Catastrophic events hit CATCo Reinsurance Opportunities – CATCo Reinsurance Opportunities (CATC) had a tough 2018 in what was a highly challenging year for the industry. The company reported its annual results to December 31, 2018, this morning, with total return NAV down 35.7% for the C Shares issued in November 2018 while returns on the ordinary shares fared worse, falling 58.4%. This was put down to (i) adverse loss development experienced during 2018 on the 2017 loss events and (ii) 2018 portfolio losses.
Catastrophic events abound
Discussing the volatile backdrop CATC faced, the company’s investment manager, Jed Rhoads, had this to say: “Global insured losses during 2018 are estimated to be $80bn, the fourth costliest year on record, compared to 2017, the worst year on record which resulted in over $140bn of insured losses. Both years endured a confluence of wind and wildfire events late in the year causing unprecedented levels of trapped capital industry wide and made for a dislocated January 1 renewal.
During the month of September, Typhoon Jebi made landfall in the Japanese Prefecture of Tokushima on Shikoku Island as the equivalent of a category 3 hurricane. The typhoon made a second landfall on the main island of Honshu where it affected Kobe and Osaka. Typhoon Jebi is the most intense tropical cyclone to make landfall over Japan since Typhoon Yancy in 1993. Typhoon Jebi has also made its mark as Japan’s largest typhoon-related insurance and reinsurance market loss on record. Munich Re estimates that insured losses total roughly $9 billion, which is slightly higher than the insured loss of Typhoon Mireille in 1991.
A few weeks later, Typhoon Trami made landfall near the city of Tanabe City in the Wakayama Prefecture as the equivalent of a category 2 hurricane. Trami impacted the region with heavy rainfall, high winds and storm surge causing extensive power outages and disruption to transportation, causing an estimated $2bn in further insured losses to the region.
During the same time period, Hurricane Florence was making landfall in Wrightsville, North Carolina as a category 1 hurricane, causing heavy rainfall and major flooding across the Carolinas region. The latest insured loss estimate as at 6 February 2019 for Hurricane Florence is $4.4bn of insured losses.
Similar to 2017, late in the fourth quarter, which is typically quiet from an insured catastrophe perspective, massive wildfires charred both North and South California in almost identical areas.
Outlook
The manager added the following on the company’s outlook: “With 2017 and 2018 being two of the four worst insured loss years on record, the retrocessional reinsurance market has entered into a period of hardening market conditions with reduced capacity compared with previous years, leading to stronger product demand. As a result, the manager has been able to build a globally-diversified 2019 portfolio with improved reinsurance terms and an enhanced return profile that is attractive to investors seeking an alternative, non-correlated investment opportunity.
Separately, on the back of these two heavy loss years, the entire industry is currently navigating its way through new challenges such as unprecedented amounts of trapped capital, loss creep leading to severe loss development and a higher frequency of events in recent years compared with the relatively benign period between 2011 and 2016. Specifically as it relates to trapped capital, the Investment Manager will continue to work closely with its reinsurance counterparties in 2019 in the proactive management of the side pocket investments in place and will seek to release capital back to shareholders in a proactive, timely and orderly manner.
Finally, given the recent decision by the company’s shareholders to put the existing portfolios into run-off, the company will seek to return expiring mid-year deal capital to its shareholders post mid-year risk expiration, which, subject to side pockets, will help investors to gain capital back via an orderly portfolio redemption process.”
CATC: Catastrophic events hit CATCo Reinsurance Opportunities