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CATCo Reinsurance Opps Fund Ltd
18 February 2014
18 February 2014
CATCo Reinsurance Opportunities Fund Ltd. ("the Company")
Annual Financial Report
For the 12 month period 1 January 2013 to 31 December 2013
To: Specialist Fund Market, London Stock Exchange and Bermuda
Stock Exchange
CATCo Reinsurance Opportunities Fund Ltd. provides its
shareholders the opportunity to participate in the returns from
investments linked to catastrophe reinsurance risks, principally by
investing in fully collateralised reinsurance contracts and also
via a variety of insurance-based investments.
2013 Highlights
-- NAV growth of 21.90%
-- Share price total return of 24.34%
-- Share price growth of 19.04%
-- Premium to NAV of 0.64% at 31 December 2013
-- New Zealand and Japanese 2011 earthquake side pocket
investments finalized and cease to exist
-- Contingent distribution of USD0.02887 per share resulting
from the Japanese earthquake side pocket investment commutation
paid to affected Shareholders
-- 2013 annual dividend of USD0.05737 per share paid to Shareholders
-- USD63.6m paid to Shareholders who elected for Return of Value payment
CHAIRMAN'S STATEMENT
Financial performance
Welcome to the 2013 CATCo Reinsurance Opportunities Fund Ltd
(the "Company") Annual Report. In the twelve month period to 31
December 2013, the Company's investment portfolio generated a very
strong financial performance for the year, achieving a net return
for shareholders of 21.90 per cent. The share price growth of 19.04
per cent for the full year reflected an expansion of the premium to
net asset value. Including the annual dividend (at a rate of LIBOR
plus 5 per cent of the company's NAV) it resulted in a share price
total return of 24.34 per cent. These positive gains resulted from
a well-diversified and balanced investment portfolio of global
risks.
2013 has been another year of growth for the CATCo Group of
Companies ("CATCo" or the "Group") as it maintains its position as
one of the leading retrocessional reinsurance investment companies
in the industry. In just three years, the Group has generated a
market share of approximately 20 per cent of the retrocessional
market and built a strong brand presence. The impressive results of
the past three years have been achieved despite the first two years
- 2011 and 2012 - being years of record catastrophe losses for the
insurance industry.
In 2013, through a disciplined Board-approved underwriting plan
and process, CATCo Investment Management Ltd. (the "Investment
Manager") created a more diversified investment portfolio with an
increased number of geographic exposures and risk pillars compared
to previous years. This was a prudent approach, with minimal
catastrophe losses impacting the portfolio during the twelve month
period under review.
Catastrophic activity in 2013
2013 was a relatively benign catastrophe year. The largest
insured catastrophe losses in 2013 stemmed from events outside of
the US. At approximately USD45bn, property catastrophe reinsurance
industry losses for the year were well below average in comparison
with the past ten years.
While the catastrophe picture for 2013 was a diverse spread of
both perils and regions, the year's catastrophic events had a
relatively insignificant impact on the 2013 portfolio,
demonstrating the diversity of the Company's portfolio of business
and the strength of its underwriting business.
Return of value and 2013 annual dividend
With the continued growth of the Company combined with no
significant insured losses incurred on the 2013 investment
portfolio in December, the Board, following consultation with
larger Shareholders, determined that a Return of Value of
approximately USD74m would be in the best interests of the
Shareholders. As announced on 3 January 2014, the Company made a
special one-off capital/income return of USD0.20 per share to its
investors, representing 18.1 percent of NAV at 31 December 2013,
which was approved at a Special General Meeting of the Shareholders
held on 27 January 2014.
The Return of Value was separate and in addition to the annual
dividend paid to shareholders.
The Return of Value demonstrates the Investment Manager's
disciplined investment approach and capital management at a time
when property and specialty catastrophe rates are somewhat
displaced. The Investment Manager will continue to target an
internal rate of return in excess of LIBOR plus 12 percent to 15
percent per annum. To that end, the Directors believe there is an
optimum level of capital required to achieve this without
diminishing returns.
At the launch of the Company, the Board of Directors indicated
the intention to pay an annual dividend in respect of any Fiscal
Year of an amount equal to LIBOR plus 5 percent of the Net Asset
Value as at the end of the relevant Fiscal Year.
An annual dividend of USD0.05737 in respect of the Ordinary
Shares for the year to 31 December 2013 was declared on 14 January
2014. This dividend was in addition to the Return of Value, as
detailed above.
The record date for this dividend was 24 January 2014 and the
Ordinary Shares went ex-dividend on 22 January 2014. The final
dividend was paid to shareholders on 31 January 2014.
Distribution in relation to Tohoku Japan earthquake
Since the Company's launch, side pocket investments (SPIs) have
been formed to reserve for catastrophic loss events. These include
both the Japan and New Zealand earthquakes of 2011 and the Costa
Concordia marine disaster and Superstorm Sandy of 2012.
Following resolution of CATCo's remaining exposures to the Japan
Earthquake of 11 March 2011, the Board of Directors announced on 14
January 2014 a contingent distribution to ordinary shareholders of
USD0.02887 per share, which was paid on 24 January 2014. This
represents a 3.0 percent restated capital return for the 2011
calendar year, and further demonstrates the value to shareholders
of CATCo's prudent loss reserve methodology.
The Investment Manager waived its right to claim any performance
fee due on the Distribution amount. There remains no change to
expectations of Costa Concordia and Superstorm Sandy at this
time.
Good corporate governance
The Board of Directors is committed to maintaining its high
standards of corporate governance with particular emphasis on
ensuring the Company is operating in the best possible interests of
Shareholders. This includes regularly evaluating the relationship
and effectiveness of the Investment Manager. The Board places a
high emphasis on risk management and assesses internal controls
each year.
Regulatory changes
As I mentioned in the Interim Report 2013, two important
regulatory changes are the application of FATCA rules in Bermuda
and the implementation of the European AIFM Directive in
Europe.
In relation to the former, the Company is taking steps to ensure
that it is registered with the IRS by the deadline of 1 July
2014.
In relation to the AIFM Directive, the Bermuda Monetary
Authority signed a co-operation agreement with Europe. The Company
may continue to be marketed in the EU under the applicable private
placement regimes. The Directive also introduces new reporting
obligations.
The Board will continue to monitor the progress and likely
implications for the Company of both FATCA and the AIFM
Directive.
Convergence results in a challenging renewal season
For many, 2013 was the year of "convergence", with traditional
reinsurers and capital market capacity moving closer together in
pricing and solutions on offer, particularly for US peak
catastrophe risk. At the financial year-end, new capital from
non-traditional sources had grown to reach USD50bn, offering buyers
of reinsurance more choice and flexibility in their risk transfer
solutions and broader coverage terms.
The growth of insurance-linked securities (ILS) and
collateralised markets has been driven by increased investor
interest in the catastrophe reinsurance sector at a time when
interest rates remain low. Catastrophe reinsurance offers
attractive returns to pension funds and other institutional
investors, that are largely uncorrelated to broader financial
markets.
So far, interest from investors has been largely focused on peak
zone catastrophe covers, where ILS pricing has fallen by up to
25-40 per cent year-on-year in some cases, due to the oversupply of
capital. The picture has been less acute in the retrocession arena
in which the Group operates; however the oversupply of investment
capital did result in a more challenging renewal season at 1
January 2014. Details about the 2014 portfolio written to date can
be seen in the Managers' Review.
Shareholders
I would like to thank shareholders for their continued support
throughout 2013. Please do not hesitate to contact the Company, or
our Investment Manager, if you have any questions.
Nigel Barton
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
18 February 2014
Managers' Review
CATCo Reinsurance Opportunities Fund Ltd. (the "Company") had an
outstanding year in 2013 thanks to a well-balanced investment
portfolio and a year that was largely unimpeded by catastrophe
events. Aside from a modest exposure to US tornadoes, the Company
enjoyed an otherwise clean year, generating a net return of 21.90
per cent. for shareholders while further growing its market share
of the global retrocessional market.
As the end of the year approached, it became apparent that
market conditions were changing, with pricing in the retrocessional
sector coming under pressure. This is largely a result of the
continued interest from capital market investors in the catastrophe
reinsurance and retrocession space. The Company took advantage of
the reduced pricing by purchasing significant global retrocessional
protections for the period 1 November to 31 December to lock in the
value of the portfolio until the end of the year at a cost of
approximately one per cent. of net assets.
2013 Investment portfolio update
While there is no such thing as a "typical" catastrophe year,
2013 stood out for its benign activity and, in particular, the low
level of claims, which were around 25 per cent below the ten-year
average.
There were however some significant catastrophes in 2013,
notably the Central European floods, hail storms in Germany and
Super Typhoon Haiyan in the Philippines. Even within Europe, with
its relatively high levels of insurance penetration, these events
were not at sufficient loss levels to trigger the Company's
retrocessional agreements.
Floods in Central Europe and hailstorms in Germany were the
highest catastrophe insurance losses for the year, estimated at
USD3bn and USD4.1bn respectively. Other notable events included
high levels of cyclonic activity in the Pacific Basin and a
succession of winter storms in Europe towards the end of the year
and into 2014. The latter, known as Winter Storms Xaver and
Christian, are likely to generate losses in the low single-digit
billion dollar range.
Super Typhoon Haiyan, one of the strongest tropical cyclones
ever recorded, was a human catastrophe for the Philippines. It
struck central Philippines at a Category 5 strength, resulting in
over 6,000 fatalities and causing widespread destruction to
infrastructure and agriculture. While the total economic loss is
estimated at USD10bn, the insured loss from Haiyan is predicted by
AIR Worldwide to be between USD300m and USD700m, due to the
country's very low insurance penetration.
The North Atlantic Hurricane season was very quiet in spite of
forecasts for an above-average year, and no hurricanes made
landfall in the US in 2013. The most serious natural catastrophe
for the year in the US was an EF5 intensity tornado near Moore,
Oklahoma on 20 May 2013. It was part of a strong weather system
which produced 16 tornado touchdowns on 18 May, 29 on 19 May and 31
on 20 May. Total insured losses from these tornadoes are estimated
at USD1.8bn. In Canada, flooding in Calgary, Alberta in June 2013
generated insured losses of USD1.6bn, making it the country's
costliest natural catastrophe on record.
Side Pocket Investments (SPIs)
Since the Company's launch, SPIs have been formed to reserve for
catastrophic loss events including the 2011 Japan Earthquake, 2011
New Zealand Earthquake, Costa Concordia Marine disaster of 2012 and
Hurricane Sandy in 2012.
During the course of 2013, any outstanding claims in relation to
the SPIs for 2011 earthquakes were fully settled and there remains
no further liability connected to either the Japan or New Zealand
events.
Regarding SPIs related to Costa Concordia and Hurricane Sandy,
there remains little or no change in the expectations of the
Company's exposure to these events. CATCo Investment Management
Ltd. (the "Investment Manager") continues to anticipate that 100
per cent of the Costa Concordia loss reserve will be paid out in
claims settlements during the course of 2014.
As at 31 December 2013, total claim payments made in relation to
Sandy amounted to approximately 41 per cent. of the original
retrocessional reinsurance loss reserve. At year-end 2013 this SPI
amounted to 3.5 per cent. of the Company's portfolio, less than
half of the total retrocessional reinsurance loss reserves held at
the same time a year ago.
2014 investment portfolio
The influx of capacity into the property catastrophe reinsurance
and retrocession market, compounded by fewer favourable catastrophe
losses over the past 12 months, has led to a depression in pricing
for certain types of products. This downturn is more pronounced in
the traditional reinsurance market and ILS space, where prices were
down by 25 per cent to 40 per cent in some cases.
In the retrocessional arena in which CATCo-Re Ltd., the
Company's reinsurer, operates, market rates fell on average by 7.5
per cent for business written at comparable risk levels to 2013,
reflecting current market pricing conditions. At the same time,
given the low level of catastrophe losses in 2013, some
retrocession buyers have decreased the extent of their purchases
for 2014.
The Investment Manager has responded to these more competitive
conditions by targeting prudent capital management. The Return of
Value to shareholders, which was approved by shareholders at a
special general meeting on 27 January 2014, is one example of this
disciplined approach.
Under the Return of Value, shareholders elected to receive
approximately USD63.6m and reinvest approximately USD10.4m
according to their chosen option. The decision allows the
Investment Manager to maintain an optimum level of capital in the
Company in order to continue to target effectively the Company's
stated annual return of LIBOR plus 12 to 15 per cent per annum.
Should market conditions change and new opportunities present
themselves throughout the year, as they did in 2011, it would very
much be the intention of the Investment Manager to allow investors
to participate in them.
For 2014, the investment portfolio has been further de-risked
and diversified by geography and peril using the Master Fund's
multi-pillared approach. For 2014, the Investment Manager has only
considered transactions that have met or exceeded the Company's
investment return target while adhering to strict investment
guidelines.
As at 15 January 2014, 85 per cent of available capital had been
deployed with terms on new 2014 reinsurance transactions agreed
with multiple reinsurance counterparties, both via existing
relationships and through new counterparty arrangements. As
renewals within the retrocessional sector were negotiated very late
this year, a number of 1 January 2014 contracts have yet to be
closed. The Investment Manager will hold back approximately 10% of
its capital base as cash for opportunistic plays through the
year.
Around one-third of the 2014 capital has been deployed into
reinsurance contracts with approximately 40 per cent lower risk
level. Overall, the portfolio has an aggregate risk level that is
20 per cent lower than the previous year. Taking into account the
2014 investment portfolio's well-diversified set of global risk
pillars, the portfolio is in a strong position to generate a
maximum no-loss return of 18 per cent for the year. This net return
is inclusive of retrocessional protection, which was secured at
competitive pricing and terms.
This ensures that exposure to a single loss event, no matter how
great the magnitude, results in net portfolio returns for investors
in the current financial year of not less than negative four per
cent.
The positive impact of the property protections purchased can be
observed by examining the impact of a modelled one-in-100-year
event (i.e. one per cent annual probability of loss occurrence) for
each of the 42 risk perils making up the 2014 investment
portfolio.
Under this modelled scenario, even a severe one-in-100-year
single catastrophic insured property event results in net portfolio
returns of at least eight per cent. for all perils. The only
exceptions to this would be the categories of US Wind, Europe Wind
or Offshore Non Elemental Marine.
CATCo Reinsurance Opportunities Fund is able to offer its
counterparties full certainty that claims will be met when they
occur. There is no credit risk for clients as the Company is fully
cash collateralised for every USD1 of risk it assumes.
Anthony Belisle
Chief Executive Officer
CATCo Investment Management Ltd.
18 February 2014
REVIEW OF BUSINESS
A review of the Company's activities is given in the Chairman's
Statement and in the Managers' Review. This includes a review of
the business of the Company and its principal activities, and
likely future developments of the business.
Investment Objective
The investment objective of the Company and CATCO Reinsurance
Fund Ltd. (the "Master Fund") is to give its Shareholders the
opportunity to participate in the returns from investments linked
to catastrophe reinsurance risks, principally by investing in fully
collateralised Reinsurance Agreements accessed by investments in
preferred shares of the Reinsurer, CATCo-Re Ltd. The Company's
investment policy appears opposite, and the Manager's Review
explains how the Company and the Master Fund have invested their
assets with a view to spreading investment risk in accordance with
the Company's investment policy.
Benchmark
Eurekahedge Insurance Linked Securities index. This index is not
a benchmark used for investment performance measurement.
Investment Policy and Investment Strategy
The Master Fund intends to spread investment risk by seeking
exposure to multiple non-correlated risk categories so as to
endeavour to limit the amount of capital at risk with respect to a
single catastrophic event.
The Master Fund intends that:
-- no more than 20 percent of its capital will be exposed to a
single catastrophic event;
-- its capital will only be exposed to catastrophic events at
loss levels that have not occurred more than twice in the past 40
years on a trended loss estimate basis, unless otherwise approved
by the Board of Directors of the Master Fund;
-- its capital will be exposed to aviation and marine (including
offshore energy) losses caused by catastrophes; and
-- at least 50 percent of its capital will be exposed to
residential and commercial property losses.
At 31 December 2013, the Portfolio of Investments reflects the
stated guidelines as each of the reinsurance arrangements entered
into by the Reinsurer contain several non-correlated pillars of
risk and provides a portfolio exposure to 42 diversified risk
pillars.
When investing, the Company's policy is to move freely between
different risk perils as opportunities arise. There are no limits
to geographical or sector exposures, except as stated above, but
these are reported to, and monitored by, the Board of Directors in
order to ensure that adequate diversification is achieved.
While there is a comparative index for the purpose of measuring
performance, no attention is paid to the composition of this index
when constructing the portfolio and the composition of the
portfolio is likely to vary substantially from that of the index. A
short term view is taken and there may be periods when the net
asset value per share declines both in absolute terms and relative
to the comparative index.
Capital Structure and Voting Rights
369,849,337 Ordinary Shares of $0.0001 par value each entitled
to one vote as at 31 December 2013.
As at the date of this Report, the Company's issued ordinary
share capital consists of 309,282,970 Ordinary Shares of $0.0001
par value each entitled to one vote.
Total Assets and Net Asset Value
At 31 December 2013, the Company had Total Assets of
$409,031,695 and a Net Asset Value per Ordinary Share of
$1.1059.
Borrowing
The Company will not borrow for investment purposes, although it
may borrow for temporary cash flow purposes such as for satisfying
working capital requirements. The Master Fund will not borrow for
investment or other purposes but may invest in Insurance-Linked
Instruments which are themselves leveraged.
Duration
The Company does not have a fixed life. A continuation vote will
be put to Shareholders every five years.
Risk
The investment funds managed by CATCo Investment Management
Limited are fully collateralised and are largely uncorrelated to
traditional asset classes. Risk is spread across multiple
non-correlated risk pillars which aims to limit the amount of
capital exposed with respect to a single catastrophic event.
Management of Risk
The Board of Directors regularly review the major strategic
risks that the Board and the Investment Manager have identified,
and against these, the Board sets out the delegated controls
designed to manage those risks. The principal risks facing the
Company in addition to the reinsurance risks as discussed above
relate to the Company's investment activities and include market
price, interest rate, liquidity and credit risk. Such key risks
relating to investment and strategy including for example,
inappropriate asset allocation or borrowing are managed through
investment policy guidelines and restrictions, and by the process
of oversight at each Board meeting as previously outlined.
Operational disruption, accounting and legal risks are also covered
annually, and regulatory compliance is reviewed at each Board
meeting.
Oversight and Review of Performance
The Board typically meet five times per year. At each Board
meeting, the Directors consider a number of performance measures to
assess the Company's success in achieving its objectives. The key
performance indicators used to measure the progress and performance
of the Company over time are established industry measures and are
as follows:
. the movement in net asset value per ordinary share on a gross, net and total return basis;
. the movement in the share price on a share price and total return basis;
. the discount; and
. the total expense ratio.
In addition to the above, the Board of Directors also considers
peer group comparative performance.
Key risks relating to investment and strategy, for example,
inappropriate asset allocation or gearing, are managed through
investment policy guidelines and restrictions, and by the process
of oversight at each Board meeting outlined above. Operational
disruption, accounting and legal risks are also covered annually,
and regulatory compliance is reviewed at each Board meeting.
An explanation of other risks relating to the Company's
investment activities, specifically concentration of credit risk
and concentration of reinsurance risk, are contained in notes 3 and
4 to the financial statements.
Results and Dividends
The total return attributable to Shareholders for the year
amounted to 21.9% (2012 - 7.06%).
With the continued growth of the Company combined with no
significant insured losses incurred on the 2013 investment
portfolio in December, the Board, following consultation with
larger shareholders, determined that a Return of Value of
approximately USD74m would be in the best interests of the
Shareholders. As announced on 3 January 2014, the Company made a
special one-off capital/income return of USD0.20 per share to its
investors, which was approved at a Special General Meeting of the
shareholders held on 27 January 2014.
The Return of Value was separate and in addition to the annual
dividend paid to shareholders of USD0.20 per share representing
18.1 percent of NAV at 31 December 2013.
At the launch of the Company, the Board of Directors indicated
the intention to pay an annual dividend in respect of any Fiscal
Year of an amount equal to LIBOR plus 5 percent of the Net Asset
Value as at the end of the relevant Fiscal Year.
An annual dividend of USD0.05737 in respect of the Ordinary
Shares for the year to 31 December 2013 was declared on 14 January
2014.
The record date for this dividend was 24 January 2014 and the
Ordinary Shares went ex-dividend on 22 January 2014. The final
dividend was paid to shareholders on 31 January 2014.
As referred to in further detail in the Chairman's Statement,
having resolved the Company's remaining exposures to the Japan
Earthquake of 11 March 2011, the Board of Directors announced on 14
January 2014 a contingent distribution of $0.02887 per Ordinary
Share, to be paid on 24 January 2014. The record date for this
distribution was 10 August 2012 and the ex-dividend date 8 August
2012.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Board of Directors are responsible for preparing the Annual
Report and the Financial Statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Board of
Directors have elected to prepare the financial statements in
accordance with US Generally Accepted Accounting Principles ("US
GAAP"). The financial statements are required by the Bermuda
Companies Act 1981 to give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for
that year. In preparing these financial statements, the Board of
Directors are required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent; and
-- state whether applicable Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements.
The Directors are responsible for keeping proper accounting
records that are sufficient to disclose the Company's transactions
and that disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Bermuda Companies Act.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities. The Directors
consider that Annual Report and Financial Statements taken as a
whole, are fair, balanced and understandable, and provide the
information necessary for Shareholders to assess the Company's
performance, business model and strategy.
The financial statements will be published on
www.catcoreoppsfund.com, which is maintained by the Investment
Manager, CATCo Investment Management Ltd. The maintenance and
integrity of the website maintained by CATCo Investment Management
Ltd. is, so far as it relates to the Company, the responsibility of
CATCo Investment Management Ltd.
The Board of Directors are responsible for the maintenance and
integrity of the corporate and financial information included on
the Company's website. Legislation in Bermuda governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
In accordance with Chapter 4 of the Disclosure and Transparency
Rules, and to the best of their knowledge, each Director of CATCo
Reinsurance Opportunities Fund Ltd. confirms that the financial
statements have been prepared in accordance with the applicable set
of accounting standards and give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company.
Furthermore, each Director certifies that the report of the
Directors includes a fair review of the development and performance
of the business and the position of the Company, together with a
description of the principal risks and uncertainties that the
Company faces.
Alastair Barbour
Chairman of the Audit Committee
18 February 2014
AUDITED STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States 31 December 2013 31 December 2012
Dollars)
--------------------------------- ----------------- -----------------
$ $
Assets
--------------------------------- ----------------- -----------------
Investment in CATCo Reinsurance
Fund Ltd.-
CATCo Diversified Fund, at
fair value $408,828,848 $353,330,814
--------------------------------- ----------------- -----------------
Cash and cash equivalents 286,057 710,727
--------------------------------- ----------------- -----------------
Other assets 67,032 25,403
--------------------------------- ----------------- -----------------
Total assets 409,181,937 354,066,944
--------------------------------- ----------------- -----------------
Liabilities
--------------------------------- ----------------- -----------------
Accrued expenses and other
liabilities 149,988 253,439
--------------------------------- ----------------- -----------------
Management fee payable 254 603
--------------------------------- ----------------- -----------------
Total liabilities 150,242 254,042
--------------------------------- ----------------- -----------------
Net assets 409,031,695 353,812,902
--------------------------------- ----------------- -----------------
NAV Per Share (See note 6)
See accompanying notes
AUDITED STATEMENTS OF OPERATIONS
(Expressed in United States Year Ended 31 Year Ended 31
Dollars) December 2013 December 2012
----------------------------------- --------------- ---------------
$ $
----------------------------------- --------------- ---------------
Net investment loss allocated
from
CATCo Reinsurance Fund Ltd.
- CATCo Diversified Fund
----------------------------------- --------------- ---------------
Interest 12,903 5,030
----------------------------------- --------------- ---------------
Performance fee (8,643,163) -
----------------------------------- --------------- ---------------
Management fee (5,654,620) (5,413,680)
----------------------------------- --------------- ---------------
Professional fees and other (271,795) (241,542)
----------------------------------- --------------- ---------------
Administrative fee (227,560) (340,305)
----------------------------------- --------------- ---------------
Miscellaneous expenses (23,992) (24,415)
----------------------------------- --------------- ---------------
Net investment loss allocated
from
CATCo Reinsurance Fund Ltd.
- CATCo Diversified Fund (14,808,227) (6,014,912)
----------------------------------- --------------- ---------------
Fund expenses
----------------------------------- --------------- ---------------
Professional fees and other (1,199,136) (762,379)
----------------------------------- --------------- ---------------
Administrative fee (54,000) (54,000)
----------------------------------- --------------- ---------------
Management fee (11,448) (13,901)
----------------------------------- --------------- ---------------
Total Fund expenses (1,264,584) (830,280)
----------------------------------- --------------- ---------------
Net investment loss (16,072,811) (6,845,192)
----------------------------------- --------------- ---------------
Net realised and net change
in unrealised gain on securities
allocated from CATCo Reinsurance
Fund Ltd. - CATCo Diversified
Fund
----------------------------------- --------------- ---------------
Net realised gain on securities 19,854,893 18,490,351
----------------------------------- --------------- ---------------
Net change in unrealised
gain on securities 69,951,369 2,373,931
----------------------------------- --------------- ---------------
Net gain on securities 89,806,262 20,864,282
----------------------------------- --------------- ---------------
Net increase in net assets
resulting from operations 73,733,451 14,019,090
----------------------------------- --------------- ---------------
See accompanying notes
AUDITED STATEMENTS OF CHANGES IN NET ASSETS
(Expressed in United States Dollars) Year Ended 31 Year Ended 31
December 2013 December 2012
-------------------------------------- --------------- ---------------
$ $
-------------------------------------- --------------- ---------------
Operations
-------------------------------------- --------------- ---------------
Net investment loss (16,072,811) (6,845,192)
-------------------------------------- --------------- ---------------
Net realised gain on securities 19,854,893 18,490,351
-------------------------------------- --------------- ---------------
Net change in unrealised gain on
securities 69,951,369 2,373,931
-------------------------------------- --------------- ---------------
Net increase in net assets resulting
from operations 73,733,451 14,019,090
-------------------------------------- --------------- ---------------
Capital share transactions
-------------------------------------- --------------- ---------------
Dividend declared (18,514,658) -
-------------------------------------- --------------- ---------------
Transfer of Class 2 - C Shares
(see note 6) - (276,563,190)
-------------------------------------- --------------- ---------------
Transfer to Class 1 - Ordinary
Shares (see note 6) - 276,563,190
-------------------------------------- --------------- ---------------
Net decrease in net assets resulting (18,514,658) -
from capital share transactions
-------------------------------------- --------------- ---------------
Net increase in net assets 55,218,793 14,019,090
-------------------------------------- --------------- ---------------
Net assets, at January 2013 353,812,902 339,793,812
-------------------------------------- --------------- ---------------
Net assets, at 31 December 2013 409,031,695 353,812,902
-------------------------------------- --------------- ---------------
See accompanying notes
AUDITED STATEMENTS OF CASH FLOWS
(Expressed in United States Year Ended 31 Year Ended 31 December
Dollars) December 2013 2012
----------------------------------------------- --------------- -----------------------
$ $
----------------------------------------------- --------------- -----------------------
Cash flows from operating activities
----------------------------------------------- --------------- -----------------------
Net increase in net assets
resulting from operations 73,733,451 14,019,090
----------------------------------------------- --------------- -----------------------
Adjustments to reconcile net
increase in net assets resulting
from operations to net cash
provided by (used in) operating
activities:
----------------------------------------------- --------------- -----------------------
Net investment loss, net realised
gain and net change in unrealised
gain on securities allocated
from CATCo Reinsurance Fund
Ltd. - CATCo Diversified Fund (74,998,034) (14,849,370)
----------------------------------------------- --------------- -----------------------
Sale/(purchase) of investment
in CATCo Reinsurance Fund Ltd.
- CATCo Diversified Fund 19,500,000 (110,500,000)
----------------------------------------------- --------------- -----------------------
Changes in operating assets
and liabilities:
----------------------------------------------- --------------- -----------------------
Other assets (41,629) (18,143)
----------------------------------------------- --------------- -----------------------
Accrued expenses and other
liabilities (103,451) (203,419)
----------------------------------------------- --------------- -----------------------
Management fee payable (349) (71,581)
----------------------------------------------- --------------- -----------------------
Net cash provided by (used
in) operating activities 18,089,988 (111,623,423)
----------------------------------------------- --------------- -----------------------
Cash flows from financing activities
----------------------------------------------- --------------- -----------------------
Dividends paid (18,514,658) (10,859,876)
----------------------------------------------- --------------- -----------------------
Net cash used in financing
activities (18,514,658) (10,859,876)
----------------------------------------------- --------------- -----------------------
Net decrease in cash and cash
equivalents (424,670) (122,483,299)
----------------------------------------------- --------------- -----------------------
Cash and cash equivalents,
at 1 January 2013 710,727 123,194,026
----------------------------------------------- --------------- -----------------------
Cash and cash equivalents,
at 31 December 2013 286,057 710,727
----------------------------------------------- --------------- -----------------------
See accompanying notes
1. Nature of operations and summary of significant accounting policies
Nature of Operations
CATCo Reinsurance Opportunities Fund Ltd. (the "Company") is a
closed-ended fund, registered and incorporated as an exempted
mutual fund company in Bermuda on 30 November 2010 and commenced
operations on 20 December 2010. The Company was organised as a
feeder fund to invest substantially all of its assets in CATCo
Diversified Fund (the "Master Fund"). The Master Fund is a
segregated account of CATCo Reinsurance Fund Ltd., a mutual fund
company incorporated in Bermuda and registered as a segregated
account company under the Segregated Accounts Company Act 2000, as
amended (the "SAC Act"). The Master Fund will establish a separate
account for each class of shares comprised in each segregated
account (each, an "Account"). Each Account is a separate
individually managed pool of assets constituting, in effect, a
separate fund with its own investment objective and policies and
overseen by CATCo Investment Management Ltd. (the "Investment
Manager"). The assets attributable to each segregated account of
the Company shall only be available to creditors in respect of that
segregated account. Pursuant to an investment management agreement,
the Company is managed by the Investment Manager. Refer to the
Company's prospectus for more information.
The Company's Shares are listed and traded on the Specialist
Fund Market ("SFM"), a market operated by the London Stock
Exchange. The Company's Shares are also listed on the Bermuda Stock
Exchange following the Secondary Listing on 20 May 2011.
The objective of the Master Fund is to give the shareholders the
opportunity to participate in the investment returns of various
insurance-based instruments, including preference shares through
which the Master Fund would be exposed to reinsurance risk,
insurance-linked securities (such as notes, swaps and other
derivatives), and other financial instruments. All of the Master
Fund's exposure to reinsurance risk is obtained through its
investment (via preference shares) in CATCo-Re Ltd. (the
"Reinsurer"). The Company's ownership is less than 50% of the
Master Fund at 31 December 2013 and 2012.
The Reinsurer is a Bermuda licensed Class 3 reinsurance company,
registered as a segregated accounts company under the SAC Act,
through which the Master Fund accesses all of its reinsurance risk
exposure. The Reinsurer will form a segregated account that
corresponds solely to the Master Fund's investment in the Reinsurer
with respect to each particular reinsurance agreement.
The Reinsurer focuses primarily on property catastrophe
insurance and may be exposed to losses arising from hurricanes,
earthquakes, typhoons, hailstorms, floods, tsunamis, tornados,
windstorms, extreme temperatures, aviation accidents, fires,
explosions, marine disasters and other retrocessional perils.
Basis of Presentation
The audited financial statements are expressed in United States
dollars and have been prepared in conformity with accounting
principles generally accepted in the United States of America
("GAAP") as detailed in the Financial Accounting Standards Board's
Accounting Standards Codification.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments, such as money market funds, that are readily
convertible to known amounts of cash and have original maturities
of three months or less.
Valuation of Investment in Master Fund
The Company records its investment in the Master Fund at the net
asset value as reported by the Master Fund. The Company records its
investment in the Master Fund at fair value which is the Company's
proportionate interest in the net assets of the Master Fund. The
performance of the Company is directly affected by the performance
of the Master Fund and is subject to the same risks to which the
Master Fund is subject. Valuation of investments held by the Master
Fund, including, but not limited to the valuation techniques used
and classification within the fair value hierarchy of investments
held are discussed as follows:
Fair Value - Definition and Hierarchy (Master Fund)
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the "exit
price") in an orderly transaction between market participants at
the measurement date.
In determining fair value, the Master Fund uses various
valuation approaches. A fair value hierarchy for inputs is used in
measuring fair value that maximises the use of observable inputs
and minimises the use of unobservable inputs by requiring that the
most observable inputs are to be used when available. Observable
inputs are those that market participants would use in pricing the
asset or liability based on market data obtained from sources
independent of the Master Fund. Unobservable inputs reflect the
Master Fund's assumptions about the inputs market participants
would use in pricing the asset or liability developed based on the
best information available in the circumstances. The fair value
hierarchy is categorised into three levels based on the inputs as
follows:
Level 1 - Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Master Fund
has the ability to access. Valuation adjustments are not applied to
Level 1 investments. Since valuations are based on quoted prices
that are readily and regularly available in an active market,
valuation of these investments does not entail a significant degree
of judgment.
Level 2 - Valuations based on quoted prices in markets that are
not active or for which all significant inputs are observable,
either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs
can vary from investment to investment and are affected by a wide
variety of factors, including the type of investment, whether the
investment is new and not yet established in the marketplace, and
other characteristics particular to the transaction. To the extent
that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair
value requires more judgment. Those estimated values do not
necessarily represent the amounts that may be ultimately realised
due to the occurrence of future circumstances that cannot be
reasonably determined. Because of the inherent uncertainty of
valuation, those estimated values may be materially higher or lower
than the values that would have been used had a ready market for
the investments existed. Accordingly, the degree of judgment
exercised by the Master Fund in determining fair value is greatest
for investments categorised in Level 3 of the fair value hierarchy.
In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In such cases,
for disclosure purposes, the level in the fair value hierarchy
within which the fair value measurement falls in its entirety, is
determined based on the lowest level input that is significant to
the fair value measurement.
Fair value is a market-based measure considered from the
perspective of a market participant rather than an entity-specific
measure. Therefore, even when market assumptions are not readily
available, the Master Fund's own assumptions are set to reflect
those that market participants would use in pricing the asset or
liability at the measurement date. The Master Fund uses prices and
inputs that are current as of the measurement date, including
periods of market dislocation. In periods of market dislocation,
the observability of prices and inputs may be reduced for many
investments. This condition could cause an investment to be
reclassified to a lower level within the fair value hierarchy.
Fair Value - Valuation Techniques and Inputs
Investments in Securities (Master Fund)
The value of preference shares issued by the Reinsurer and
subscribed for by the Master Fund and held with respect to a
reinsurance agreement will equal:
(i) the amount of capital invested in such preference shares; plus
(ii) the amount of earned premium (as described below) that has
been earned period to-date for such contract; plus
(iii) the amount of the investment earnings earned to date on
both the capital invested in such preference shares and the
associated reinsurance premiums in respect of such contract;
minus
(iv) the fair value of any loss estimates associated with
potential claims triggering covered events (see "Covered Event
Estimates" below).
The value of preference shares issued by the Reinsurer will also
recognise expenses which are directly attributable to the Master
Fund as a result of the Reinsurer conducting reinsurance activities
that inure to the benefit or detriment of the Master Fund. To the
extent that the inputs into the valuation of preference shares are
unobservable, the preference shares would be classified as level 3
within the fair value hierarchy.
Investments in Securities held by the Reinsurer
Industry Loss Warranties ("ILWs")
ILWs will be marked similar to preference shares held with
respect to reinsurance agreements, except that following a Covered
Event, loss information from the index provider on the trade will
be used.
Earned Premiums
Premiums shall be considered earned with respect to computing
the Master Fund's Net Asset Value in direct proportion to the
percentage of the risk that is deemed to have expired year-to-date.
Generally, all premiums shall be earned uniformly over each month
of the risk period. However, for certain risks, there is a clearly
demonstrable seasonality associated with these risks. Accordingly,
seasonality factors are utilised for the establishment of certain
investments, including preference shares relating to reinsurance
agreements, ILWs and risk transfer derivative agreements, where
applicable. Prior to the investment in any seasonal contract, the
Investment Manager is required to produce a schedule of seasonality
factors, which will govern the income recognition and related fair
value price for such seasonal contract in the absence of a covered
event. The Investment Manager may rely on catastrophe modeling
software, historical catastrophe loss information or other
information sources it deems reliable to produce the seasonality
factors for each seasonal contract. Once established, the
seasonality factors do not change unless for a significant outlying
catastrophic event.
Covered Event Estimates
The Investment Manager provides monthly loss estimates for all
incurred loss events ("Covered Events") potentially affecting
investments relating to a reinsurance agreement of the Reinsurer.
As the Reinsurer's reinsurance agreements are fully collateralised,
any loss estimates above the contractual thresholds as contained in
the reinsurance agreements will require capital to be held in a
continuing reinsurance trust account with respect to the maximum
contract exposure with respect to the applicable Covered Event.
"Fair Value" Pricing used by the Master Fund
Any investment that cannot be reliably valued using the
principles set forth above (a "Fair Value Instrument") is marked at
its fair value, based upon an estimate made by the Investment
Manager, in good faith and in consultation or coordination with
Prime Management Limited (the "Administrator") where practicable,
using what the Investment Manager believes in its discretion are
appropriate techniques consistent with market practices for the
relevant type of investment. Fair valuation in this context depends
on the facts and circumstances of the particular investment,
including but not limited to prevailing market and other relevant
conditions, and refers to the amount for which a financial
instrument could be exchanged between knowledgeable, willing
parties in an arm's length transaction. Fair value is not the
amount that an entity would receive or pay in a forced transaction
or involuntary liquidation.
The process used to estimate a fair value for an investment may
include a single technique or, where appropriate, multiple
valuation techniques, and may include (without limitation and in
the discretion of the Investment Manager, or in the discretion of
the Administrator subject to review by the Investment Manager where
practicable) the consideration of one or more of the following
factors (to the extent relevant): the cost of the investment to the
Master Fund, a review of comparable sales (if any), a discounted
cash flow analysis, an analysis of cash flow multiples, a review of
third-party appraisals, other material developments in the
investment (even if subsequent to the valuation date), and other
factors.
For each Fair Value Instrument, the Investment Manager and/or
the Administrator, may as practicable, endeavor to obtain quotes
from broker-dealers that are market makers in the related asset
class, counterparties, the Master Fund's prime brokers or lending
agents and/or pricing services. The Investment Manager, may, but
will not be required to, input pricing information into models
(including models that are developed by the Investment Manager or
by third parties) to determine whether the quotations accurately
reflect fair value.
In addition, the Investment Manager, may in its discretion,
consult with the members of the investment team to determine the
appropriate valuation of an instrument or additional valuation
techniques that may be helpful to such valuation.
From time to time, the Investment Manager may change its fair
valuation technique as applied to any investment if the change
would result in an estimate that the Investment Manager in good
faith believes is more representative of fair value under the
circumstances. The determination of fair value is inherently
subjective in nature, and the Investment Manager has a conflict of
interest in determining fair value in light of the fact that the
valuation determination may affect the amount of the Investment
Manager's performance fee.
At any given time, a substantial portion of the Master Fund's
portfolio positions may be valued by the Investment Manager using
the fair value pricing policies. Prices assigned to portfolio
positions by the Administrator or the Investment Manager may not
necessarily conform to the prices assigned to the same financial
instruments if held by other accounts or by affiliates of the
Investment Manager.
Side Pockets
The Board of Directors of the Master Fund (the "Board"), in
consultation with the Investment Manager, may classify certain
Insurance-Linked Instruments as investments in which only persons
which are shareholders at the time of such classification can
participate ("Side Pocket Investments"). This typically will happen
if a Covered Event has recently occurred or seems likely to occur
under an Insurance-Linked Instrument, because determining the fair
value once a Covered Event has occurred under an Insurance-Linked
Instrument is often both a highly uncertain and a protracted
process. Side Pocket Investments are valued in the statement of
assets and liabilities at their fair value as determined in good
faith by the Board following consultation with the Investment
Manager.
Financial Instruments
The fair values of the Company's assets and liabilities, which
qualify as financial instruments under ASC 825, Financial
Instruments, approximate the carrying amounts presented in the
statements of assets and liabilities.
Investment Transactions and Related Investment Income and
Expenses
The Company records its proportionate share of the Master Fund's
income, expenses, and realised and changes in unrealised gains and
losses on a monthly basis. In addition, the Company incurs and
accrues its own income and expenses.
Investment transactions of the Master Fund are accounted for on
a trade-date basis. Realised gains or losses on the sale of
investments are calculated using the specific identification method
of accounting. Interest is recognised on the accrual basis.
Translation of Foreign Currency
Assets and liabilities denominated in foreign currencies are
translated into United States dollar amounts at the period-end
exchange rates. Transactions denominated in foreign currencies,
including purchases and sales of investments, and income and
expenses, are translated into United States dollar amounts on the
transaction date. Adjustments arising from foreign currency
transactions are reflected in the statements of operations.
The Company does not isolate the portion of the results of
operations arising from the effect of changes in foreign exchange
rates on investments from fluctuations arising from changes in
market prices of investments held. Such fluctuations are included
in net gain (loss) on investments in the statements of
operations.
Income Taxes
Under the laws of Bermuda, the Company is generally not subject
to income taxes. The Company has received an undertaking from the
Minister of Finance in Bermuda that in the event that there is
enacted in Bermuda any legislation imposing income or capital gains
tax, such tax shall not until 31 March 2035 be applicable to the
Company. However, certain United States dividend income and
interest income may be subject to a 30% withholding tax. Further,
certain United States dividend income may be subject to a tax at
prevailing treaty or standard withholding rates with the applicable
country or local jurisdiction.
The Company is required to determine whether its tax positions
are more likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related
appeals or litigation processes, based on the technical merits of
the position. The tax benefit recognised is measured as the largest
amount of benefit that has a greater than fifty percent likelihood
of being realised upon ultimate settlement with the relevant taxing
authority. De-recognition of a tax benefit previously recognised
results in the Company recording a tax liability that reduces
ending net assets. Based on its analysis, the Company has
determined that it has not incurred any liability for unrecognised
tax benefits as of 31 December 2013. However, the Company's
conclusions may be subject to review and adjustment at a later date
based on factors including, but not limited to, on-going analyses
of and changes to tax laws, regulations and interpretations
thereof.
The Company recognises interest and penalties related to
unrecognised tax benefits in interest expense and other expenses,
respectively. No interest expense or penalties have been recognised
as of and for the year ended 31 December 2013.
Generally, the Company may be subjected to income tax
examinations by relevant major taxing authorities for all tax years
since its inception.
The Company may be subject to potential examination by U.S.
federal or foreign jurisdiction authorities in the areas of income
taxes. These potential examinations may include questioning the
timing and amount of deductions, the nexus of income among various
tax jurisdictions and compliance with U.S. federal or foreign tax
laws. The Company was not subjected to any tax examinations during
the year ended 31 December 2013.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the Company's management to make estimates and
assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates.
Offering Costs
The costs associated with each capital raise are expensed as
incurred.
2. Schedule of the Company's share of the investments held in
the Master Fund and fair value measurements
The following table reflects the Company's proportionate share
of the fair value of investments in the Reinsurer held by the
Master Fund at 31 December 2013.
Preferred Shares $ Fair Value
Investments in CATCo-Re Ltd.
Class AA preferred Shares $18,681,478
Class BB preferred Shares 4,074,807
Class CC preferred Shares 1,275,717
Class KK preferred Shares 1,582,598
Class Q preferred Shares 2,377,034
Class S preferred Shares 3,596,617
Class T preferred Shares 3,019,922
Class W preferred Shares 2,051
Class Z preferred Shares 2,264,403
Class SP preferred Shares 8,311
Class MM1 preferred Shares 1,035,815
Class MM2 preferred Shares 1,035,804
Class AB preferred Shares 45, 293,030
Class AC preferred Shares 22,644,591
Class AD preferred Shares 35,101,162
Class AE preferred Shares 15,963,598
Class AF preferred Shares 4,397,637
Class AG preferred Shares 3,960,440
Class AH preferred Shares 16,980,915
Class AI preferred Shares 19,952,719
Class AJ preferred Shares 9,424,666
Class AK preferred Shares 36,232,561
Class AL preferred Shares 21,510,733
Class AM preferred Shares 19,020,624
Class AN preferred Shares 9,055,982
Class AO preferred Shares 5,024,878
Class AP preferred Shares 7,538,724
Class AQ preferred Shares 1,181,920
Class AR preferred Shares 8,942,495
Class AS preferred Shares 3,960,418
Class AT preferred Shares 20,945,312
Class AU preferred Shares 3,394,191
Class AV preferred Shares 26,125,482
Class AW preferred Shares 30,145,301
Class AX preferred Shares 1,016,097
Class BA preferred Shares 4,254,847
Class BC preferred Shares 1,644,595
Class BD preferred Shares 1,095,633
Class BE preferred Shares 1,021,473
Class BF preferred Shares 997,473
Class BH preferred Shares 241,481
Total Investments in CATCo-Re Ltd. 416,023,535
The following table reflects the Company's proportionate share
of the fair value of investments in the Reinsurer held by the
Master Fund at 31 December 2012.
Preferred Shares - Investments in CATCo-Re Ltd.
Preferred Shares $ Fair Value
Investments in CATCo-Re Ltd.
Class M preferred Shares $18,076,018
Class N preferred Shares 40,097,989
Class O preferred Shares 16,870,658
Class P preferred Shares 34,750,348
Class Q preferred Shares 10,276,065
Class R preferred Shares 4,064,605
Class S preferred Shares 48,026,408
Class T preferred Shares 21,085,490
Class U preferred Shares 13,556,340
Class V preferred Shares 42,168,817
Class W preferred Shares 8,073,758
Class X preferred Shares 4,064,810
Class Y preferred Shares 2,514
Class Z preferred Shares 9,486,883
Class AA preferred Shares 12,755,634
Class BB preferred Shares 17,614,960
Class CC preferred Shares 8,048,037
Class JJ preferred Shares 1,472
Class KK preferred Shares 2,106,198
Class MM1 preferred Shares 1,378,727
Class MM2 preferred Shares 1,378,732
Class NN preferred Shares 6,017,296
Class OO preferred Shares 6,774,069
Class PP preferred Shares 6,553,697
Class UU preferred Shares 2,558,923
Class VV preferred Shares 902,475
Class WW preferred Shares 1,805,268
Class XX preferred Shares 1,504,185
Class YY preferred Shares 1,354,253
Class ZZ preferred Shares 2,708,448
Class AAA preferred Shares 1,504,203
Class BBB preferred Shares 2,708,165
Class CCC preferred Shares 1,382,070
Class DDD preferred Shares 1,503,719
Class EEE preferred Shares 1,409,127
Class FFF preferred Shares 751,841
Class SP preferred Shares 8,612
Total Investments in CATCo-Re Ltd. 353,330,814
The Company's assets and liabilities recorded at fair value have
been categorised based upon a fair value hierarchy as described in
the Company's significant accounting policies in Note 1. The
following table presents information about the Company's assets
measured at fair value:
Year ended 31 December 2013
Level 1 Level 2 Level 3 Total
Assets (at fair value)
Investments in securities
Investment in Master
Fund $ - $ - $ 408,828,848 $ 408,828,848
Total Investments in
securities $ - $ - $ 408,828,848 $ 408,828,848
Year ended 31 December 2012
Level 1 Level 2 Level 3 Total
Assets (at fair value)
Investments in securities
Investment in Master
Fund $ - $ - $ 353,330,814 $ 353,330,814
Total Investments in
securities $ - $ - $ 353,330,814 $ 353,330,814
Transfers between Levels 1 and 2 generally relate to whether a
market becomes active or inactive. Transfers between Levels 2 and 3
generally relate to whether significant relevant observable inputs
are available for the fair value measurements in their entirety.
See Note 1 for additional information related to the fair value
hierarchy and valuation techniques and inputs. All transfers are
recognised by the Company at the end of each reporting period.
There were no transfers between levels for the years ended 31
December 2013 and 2012.
The following table presents additional information about Level
3 assets and liabilities measured at fair value. Both observable
and unobservable inputs may be used to determine the fair value of
positions that the Company has classified within the Level 3 fair
value category. As a result, the unrealised gains and losses for
assets and liabilities within the Level 3 fair value category may
include changes in fair value that were attributable to both
observable and unobservable inputs.
Changes in Level 3 assets measured at fair value for the year
ended 31 December 2013 were as follows:
Change
in
Unrealised
Gains
Realised for
Beginning and change Trasfers Securities
Balance in Transfers (out) Ending Still
1 Unrealised Into of Balance held at
January Gains Level Level 31 December 31 Dec
2013 (Losses)(a) Purchases Sales Settlements 3 3 2013 2013 (b)
------------- -------------- ------------ ---------- ---------------- ------------ ---------- --------- ------------- ------------
Assets
(at fair
value)
Investments
in
Master
Fund $ 353,330,814 $74,998,034 $ - $ (19,5000,000) $ - $ - $ - $408,828,848 $74,998,034
------------- -------------- ------------ ---------- ---------------- ------------ ---------- --------- ------------- ------------
(a) Realised and change in unrealised gains are all included in
net investment loss allocated from the Master Fund and net gain on
securities in the statements of operations.
(b) The change in unrealised gains for the year ended 31
December 2013 for securities still held at 31 December 2013 are
reflected in net Investment loss allocated from the Master Fund and
net gain on securities in the statements of operations.
Changes in Level 3 assets measured at fair value for the period
ended 31 December 2012 were as follows:
Change
in
Unrealised
Gains
for
Securities
Realised Still
Beginning and change held
Balance in Transfers Ending at
1 Unrealised In/(Out) Balance 31 Dec
January Gains Level 31 December 2012
2012 (Losses)(a) Purchases Sales Settlements 3 2012 (b)
------------- -------------- ------------ -------------- ------ ------------ ---------- ------------- ------------
Assets (at
fair value)
Investments
in
Preferred $
shares $ 227,981,444 $14,849,370 $ 110,500,000 - $ - $ - $353,330,814 $14,849,370
------------- -------------- ------------ -------------- ------ ------------ ---------- ------------- ------------
(a) Realised and change in unrealised gains are all included in
net investment loss allocated from the Master Fund and net gain on
securities in the statements of operations.
(b) The change in unrealised gains for the year ended 31
December 2012 for securities still held at 31 December 2012 are
reflected in net investment loss allocated from the Master Fund and
net gain on securities in the statements of operations.
The table below summarises information about the significant
unobservable inputs used in determining the fair value of the
Master Fund's Level 3 assets:
Valuation Unobservable
Technique Input Range
---------------- ------------------------------- ------------------
Preferred Premium Premiums earned - straight 12 months
Shares earned line 5 to 6 months
+ investment Premiums earned - seasonality 0.10% to 0.15%
income adjusted 0 to contractual
- Loss reserve Investment income limit
Loss Reserves
---------- ---------------- ------------------------------- ------------------
As described in note 5, significant increases or decreases in
loss reserves would result in a significantly lower or higher fair
value measurement.
3. Concentration of credit risk
In the normal course of business, the Company maintains its cash
balances (not assets supporting retrocessional transactions) in
financial institutions, which at times may exceed federally insured
limits. The Company is subject to credit risk to the extent any
financial institution with which it conducts business is unable to
fulfill contractual obligations on its behalf. Management monitors
the financial condition of such financial institutions and does not
anticipate any losses from these counterparties. At 31 December
2013 and 2012, cash and cash equivalents are held with HSBC Bank
Bermuda Ltd. which has a credit rating of A and A+ as issued by
Standard & Poor's, respectively.
4. Concentration of reinsurance risk
The following table illustrates the diversified risk profile of
the Reinsurer's portfolio by geography and peril as at 31 December
2013.
2013 Retrocessional Reinsurance Portfolio
Geographic Distribution Exposure by Risk Peril
1. North America & Caribbean 36% 1. Wind 45%
2. All Other 15% 2. Earthquake 31%
3. Europe 9% 3. Back Up Protections 9%
4. Australia/ New Zealand 9% 4. Marine/Energy/Aviation 7%
5. Global Backup Protections 9% 5. Severe Convective Storms 3%
6. Global Marine/Energy/Terrorism/Aviation 8% 6. Flooding 2%
7. Japan 8% 7. Winterstorm/Wildfire 2%
Mexico/Central America/South
8. America 6% 8. Terrorism 1%
The following table illustrates the diversified risk profile of
the Reinsurer's portfolio by geography and peril as at 31 December
2012.
2012 Retrocessional Reinsurance Portfolio*
Geographic Distribution Exposure by Risk Peril
1. North America & Caribbean 39% 1. Wind 50%
2. Europe 13% 2. Earthquake 27%
3. Global Backup Protections 13% 3. Back Up Protections 13%
4. All Other 9% 4. Marine/Energy/Aviation 6%
5. Japan 9% 5. Severe Convective Storms 2%
6. Global Marine/Energy/Terrorism/ 7% 6. Flooding 1%
Mexico/Central America/South
7. America 6% 7. Terrorism 1%
8. Australia/ New Zealand 4%
*Presentation of note 4 was different in the 2012 audited
financial statements. Hence 2012 comparative is unaudited.
5. Loss Reserves
The following disclosures on loss reserves are included for
information and relate specifically to the Reinsurer and are
reflected through the valuations of investments held by the
Company.
The reserve for unpaid losses and loss expenses recorded by the
Reinsurer includes estimates for losses incurred but not reported
as well as losses pending settlement.
The Reinsurer makes a provision for losses on contracts only
when an event that is covered by the contract has occurred. When a
potential loss event has occurred, the Reinsurer obtains and uses
assessments from counter- parties as a baseline, incorporating its
own models and historical data regarding loss development, to
determine the level of reserves required.
Future adjustments to the amounts recorded as of period-end,
resulting from the continual review process, as well as differences
between estimates and ultimate settlements, will be reflected in
the Reinsurer's statement of operations in future periods when such
adjustments become known. Future developments may result in losses
and loss expenses materially greater or less than the reserve
provided.
During 2013, the Reinsurer paid claims of $65,256,034 pertaining
to the Christchurch, New Zealand earthquake in February 2011,
Tohoku, Japan earthquake in March 2011, Costa Concordia marine
disaster in January 2012 and Superstorm Sandy in October 2012.
6. Capital share transactions
As of 31 December 2013 and 2012, the Company has authorised
capital stock of 500,000,000 unclassified shares of par value
$0.0001 per share.
As of 31 December 2013 and 2012, the Company has issued
369,849,337 Class 1 Ordinary Shares (the "Shares").
Transactions in Shares during the year, and the Shares
outstanding and the net asset value ("NAV") per share are as
follow:
31 December 2013
Beginning Shares Shares Ending
Shares Issued Redeemed Shares
-------------------- ------------- -------- ---------- ------------
Class 1 - Ordinary
shares 369,849,337 - - 369,849,337
Beginning Amounts Amounts Ending Ending
Amounts Issued Redeemed Net Assets NAV
Per Share
-------------------- -------------- -------- ---------- ------------- -----------
Class 1 - Ordinary
shares $ 353,812,902 - $409,031,695 $1.1059
31 December 2012
Beginning Shares Shares Ending
Shares Issued Converted Shares
-------------------- ------------ ------------ -------------- ------------
Class 1 - Ordinary
shares 87,642,000 282,207,337 - 369,849,337
Class 2 - C Shares 244,118,029 - (244,118,029) -
Beginning Amounts Amounts Ending Ending NAV
Amounts Issued Converted Net Assets Per Share
---------------------- -------------- ------------- --------------- ------------- -----------
Class 1 - Ordinary
shares $ 87,750,750 $276,563,190 - $353,812,902 $0.9566
Class 2 - C Shares $ 250,296,737 - $(276,563,190)
The Company has been established as a closed-ended fund and, as
such, shareholders do not have the right to redeem their Shares.
The Shares are held in trust by Capita IRG Trustees Limited (the
"Depository") in accordance with the Depository Agreement between
the Company and the Depository. The Depository holds the Shares and
in turn issues depository interests in respect of the underlying
Shares which have the same rights and characteristics of the
Shares.
The Board has the ability to issue C Shares during any period
when the Master Fund has designated one or more investments as
"Side Pocket Investments". This typically will happen if a covered
or other pre-determined event has recently occurred or seems likely
to occur under an Insurance-Linked Instrument. In such
circumstances, only those Shareholders on the date that the
investment has been designated as a Side Pocket Investment will
participate in the potential losses and premiums attributable to
such Side Pocket investment. Any shares issued when side pockets
exist will be as C Shares that will participate in all of the
Master Fund's portfolio other than in respect of potential losses
and premiums attributable to any Side Pocket Investments in
existence at the time of issue. If no Side Pocket Investments are
in existence at the time of proposed issue, it is expected that the
Company will issue further Ordinary Shares.
On 2 August 2012 the Board of the Company announced that it has
declared a distribution (the "Distribution") to Ordinary
Shareholders of any proceeds it receives in connection with that
part of its investment in the Master Fund which is exposed to
potential losses arising from the Master Fund's investment in
reinsurance contracts linked to the Christchurch, New Zealand
earthquake and Tohoku, Japan earthquake Exposures.
The Distribution, if any, would be made to Ordinary Shareholders
on its register of members on 10 August 2012 (the "Record Date")
pro rata to the number of Ordinary Shares held on the Record Date,
as soon as practicable following receipt of any proceeds from the
Master Fund. In January 2014, the Board announced the declaration
of a contingent distribution in relation to the cessation of
Japanese Tohoku earthquake. Please refer to subsequent note 12 for
further details.
On 8 August 2012 the Board announced that the Master Fund in
which the Company invests had closed its side pocket associated
with the Christchurch, New Zealand earthquake and Tohoku, Japan
earthquake Exposures. As described in the Prospectus, this
triggered the conversion of C Shares into Ordinary Shares. The
conversion of 244,118,029 C Shares into 282,207,337 Ordinary Shares
was effective close of business 10 August 2012 with the admission
for the new Ordinary shares effective 13 August 2012.
On 9 January 2013, the Board declared a final dividend of
$0.05006 in respect of the Ordinary Shares with a record date of 18
January 2013. This final dividend was paid to shareholders on 27
March 2013.
7. Investment management agreement
Pursuant to the Investment Management Agreement dated 16
December 2010, the Investment Manager is empowered to formulate the
overall investment strategy to be carried out by the Company and to
exercise full discretion in the management of the trading,
investment transactions and related borrowing activities of the
Company in order to implement such strategy.
8. Related party transactions
The Investment Manager of the Company is also the Investment
Manager of the Master Fund and the Reinsurer. The Investment
Manager is entitled to a management fee, calculated and payable
monthly in arrears equal to 1/12 of 1.5% of the net asset value of
the Company, which is not attributable to the Company's investment
in the Master Fund Shares as at the last calendar day of each
calendar month. Management fees related to the investment in the
Master Fund shares are charged in the Master Fund and allocated to
the Company. Performance fees are charged in the Master Fund and
allocated to the Company.
Qatar Insurance Company, an affiliate of the Investment Manager,
holds 7.10% and 7.44% of the voting rights of the Ordinary Shares
issued in the Company as of 31 December 2013 and 2012 respectively.
In addition, the directors of the Company are also shareholders of
the Company.
9. Administrative Fee
Prime Management Limited (the "Administrator") a subsidiary of
SS&C GlobeOp serves as the Company's Administrator and performs
certain administrative services on behalf of the Company. For the
provision of the service under the administration agreement, the
Administrator receives a fixed fee.
10. Financial highlights
Class 1 Class 1 Class 2
Ordinary Shares Ordinary C Shares **
Shares
United States United States
Dollar Dollar
Per share operating performance
Net asset value, beginning of
year $0.9566 $ 0.9999 $ 1.0329
Income (loss) from investment
operations:
Net investment loss (0.0048) (0.0039) (0.0023)
Performance Fee #* (0.0234) 0.0120 (0.0112)
Management Fee (0.0153) (0.0146) (0.0096)
Net gain (loss) on investments 0.2429 (0.0368) 0.1231
Total from investment operations 0.1994 (0.0433) 0.1000
Dividend (0.0501) - -
Net asset value, end of year $1.1059 $ 0.9566 $ 1.1329**
Total return
Total return before performance
fee 23.28% (5.52)% 10.77%
Performance fee#* (2.44)% 1.20% (1.09)%
Total return after performance
fee 20.84% (4.32)% 9.68%
Ratios to average net assets
Expenses other than performance
fee (2.01)% (1.29)% (1.29)%
Performance fee#* (2.34)% 0.90% (1.22)%
Total expenses after performance
fee (4.35)% (0.39)% (2.51)%
Net investment loss (4.35)% (0.39)% (2.51)%
Adjusting the opening capital to reflect the dividend declared
on 9 January 2013, the normalised total return for 2013 is
equivalent to 21.9%
* The performance fee is charged in the Master Fund.
# At the time of the collapse of the Class 2 C Shares into the
Class 1 Ordinary Shares, there was a performance fee accrued on the
Class 2 C Shares that did not become payable on the collapse of the
Class 2 C Shares, but became attached to the exchanged Class 1
Ordinary Shares. Subsequent to the date of the collapse, the
accrued performance fee that attached to the exchanged Class 1
Ordinary Shares was reversed due to the performance of the Company.
As a result, the performance fee numbers and ratios for the
Ordinary shares appear income/recovery and not expense in 2012.
** Net asset value before conversion. Class 2 C Shares were
converted to Ordinary Shares 10 August 2012. The total return and
ratios have not been annualised.
The ratios to weighted average net assets are calculated for
each Class of Share taken as a whole. An individual shareholder's
return and ratios to weighted average net assets may vary from
these amounts based on the timing of capital transactions. Returns
and ratios shown above are for the year ended 31 December 2013 and
2012. Returns and ratios for periods of less than one year have not
been annualised. The per share amounts and ratios reflect income
and expenses allocated for the Master Fund.
11. Indemnifications or warranties
In the ordinary course of its business, the Company may enter
into contracts or agreements that contain indemnifications or
warranties. Future events could occur that lead to the execution of
these provisions against the Company. Based on its history and
experience, management believes that the likelihood of such an
event is remote.
12. Subsequent events
On 14 January 2014, the Board declared a final dividend of
$0.05737 per share in respect of the Ordinary Shares with a record
date of 24 January 2014 and was paid on 31 January 2014.
In addition, the Board announced on 14 January 2014 that it had
declared a contingent Distribution in relation to the cessation of
the Japanese Tohoku earthquake loss reserve for 2011 (as discussed
in Note 6) of $0.02887 per share to Ordinary Shares and was paid on
24 January 2014.
On 27 January 2014, the Board announced that the proposed return
of value to shareholders of $0.20 per existing Ordinary Share,
equivalent to approximately $74,000,000, and the subsequent share
capital consolidation were approved. Following the share capital
consolidation, a total of 299,577,962 Ordinary Shares were issued
effective 28 January 2014. In addition, a total of 9,705,008
Ordinary Shares were issued effective 29 January 2014.
These financial statements were approved by the Board of
Directors and available for issuance on 18 February 2014.
Subsequent events have been evaluated through this date.
For further information, please
contact:
CATCo Investment Management Ltd
Jason Bibb, Director
Telephone: +1 441 531 2227
Email: jason.bibb@catcoim.com
Mark Way, Corporate Communications
Telephone: +44 7786 116991
Email: mark.way@catcoim.com
Numis Securities Limited
David Benda / Hugh Jonathan
Telephone: +44 (0) 20 7260 1000
Prime Management Ltd
John Whiley
Tel: +1 (441) 295 0329
- Ends -
This information is provided by RNS
The company news service from the London Stock Exchange
END
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