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Catastrophe fund faces wipe-out from regulatory inquiry

Catastrophe fund faces wipe-out from regulatory inquiry

Analysts have questioned the viability of CatCo Reinsurance Opportunities after its US fund manager revealed it was under regulatory investigation and the company announced a further spike in losses from hurricanes and Californian wildfires.

Ordinary shares in CatCo – one of the more unusual ‘alternative’ investment companies on the London Stock Exchange – plunged 44% or 14 cents to 18 cents after New York-based Markel Corporation said it had been contacted by the US and Bermudan governments on 30 November over loss reserves made in late 2017 and early 2018 by Markel CatCo Investment Management and its subsidiaries.

Markel CatCo is CatCo’s investment manager and its subsidiaries include Markel CatCo Reinsurance Fund Ltd, the master fund through which the company invests, and Markel CatCo Re Ltd, the reinsurer through which its Bermuda-based master fund invests, CatCo’s board stated.

Markel Corporation, in an announcement last night after the US stock market closed, said it was fully co-operating with the enquiries and had hired legal counsel to conduct an internal review. Its shares (MKL.N) fell 6% in pre-trading in New York.

‘The board understands that these enquiries are at a preliminary stage and continues to support Markel CatCo as the company's investment manager,’ added CatCo in London.

News of the investigation into loss reserves, combined with the latest in a series of hikes in provisions to Hurricanes Harvey, Irma, Maria and the California wildfires, is a double blow to ordinary shareholders, who had already seen their stakes lose nearly two thirds of their value this year.

The company’s C-shares – which raised £400 million in November last year to invest in a separate portfolio of reinsurance contracts – tumbled 13% to 50 cents today, having declined 40% this year.

Any dispute over the level of reserves made by Markel at the end of 2017 raises the possibility that shareholders who subscribed for the C-shares may have been given misleading or inaccurate information.

CatCo has been well backed in the past by fund managers who believed it offered a useful diversification from conventional shares and bonds.

According to Thomson Reuters data, its seven biggest shareholders are: Quilter Investors (18.3%), Aberdeen Standard (10.3%), CCLA Investment Management (7.8%), Cazenove Capital Management (7.6%), Baillie Gifford (7.4%) and Schroder Investment Management (6.9%).

CatCo’s latest increase in loss reserves comes as insurers grapple with escalating losses from the hurricanes and fires, up 12% since an industry estimate in April. It will knock 27.7% off CatCo’s net asset value (NAV) per share for 30 November when it is updated this month. This is on top of a 28.8% and 21.7% markdown the ordinary and C-shares’ NAVs this year.

Nor is that the end with Markel CatCo expecting to announce another hit to NAV as it assesses the impact of this year’s Californian fires, in particular the Camp Fire in the Sierra foothills which last month killed 85 people and destroyed thousands of homes.

‘An update will be made to shareholders as soon as the potential impact to the private insurance marketplace is known,’ the company said.

Both share classes have fallen more than their NAV as investors have sold the stock in alarm at the deteriorating outlook expressed by CatCo Markel’s manager Tony Belisle. This is reflected in their wide discounts, which at yesterday’s close saw the ordinaries stand 50% below broker Numis Securities’ estimated NAV per share of 65 cents, and the C-shares which traded 33% lower than their estimated NAV of 86 cents per share.

Today’s reduction in NAV reduces the discounts on both share classes by bringing the valuations of their two portfolios closer to the battered share prices. Liberum analyst Conor Finn estimated the discounts would be around 31% and 34.5% respectively for the ordinaries and C-shares but cautioned there was little prospect of them re-rating given the uncertainty.

Finn added: ‘The regulatory inquiry into loss reserves is a worrying development for the company. The announcement from Markel CATCo contains little detail but question marks over the company's loss reserves policy will lead to further negative sentiment.’

He believed the board would come under pressure to launch tender offers to allow shareholders to sell 30% of their shares. Under the company’s policy, a continuation vote would be held if more than half of the shares were tendered, raising a real prospect of the fund being put into liquidation.

Jefferies analyst Matthew Hose discouraged investors from buying the shares in the hope of making gains should the company be wound up.

‘Although (now much reduced) discounts to NAV can effectively provide a buffer for further loss deterioration, if any concerns over reserving are found to be legitimate, we don't see much of a future of the fund. In this case, capturing the discount upon any wind-up could also prove futile,’ Hose said.

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