Early Markel Catco loss picks suggest capacity could halve in 2019

Retro buyers have poor visibility over how much capacity Markel Catco will have to renew its January 2019 portfolio, as the fund manager grapples with a second consecutive year of losses.

Meanwhile, analysts have questioned the firm’s chances of raising further capital for its listed fund after the vehicle’s share price dropped steeply in November.

The firm’s statement warning of further 2017 deterioration and higher 2018 wildfire losses has spooked investors. (Click here to read analyst views on the downturn).

Some buyers are looking into alternatives to add into their programmes, sources said, as the retro writer has told counterparties it will be “tiering” its client base as it prepares to shrink its portfolio.

But just how much capacity the Bermudian fund will have remains opaque, with market participants seeing it as an “enigma” and buyers uncertain when asked if Markel Catco’s pillared cover will feature in their programme next year, although it has begun quoting renewals.

Conservative estimates based on its initial loss reports suggest the firm’s 2019 capacity could well be halved, after doubling the reported losses to account for trapped capital.

Crunching the capacity left

Markel Catco has provided initial estimates of losses from Hurricane Michael and Typhoon Jebi, as well as a broad-brush warning on the Californian wildfires. But a key question for its continuing capacity will be how much capital is locked on top of estimated losses.

Michael and Jebi wiped out around $60mn from the $615mn asset base it managed in the post-Harvey, Irma and Maria (HIM) share class of its listed Reinsurance Opportunities fund.

Wildfire losses this year are likely to surpass the level recorded in 2017, when they wiped 17 percent off the manager’s asset base for the year.

Assuming a hit of around 20 percent from the blazes, the firm would be left facing a further $115mn of losses, paring the post-HIM assets back to $459mn, before accounting for premium earnings.

If the level of trapped capital matched reported losses – which is a fairly standard rule of thumb for immediate post-event collateral lock-up agreements – this suggests the capital in the class C shares available to redeploy in 2019 could fall to $284mn. This does not account for premium or attritional loss reserves in the final two months of the year.

Within the ordinary share class that is exposed to last year’s losses, Markel Catco had redeployed some capital into its 2018 portfolio – representing around $111mn of its $281mn ordinary share net assets at the start of October.

The remainder is held in prior-year side pockets, which face further loss erosion from 2017 events, so are assumed to remain locked.

Of the ordinary shares invested in the 2018 portfolio, Michael and Jebi losses wiped around $10mn off the $111mn value in October, with wildfire claims possibly wiping another $21mn off in November, using the 20 percent assumed loss.

This would leave around $50mn from the 2018 portfolio proceeds in the ordinary share class. Together with the class C proceeds, that gives a total of around $334mn from the listed fund to reinvest in 2019.

Markel Catco also runs private funds alongside its listed vehicle, so these sums will be augmented by the proceeds left over from the $1.8bn it raised last year to deploy in January 2018.

But using the listed fund as a guideline for the proportion of capacity that could be lost suggests the firm’s asset base could be slashed dramatically in 2019.

The $334mn of capital that could be left in the listed fund represents around 46 percent of the 2018 portfolio assets at the start of October. In relation to its 1 January 2018 capacity of $546mn, the C share proceeds of $284mn could be around half its opening 2018 capacity.

Markel Catco had $6.5bn of assets under management in mid-2018 across all its funds, including trapped capital connected to 2017 events.