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Wildfires burn bigger hole in CatCo after year of disasters

23 January 2018

The wild fires that struck California at the end of last year knocked more than 16% off the net asset value of CatCo Reinsurance Opportunities in December.

The wild fires that struck California in the fourth quarter of 2017 knocked more than 16% off the net asset value (NAV) of CatCo Reinsurance Opportunities (CAT) in December, capping off its worst year ever.

The high-yielding Bermuda-based but London-listed investment company provides capital to help reinsurers cover the cost of catastrophe claims from front-line property and life insurers.
In good times it earns premiums that support shareholder returns and an annual dividend currently yielding over 8%.

Last year was the worst of times, however, with record global insured losses of $135 billion, according to Munich Re, after a series of hurricanes in the US, Caribbean, an earthquake in Mexico and bushfires in south and north California.

CatCo’s exposure to these saw its NAV plunge 27.6% in 2017 – its worst performance since in its 2010 launch – as it set money aside to meet future claims. Over one year its shares have fallen 36.6% and trade at 6.8% discount, reflecting the uncertainty over its prospects as investors wait for clarification on its actual losses.

Long-term returns remain reasonable, said Ewan Lovett-Turner, analyst at CatCo’s corporate broker Numis Securities. ‘The 2017 performance has significantly impacted CatCo’s long-term record, but it is worth noting that an investor in the major fundraising in May 2011 would still have generated positive returns of 45%, or 6% per annum,’ he said.

For holders of its new C-shares – of which it issued $546 million worth last month – the prospects are brighter. This separate pool of money is not liable to claims from 2017 and could benefit from an increase in insurance rates resulting from last year’s spate of natural catastrophes.

For example, the fund’s manager Markel CATCo is forecasting a portfolio return of 23% in 2018 if there are no insurance losses, up from 16% last year.

At yesterday’s close of $1.01 the C-shares stood at a 3.6% premium over their NAV per share of $0.98 at 31 December.

Lovett-Turner said they looked attractive but said ‘the final outcome will clearly be dependent on the level of catastrophe activity in 2018’.

Investment company news brought to you by Citywire Financial Publishers Limited.

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