Markel CATCo secures U.S. court order giving effect to schemes

By Sarah Lizee

Olympia, Wash., March 16 – Markel CATCo Reinsurance Fund Ltd. and CATCo Reinsurance Opportunities Fund Ltd.’s joint provisional liquidators secured an order giving full force and effect to the funds’ Bermuda schemes of arrangement, according to an order filed Wednesday with the U.S. Bankruptcy Court for the Southern District of New York.

As previously reported, in 2017 and 2018, the catastrophic risk reinsurance business of the CATCo group was hit by historically large losses due to a number of large windstorms and forest fires, Simon Appell, a foreign representative for the company, said in a declaration.

Consequently, investors in the Markel CATCo business suffered material losses on their investments, Appell added.

Following a second year of losses in 2018, debtor and manager Markel CATCo Investment Management Ltd. extended a special redemption option to investors of CATCo Reinsurance Opportunities Fund Ltd., the public fund, and Markel CATCo Reinsurance Fund, the private fund, and, in view of the majority uptake, decided to cease offering new investment in the funds.

At the end of the 2019 policy year, all remaining capital in the funds, other than that trapped as collateral for insurance policies, was returned to investors.

On March 26, 2019, investors in the public fund voted to approve the orderly run-off of its investments in the Markel CATCo Diversified Fund, the master fund, operated by the private fund.

On July 25, 2019, the manager announced that the private fund would cease accepting new investments and would not write any new business going forward through the reinsurer, Markel CATCo Re Ltd. After that, the manager started the orderly run-off of the reinsurer’s existing portfolio.

The manager has since continued to manage the retro and reinsurance portfolios, in order to run-off the policies in an orderly manner and, subject to approval from the Bermuda court, return capital to investors as it is released from the trust accounts to the reinsurer.

Appell said the run-off has progressed smoothly since the funds stopped accepting new subscriptions, with a total of about $2.3 billion released and returned to investors as of August. The manager expects the run-off to be completed by January 2023.

Recently, three small investors in sub-funds operated by the private fund asserted claims seeking to recover losses incurred on their investments in 2017 and 2018.

Appell said that in order to resolve the uncertainty around further investor litigation, to ensure that all investors are treated alike and none gain an unfair advantage through litigation, and to facilitate the return of funds to investors, parent company Markel Corp. has decided to make a buyout transaction available to the private fund and the public fund.

The schemes are being proposed by each of the private fund and the public fund to implement the buyout transaction, under which investors will receive an early return of all or substantially all of their remaining capital invested in the funds, as well as being entitled to any future upside on their investments. In exchange, investors will provide a release of any potential claims against the debtors and related entities.

Specifically, scheme creditors will receive a return of the net asset value of the Markel CATCo Reinsurance Fund, the private fund, as well as their pro rata shares of $44 million to be provided by Markel Corp.

Markel Corp. will also contribute $25 million to $30 million to cover the legal and other costs of the transaction, in order that such costs do not reduce the NAV available to investors.

Markel Corp. has also agreed to contribute about $14.8 million to pay an early consent fee to scheme creditors that timely agreed to support the transaction, and a work fee to certain investors involved in the negotiation and development of the proposal.

In addition, Markel Corp. will contribute $20 million less the amount of any insurance proceeds received, to fund a settlement between Markel Corp. and litigation claimants.

The amount of cash required to fund the immediate return of NAV to creditors will be provided by some of Markel Corp.’s wholly owned subsidiaries under a loan agreement.

The deadline for scheme creditors to submit voting instructions was 1 p.m. ET on March 1.

The Hamilton, Bermuda-based insurance-linked investment manager filed bankruptcy on Oct. 5 under Chapter 15 case number 21-11733.

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