts warehoused under Markel Bermuda through 2020.
It then established its own reinsurance vehicle, the first collateralized insurer to be registered in Bermuda, Lodgepine Reinsurance Limited.
Lodgepine Capital Management launched its first ILS fund with third-party capital backing this year, with the Lodgepine Fund beginning operations from July 1st with just under $100 million of capital, which included an initial investment by Markel of $18.9 million.
In 2021, Lodgepine wrote a portfolio of property retrocessional business that consisted of approximately $230 million of initial limits, Markel explained.
Performance, market forces (supply and demand), a lack of interest from new investors in the retro market, or a combination of all three, plus the fact that at its small size Lodgepine may not have been particularly economically viable, unfortunately the Lodgepine venture has clearly not worked for Markel.
As a result of the winding down, Markel will enter into a consultation period with the 18 employees of Lodgepine, saying it will look for redeployment opportunities for them within its operations.
Lodgepine has some very experienced ILS and retro specialist staff that should be attractive hires for some other ILS fund management operations or reinsurers, meaning there should be opportunities in the industry for the majority at this time if Markel cannot redeploy them, it seems.
It’s unfortunate for Markel that it will now be known as the owner of two failed retro reinsurance ILS fund management ventures.
But perhaps this just underscores the significant challenges in writing that business sustainably in a world where catastrophe frequency and severity appears to be increasingly difficult to model and price for, while product terms have become increasingly loose.
The fact retro pricing softened to such low levels in recent years has also been a key driver of challenges, when losses eventually did strike the retro market, meaning this saga should be another lesson for those writing it.