CATCo forecasts strong year; leverages soft market

Insurance investment manager CATCo, which now claims to provide some 27 percent of global retro capacity, posted what it described as a strong performance in the first half of 2015 thanks to no significant losses. It anticipates that its overall return to shareholders this year will exceed that of last year.

It noted that while reducing rates in the traditional reinsurance sector present it with a challenge, it has also used this dynamic to de-risk its portfolio with higher average attachment points and protections secured.

As a result, the likelihood of a catastrophic event leading to a claim against the company is approximately 20 percent below that of 2014, significantly reducing the impact of major loss events on the 2015 portfolio, it said.

The company reported a net asset value (NAV) return of 4.47 percent for the first six months of 2015, whilst its share price total return was 4.86 percent. Looking ahead, the firm predicts its annual performance will beat last year's result, when the manager achieved a net return for shareholders of 14.08 percent.

Nigel Barton, chairman of the CATCo Reinsurance Opportunities Fund, said that competitive pressures in the reinsurance market have been the inevitable result of excess capital and an extremely benign catastrophe year in 2014, continuing so far into 2015. But he said the strength of the CATCo brand, market share and strong relationships shield the portfolio from the worst of these forces.

“Despite the pricing pressure, it has been apparent from activity so far in 2015 that insurance-linked securities (ILS) and ILS funds remain highly attractive to pension funds and other institutional investors. ILS pricing - while soft at present - is becoming more stable. The low interest rate environment, growing alternative investment allocations and non-correlating nature of catastrophe risk has created long-term appetite for this asset class,” Barton said.

He added: “Downward rating pressure is being felt more significantly in the traditional reinsurance sector, where the first half of 2015 has seen a high level of M&A activity. It is clear that traditional reinsurers are looking at their existing business models and cost of capital as they adapt to new realities in this market.

“Many are withdrawing capacity from US property catastrophe and redeploying it into other classes of business. Meanwhile, an ILS taskforce was set up by the London Market Group to look at ways of attracting more of the business after UK Chancellor George Osborne identified an ILS solution as critical to London's future in his budget speech in March.

“We believe that traditional cycles and business models within catastrophe reinsurance are changing irreversibly. We expect investor interest to remain strong. Capital is now able to move with great ease into the sector post-event, and this process will ensure catastrophe capacity remains plentiful and cost-effective going forward.”