Against a backdrop of US and Bermuda government inquiries, senior executives being dropped and certain redemption rights being offered to ILS funds managed by the company, Markel CATCo's ability to maintain or raise capital has been adversely impacted, parent Markel Corporation has confirmed.
Markel Corporation was hit by a $179 million impairment charge in connection with reducing the carrying value of the goodwill and intangible assets of Markel CATCo.
The company suggested the pending government inquiries into loss reserves recorded at an entity managed by Markel CATCo in late 2017 and early 2018 may have an adverse impact on the operations of the ILS fund manager. This may result in adverse findings, reputational damage, the imposition of sanctions, increased costs, litigation and other negative consequences.
Regulators in the US and Bermuda are investigating Markel CATCo in relation to loss reserves recorded in late 2017 and early 2018, which proved to be inadequate.
Markel CATCo builds and manages portfolios that provide investors the opportunity to participate in the returns from a selected mix of investments linked to reinsurance risks accessed through its reinsurance company Markel CATCo Re.
It is one of a number of funds that has been exposed to so-called loss creep since the catastrophes in late 2017. The issue is important because many investors quickly reloaded and reinvested in the aftermath of those events, partly on the basis of those initial loss estimates.
A number of investors that purchased Markel securities during this time have filed a class action lawsuit against the company, alleging they were misled regarding the company’s financial condition.
Despite Markel's results being impacted by a goodwill and intangible asset impairment to its Markel CATCo operations, Markel Corporation co-CEOs Thomas Gayner and Richard Whitt said they remain committed to the company's strategy in the ILS 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."
Markel CATCo CEO Anthony Belisle and Bermuda CEO Alissa Fredricks were dropped from the company following an internal review into loss reserves in 2017 which discovered evidence of an "undisclosed personal relationship".
As a result of their departure, Markel accrued $64.3 million of incentive and retention compensations as of September 30, 2018, of which $34.9 million was accrued as of December 31, 2017.
Overall, Markel posted a comprehensive loss to shareholders of $375.8 million for the year ending December 31, 2018, compared to a comprehensive income of $1.2 billion in 2017.
The consolidated combined ratio of both Markel’s insurance and reinsurance segments improved to 98 percent in 2018 compared to 105 percent in 2017, attributable to lower catastrophe losses in 2018 compared with 2017.
The insurance segment improved to 94 percent from 97 percent, and the reinsurance combined ratio - while still above 100 - improved from 132 percent in 2017 to 113 percent in 2018.
Gross written premiums in Markel's insurance underwriting segment increased 14.7 percent year-on-year to $4.7 billion. Markel suggested this increase was driven by its new surety and collateral protection businesses, both of which were acquired in 2017, as well as growth within its general and professional liability product lines and personal lines business.
The reinsurance segment's GWP decreased 6 percent to $1.05 billion, which Markel attributes to a large specialty quota share treaty entered into in the first quarter of 2017 that did not renew in 2018, as well as lower gross premium volume in our property product lines, primarily due to contracts that did not renew.
Gayner and Whitt said: "We continued to see organic growth and substantial contributions from our recent acquisitions within both our insurance and Markel Ventures operations. Our underwriting results for the year were positive, despite significant catastrophe losses in 2018. Comprehensive loss to shareholders and book value per share were impacted by declines in both our fixed income and equity portfolios, driven by an increase in interest rates and unfavorable movements in the equity markets during 2018.”
Markel, CATCo, Results, ILS, Bermuda, North America