No evidence CATCo acted in bad faith on loss reserves: Markel

After an internal review conducted by outside legal counsel was completed, Markel Corporation says that the review found no evidence of “bad faith in exercising business judgment” by Markel CATCo personnel when it came to setting loss reserves in late 2017 and early 2018.

Markel Corporation previously said that it had engaged an outside counsel to conduct an internal review of retro reinsurance investment specialist Markel CATCo following the previously announced notification of governmental inquiries into loss reserving practices from late 2017 and early 2018.

Inquiries into loss reserving practices at Markel CATCo by these governmental authorities, the U.S. Department of Justice, U.S. Securities and Exchange Commission and Bermuda Monetary Authority, are ongoing, the company said.

But this internal review, that Markel kickstarted with the help of an outside legal counsel, has found no evidence of wrong-doing, when it came to how the Markel CATCo team dealt with the loss reserving process related to the major catastrophe events.

The internal review by outside counsel has recently been completed, Markel said, finding “no evidence that CATCo personnel acted in bad faith in exercising business judgment in the setting of reserves and making related disclosures during late 2017 and early 2018.”

Markel’s outside counsel has now met with the Governmental Authorities and reported the findings from the internal review to them.

Markel explained that it, “cannot currently predict the duration, scope or result of the Governmental Authorities’ inquiries.”

Markel CATCo had to harden its loss reserves significantly for a number of the major catastrophe loss events that struck the firm’s portfolio of retrocessional reinsurance contracts, leading to increasing impacts to investors in its funds.

However, it is important to note that this loss creep has been significant and widespread and far from only experienced by CATCo.

It led others in the insurance-linked securities (ILS) and collateralised reinsurance investments space to also have to harden their loss reserves significantly, particularly for hurricane Irma. So here Markel CATCo was not alone.

Some Florida domestic property insurers have now increased their hurricane Irma loss estimates by 50% or more, since their first attempts at estimating the losses from the storm, leading to reinsurance firms having to increase their loss estimates and passing this loss creep on to retrocessional providers of protection as well.

Being further down the line and removed from the original property loss, with often little visibility of its development, estimations of ultimate impacts for retrocessionaires can be notoriously difficult.

Markel CATCo, as well as others that had to strengthen reserves considerably, were hit by a perfect storm of sorts, when it comes to Irma, that would have made the loss estimation process incredibly challenging.

We now know that loss creep from hurricane Irma continued all the way through 2018 for some ILS markets and traditional reinsurance firms. There could even be more to come.

Now, there’s also an expectation that hardening of reserves for typhoon Jebi from 2018 could be significant for some traditional reinsurance firms, after the original loss estimates for that storm more than doubled since it occurred.

So these loss reserve hikes are far from an isolated event that hit a single market player.

Markel previously confirmed its support for the Markel CATCo team and said that it would look 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.

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