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CatCo reports on its annus horribilis

CatCo reports on its annus horribilis – CatCo Reinsurance Opportunities has published its accounts covering 2017. The net asset value of the ordinary shares declined by 27.6%.

When the company thinks it might face claims in relation to losses, it holds money in ‘side pocket investments’, effectively cash, rather than reinvesting this money in new investments. Due to the number of severe catastrophic events that occurred in 2017 and the nature of the underlying multi-pillared reinsurance deal structures, more side pocket investments have been established in 2017 than any other previous year since the company’s inception. Historically, the side pocket investments contained within the portfolio have amounted to approximately 5% to 15% of NAV. However, following the 2017 catastrophic activity, the side pocket investments represent 65.9% of NAV as at 31 December 2017. In 2017, side pocket investments were established (inter alia) in relation to hurricanes Harvey, Irma and Maria and the California wildfires. These side pocket investments amount to 55% of the NAV as at 31 December 2017.

As reported in the 2017 interim statement, the company continues to hold side pocket investments in relation to underwriting years 2014 – 2016. As at 31 December 2017, the amounts held are as follows:

  • 2014 SPIs, predominantly resulting from U.S. severe convective storms, amount to approximately one per cent of NAV.
  • 2015 SPIs, principally relating to U.S. and Canada winter storms and U.S. severe convective storms, amount to 1.6 per cent of the NAV.
  • 2016 SPIs created for exposures to the Fort McMurray wildfire, the Jubilee oil field off the Ghana coast, Hurricane Matthew and the South Island earthquake in New Zealand amount to 8 per cent of NAV.

As a result of the 2017 catastrophic events, retrocessional reinsurance market conditions hardened and price increases were achieved by the underlying reinsurer. As a consequence, the 2018 portfolio illustrative maximum net return (assuming no losses), including hedging costs, is approximately 23 per cent on invested capital. In addition, the overall risk profile of the 2018 portfolio improved, with the maximum capital exposed to a worst-case single event limited to 8 per cent (net), compared to 10 per cent for 2017.

2017 losses

Global insured losses during 2017 are estimated to be $135 billion (source: Munich Re), making this the highest insured loss year on record. However, the company is not exposed to the majority [by number] of the global catastrophes contributing to this insured loss estimate. Major events during 2017 that are expected to have a material impact to the Company include Hurricanes Harvey, Irma, and Maria, and the California Wildfires.

After twelve years without a major hurricane (Category 3 or greater) making landfall in the U.S., the 2017 Atlantic hurricane season featured record breaking Hurricanes Harvey, Irma, and Maria. All three storms made landfall in U.S. territories as Category 4 hurricanes, a first for any season since modern record keeping began. Based on current insured loss estimates from Property Claims Services (PCS), Hurricanes Harvey, Irma, and Maria are all now within the top seven insured losses due to natural catastrophes to occur within U.S. territories, since PCS records began in 1950.

According to PCS, Hurricane Maria, which devastated parts of the Caribbean, and in particular Puerto Rico, is currently estimated at $23.97 billion of insured loss. This makes Hurricane Maria the second largest insured loss due to a natural catastrophe in U.S. history, only behind Hurricane Katrina ($51.88 billion, CPI-trended).

Hurricane Irma was also highly destructive for the Caribbean, most notably the U.S. Virgin Islands, St. Martin, as well as Antigua and Barbuda. Following this first wave of impact, Hurricane Irma then continued on a path up the West Coast of Florida. PCS currently estimates the total losses Hurricane Irma at $17.2 billion.

Hurricane Harvey, the first major hurricane to make landfall in U.S. territory since Hurricane Wilma in 2005, now holds the record for the highest total precipitation in the continental U.S. due to a tropical cyclone. Hurricane Harvey stalled near the coastline of Southeastern Texas, dropping torrential rains over the Houston metropolitan region with total rainfall exceeding 50 inches. PCS currently estimates the insured loss due to Hurricane Harvey at $15.7 billion.

Insured losses due to wildfire events in 2017 that impacted regions of Northern California in October, and Southern California during December, are now estimated at $12.5 billion according to PCS. The 2017 wildfires are now more than four times the cumulative insured losses recorded in any previous year due to wildfires in U.S. history.

Loss Reserves

During 2017, the Investment Manager established total loss reserves of 47.4% of the 2017 investor capital for the following events:

  1. Hurricanes Harvey, Irma, and Maria 28.5 per cent (net of recoveries on hedges);
  2. California Wildfires 17.1 per cent; and
  3. Attritional losses of 1.8 per cent available for potential losses due to the Mexico Earthquakes, Cyclone Debbie, and
  4. U.S. Severe Convective Storms.

As a result, the 2017 side pocket investments represents approximately 55 per cent of the Net Asset Value of Ordinary Shares as at 31 December 2017. The Investment Manager believes that the total loss reserves established for the 2017 loss events are sufficient to provide for all cedant claims with respect to these loss events, based on the information currently available. However, there is still some level of industry uncertainty with regards to the final insured loss impact of the 2017 loss events.

2018 outlook

According to Guy Carpenter, despite substantial insured losses in 2017, overall traditional reinsurance industry capital did not decline, leading to only a moderate year over year premium increase of 6.1 per cent for 2018 renewals.

However, the large losses of 2017 translated into more favorable opportunities for those in the ILS market. As a result of its unique product offering, the Investment Manager secured for the 2018 portfolio an illustrative maximum net return (assuming no losses)* of approximately 23 per cent on invested capital, a 43 per cent increase over the 2017 portfolio illustrative maximum net return of 16 per cent. These figures are inclusive of hedging costs.

The Investment Manager also improved terms and conditions related to the portfolio’s underlying reinsurance contracts. As a result, the maximum capital exposed to a worst-case single event is limited to 8 per cent (net) for the 2018 portfolio, which represents a 20 per cent reduction over the 10 per cent worst-case single event net return for the 2017 portfolio. In addition, as a result of the reduction in the worst-case single event net return, the 2018 portfolio required the purchase of fewer ILW protections, leading to further cost savings for investors.

CAT / CATC : CatCo reports on its annus horribilis

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