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Portfolio Positioning Update – December 2020

Portfolio Positioning Update – December 2020

Value Investing in the Reinsurance Industry

During early December we participated in the initial public offering (IPO) of Conduit Holdings, a newly formed reinsurance business.  Led by senior managers with decades of experience in the reinsurance industry, the company will be deploying capital at an attractive time in the sector.  Following three years of significant catastrophe losses in the industry, totalling over $300bn, existing industry participants have been unable to write significant new business, leading to increases in rates across geographies and various insurance lines.  With losses stemming from the ongoing COVID-19 pandemic still uncertain for many reinsurers, market conditions are very attractive for a new firm to enter the industry.  While several market participants have raised new equity this year, it is likely this additional capital will be used to shore up balance sheets rather than invested in new business.  In addition, in the context of an estimated $500bn of traditional reinsurance capital, newly raised capital has been insignificant.

Conduit enters the market with no uncertainty regarding legacy insurance claims and a clean balance sheet, allowing it to allocate its capital to new business at increasingly attractive rates.  We believe an investor at IPO has a very attractive risk return profile, with shareholders investing at book value for a company aiming to deliver a mid-teens return on equity.  Corporate activity in recent years has seen comparable reinsurance businesses acquired for around 1.6 times book value, indicating if management execute on their strategy successfully, a valuation uplift could provide additional returns to investors.

Energy Storage

In 2019, the UK government passed legislation to reach net zero greenhouse gas emissions by 2050, one of the first countries in the world to do so.  A major contributor to this aim will be the use of renewable energy, which made up 45% of power generation across the UK in the second quarter of this year.  Two key renewable energy sources are wind and solar, but both however, are intermittent.  A sunny or windy day can mean the national power system has an oversupply of electricity versus demand, or conversely and problematically, an undersupply versus demand can lead to blackouts in various parts of the country.  In order to keep the system in balance, energy storage is likely to take on an increasingly important role.

Gore Street Energy Storage Fund owns a portfolio of operational lithium-ion battery storage assets across the UK and Republic of Ireland.  The assets can generate revenue via several means, of which multiple revenue streams can be stacked on a single battery.  Two main sources of revenue come from fixed price contracts with the UK government and electricity transmission network operator, National Grid, where the battery assets can provide both instantaneous supply and demand to the network, along with the security of backup capacity for future peak demand periods.  Managed by an experienced investment team and backed by several large public and private investors, the Fund is targeting a minimum gross return of 10%, along with a dividend yield of 7%.

 

Important Information

Sources:

Value Investing in the Reinsurance Industry – Conduit holdings

Energy Storage – Gore Street Energy, please note the gross return and dividend yield are targets based on a number of assumptions and may not be achieved.

For professional investors only.

This communication represents the views of Tom Delic at the time of preparation and are not necessarily those of Seneca Investment Managers Limited. His views may be subject to change and should not be interpreted as investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This document is provided for the purpose of information only. Seneca Investment Managers Limited is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP21 007

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