CATCo Investment Management, the specialist Bermuda based reinsurance-linked investment business that manages around $2 billion of retrocessional reinsurance portfolios for its clients, has commuted a portion of its losses from the Costa Concordia marine disaster according to a stock exchange announcement. Commuting the losses early allows them to be accounted for now and reduces the chance for loss creep affecting the CATCo Reinsurance Opportunities Fund investors.
The update from CATCo says that industry loss estimates for the overall cost of the sinking of the Costa Concordia look set to rise after the international group of P&I Associations’ actual and expected insured loss estimate for Protection and Indemnity (Wreck Removal and Cargo/Crew/Passenger Liability) increased by approximately $130m, from circa $521m to $652m. The final settlement for the Hull & Machinery claim amounted to circa $520 million. This makes the overall loss total for Costa Concordia around $1.172 billion.
The CATCo Reinsurance Opportunities Fund exposure within its Master Fund portfolio is for an industry loss of $1.25 billion or greater, however CATCo’s investment managers believe that issues like the wreck removal for which the timetable is uncertain are set to increase the loss estimate further over time.
So CATCo has taken what appears to be a very sensible decision and commuted the losses from one of their retrocessional reinsurance contracts which cover offshore marine risk. There are two retro contracts which have exposure within the portfolio and the one commuted accounts for 40% of CATCo’s exposure to this loss. By commuting the contract now CATCo effectively shut off any future liabilities that could be caused by loss creep and avoid a potentially larger payout should the loss increase significantly.
CATCo says that the total liability to offshore marine is equivalent to a 4% gross impact to 2012 returns. The commutation of this retro contract is equivalent to 1.5% of that. As a result of this commutation agreement, CATCo avoids having to establish any side pocket investments at the year end which lock up capital meaning it cannot yield a return in 2013. CATCo has already deployed new Offshore Marine risk for 2013 at significantly increased pricing according to its update. The loss from this commutation will be reported in the October 2012 net asset value.
Finally, CATCo is going to seek to commute the other retro reinsurance agreement before the year end as well.
This is a good example of an investment manager who understands the reinsurance loss process and how estimates can creep upwards , so proactively protecting its investors from greater loss potential. Loss creep is forever one of the great unknowns in this sector and retro contracts can be some of the most susceptible to it.