As readers will know I keep a watchful eye on the catastrophe bonds space and in particular Catco, a UK listed fund that focuses on this very niche space.
Hurricane Irma seems to have inflicted most of its damage and almost immediately we saw the funds share price tick up from a recent low of $1.10 to $1.13. My own feeling is that this timid rebound might be a little premature, largely because the painful numbers will now start rolling in for massive damage to Florida and beyond. I’d stick with my guestimate that the fund’s share price will drop below $1.10 and possibly even $1.00.
But maybe I’m being a little too conservative. A note from Numis earlier this week paints a slightly more optimistic picture. I’ve pasted it in below in full.
“ It is too early to assess the full impact of Irma from an insurance perspective, but a shift in the path of the hurricane away from Miami and up the west of Florida means that many of the industry’s worst fears have not been realised. In recent days, there have been widespread forecasts that this would lead to “1 in 100 year losses”, equivalent to insurance losses of $150bn or more. However, commentators are now suggesting that insured losses could be in the region of $50-75bn. By comparison, Katrina cost the insurance industry $45bn.
Of course, this comes shortly after Hurricane Harvey which led to widespread flooding in the Houston area. Residential flood losses are largely covered by the government’s National Flood Insurance Program (NFIP). However, insured losses are still anticipated to be in the region of $20-40bn.
Potential Impact on CATCo: It is likely to be several weeks before Markel CATCo is able to be able to state an expected loss level based on preliminary loss estimates for either event. Harvey is classified under the risk pillar of Gulf Wind, whilst Irma comes under Florida Wind. It is possible that there could be claims on other pillars, but we understand that a client cannot make claims on more than one pillar for a single event.
We understand that CATCo’s key exposures start at losses of c.$10bn on an industry level for both Gulf and Florida Wind. As a result, we expect it to face some losses from both events. The net return on invested capital assuming no losses was c.16% in 2017, implying a maximum provision for a single event of 26% (calculated on net assets at the start of the year). CATCo had 7.5% held in side-pockets at 30 June 2017 (relating to unsettled events in previous years), implying that its portfolio is 92.5% invested in current year contracts. Allowing for this would reduce the maximum provision for a single event to 24% (calculated on net assets at the start of the year). However, it needs to be recognised that while CATCo’s exposure starts at industry losses of c.$10bn, the worst case scenario would only be triggered with industry losses significantly larger than in previous catastrophes such as Katrina.
It is hard to be precise, but we estimate that CATCo could face losses of 5-10% for Harvey and perhaps 10-15% for Irma. It needs to be recognised that CATCos’ contracts are individually negotiated and most are based on the actual losses suffered by the client (insurer/reinsurer), rather than an estimate of overall industry losses. CATCo’s NAV growth in the first seven months of 2017 was 4.79%, although we estimate that the current NAV (excluding Harvey and Irma) is c.$1.33 per share, up 8.0% YtD reflecting NAV accrual during August/September. Combined estimated losses of 15-25% for Harvey/Irma (from the no loss expected return of +16%) would result in an NAV range of c.$1.00 to $1.15, although further NAV gains would accrue over the remainder of 2017 assuming no losses (the largest monthly accruals occur from August-October, reflecting the seasonality of US hurricanes). CATCo’s current share price was down 18.5% from $1.35 prior to Harvey to $1.10 at Friday’s close, although it has rallied a little this morning to $1.12.
While the level of loss is hard to estimate, it seems highly likely that CATCo will have substantial side-pockets at the end of 2017 as it will take some time for all of the claims to be settled. On the other hand, the size of these events suggests that there should be some strengthening of retro-reinsurance rates in 2018.”
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