Swiss Re Insurance-Linked Fund Management

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CATCo publish update on Japan and New Zealand earthquake exposures


CATCo Investment Management has published an update to the stock market and their investors on their expected losses and exposure to investors from the earthquakes in New Zealand and Japan in 2011 through their investment in the collateralized reinsurer and retrocession underwriter CATCo Re.

As we’ve written before, only those who invested in CATCo prior to 31st March 2011, so holders of Ordinary shares in the London listed firm will be exposed, those who invested after that date have had their investments de-risked by CATCo’s decision to use side-pockets to segregate a new class of C shares which are not exposed to these events.

CATCo has recently held meetings with the two retrocessional reinsurance counterparties that represent the NZ and Japan Exposures and has been informed that both Reinsurance Counterparties have implemented a 100% loss reserve on their respective balance sheets associated with CATCo-Re’s protections. As a result the managers of CATCo have decided to include the same loss reserve provision meaning that they will write off all of their exposure to these two events.

CATCo explains that shareholders should note that this is a loss reserve, and not a crystalised loss, as CATCo Re’s protections are based on the actual paid claims. Based on the most recent loss advice, one Reinsurance Counterparty, representing 31.4% of the Japan Exposure, has been fully paid by CATCo Re, so this loss is settled with them. This Reinsurance Counterparty also represents 100% of the NZ Exposure, but, to date, has not sought any loss payment from CATCo-Re related to this. The other Reinsurance Counterparty, representing 68.6% of the Japan Exposure, has not sought any loss payment from CATCo-Re to date.

CATCO say it has recently sought to commute the NZ and Japan Exposures once the Reinsurance Counterparties’ loss reserves were better known. However, the proposals were rejected by the Reinsurance Counterparties due to the expected size of their respective reinsurance loss reserves.

CATCo Re had already implemented a 100% loss reserve for the New Zealand earthquake back in January 2012 and a 30% loss reserve on the Japan quake, as they were expecting these exposures. However, the reason they only reserved 30% for Japan was that CATCo Re had retro protections of their own in place. According to the Reinsurance Counterparty representing 68.6% of the Japan Exposure, these protections were expected to shield CATCo Re from any losses in relation to Japan. However, this Reinsurance Counterparty has now significantly increased their Japan earthquake loss reserves. Prior to the most recent loss advice from this Reinsurance Counterparty, it had always been suggested that the insurance reserves being held were well below those detailed in loss event deductibles set out in the relevant Reinsurance Agreements. As such, the Investment Manager had maintained the opinion, based on discussions with the Reinsurance Counterparty, that it did not believe that there were any potential losses related to this counterparty’s Japan Exposure. However, the earthquake and tsunami losses in the Tohoku region of Japan last year have continued to escalate.

So the Japan loss creep has been severe enough to cause CATCo a 100% loss on the Japanese earthquake event as well as the expected 100% loss on New Zealand. This isn’t surprising given the size of these events, the difficult nature of the claims process and the amount of insured losses suffered last year. These losses seem pretty consistent with the rest of the market and other similar reinsurance and collateralized underwriters, who write extreme top-layers of catastrophe reinsurance protection. At least now the loss is understood CATCo can focus on maximising their return to investors for the year ahead.

Now that these two loss events are finally being dealt with the Directors of CATCo are investigating the most efficient manner to merge the C Shares back into the Ordinary Shares. Jason Bibb, CATCo Director, Chief Operating Officer and Chief Financial Officer said; “CATCo can confirm that the Board is considering the best options to collapse the C shares and there will be an announcement in due course.”

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