CATCo sees 25% Hagibis, Faxai & Dorian hit to 2019 capital deployed

Retrocessional reinsurance focused investment manager Markel CATCo Investment Management expects that the combined impacts of recent catastrophe events typhoon Hagibis, typhoon Faxai and hurricane Dorian will result in a roughly 25% impact to capital deployed in the 2019 portfolio of its listed fund.

Markel CATCo has today revealed its potential exposure to losses caused by October’s typhoon Hagibis in Japan to its listed retro ILS fund the CATCo Reinsurance Opportunities Fund.

Despite the fact the typhoon occurred very recently, Markel CATCo has already set up a specific loss reserve for the event, based on the information available to it in the way of industry loss estimates.

The retro reinsurance focused investment manager has established specific loss reserves of -6.0% of net asset value (NAV) for its Ordinary share class and -9.0% of NAV for the C share class, as of October 31st 2019.

Information continues to develop for the typhoon Hagibis loss and also for September catastrophes typhoon Faxai and hurricane Dorian, the manager explained.

The company has set up its loss reserves for these events based on early estimates of insurance and reinsurance industry losses and without cedant loss notifications.

As a result, Markel CATCo warns of the potential for the loss reserves to change materially, as information does become available.

Information from cedants has been extremely slow with the Japanese typhoons in particular, as has often been the case with storms impacting Japan.

For retrocessionaires, the flow of information can often be slowest as well, given reinsurance firms cannot have a clear view of their losses until the primary market has disclosed theirs, which in the case of Japan has proven extremely slow at times.

Hence, retro specialists have to rely on available industry loss estimates from risk modellers and companies like PCS, in order to set loss reserves for these types of event. In the case of the typhoons, the fact Faxai and Hagibis have come so soon after one another has also exacerbated the ability to allocate losses to the storms, slowing the process further in some cases.

So Markel CATCo has to set its reserves based on where it feels the industry impacts could hit its 2019 portfolio that was deployed at the beginning of the year.

The company explained that the loss reserves established for typhoon Faxai, Hagbis and hurricane Dorian is estimated to cause an impact to capital deployed in the 2019 portfolio of roughly 25% at this time.

The NAV’s are reported as down -9% for the C Shares and -11% for the Ordinary, month on month.

The impacts to the Markel CATCo collateralised retrocession product also gives an idea of how much pain other retro providers may be feeling right now, with the important January renewals fast approaching, particularly those providing an aggregate retro product.

With significant impacts and losses expected to retrocesionnaires again in 2019, the resulting issues related to trapped and lost capital at the January 2020 renewals are set to make retro rates rise perhaps significantly, also impacting some reinsurers ability to carry on doing business on the same gross to net basis they have in the past (thanks to retro support).

Retro market dynamics are going to be fascinating and a driver of reinsurance pricing through 2020 and perhaps beyond. Of course, precisely how the market reacts will also be intriguing, as well as what influence any capital inflows may have.