It just keeps getting worse! The shine has very definitely come off reinsurance vehicle Catco. The well-established ordinary shares were already bearing the brunt of massive losses from last year’s hurricane season. Last week brought truly terrible news for the recent C class shareholders – their turn has come for a thorough kicking.
Yesterday a manager webinar with Tony Belisle and Alissa Fredricks added some color (nearly all of it red) to the picture. Following the call Numis reckons that there will be a c.30% (32 cents) write-down to NAV, reducing their NAV estimate to 75 cents. The shares were down 23% on Friday to $0.445, putting them on 41% discount to Numis’ estimated NAV. For the ordinary shares Numis estimates 41 cents per share. The shares were down 40% on Friday, with the current price of 19.5 cents representing a discount of c.50% to our estimated NAV.
The big event, for the C shares at least, were those terrible California Wildfires. The table below breaks out some of the losses – Numis reckons that the Campfires alone will have a significant impact of as much as 16% of NAV. But it gets worse! The managers also announced that 2019 renewals will be hit by a reduction in capital available. Numis estimates as little as 20% of total capital will now be available to capture increased premiums.
|2018 Major Loss Events|
|TBD – to be determined. As at 31 October 2018. Source: Company data|
Two big and obvious questions now remain for me.
The first is whether the model is broken – is the forecasting model (and associated premium writing activity) built around flawed models? I think it is. Reinsurers I speak to offer reassurance but I think something is changing, and that something is global warming. In the webinar the manager apparently highlighted a report from Cliff Mass, a professor of Atmospheric Sciences at the University of Washington (http://cliffmass.blogspot.com/2018/11/was-global-warming-significant-factor.html) which indicates weather conditions were not unusual in California in the run-up to these fires and that he believes that global warming was not a significant factor in causing the Camp fire. My guess is that other academics might take a different view. Watch this space.
The manager also piled the blame on local utility firm PG&E, who will now be the subject of legal action by the fund. Good luck with that epic battle! In addition, from next year the managers will be removing CA Wildfire cover from policies or significantly increase pricing.
Given this woeful record on provisioning, its little surprise that there weren’t any further updates on the news that the US and Bermudan regulatory authorities were investigating the loss provisioning policy. Could someone please call the FCA and wake them up?
The other obvious big question for me is whether the fund deserves to survive. Massive losses have been booked just a short time after a major fundraising – which was premised on better risk control and increased premiums. This strategy has now quite literally gone up in smoke.
What are the next steps? First off there’s a continuation vote.
According to Numis if the three-year trailing performance is less than LIBOR plus 7.5% a vote is triggered. Check.
A vote is also triggered if there is greater than 50% take up for a discount triggered tender. My guess is that this will also be triggered.
Another protection is that if a share class trades at an average discount of wider than 5% in the three months to 31 August then a tender offer for up to 30% of the class is triggered. Check.
Analysts at Numis were, I think, quite generous when they concluded that a “likely option” may be offering a return of capital via a redemption share class which receives capital over time. Numis also observes that the “Board and manager will have to put up a strong case for an ongoing vehicle in order to reassure investors about maintaining exposure, even allowing for a rise in premiums for 2019 contracts.”
This is I think something of an epic understatement. Such massive losses – and now a lockout from the upside of increased premiums – so early on in the life of the C class shares is really quite extra ordinary.
My guess is that everyone and their Auntie will be heading for the door. Speaking as a (very small) C shareholder, I have to say that Catco and its board needs to be put out of its misery as fast as is humanly possible. Drop me a line if you also have a view on this debacle.