Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

CATCo updates on loss development and side pocket reserving


CATCo Investment Management have published an update to the stock market and their investors regarding the development of loss estimates from some of the major catastrophes experienced around the world in 2011 and how that will impact the returns they will be making to investors. Loss estimates associated with the Japanese and New Zealand earthquakes have now been implemented and this has an obvious impact on the returns their fund can make to those who invested in them at 1st Jan 2011.

Investors in CATCo who invested after 31st Mar 2011 will be unaffected by the Japanese and New Zealand quakes. Of those who invested prior to that, Ordinary shareholders in CATCo will have an indirect exposure to the potential losses from the New Zealand and Japan earthquakes. As a heavy player in the retro market CATCo was bound to have exposure to these severe loss events. Due to the continued uncertainty in exactly how big this exposure is, the market still has to wait for firm losses to be disclosed, and the duration of the underlying reinsurance contracts, CATCo have set aside the Master Fund’s potential NZ Exposures and Japan Exposures as a Side Pocket investment. This means that Master Fund Shares issued after 31st March 2011 will avoid any exposure to these catastrophe events and will not participate in any losses or premiums from them. CATCo’s C Share class operate in the same way and have no exposure to these events.

This strategy of segregating the potential liabilities and allowing new investors to come on board without exposure to past severe events is a good strategy which allows CATCo to attract further inflows from investors and also keep existing investors aware of their potential losses.

CATCo say that the New Zealand exposures have grown again as insured loss estimates have risen. This has led them to announce that they intend to fully reserve for a 100% loss on these contracts. As a result they include this retrocession loss in their net asset value calculation as at the end of 2011. They stress that this is a reinsurance reserve loss and not an actual loss (yet). The actual loss to CATCo and their investors will become clear once their reinsurance counterparties actually need to pay their claims. They base the reserving on the latest advice from these counterparties and as such are preparing in advance for the worst outcome on this exposure.

Because of the additional loss creep on both events CATCo haven’t been able to do as they planned and settle the side pocket investments they made earlier in the year. That would have allowed C Shares to be converted back to Ordinary shares on their publicly listed fund, however CATCo says the side pocket will remain in place until more formal loss information is made available by their reinsurance counterparties.

For their Ordinary of shares combined with the Ordinary class side pocket shares, CATCO say that should the New Zealand or Japan earthquake events lead to a total loss to either of their Rest of the World or Japanese risk pillars, then the maximum 2011 annualised gross returns would be either 18% or 5% respectively. If both pillars lead to complete losses then the annualised return for 2011 would be approx 0% for this particular class of share only.

CATCo say it is difficult to give an estimate of when this situation will be resolved for the side pocket investors. They are reliant on the loss estimates and confirmations from reinsurance counterparties, but say they will keep investors updated in monthly reports.

Commenting on this announcement, Anthony Taylor, Chairman of CATCo said; “With approximately $105bn in insured natural catastrophe losses, 2011 ranks as the most expensive year for the insurance industry, exceeding 2005’s natural catastrophe losses of $101bn, which included hurricanes Katrina, Wilma and Rita. In 2011, moderate hurricane losses have kept costs from escalating even further. If Japan had been as well insured as other countries with high seismic risk, such as New Zealand, the overall industry cost would have been much higher. The Board, in light of the market backdrop, is very encouraged by the returns achieved in the first year of trading.”

Tony Belisle, CEO of CATCo Investment Management Ltd, said; “The Investment Manager Team is very pleased at generating the returns achieved amidst a difficult catastrophic environment, particularly with reference to the comparative peer group and global equity markets. As a consequence of the severe industry losses in 2011, we expect the 2012 portfolio to generate significantly higher returns than were available in January 2011. A formal portfolio announcement will be made in the coming weeks and detailed in the Company’s January Monthly Insight Report (produced in early February).”

CATCo also announced that their 2012 investment portfolio has been fully invested at attractive premiums and that they expect this to translate into enhanced expected returns for the coming year. With a lot of capital at their disposal during the recent renewals, and the much discussed lack of capacity in the retro markets, it’s suspected that CATCo will have had a lot of deals to choose from in the retrocession and collateralized reinsurance market and will have been able to continue their policy of choosing the best premium opportunities to make the best returns for their investors.

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