Regular readers will know that I’ve been keeping a close eye on events at Catco and how this very specialised London listed fund has been impacted by the string of ‘Wind events’ i.e terrible hurricanes and tropical storms. I’ve mentioned the likely scale of bottom line hits on both this blog and in my FT column, indicating that I think the losses might be much bigger than we think.
Equally, though I also think that something very important is afoot. There’s a slow realisation that the probability of high impact events MIGHT be increasing and that the intensity of these events (in terms of damages) MIGHT also be increasing. My hunch is that climate change has some influence but it’s equally possible that we could see some other base systemic driver such as El Nino at work. Who knows! But the point is that perceptions are changing even if our causal frameworks still have massive blank spaces. Insurers are successfully getting the message out there that when this stuff happens the costs are escalating – and this justifies a hike in premiums moving forward. That could be good news for the reinsurance industry although it remains to be seen whether the incidence of huge claims does steadily increase – in which case any increase in premiums will be washed out by these storms.
So, for investors, the tricky issue is that if you buy Catco’s shares now, you are still on the hook for any claims from existing events – which might be a hefty tab. The fund has released some numbers today which shows that although the current portfolio NAV is $1.25 (with a 6% initial loss from Hurricane Harvey) the year end range for NAV could be anything between $1.04 and $1.29. My money would be on a number closer to the bottom range which makes the recent decline in the share price to $1.11 about right – although I still think we might see another cent or so off that price. According to the funds’ statement, the managers accept that there’s still a possibility of more bad news to come, observing that there is “significant uncertainty regarding the market impact of the recent events”.
The issue will be this uncertainty – and the inevitable side pockets where bills will come due in 2018.
Wouldn’t it be much better if investors could simply buy into the probability of rising premiums IN THE FUTURE, leaving behind these legacy claims? As if on cue the fund has announced today that the manager (Markel CATCo IM) is considering a potential fundraising. According to analysts at Numis this will be done via the Markel CATCo Diversified Fund, the Master Fund through which CATCo Reinsurance Opportunities (CATCo), the London listed fund, invests substantially all of its assets. “ As a result, a prospectus will be published in early November with a view to closing the fundraise by the end of November. The issue will be via a placing of new C shares.” Crucially these new C shares would have no exposure to these historic events, and would not have capital tied up in side-pockets (which results in a cash drag on future returns).
I think these new C shares sound a great idea and I’d certainly be interested myself. Just as a quick reminder overall the fund targets a US$ net return of Libor plus 9%-12% (Libor plus 12%-15% pa gross) over the medium term through exposure to a portfolio of collateralised retrocessional reinsurance contracts written to provide reinsurers with protection against low frequency/high severity insured loss events such as hurricanes and earthquakes.