CATCo expects significant increase in retrocessional pricing

CATCo, the specialist Bermuda based investment manager with a fund listed on the London Stock Exchange, have published their third monthly update since their CATCO Reinsurance Opportunities Fund’s inception at the start of the year. The fund saw a return of 0.82% in March and year to date has returned 2.8% which is not far off their target for this point of the year despite the Q1 catastrophes.

CATCO have recently issued an additional $7.4m in shares and is actively seeking additional capital as it seeks to meet demand from investors who want to invest in their brand of retrocessional and collateralized reinsurance products and securities.

In their update on the funds performance during March CATCo give some insight into what they see as the effect on pricing of retrocessional protections in the wake of a catastrophic first quarter of the year.

In the fund managers view, the major catastrophic events of Q1 2011 (including the Australian flooding, New Zealand quake and Japanese disaster) will likely lead to ‘a significant increase in market pricing for retrocessional protections’. CATCo’s view is supported by confirmation from independent brokerages who suggest that global retrocessional pricing has increased between 30%-40% since the start of the year.

CATCo also note that industry-loss warranties (ILW) are being sold at prices 50% up on the start of the year as reinsurers seek to secure protection in time for the approaching U.S. wind and hurricane season. This has presented opportunities to collateralized retro specialist reinsurers. CATCo say they will take advantage of these developments to deploy the additional capital investment they have secured since the start of April.

With such large increases in retro and ILW pricing in recent weeks, catastrophe bonds really could be a cost effective solution for anyone seeking capacity for the hurricane season this year. As we’ve seen, since the events in Japan cat bond pricing has dropped and the trend has been for closer parity in pricing of cat bonds and reinsurance for some time. There is a good chance that the catastrophe bond market could come to life in the next few weeks with a number of deals focused on replacing U.S. wind capacity we hear from sources in the market. However, issuers are said to be waiting for the fate of Japan linked cat bonds to become clear.