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CatCo investors pray for early exit as provisions bite again

8 February 2019

Bad news keeps on coming for ordinary shareholders in CatCo Reinsurance Opportunities, one of last year's worst performers, with another 12.5% lopped off net asset value and 76% of capital locked for up to three years.

The bad news keeps on coming at CatCo Reinsurance Opportunities (CAT) with another 12.5% lopped off the net asset value (NAV) of its ordinary shares and the revelation that over three quarters of their remaining capital is locked up in ‘side pockets’ in case losses from insurance claims rise.

Analysts reckon a decision to wind-down the investment company is almost inevitable after successive body blows to the portfolio from hurricane and earthquake damage from the past two years, a regulatory probe into its reserves announced in December and the sacking of its fund managers last month for an undisclosed personal relationship.

CatCo is assessing whether there are any investors who want to continue with the fund after its disastrous performance last year. It was one of the worst performing investment companies in 2018 with its ordinaries plunging 71% and its ‘C’, or conversion shares (CATC), only issued at the end of 2017, tumbling 55%.

If a sufficient number of investors wished to continue, a redemption share class could be offered to those looking to exit. However, the extent of claims and the length of time it takes to resolve their impact on the fund is an unattractive prospect. This is underlined by the 12.5% reduction in the ordinary share class NAV in December caused by the need to increase provisions against 2017 claims that are still rising.

This means their NAV of 34.79 cents per share at the end of December was down 61% from January, although a dividend of 2.65 cents to be paid this month offers a crumb of comfort.

Confusingly, the C-shares saw their NAV raised 1.8% in December to 62.99 cents per share, reducing their loss for 2018 to 36%. This modest hike is because the C-shares have no exposure to 2017 and because the new fund managers at CatCo Markel believe the loss reserves for last year are currently ‘deemed sufficient based on latest industry loss information’.

However, the C-shares are not a lot better off as 47% of their £250 million of capital is also locked in the ‘side pockets’ to meet future potential claims to disasters from 2018, such as the devastating California wildfires.

It may take up to three years for investors to get back this money, although the silver lining in the very dark clouds is that the timetable for this may start sooner than thought. The board had indicated it would offer shareholders an exit opportunity in the middle of this year.

However, Matthew Hose of Jefferies said the fund managers had this week told analysts they were offering investors in their US insurance funds ‘a special redemption right’ to use by the end of March.

According to a transcript of the call, the Markel fund managers said the board of CatCo ‘needs to take its own decisions in terms of what they want to do’, which Hose believed could point to an ‘earlier-than-expected redemption opportunity’.

With the CatCo ordinaries and C-shares trading at huge discounts of 48% and 41% to their battered NAV, this can’t come soon enough for the wealth managers and fund managers, like Aberdeen Standard, who bought the stock in a vain hope for uncorrelated returns to fragile stock markets.

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