It's not an easy time to be investing in equities, which makes the prospects of high returns which are uninfluenced by the movement in major indices look particularly attractive. Catco Reinsurance, a Bermuda-based investment trust, launched last December, that invests through a master fund, hopes to provide its backers with such an opportunity and prospects look very enticing, so much so that it is looking to raise fresh funds.
- Uncorrelated returns to equity
- Likely to avoid major 2011 losses
- Target yield of Libor + 5 per cent
- Rising premiums rates
- High fees
- Premium rating
Catco makes its money by providing a backstop to the insurance industry. In exchange for a fee, or premium as it is called in industry speak, Catco promises insurers it will make up the difference if claims relating to a certain type of catastrophe exceed a given level in a year. The fund targets returns of Libor plus 12-15 per cent including a yield of Libor plus 5 per cent based on year-end net asset value (NAV).
This is an unconventional asset class, which in itself brings risks. The experienced team that runs the fund has sought to diversify its exposure to catastrophes, and therefore losses, by targeting 19 “risk pillars”, such as US Wind, Japan Quake and European Wind. The types of catastrophes it covers usually occur as unrelated events, so one is unlikely to trigger another, for example. In fact, 11 of the pillars bear no noticeable relationship with each other at all.
| Catco Reinsurance Opportunities Fund (CAT) | |||
|---|---|---|---|
| PRICE "Ord" | 111¢ | GEARING | 100 |
| AIC SECTOR | Specialist | NAV | 107¢ |
| FUND TYPE | Bermuda-based investment trust | PRICE PREMIUM TO NAV | 4.70% |
| SIZE OF FUND | $222m | YTD PRICE PERFORMANCE | 9.20% |
| No OF HOLDINGS: | 19* | 3-YEAR PRICE PERFORMANCE | na |
| SET UP DATE | 20 December 2011 | 5-YEAR PRICE PERFORMANCE | na |
| VOLATILITY | na | ANNUAL MANAGEMENT CHARGE | 1.5% |
| TRACKING ERROR | na | YIELD | 5.00% |
| SHARPE RATIO | na | MORE DETAILS | www.catcoim.com |
| TOP 10 EXPOSURES TO EVENTS (as at 31 Aug 2011) | % |
|---|---|
| 2nd Event Protection | 12 |
| US/Canada Quake | 13 |
| US/Caribbean Wind | 13 |
| Japan/Caribbean Quake | 9 |
| Marine Non-Elemental | 8 |
| Europe All Natural Perils | 6 |
| Florida 2nd Event Wind | 5 |
| Gulf of Mexico Wind | 5 |
| Northeast Wind | 5 |
| Rest of World | 3 |
*Risk Pillars
Source: Company, Datastream
So far 2011 has been a terrible year for catastrophes, which on the face of it sounds like bad news for Catco. Indeed, the trust has put $18.2m aside to cover its maximum exposure to the New Zealand and Japanese earthquakes, although its “C” shares have no exposure to these events due to when they were issued. However, the trust currently does not expect to suffer any losses related to these events. What's more, with the hurricane season over, risks are greatly reduced for the rest of the year.
What is perhaps now most pertinent about 2011’s heavy industry-wide losses is that they could result in major upside for Catco in 2012. The impact of the disasters on the industry’s capital is expected to result in a premium-rate hike due to lower reinsurance capacity. What’s more, solvency regulations are also expected to reduce capacity and boost rates. Catco says it expects to see rises of 5-15 per cent in property catastrophe, 0-5 per cent in property non-catastrophe while it thinks specialist areas, such as Marine, are likely to see rates rise “markedly”. Given the buoyant outlook for rates, Catco is looking at ways to raise new money in order to take advantage of the situation and also further diversify risk.
The attraction of the investment opportunity and the poor outlook for equities means Catco shares have been popular and currently both shares classes trade at a premium to NAV. However, the current premiums of 4.7 per cent for the ordinaries and 6.9 per cent for the C shares look decent compared with one-year average premiums of 4.2 per cent and 11.3 per cent respectively.
A bigger issue with the fund than the premium rating is the high fees charged by the manager. As well as a management fee of 1.5 per cent of NAV each year there is a 10 per cent performance fee triggered when returns go over Libor plus 7.5 per cent. However, the performance fee is subject to a high-watermark, which means in the case of NAV slipping back, management must make up the lost ground before they are in line for a bonus again.
