TIDMCAT
RNS Number : 7358X
CATCo Reinsurance Opps Fund Ltd
15 January 2014
CATCo Reinsurance Opportunities Fund Ltd. ("the Company")
Portfolio Update
To: SFM, London Stock Exchange Date: 15 January 2014
and Bermuda Stock Exchange
Highlights
-- FY13 net asset value ("NAV") growth of 21.90%
-- FY13 share price total return of 24.34%
-- FY13 share price growth of 19.04%
-- Premium to NAV of 0.64% at 31 December 2013
-- New Zealand and Japanese 2011 earthquake side pocket
investments have been finalized and cease to exist
-- Declared contingent distribution of $0.02887 per share
resulting from the Japanese earthquake side pocket investment
commutation will be paid to affected Ordinary Shareholders on 24
January 2014
-- FY13 annual dividend declared of $0.05737 per share
-- All remaining side pockets performing as anticipated
-- Proposed Return of Value to Shareholders equivalent to
approximately US$74 million in aggregate from profits generated
since launch
-- Market disruption and over supply of investment capital in
the retrocessional reinsurance market have resulted in a
challenging renewal season
-- The Managers have maintained a disciplined 2014 deployment
which has yielded a de-risked portfolio while still achieving in
excess of the Company's stated targeted investment return of LIBOR
plus 12-15% per annum
-- FY14 portfolio provides for an indicative net return of approximately 18%
FY13 Performance
Positive capital gains over the year to 31 December 2013 ("the
period") resulted from a well-diversified and balanced investment
portfolio of global risks, not skewed to the peak zones around the
world where premium is significantly concentrated.
Whilst there were significant catastrophic events that occurred
during 2013, very few were at levels where the Managers investment
portfolio was written. The net asset value appreciation for the
period was 21.90%, ahead of the Eurekahedge Insurance Linked
Securities Advisors Index of 7.51%*. The Company has continued to
pay an annual dividend representing LIBOR plus 5% of the net asset
value of the Company at 31 December each year.
This was approved by Shareholders during the General Meeting in
February and was paid to Shareholders in March. The share price
return of 19.04% reflected an expansion of the premium to net asset
value and with the inclusion of the dividend paid resulted in a
Share price total return of 24.34%.
On 14 January 2014 the Board of Directors declared the FY13
annual dividend of $0.05737 per share.
2013 Expected Returns versus Actual Returns
On 9 January 2013, the Company announced that the 2013
investment portfolio had indicative annualized net returns of 27%
based on the portfolio at that time. However, historic side pocket
investments that could not be deployed into the new contracts
resulted in a cash drag of approximately 3.4%.
During the year, the 2013 portfolio experienced minor exposure
to multiple US / Canada tornados for which a retrocessional
reinsurance loss reserve equal to 100% of this exposure had been
implemented at 31 December 2013. This loss reserve amounts to
approximately 1% of the Company's 2013 expected net return.
Finally, the Managers acquired significant global retrocessional
protections for the period 1 November to 31 December in order to
hedge the portfolio until the end of the year at a cost of
approximately 1% of net assets. Collectively, the cash drag, the
2013 retrocessional loss exposure and the cost of hedging, resulted
in the final FY13 net returns of 21.90%.
Side Pocket Investments ("SPIs")
Since the Company's launch, SPIs have been initiated for
catastrophic loss events such as the New Zealand Earthquake in
2011; the Japanese Earthquake in 2011; the Costa Concordia marine
disaster in 2012; and Super-storm Sandy also in 2012. Until Q413,
no other loss events had any impact of the Company's portfolio of
investments.
During the year, SPIs in respect of the New Zealand and Japanese
earthquakes were fully settled. There remains no further liability
associated with either the New Zealand or Japan earthquake events
on the Company's portfolio.
With respect to the Japanese earthquake, the Managers negotiated
a full and final commutation of the liability to this event. The
Board of the Company previously declared a contingent distribution
to Ordinary Shareholders of any proceeds it received in connection
with that part of its investment in CATCo Diversified Fund (the
"Master Fund"), a segregated account of CATCo Reinsurance Fund Ltd.
(the "Master Fund SAC"), which was exposed to potential losses
arising from the Master Fund's investment in reinsurance contracts
linked to the Japan earthquake that occurred on 11 March 2011.
The Distribution would be made to Ordinary Shareholders on its
register of members on 10 August 2012. As a result of the
commutation, the Directors have declared a contingent distribution
to Ordinary Shareholders of $0.02887 per share. This will be paid
to those shareholders on the register at 10 August on 24 January
2014 and represents approximately 3% capital return for the year to
31 December 2011.
The Managers have waived their right to claim any performance
fee due on the Distribution amount.
There remains no change in the Manager's expectation of the
potential loss associated with the Costa Concordia marine disaster.
The Company's current retrocessional reinsurance loss reserve
represents 100% of Costa Concordia maximum exposure. The Investment
Managers expect that the 100% of the Costa Concordia exposure will
be paid out to affected reinsurance counterparties during 2014.
There remains little change in the exposure to Super-storm Sandy
and no adjustment has been made to the retrocessional reinsurance
loss reserve previously established. At 31 December 2013, total
claim payments made to reinsured counterparties amounted to
approximately 41% of the original retrocessional reinsurance loss
reserve. This SPI amounted to 3.4% of the net asset value at 31
December 2013 relative to 7.5% at the same time the previous year
end.
All other 2013 investment exposures have been released by the
Company's reinsurance counterparties with the exception of mid-year
annual reinsurance transactions.
Proposed Return of Value to Shareholders
With no significant insured losses incurred on the 2013
investment portfolio the Company concluded a successful year with
the net asset value benefitting from approximately 20 cents per
Ordinary Share of net insurance premiums earned over the full
year.
The Directors remain mindful of the need to maintain a
disciplined investment approach with regards to risk while
remaining focused on the Company's investment objective which is to
target an internal rate of return in excess of LIBOR plus 12% to
15% per annum. To that end, the Directors believe that there is an
optimum level of capital required to achieve these aims beyond
which they may start to become impaired.
Consequently, the Company announced on 3 January 2014 that the
Directors propose to return up to approximately US$74 million in
aggregate, or US$0.20 per Existing Ordinary Share equating to
approximately 18% of the Company's market capitalization, by way of
the proposed Return of Value (Capital or Income Distribution), or
if the Return of Value is not approved by Shareholders simply by
way of a dividend.
The Return of Value is separate and in addition to the target
annual distribution of an amount equal to LIBOR plus 5% of the Net
Asset Value at the end of each Fiscal Year.
2014 Investment Portfolio Deployment
The convergence of traditional reinsurance and capital markets
capacity continues. However, increased demand in the sector from
capital markets has largely led to an overcapitalized market
resulting in pricing pressure. Catastrophe bonds together with
Industry Loss Warranties sold individually for a specific coverage
have seen pricing pressure decreases of 25% to 40% year on year, in
some cases.
The influence of capital markets capacity is set to expand over
the coming period in the reinsurance sector. Whilst this
development was expected to provide carriers with additional
flexibility to offload and diversify risk and establish capital
market solutions as a sustainable complement to traditional
reinsurance, it has really brought new capital market capacity in
direct competition with the traditional reinsurance market, and
existing funds alike, whom sell these traditional products.
In addition, given the lack of catastrophic events during 2013
that affected the traditional reinsurance sector, some
counterparties have reduced their retrocessional purchases for 2014
as capital surpluses are high as a result of the benign 2013
year.
Despite this more competitive market landscape, the Managers
continued to maintain their investment discipline and only
considered transactions that met or exceeded the Company's stated
targeted investment return of LIBOR plus 12-15% per annum while
adhering to the Company's investment guidelines.
At the date of this announcement, the Investment Manager, on
behalf of CATCo-Re Ltd., have agreed terms on new 2014 reinsurance
transactions with multiple reinsurance counterparties that have
utilized approximately 85% of the available capital received.
The Company and Master Fund's reinsurance portfolio contains a
significantly diverse set of global risk pillars. Indicative
annualized net returns for 2014, including retrocessional
protections, provide for maximum, no-loss, return of 18%. The
Master Fund's diversified portfolio, including reinsurance
protections, ensures that exposure to a single loss event, no
matter the magnitude of the event, results in net portfolio returns
for investors in the current financial year of not worse than
negative 4% as detailed in the table below.
Worst Case Single Insured Event Scenario Analysis
No Losses 18%
1 New Zealand Wind 18%
2 Canada Wind 18%
3 Israel Quake 17%
4 Central America Wind 17%
5 Aviation/ Satellite 17%
6 Guam Wind 17%
7 Guam Quake 17%
8 India Quake 16%
9 US Wildfire 16%
10 Offshore Elemental Marine 15%
11 All Other 14%
12 South Africa Quake 14%
13 South Korea Wind 13%
14 US/Canada Winter Storm 13%
15 Terrorism 12%
16 Philippines Wind 12%
17 Taiwan Wind 12%
18 Hong Kong Wind 11%
19 China Wind/Flood 11%
20 Mexico Wind 9%
21 China Quake 9%
22 Philippines Quake 8%
23 US Severe Convective Storms 8%
24 Indonesia Quake 8%
25 Taiwan Quake 8%
26 Offshore Non Elemental Energy 8%
27 Offshore Non Elemental Marine 4%
28 Mexico Quake 3%
29 Caribbean Wind 2%
30 US/Canada Quake 0%
31 Europe Flood 0%
32 Japan Quake -1%
33 Central America Quake -2%
34 Caribbean Quake -2%
35 South America Quake -2%
36 Europe Quake -2%
37 Australia Quake -3%
38 US Wind -3%
39 Europe Wind -4%
40 Japan Wind -4%
41 Australia Wind -4%
42 New Zealand Quake -4%
Comparison of 2014 versus 2013 Investment Portfolio
As shown above, the 2014 investment portfolio provides for
indicative net returns of 18%. This compares to 27% for the 2013
investment portfolio.
For 2014 reinsurance contracts written at a similar risk level
as the 2013 reinsurance contracts, the indicative net returns are
25%. As a result, premium rates reduced by approximately 7.5% for
comparable risk levels, reflecting current market pricing
conditions. However, about one-third of the 2014 capital was
deployed into reinsurance contracts with approximately 40% lower
average expected loss rates (i.e approximately 40% lower risk
level) and, subsequently, significantly lower pricing levels than
the 2013 reinsurance contracts. This reduced the overall maximum
2014 portfolio indicative net returns to 21%. In addition, very
efficient retrocessional protections were available for 2014 and
approximately 3% of the available capital was utilized on these
protections, resulting in final indicative net returns on the 2014
investment portfolio of 18%.
Overall, the 2014 investment portfolio has an aggregate risk
level that is 20% lower than the 2013 portfolio. The difference in
the 2014 and 2013 maximum investment portfolio returns can be
summarised as follows:
(a) 2013 indicative net returns = 27%;
(b) Impact of 2014 average premium rate reduction = 2%;
(c) Impact of 2014 lower risk contracts = 4%;
(d) Cost of 2014 retrocessional protections = 3%;
(e) 2014 indicative net returns = (a) - (b) - (c) - (d) =
18%.
Commentary from the Chairman
The Chairman of the Company commented that, "the Manager's
investment performance for 2013 has been excellent. Perhaps more
impressive was the fact that the Company has been able to generate
such positive results for all investors over the past three years,
despite the first two years having been the costliest ever recorded
for the insurance industry. Furthermore, faced with a well
documented, difficult 2014 renewal environment, the Managers have
been able to deploy their capacity with indicative 2014 net returns
in excess of the Company's stated objectives and with a lower risk
profile."
* Eurekahedge Insurance Linked Securities Advisors Index is not
the Company's stated investment benchmark.
This information is based on research undertaken by CATCo. CATCo
Investment Management Limited may change its opinions and views
without prior notice. It does not constitute investment advice nor
is it an invitation to invest in this company. This is purely a
scenario analysis and not a forecast.
For further information, please contact:
Judith Wynne,
Company Secretary and General Counsel
CATCo Investment Management Limited
Telephone: +44 7986 205364
Email: judith.wynne@catcoim.com
Mark Way
Corporate Communications Director
CATCo Investment Management Limited
Telephone: +44 7786 116991
Email: mark.way@catcoim.com
David Benda / Hugh Jonathan
Numis Securities Limited
Telephone: +44 (0) 20 7260 1000
John Whiley
Prime Management Ltd
Tel: +1 (441) 295 0329
This information is provided by RNS
The company news service from the London Stock Exchange
END
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