US authorities take no action against Markel CATCo on loss reserves

United States governmental authorities have concluded their investigations into retrocessional reinsurance investment manager Markel CATCo this week, with no action set to be taken.

It’s another step towards the successful winding-up and running-off of the Markel CATCo retro reinsurance investment funds, on which as we explained earlier this week the manager is now seeking a faster resolution for its investors with a buy-out offer part-funded by parent Markel Corporation.

Yesterday, Markel Corporation said that the US authorities investigations have drawn to a close, removing another shadow hanging over the companies legacy retro ILS fund manager.

Back in late 2018, Markel Corporation received enquiries from the US Department of Justice (DOJ), US Securities and Exchange Commission (SEC) and Bermuda Monetary Authority (BMA) into loss reserving practices at its reinsurer Markel CATCo Re Ltd.

This was all related to loss reserves set in 2017 and 2018, which were the two main years of loss activity that drove the Markel CATCo funds towards their eventual shuttering and running-off.

The Markel CATCo retro reinsurance funds had to reserve heavily for both of these calendar years, but loss creep that affected the entire insurance, reinsurance and insurance-linked securities (ILS) industry drove the manager to make significant increases in its reserves for certain events.

That drove the investigation it seems, the increases to loss reserves, particularly for the 2017 hurricanes, which of course included Irma, and California wildfires of 2018.

Markel engaged outside counsel to conduct an internal review, which found no evidence of any issues in the setting of reserves and making related disclosures during late 2017 and early 2018.

Once that review was completed, Markel’s outside counsel met with the governmental authorities and reported the findings.

Now, on September 27th this week, the SEC notified Markel that its investigation was completed and that it does not intend to recommend an enforcement action against Markel CATCo.

The next day, on September 28, Markel was advised by the Department of Justice that it had also concluded its investigation and would not take any action either.

Markel also said that it has kept the BMA informed throughout the process and that there are currently “no pending requests” from the BMA, which has not been in touch with Markel in relation to the governmental inquiries for over a year now.

It’s another step forwards and additional clarity for Markel as the running-off of CATCo’s retro fund strategies continues.

The next step is gaining approval for the accelerated buy-out proposal, which if approved by shareholders will see the Markel CATCo strategies wound down far more quickly and investors receive their funds largely by the end of this year.