Markel won’t try to emulate CATCo, committed to ILS

Markel Corporation has no intention of emulating the well-known CATCo retrocession products within the new retro insurance-linked securities (ILS) platform the firm intends to launch for the end of the year.

As revealed last week, the Markel CATCo unit and investment funds are now set to be wound down and capital returned to investors, while a new retrocessional ILS focused operation is established.

Markel’s focus now turns to a slow and steady build-up of a new and ultimately more sustainable retro ILS platform under the watch of its leaders Jed Rhoads, President and CUO of Global Reinsurance at Markel as well as Andrew “Barney” Barnard, Senior Managing Director, Head of International Property Catastrophe and Retro.

Analysts asked the executive leadership team of Markel Corporation whether it was their intention to look to emulate or copy the CATCo strategy in this new retro ILS platform.

But in response Richie Whitt, Co-Chief Executive Officer of Markel, explained, “First thing is, it’s not a replacement for Markel CATCo. It’s a different strategy, different leadership team, run by Jed Rhoads, Barney Barnard and a number of their underwriting talent from the Markel Re group.”

He went on to explain that the new retro ILS platform would underwrite a different product to CATCo.

“We have learned a lot through the difficulties that CATCo had and the impact it had on their investors,” Whitt said. “When we went out and talked to investors, and we’ve talked to virtually all of the investors in CATCo, there was very little appetite to continue to invest in the CATCo product. So, we’re following the wishes of those investors, in that the product will go away.”

So that seems to spell the end of what was at one time possibly the most popular retrocessional reinsurance protection product in the market, widely used and deployed by many reinsurers and Lloyd’s syndicates.

Of course the product-set offered proved particularly susceptible to aggregations of major losses over repeat years (as seen in 2017 and 2018), as well as loss creep, which led to the ultimate demise of CATCo.

But there is now a gap in the market and it would make sense for Markel to look to fill it, albeit with a newly designed retrocessional offering and the ILS funds to back it.

The firm has expertise in depth in this area, with some of its Global Reinsurance team having run collateralized retrocession products in their time at acquisition Alterra.

The new retro ILS unit will not be up and running and seeking out bucket-loads of capital from the off though, with the Markel leaders saying it would be a slow build-up.

Whitt explained, “It’s a different portfolio than what CATCo was writing. In terms of size, it’s going to be crawl, walk, run.

“Success this year would be getting it off the ground and getting it started so we’ll, like we do in so many things at Markel Corporation, it’ll be a crawl, walk, run approach to it.”

Jeremy Noble, CFO of Markel, explained that growing the insurance-linked securities operation is important to the firm.

“Markel strongly believes that the insurance-linked security market is here to stay,” he explained. “We’ll continue to grow in as an area where we are establishing a market leading position with our recent acquisitions in Nephila in State National.”

The contribution of those activities continues to build, as we reported earlier this week.

“The new platform is expected to allow us to expand our current range of ILS capability, drawing on the deep talent and resources from across the Markel organisation,” Noble continued.

Adding, “Initial product offerings are expected to include a property catastrophe retrocessional investment fund, ahead of the 2020 renewal period. The fund is expected to offer cedants a suite of property retrocession products, with the ability to have coverage provided either on a collateralized basis, on a rated paper basis written by Markel Bermuda Limited, or by a combination of both.”

Finally, Co-CEO of Markel Thomas Gayner explained that while the remaining Markel CATCo employees will be tasked with running off the CATCo portfolios and returning capital to investors in their funds, they will likely transition across to support the new venture.

“There’s about 20 folks at Markel CATCo. For the coming few years job one will absolutely be the orderly run-off of CATCo and returning capital to the investors as soon as humanly possible. That will be job one, but obviously these people have experience in all the back office functions and so forth that it takes to run a fund, so the hope would be over time as CATCo winds down they could assist in the new effort,” he explained.

So now the process of winding down one retro focused ILS operation, while at the same time starting another, begins at Markel.

It’s likely to be a slow build, as the Co-CEO’s pointed out, as investor trust and confidence will need to be cultivated as the new platform is rolled out.

But the timing may work in Markel’s favour here, as there is a definite requirement for a better breed of hedging products for reinsurers and this development time spent on the new retro ILS unit may well prove well spent as a result.