I have to say that when I first saw the news reports about the amount of rain in Houston – as a result of hurricane/tropical storm Harvey – I thought there was “shurely shome” mistake as Private Eye might say. 50 inches of rain in just a few hours. I struggle to even comprehend these amounts. And it sounds like it might be about to get much worse with the tail end of the storm delivering even more rain. We’ve already seen a knock on impact on oil prices with investors worrying about all that refining capacity being hit.
A note from analysts at Goldman Sachs on Sunday evening gives us some context to the energy markets – as of Sunday evening of Sunday” nearly 3 mb/d of refinery capacity was offline (16.5% of the 18.2 mb/d US capacity) vs. c.1 mb/d of crude production (11% of 9.3 mb/d current production) and 2 Bcf/d of gas production (3% of 72 Bcf/d current production). Should these levels of outages remain in place, and using past hurricanes as proxies for the impact on oil demand, we roughly estimate that the impact of Harvey on the US oil market would be to increase domestic crude availability by 1.4 mb/d while removing 615-785 kb/d of gasoline and 700 kb/d of distillate supplies. Larger refinery outages would increase these long crude and short product impacts”
Investors have also been running for the exit with shares in Catco, a big catastrophe reinsurance fund listed on the London Stock Exchange, with the ticker CATC.L. The last time I looked today, its share price has slipped from around $1.35 to the current $1.25. I have to say that I quite like Catco. It’s a very specialist fund which writes
I have to say that I quite like Catco. It’s a very specialist fund which writes collateralised retrocessional reinsurance contracts to provide reinsurers with protection against low frequency/high severity insured loss events such as hurricanes and earthquakes. It’s not over sold itself to uninformed investors and has stuck to its knitting, providing uncorrelated returns for investors in a market that has shown signs of getting a bit ‘frothy’ in recent years (too much dumb capital chasing too few opportunities). On a share price basis the fund has provided a 5 year return of 58.8%, with positive gains of 15% over the last year. Also for much of the year its shares have been trading at well above NAV, with premiums of 5% or more not uncommon.
The current sharp drop in the share price implies that prior to Harvey, it’s trading at a 5% discount. But of course, it’s obvious to all and sundry that this freak Gulf Wind event (as they’re technically called) will have a big impact on net asset values. My hunch is that could have an even bigger impact than Hurricane Katrina. Not because of human misery and suffering – it would take a lot to beat New Orleans after that hurricane – but because of the damage to commercial businesses. Without sounding too cynical, Houston (as well as places such as Galveston) are hugely successful, booming cities with a lot of ordinary commercial outfits to damage. Katrina cost over $45 billion and my complete guess would be that we could see losses hit $50 billion once the clean up is finished.
At this stage its impossible to know what impact this will have on CatcCo’s balance sheet. A note this morning from Numis suggests that the fund reckons that the worst case estimate is a 10% hit to NAV. But the fund isn’t fully invested and it is running a 0.15% per month attritional loss reserve which will presumably be called into play. Trying to second guess these numbers is of course largely pointless at this stage but I have one other measure we can use. Over the last seven or so years we can count five other big scares when it comes to Catco’s share price. If we look at the average peak to trough move we can see a loss of 10%. Taking the peak price of $1.35 a share – and adding on a per cent or so for good measure – we end up with a share price of around $1.20.
My fag packet estimate suggests that we could see further price falls for CatCo, possibly to as low as $1.15. But at that point I would be a buyer of Catco shares. Presumably this disaster could result in an increase in premiums which will help the trading position of the fund. The fund’s relatively steady returns over the last few years will also kick in – once we strip out these short term scares around catastrophes – we see a fairly steady 8 to 10% net return