TIDMCAT
RNS Number : 3110V
CATCo Reinsurance Opps Fund Ltd
10 January 2012
CATCo Reinsurance Opportunities Fund Ltd. ("the Company or
CATCo")
Preliminary 2012 portfolio and side pocket investment update
To: SFM, London Stock Date: 9 January 2012
Exchange and the Bermuda
Stock Exchange
Key points:
-- 2012 Investment Portfolio has been fully invested at
attractive premiums, resulting in enhanced expected returns.
-- Side pocket update
o Loss estimates associated with New Zealand and Japan have been
implemented; and
o Delay to the settlement of the SP Investment and the resulting
conversion of the C Shares.
The Company's Ordinary Shareholders are indirectly exposed to
potential losses arising from the New Zealand earthquake that
occurred on 22 February 2011 and the Japan earthquake on 11 March
2011 (respectively, "NZ Exposures" and "Japan Exposures") through
the CATCo Reinsurance Fund Ltd - Diversified Fund (the "Master
Fund") and ultimately through CATCo-Re Ltd. ("CATCo-Re"). Due to
the uncertainty in valuing this exposure and the tenure of these
contracts, the Master Fund's Board of Directors had designated the
Master Fund's potential NZ Exposures and Japan Exposures as a Side
Pocket ("SP Investment"). As a result, Master Fund Shares that were
issued to Master Fund Shareholders after 31 March 2011 would
participate fully in the Master Fund'sportfolio, except that they
will not have any NZ Exposures or Japan Exposures and will
accordingly not participate in any losses or premiums attributable
to such exposures. The Company's C Shares operate in the same way
and have no exposure to these events.
The Company's Investment Managers have recently had meetings
with the reinsurance counterparties that have NZ and Japan
Exposures included in the Side Pocket Investment and further
information has been received.
As announced on 12 October 2011 (copied in the notes to this
announcement) there has been a significant growth of insured loss
related to the NZ Exposure. Following the meetings that have taken
place, the reinsurance counterparty has advised CATCo-Re that they
have, or intend to, fully reserve for a 100% loss on the NZ
Exposure. As a consequence, the Master Fund's Board of Directors
will include this retrocessional reinsurance loss reserve provision
in the Net Asset Value calculation at 31 December 2011. This is a
retrocessional reinsurance loss reserve, and not a crystalised
loss, as CATCo-Re's protections are based on the reinsurance
counterparties actual paid claims. Based on the most recent
reinsurance counterparty loss advice, they have not made any actual
claims payments to the affected insureds.
CATCo-Re has two separate contracts, transacted with different
reinsurance counterparties, for its Japan Exposure. It is
understood that, a leading Japanese insurance company, that buys
the industry's largest property catastrophe reinsurance programme,
has disclosed to its reinsurers that its total claims 'estimate'
from the Japanese earthquake is rising from 635bn yen ($8.4bn) to
890bn yen ($11.4bn). Even though CATCo-Re has certain
retrocessional protections standing before its retrocession
reinsurance exposure, the Master Fund's Board of Directors,
together with the Investment Managers, believe that, as the
reinsured loss continues to increase in relation to the Japan
Exposure, implementing a retrocession reinsurance reserve of 30% of
the Japan Exposure would be prudent. As a consequence, the Master
Fund's Board of Directors will include this retrocessional
reinsurance loss reserve provision in the Net Asset Value
calculation at 31 December 2011. This is a retrocessional
reinsurance loss reserve and not a crystalised loss as CATCo Re's
protections are based on the reinsurance counterparties paid
claims. Whilst we believe this retrocessional reinsurance loss
reserve is prudent, there can be no guarantee that this will be
CATCo-Re's final exposure as the final insured loss from the event
could increase, or decrease, over time.
It was the Company's intention to settle CATCo-Re's exposure to
the NZ and Japan Exposures before the 31 December to enable the
Side Pocket Investment to be realised and the SP Investment
exchanged for Master Fund Shares. This would have also led to any C
Shares issued throughout 2011 to be converted into Ordinary Shares.
However, based on the new information received from our reinsurance
counterparties in mid-December, this will no longer be possible,
and the side pocket investments will remain in place until more
formal information becomes available from the reinsurance
counterparties.
For the Ordinary Shares, as highlighted previously and for
illustrative purposes only, should the New Zealand or the Japanese
earthquakes lead to a 'complete loss' to either the Rest of World
or the Japanese risk pillars, then the 2011 maximum annualised
gross returns would be either 18 per cent. or 5 per cent.,
respectively. If both the New Zealand and the Japanese earthquakes
lead to complete losses, then the 2011 annualised gross return from
the 2011 Portfolio would be approximately 0 per cent.
The SP Investment NAV has benefited from its projected returns
as the remainder of the risk period expired with no further losses.
As a result of this, and beneficial contract loss provisions, the
total assets now exceed the potential maximum loss for the NZ and
Japan Exposures by 18.64 per cent. and this surplus has been
converted into Master Fund Shares as of the 31 Dec 2011 as per the
Offering Memorandum*.
*In accordance with the Offering Memorandum ("OM"), Side Pocket
Investments ("SP Shares") will remain in place until a Valuation
Recognition Event occurs at which point such SP shares are
subsequently re-converted to the ordinary Shares. Upon a valuation
recognition event all or a portion of the SP shares will be
re-converted to Ordinary Shares. As defined in the OM a Valuation
Recognition Event can include a situation where 'any obligation to
pay out under such SP shares has expired or been significantly
reduced.'
Given the most recent indications provided by the reinsurance
counterparties to CATCo-Re, it is difficult to give an indication
as to timing for the settlement of the SP Investment and the
resulting conversion of the C Shares. The Company will ensure that
any progress is provided in the Monthly Insight Reports provided to
all investors.
Commenting on today's 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).
-Ends-
For further information, please contact:
CATCo Investment Management Ltd
Jason Bibb, Director
Telephone: +1 441 531 2227
Email: jason.bibb@catcoim.com
David Benda / Hugh Jonathan
Numis Securities Limited
Telephone: +44 (0)20 7260 1000
Notes:
On 12 October 2011, the Company's Board of Directors announced
that:
"Following the Christchurch earthquake in New Zealand which
occurred on 22 February 2011, on the basis of expected loss
analyses released to the market by EQECAT and AIR which all
indicated that the attachment triggers in our reinsurance contracts
would not be breached, we issued the recurring statement that "the
Managers have no reason to believe that there are any potential
losses to their reinsurance portfolio resulting from this event
given where our Reinsurance Agreement loss event deductibles are
set." Over a nine month period, however, Christchurch has been
impacted by three significant earthquakes which have presented the
insurance industry with a unique challenge in determining where the
allocation of loss really occurred and quantifying the incremental
damage and losses, from the September 2010, February and June 2011
events.
A significant driver of the damage in the February 2011
earthquake was the amplification of soft soils in the Christchurch
area. Reports from the February earthquake note more ground
failures (landslides, liquefaction) from that event, and several
collapses. Especially notable was the renewed damage to utilities
(water, electricity), which were promptly repaired after the
September 2010 event.
A sequence of events of this type of severity falls outside of
the planning scenarios for the insurance adjusters, regulators, and
contractors that are working to restore properties. Areas of
uncertainty include the treatment of deductibles (one, two or
three), limits, and the interaction of policies that have renewed
in the interval between the February and June 2011 events.
Initial loss estimates suggested the February 2011 earthquake
would result in US$3-5bn of insured losses. Although the New
Zealand Prime Minister and Insurance Council of New Zealand
initially stated this was too high; other industry figures
suggested the damage was likely to be in the millions rather than
billions because so much damage had already incurred in the earlier
September 2010 earthquake. However, liquefaction in Christchurch
was much greater than catered for in the modelling, and modelling
error seems to have arisen in the areas of construction quality,
business interruption and the interaction between private insurance
and the New Zealand Earthquake Commission. Today, loss estimate
revisions for the February 2011 New Zealand earthquake suggest
insured losses of US$15bn, representing a 300% increase on the
highest initial loss estimate.
Given the level of increase in expected insured loss, the
Managers of the Company are working with senior management at the
reinsured party to determine the level, if any, of exposure the
Company may have to this specific event. To date, the Company has
not received any loss advice relating to the New Zealand
earthquakes. The Board of Directors, and the Managers, would prefer
to resolve such ambiguity ahead of the 1 January retrocessional
renewal cycle and to release the capital allocated to a side pocket
investment from the February 2011 event which represents a maximum
'capped' exposure of 4.5% of gross expected return for 2011. The
Managers have further meetings with the reinsured party in October
2011 and hope to provide further clarity of any potential or
realised exposure thereafter once the situation has more
clarity.
The Current Portfolio continues to have potential exposure to
the Japan earthquake in its Japanese Earthquake and Japanese All
Natural Perils risk pillars. The Managers have further meetings
with the reinsured parties in October 2011 and thereafter hope to
provide further information on any potential or realised exposure
once the situation has more clarity."
This information is provided by RNS
The company news service from the London Stock Exchange
END
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