|Buying opportunity for CATCo Reinsurance Opportunities
You don’t get much more alternative than catastrophe insurance, which is what the C shares in CATCo Reinsurance Opportunities (CATC) offer exposure to. The idea is that catastrophes are rare events and – if you get your underwriting right –can make good money taking in premiums in between shelling out for claims.
This London-listed feeder for a Bermuda-based fund has been prominent in our first table for a few weeks. A note today from Numis Securities, the company’s broker, offers an explanation for why its shares have been out of favour, with their price falling to a 6.4% discount below net asset value (NAV) after the fund’s NAV took a 2.1% hit in December.
The current discount compares to the average 0.4% premium above NAV that the stock has stood at in the past year, giving it a Z-score of -2.9.
Just to recap, a Z-score is a measure used by analysts to determine whether an investment trust is trading significantly beyond its one-year range. Roughly speaking, a Z-score of -2 or below is ‘cheap’ while a score of 2 or more is ‘expensiveR17;.
According to Numis, December is often a busy month for claims as companies wait for the year end to file their losses. Moreover, 2016 was beset with a large number of catastrophes such as the wildfires that plagued Canada in the summer, hurricane Matthew that hit South Carolina in October and the earthquake that struck New Zealand the following month.
The fall in December means the NAV of the dollar-denominated C shares rose 7.3% last year, below its target return of Libor (the inter-bank lending rate currently at 1%) plus 9-12%. Numis says the portfolio has hit its target since its 2010 launch with a 9.7% annual return and reckons the shares are suitable for investors seeking returns unconnected to equity and bonds markets.|
The Investment Manager recorded a loss reserve of c.1% of NAV in relation to Hurricane Matthew that impacted parts of the Caribbean before making landfall in South Carolina, U.S. on 8 October 2016.
A loss reserve of c.1% of NAV was also recorded in relation to the magnitude 7.8 earthquake that struck the South Island of New Zealand on 14 November 2016.
In addition, the Investment Manager increased its specific loss reserve for the Canadian Wildfires to a total of c.3% of NAV (c.1% was included in the June NAV). However, approximately 1% of the annual attritional loss reserve (c.2% per annum) was un-utilised, therefore this was reversed into the December NAV and partly offsets the afformentioned loss reserve increase.
Performance down compared with past two years. Not bad considering the range of events.
I'd guess a lower dividend, too. Maybe 5c?|
|Still early days!|
|Jonwig, I sold out when I heard about the hurricanes. Looks like I was too cautious. Good luck to you.|
|Hurricane Matthew, which devastated parts of the Caribbean before battering the U.S. East Coast, may cost insurers as much as $8.8 billion, according to AIR Worldwide.
The catastrophe-modeling firm estimates insured losses range from $2.2 billion to $6.8 billion for the U.S. and from $600 million to $2 billion for the Caribbean.
At $8.8 billion of insured losses, Matthew wouldn’t make it to the top 10 list of the costliest claims for insurers and the re-insurers who help them shoulder risks.
May help explain why there has been no cautionary statement from CAT.|
|First category 1 hurricane to hit Florida in 11 years:
Probably a couple of weeks before company can make a loss estimate statement. However:
Despite increase in insurance losses globally ...
As the Company enters the latter six months of 2016, the Investment Manager continues to target a 2016 net return in excess of LIBOR plus 9 to 12 per cent per annum.
The unused portion of the 0.15% of NAV monthly provision (~2% pa) will be reversed in the end-Dec NAV numbers.|
|June NAV advanced despite loss from Canada fires of about 1% plus ongoing provisions of about 0.15% pm.|
|No, I'm thinking of a Katrina-level event which could take 20% from returns. We haven't had a bad US wind season for years!|
|Interesting. Would you have categorised the recent UK floods as a big cat event? Might be a risk of over-reacting by selling out to any and all such events, but better safe than sorry I guess.
I know Markel well (as an adviser, not an employee): they are an excellent company.|
|Hi, Stonesfan - yes, me too. I also subscribed for the C shares.
If there's a big cat event, it might be possible to sell before the market reacts (a lot of pension funds, etc. may be slow?) then buy back. I managed this once. On the other hand, a cat event will enable retro prices to harden and increase future returns. All good stuff!
Incidentally, a close relative works for Markel (not this sector) and they are one of the most cautious of insurers - combined ratio in the 80s, I believe.|
|Thanks for sharing, Jonwig. Catco is prudently run with the interests of shareholders in mind and I am a happy long term holder.|
|A month old:
Shareholders in the retrocessional reinsurance linked investment focused CATCo Reinsurance Opportunities Fund Ltd. benefited from an 18.1% total-return over the course of 2015, as dividends boosted the 11.58% net return.
The 11.58% net return that insurance and reinsurance linked investment manager CATCo returned to shareholders could have been as high as 14%, equaling the 2014 figure, were it not for the UK floods at the end of the year.
The provision of dividends and capital return throughout the year make the share price total-return of the fund much higher, which helps to make this type of ILS investment a buy and hold style investment for many shareholders.
More up-to-date, explaining why NAV above xd effect in Feb:
Reinsurance and retrocession linked investment and fund manager Markel CATCo Investment Management Ltd. has released a portion of side pocket investments set up in December 2015 for potential exposure to the UK floods and U.S. severe convective storms.
In an announcement related to the retrocessional reinsurance investment focused listed CATCo Reinsurance Opportunities Fund Ltd. the investment manager said that the amount of collateral it needs to hold against potential losses from these events had shrunk.
|Portfolio update partially explains fall in NAV during December:
The late December UK flooding and US tornado events also necessitated the need for a conservative reserving approach at year-end, which adversely impacted the NAV by 175 bps. However, the expectation is that a significant proportion of this reserve will be released during 2016
Dividend announcement on 29th.|
|Reinsurers hit by falling renewal prices:
|88,435,018 new C shares issued in placing and offer. These will be converted on a basis of relative NAV early next year.
"The fund raise has exceeded expectations and the Board welcomes the strong support shown from existing and particularly new shareholders.
"During its first five years of operations the Company has on average out performed its targeted net returns of Libor +9-12%. With returns on a no loss basis for 2016 expected to be similar to the current year, with a similarly de-risked portfolio, prospects for the Company continue to look strong."|
• "... target a 2015 gross return in excess of LIBOR plus 12 percent to 15 percent per annum, assuming there are no signiﬁcant losses between now and year end. At this stage in the year, the annual performance is expected to be ahead of last year's result, where the Manager achieved a net return for Shareholders of 14.08 percent."
• "... proposing a Return of Value to Shareholders of approximately $35mn in aggregate, equating to roughly 10% of the Company's market capitalisation as at 1 January 2015." [That would be about 13c.]
• dividend lasat year was LIBOR + 5% of year-end NAV. No explicit forecast for current year, but policy suggests same formula.
Assuming no significant losses!!|
|From now, the NAV should be increasing by around 1c per month. This year, it's from a higher base than last, of course.
Anyway, the pattern seems to have started - danger time is approaching, though!|
|Sorry, yes, must be dozing again. BCGR about 5% discount.
The best buying opportunity might be after a large insured loss, such as Nov 2012 and Hurricane Sandy.|
|With the last NAV stated as 116c, surely the discount here is just 3%ish...
Personally decided to sell c3weeks ago as the $ looked toppy; but if that 10% discount materialises I would likely buy back in here.|
|Both CAT and BCGR are standing on discounts of almost 10% to NAV at present, which is a bit unusual in that NAV values accelerate over the summer ... usually.
Nepal earthquake not a factor, I think, as insured losses should be negligible.
(Sounds insensitive, but how can one communicate objective facts in such a situation? Ignore them?)|
|FT _ budget proposal as to turn London into a global cat bond etc centre.
Can't link as read on app.|
|Yes, also credited at Sippdeal.|
|Yes, TDD paid it yesterday.|