Markel writes down value of CATCo investment

Markel Corporation has written down the value of its investment in collateralized retrocessional reinsurance investment fund manager Markel CATCo Investment Management following recent challenges at the unit.

Markel Corporation said that “Markel CATCo’s ability to maintain or raise capital has been adversely impacted” by the situation that resulted from inquiries into loss reserves set at the unit after the major catastrophe losses of 2017 and 2018 hit the managers reinsurance and retrocession strategies.

In its results announcement yesterday Markel said that it has “reduced the carrying value of the goodwill and intangible assets of the Markel CATCo reporting unit to zero,” which drove an impairment charge of $179 million to its quarterly results.

The company said that Markel CATCo’s ability to raise and maintain its capital base has been impacted by the revelation of government-led inquiries into catastrophe loss reserves that had been recorded in late 2017 and early 2018, and that in writing down the value of the investment it also took into consideration the recent departure of the CEO and Bermuda CEO, as well as factoring in the redemption rights that are now being offered to investors in Markel CATCo managed ILS funds.

Thomas S. Gayner and Richard R. Whitt, Co-Chief Executive Officers at Markel Corporation, commented, “Our results were also impacted by a goodwill and intangible asset impairment in our Markel CATCo operations; however, we remain committed to our strategy in the insurance-linked securities market. In the fourth quarter, we completed the acquisition of Nephila, the industry’s preeminent insurance-linked securities investment manager, and we are excited about the strategic opportunities this business brings to Markel. The acquisition of Nephila, along with our other recent acquisitions, reflects our continued strategy and commitment to build long-term value for our shareholders.”

Given the situation, Markel said that after assessing how the recoverable the value of goodwill and intangible assets at Markel CATCo are as of December 31st 2018, the firm determined that taking an impairment charge was necessary at this time.

Markel noted that there is a potential for reputational damage due to the inquiries and that these could have an impact on the units ability to operate, as well as drive increased costs, litigation risks and other negative consequences, while also taking time from management to resolve any resulting issues.

Markel also revealed that investment losses to its stakes in Markel CATCo ILS and collateralized reinsurance funds amounted to $124.6 million in 2018, following $52 million in 2017, as the fair value of these reinsurance and retrocessional portfolios declined due to the impacts of major catastrophe losses across the two years.

As of December 31st 2018 and 2017, Markel said that the fair value of its investments in the CATCo ILS funds amounted to $58.2 million and $189.3 million, respectively.

It seems that the aggregation of multiple losses and steep loss creep from Irma severely dented these investment funds performance, while the initial 2017 hit from catastrophes was at the time seen as less severe.

In addition Markel also highlighted that, related to the departure of the two CEO’s, it had accrued $64.3 million of incentive and retention compensation for the pair as of September 30th 2018, of which $34.9 million was accrued as of December 31st 2017. This accrual was reversed by Markel in Q4 2018 and the firm reflected it as a reduction to services and other expenses in its results.

Update: Markel CATCo added to its 2017 loss reserves again and said redemptions are expected by end of March.

Also read: Markel confirms commitment to ILS, support for CATCo team.