Markel sued over CATCo loss reserves

Investors have launched a lawsuit against Markel Corporation over loss reserves at its wholly-owned subsidiary Markel CATCo Investment Management following the disclosure of  regulatory probes by the US and Bermuda authorities.

On Dec. 6, 2018, Markel disclosed that it had been contacted by the US and Bermuda authorities on Nov. 30, 2018 regarding “loss reserves recorded in late 2017 and early 2018 at Markel CATCo Investment Management and its subsidiaries.”

On this news, the company’s share price fell $99.70 per share, more than 8 percent, to close at $1048.23 per share on December 7, 2018, on unusually high trading volume, according to the lawsuit.

Markel CATCo Investment Management 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.

In the lawsuit filed at the US District Court Eastern District of Virginia in form of a class action, investors claim that Markel failed to disclose to investors that the company’s subsidiaries did not reasonably record loss reserves; that, as a result, the loss reserves would be adjusted; that these practices would lead to regulatory scrutiny; and that, as a result of the foregoing, Markel’s positive statements about the company’s business, operations, and prospects, were materially misleading and/or lacked a reasonable basis.

In November 2018, Markel CATCo raised reserves for hurricane Michael and typhoon Jebi and warned over a loss creep from the 2017 hurricane season.

Markel CATCo implemented a specific loss reserve to cover the 2018 events hurricane Michael and typhoon Jebi and has also warned over potential California wildfire losses and a loss creep from 2017 nat cat events.

The reserves for hurricane Michael and typhoon Jebi losses resulted in a 3.7 percent impact to the ordinary share net asset value (NAV) and 9.8 percent impact to the C Share NAV as of 31 October 2018, the firm said in an update.

The investment manager also warned over potential losses from the California wildfires, notably the Camp (Northern California) and Woolsey (Southern California) fires, which began in early November.

Based on early assessments of the industry loss potential due to the fires, it appears a material loss to the portfolio is likely in an amount that could exceed the impact of the 2017 California Wildfire events (2017: c.17 percent), the investment manager said.

In addition, the company has warned over a potential loss creep from the 2017 nat cat events.

In December 2018, Markel CATCo Investment Management disclosed that it planned to increase the specific loss reserves held by the company related to the 2017 loss events namely hurricanes Harvey, Irma, Maria (HIM) and the California wildfires that year.

The impact of the increase was estimated to be approximately 27.7 percent of the Oct. 31, 2018 ordinary share net asset value (NAV) and would be accounted for within the Nov. 30 2018 NAV. On a normalised basis, this represents approximately a 15.7 percent deterioration in the ordinary share 2017 annual performance and is equivalent to a 2017 NAV return on the ordinary shares of approximately -57.1 percent (down from the -41.4 percent reported at year-end).