CATCo chairman expects further rate declines at 2019 January renewals

The chairman of the CATCo Reinsurance Opportunities Fund is expecting further rate decreases in the January 2019 renewals following challenging 2018 renewals.

“Looking forward to the January 2019 renewals, the traditional reinsurance market and ILS funds are expected to experience further rate declines, in the absence of major catastrophic loss activity during the last half of 2018,” said CATCo chairman James Keyes in the firm’s first half 2018 update.

“Despite the record losses of 2017, the traditional reinsurance market and many ILS funds have found it challenging to achieve desirable pricing increases for 2018 renewals, with rates largely decreasing by mid-year 2018 across the sector,” Keyes noted.

Nevertheless, the company expects the 2019 January deals to be renewed at similar terms to those that were achieved during 2018. In addition, the company reported that the it has already received both written and verbal orders from buyers totalling $750 million for January 2019, all at the same higher pricing levels as 2018. The investment manager expects around $1 billion of orders for January 2019 to be written before the start of September at flat pricing.

CATCo Reinsurance Opportunities Fund allows shareholders to participate in the returns from investments linked to catastrophe reinsurance risks, principally by investing in fully collateralised reinsurance contracts as well as insurance-based investments.

The firm’s mid-year 2018 portfolio has increased by around 30 percent from the 2017 mid-year portfolio, at pricing that has remained at the same rates achieved at January 2018. This is an approximate 43 percent increase over 2017 prices, the company noted.

However, 2017 loss events continue to be difficult to estimate as of mid-year 2018, which is largely the consequence of a high frequency and severity loss year, CATCo noted.

A number of traditional reinsurers and ILS funds have increased their specific loss reserves related to the 2017 events, CATCo cited recent insurance market reports as saying. According to the Eurekahedge ILS index, a number of ILS funds have reported negative returns in each monthly index published in 2018 (as reported through June 2018).

Negative fund performance was mostly due to increasing loss estimates related to Hurricane Irma. In addition, loss estimates reported by Property Claims Services (PCS) increased 19 percent over initial estimates reported for the 2017 loss events (as reported through 5 August 2018), CATCo noted.

In April 2018, insurance market information indicated that further loss creep was likely to occur, particularly related to Hurricane Irma.

In particular, higher than expected loss adjustment expenses and increases to losses in the Caribbean indicated that initial industry loss impact for Irma was potentially underestimated. As a result, CatCo decided to strengthen the reserves for 2017 events, representing an about 14 percent deterioration in the ordinary share 2017 annual performance (c. 20% of the 30 April 2018 Ordinary Share Net Asset Value (NAV)), equivalent to a 2017 NAV annual return on the Ordinary Shares of c. -41%.

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