CATCo Investment Management, the specialist Bermuda based reinsurance-linked investment manager who manage around $2 billion of retrocessional reinsurance portfolios for their clients, has announced that it is establishing a retrocessional reinsurance loss reserve for the expected impact of hurricane Sandy.
Given the continuing uncertainty around the eventual industry loss impact from Sandy, CATCo are ensuring that it and its investors are prepared for an impact by including a loss reserve provision in the net asset value of the CATCo Reinsurance Fund Ltd.
The investment managers have modelled the projected loss distribution for hurricane Sandy against the CATCo-Re Ltd. 2012 portfolio of risk, using PCS’s industry loss estimate and those published by the main risk modelling firms to assess the potential impact.
The Directors of the CATCo Reinsurance Fund have taken a cautious approach to this and are including a retrocessional reinsurance loss reserve provision based on an industry loss of $20 billion in the net asset value calculation for the 30th November. They stress that this is a loss reserve provision and not an actual loss at this time, given the uncertainty surrounding the final industry loss from Sandy there is a chance it could go up or down.
The PCS estimate of insurance industry losses is likely key to CATCo as they will probably have some exposure to ILWs or reinsurance contracts which use the final published number as a trigger. It is also a good proxy for the ultimate net losses suffered by insurers and reinsurers who they may underwrite. The initial PCS estimate of $11 billion is considered likely to rise considerably.
CATCo said that a reinsurance loss reserve based on a $20 billion industry loss estimate could reduce its gross expected returns for 2012 by up to 13.2% points. CATCo had been expecting a stellar year of returns, forecasting 20%+ for 2012. Even with the impact of Sandy the fund will likely beat the return of many other asset classes such as equity indices.