TIDMCAT
RNS Number : 6674P
CATCo Reinsurance Opps Fund Ltd
22 February 2016
19 February 2016
CATCo Reinsurance Opportunities Fund Ltd. ("the Company")
Annual Financial Report
For the 12 month period 1 January 2015 to 31 December 2015
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.
2015 Highlights
-- Net Asset Value Return of 11.58%
-- Share price total return of 18.1%
-- 2015 annual dividend of $0.06619 per share paid to Shareholders
-- C Share capital raise of $91mn
CHAIRMAN'S STATEMENT 2015
Welcome to the 2015 CATCo Reinsurance Opportunities Fund Ltd.
(the "Company") Annual Report. The Company has delivered another
strong performance for the year ended 31 December 2015, achieving a
net return for Shareholders of 11.58 percent and exceeding the
Company's stated target annual net return of LIBOR plus 9 to 12
percent per annum. The Company outperformed the industry benchmark,
the Eurekahedge ILS Advisors Index, by 7.31 percent.
The 2015 net return was on track to equal last year's NAV return
of approximately 14 percent. However, in view of the UK flooding
event that occurred in late December, and increased levels of
uncertainty amongst the Company's reinsurance clients, the Board
decided it prudent to apply a conservative reserving approach for
the event at year-end. The Investment Manager expects that a
proportion of this reserve will be released during 2016.
2015 represented the fifth full year of operations of continued
solid performance with a share price total return of 18.1 percent,
which includes the annual dividend (at a rate of LIBOR plus 5
percent of the Company's NAV). The Company, the largest UK listed
collateralised retrocessional fund, forms part of the CATCo Group
which now has a combined private and public fund capital base of
approximately $3.2bn.
In 2014, Side Pocket Investments were created as a result of
U.S. severe convective storm events, amounting to around 3.5
percent of NAV. These loss reserves reduced during 2015 and as at
31 December 2015 amounted to 1 percent of NAV.
Over the course of 2015 the Investment Manager also released
loss reserves connected with the 2012 Superstorm Sandy Side Pocket
Investment, resulting in an additional NAV appreciation of 1
percent. The majority of the capital released from these Side
Pocket Investments has been redeployed into new contracts.
On 8 December 2015, Markel Corporation completed the purchase of
the majority of the assets of CATCo Investment Management Ltd., the
Company's investment manager. The strength of the combined brands
is reflected in the name of the Company's new investment manager,
Markel CATCo Investment Management Ltd. The Company enters 2016
with strong optimism thanks to continuing strong investor support
and an expanding and dedicated client base.
Capital Raising
Following strong demand from potential new investors and after
consulting with existing Shareholders, the Board took the decision
to raise additional capital in 2015. The exercise exceeded
expectations and the Company successfully raised $88.44mn in
October and a further $3.4mn in December from both new and existing
investors, issuing 91,835,018 new C Shares at a price of $1 per
share.
The additional capital was fully invested as of the 1 January
reinsurance renewals, which has enabled the Investment Manager to
meet the increased demand from reinsurance clients during this key
renewal date.
The separate share classification will remain until all Side
Pocket Investments have either been released or deemed immaterial,
limiting the new capital's exposure to legacy losses. The Company
has the flexibility to raise additional capital during 2016 should
significant events occur or if new and attractive investment
opportunities present themselves. Any further share placings under
the Placing Programme, which expires on 28 September 2016, will be
issued at a premium to the latest published Net Asset Value per
Ordinary Share to cover the associated costs and expenses.
Dividend and Tender Offer
In order to make an investment in the Company more attractive to
a wider range of investors, the Board has introduced a policy under
which is has the capability to implement a Return of Value Tender
Offer at the end of each fiscal year. This is in addition to the
annual dividend, which has a target annual distribution equal to
LIBOR plus 5 percent of NAV.
The Tender Offer will be offered at the Board's discretion and
only if the Company's shares have been trading at a discount to the
Net Asset Value per share as at 31 October in a particular year. No
Return of Value Tender Offer was made in 2015.
An annual dividend of $0.06619 in respect of Ordinary Shares
will be paid to Shareholders on 26 February 2016 as announced on 29
January 2016.
Shareholders
I would like to thank Shareholders for their continued support
throughout 2015 and increased support for 2016. In addition the
Board greatly appreciates the hard work demonstrated by the
Investment Management team during 2015 resulting in another
successful year for the Company. I would also like to welcome
Markel Corporation as the new owners of the Investment Manager.
Nigel Barton
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
19 February 2016
Manager's Review
In September 2015 CATCo Investment Management Ltd. agreed to
sell substantially all of its assets to Markel Corporation
("Markel"), a U.S.-based financial holding company with a strong
presence in specialty insurance and reinsurance products. The deal
completed as planned on 8 December 2015 with the establishment of
Markel CATCo Investment Management Ltd. ("the Investment Manager"
or "Markel CATCo IM"). Markel CATCo IM was subsequently appointed
by the Company as the new investment manager entity and serves as
the investment manager for Markel CATCo Reinsurance Fund Ltd. and
insurance manager for Markel CATCo Re Ltd. (collectively "Markel
CATCo"). We believe Markel CATCo offers investors and clients extra
financial support, scale and the opportunity to develop new
products.
Founded in 1930 and headquartered in Virginia, U.S., Markel is
listed on the New York Stock Exchange (MKL). As at the date of this
report Markel has a market capitalisation of over $12bn and 2015
operating revenues of more that $5bn. Over the past two decades it
has significantly expanded both globally and by class of business.
In May 2013, Markel increased the scope of its business by
purchasing Bermuda based reinsurer Alterra Capital Holdings Limited
for $3.3bn.
In addition to sharing a similar culture and goals, we believe
Markel offers the ability to access additional resource if it is
needed. We are excited by the opportunities this union offers
Markel CATCo's clients and investors with the combination of Markel
CATCo's ILS investment management and differentiated product
innovation capabilities complementing Markel's brand and global
reach.
2015 Significant Loss Events Update
2015 saw the lowest level of catastrophe losses since 2009 with
total economic losses amounting to approximately $90bn, of which
approximately $27bn were insured, according to Munich Re.
The largest insured loss from a natural catastrophe came from a
series of winter storms which struck North-Eastern U.S. and Canada
in February 2015, causing cumulative claims of $2.1bn. This could
yet be surpassed by flooding in Northern England and Scotland
during December 2015, with early estimates suggesting claims could
be between $2.3bn and $3.3bn. As these estimates are significantly
lower than the loss levels used to set the reserves at the end of
December 2015, the Investment Manager is confident that a
proportion of these reserves will be released during 2016.
A series of large explosions at the Chinese port city of Tianjin
on August 12(th) was the most costly manmade disaster of 2015.
Industry claims of at least $2bn are expected.
As a result of the relatively uneventful catastrophe year,
portfolio losses from the 2015 events were approximately 4.25
percent due principally to the winter storm in the U.S. and Canada,
the Tianjin explosion and the UK floods. The small Tianjin exposure
was fully settled at 31 December 2015 and the conservative loss
reserve put in place for the UK floods is expected to be partly
released during 2016 as the losses materialise.
Outlook
The Investment Manager has continued to build a robust and
diversified investment portfolio for 2016, with a broad geographic
spread and balanced exposure to differing risk perils. While the
soft market presents challenges, it has also enabled the purchase
of broader balance sheet protections for 2016, mainly in the form
of ILWs, at a similar price year-on-year.
It is expected that excess capacity in the reinsurance sector
and the three-year absence of significant natural catastrophe
losses will continue to exert downward pressure on traditional
reinsurance pricing as we move into 2016. Property catastrophe
rates on line were down 7 to 10 percent at 1 January 2016, although
it is the opinion of Guy Carpenter that the rate of decline has
moderated, particularly for U.S. property catastrophe risks.
The Investment Manager will continue to practice underwriting
discipline and prudent capital management and will look to take
advantage of the challenging operating environment. The ability to
further de-risk the portfolio will also be taken on an
opportunistic basis.
Anthony Belisle
Chief Executive Officer
Markel CATCo Investment Management Ltd.
19 February 2016
REVIEW OF BUSINESS
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A review of the Company's activities is given in the Chairman's
Statement and in the Manager's 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, CATCo Reinsurance Fund
(the "Master Fund") and Markel CATCo Reinsurance Fund Ltd. (the
"Markel CATCo Master Fund") is to give their 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
Preference Shares of the Reinsurer, CATCo-Re Ltd. (for the year
ended 31 December 2015, and, for future years, in preference shares
of Markel CATCo Re Ltd. (the "Markel CATCo Reinsurer"). The
Company's investment policy appears below, 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 and the Markel CATCo Master Fund intend 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 and the Markel CATCo Master Fund intend
that:
-- no more than 20 percent of their respective capital will be
exposed to a single catastrophic event;
-- their respective 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 or the Markel
CATCo Master Fund, as appropriate;
-- their respective capital will be exposed to aviation and
marine (including offshore energy) losses caused by catastrophes;
and
-- at least 50 percent of their respective capital will be
exposed to residential and commercial property losses.
At 31 December 2015, the Portfolio of Investments re ects 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 50 diversi ed 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 diversi cation 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
273,224,673 Ordinary Shares of $0.0001 par value each entitled
to one vote as at 1 January 2016. On 2 November 2015, the Company
issued 88,435,018 C Shares, and a further 3,400,000 C Shares on 7
December 2015, resulting in a total of 91,835,018 C Shares as at 1
January 2016.
Total Assets and Net Asset Value
At 31 December 2015, the Company had Total Assets of $437.1mn
and a Net Asset Value per Ordinary Share of $1.2705.
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 and the Markel CATCo
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 portfolio managed by Markel CATCo
Investment Management Limited consist of fully collateralised
reinsurance contracts 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.
Monitoring Performance
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.
Management of Risk
The Manager's risk objectives are closely linked to their
performance goals. They seek to optimise trade-offs to ensure that
they meet their return objectives, control the volatility of these
returns, track underlying liquidity and identify and manage
macro-factor 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.
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 Ordinary Shareholders for the
year amounted to 11.58% (2014 - 14.08%).
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 USD0.06619 in respect of the Ordinary
Shares for the year to 31 December 2015 was declared on 29 January
2016.
The record date for this dividend was 12 February 2016 and the
Ordinary Shares went ex-dividend on 11 February 2016. The dividend
will be paid to Shareholders on 26 February 2016.
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 present fairly in all material respects 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 the 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, Markel CATCo Investment Management Ltd. The maintenance
and integrity of the website maintained by Markel CATCo Investment
Management Ltd. is, so far as it relates to the Company, the
responsibility of Markel 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 present fairly the assets, liabilities,
financial position and profit or loss of the Company.
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Furthermore, each Director confirms that, to the best of his or
her knowledge, 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.
Nigel Barton
Chairman, CATCo Reinsurance Opportunities Fund Ltd.
19 February 2016
AUDITED STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States 31 December 31 December
Dollars) 2015 2014
--------------------------------- -------------- --------------
Assets $ $
--------------------------------- -------------- --------------
Investment in CATCo Reinsurance
Fund Ltd.
- CATCo Diversified Fund,
at fair value 347,516,987 363,800,160
--------------------------------- -------------- --------------
Cash and cash equivalents 1,839,305 106,162
--------------------------------- -------------- --------------
Advance subscription in
Markel CATCo Reinsurance
Fund Ltd. 88,000,000 -
- Markel CATCo Diversified
Fund
--------------------------------- -------------- --------------
Other assets 30,125 30,566
--------------------------------- -------------- --------------
Total assets 437,386,417 363,936,888
--------------------------------- -------------- --------------
Liabilities
--------------------------------- -------------- --------------
Accrued expenses and other
liabilities 282,989 211,261
--------------------------------- -------------- --------------
Total liabilities 282,989 211,261
--------------------------------- -------------- --------------
Net assets 437,103,428 363,725,627
--------------------------------- -------------- --------------
NAV per Share (See Note 6)
See accompanying Notes to Financial Statements
AUDITED STATEMENTS OF OPERATIONS
Year Ended Year Ended
(Expressed in United States 31 December 31 December
Dollars) 2015 2014
----------------------------------- -------------- ---------------
$ $
----------------------------------- -------------- ---------------
Net investment loss allocated
from
CATCo Reinsurance Fund
Ltd. - CATCo Diversified
Fund
----------------------------------- -------------- ---------------
Interest 7,768 15,251
----------------------------------- -------------- ---------------
Miscellaneous income 2,992 140,791
----------------------------------- -------------- ---------------
Management fee (4,987,744) (5,136,652)
----------------------------------- -------------- ---------------
Performance fee (4,274,137) (5,083,337)
----------------------------------- -------------- ---------------
Professional fees and other (383,083) (288,299)
----------------------------------- -------------- ---------------
Administrative fee (157,199) (190,215)
----------------------------------- -------------- ---------------
Net investment loss allocated
from
CATCo Reinsurance Fund
Ltd. -
CATCo Diversified Fund (9,791,403) (10,542,461)
----------------------------------- -------------- ---------------
Company expenses
----------------------------------- -------------- ---------------
Professional fees and other (2,468,689) (1,646,002)
----------------------------------- -------------- ---------------
Administrative fee (54,000) (54,000)
----------------------------------- -------------- ---------------
Management fee (18,175) (22,314)
----------------------------------- -------------- ---------------
Total Company expenses (2,540,864) (1,722,316)
----------------------------------- -------------- ---------------
Net investment loss (12,332,267) (12,264,777)
----------------------------------- -------------- ---------------
Net realised gain and net
decrease in unrealised
appreciation on securities
allocated from CATCo Reinsurance
Fund Ltd. -
CATCo Diversified Fund
----------------------------------- -------------- ---------------
Net realised gain on securities 51,154,113 78,813,489
----------------------------------- -------------- ---------------
Net decrease / increase
in unrealised appreciation
on securities (2,445,883) (18,697,603)
----------------------------------- -------------- ---------------
Net gain on securities 48,708,230 60,115,886
----------------------------------- -------------- ---------------
Net increase in net assets
resulting from operations 36,375,963 47,851,109
----------------------------------- -------------- ---------------
See accompanying Notes to Financial Statements
AUDITED STATEMENTS OF CHANGES IN NET ASSETS
Year Ended Year Ended
(Expressed in United States 31 December 31 December
Dollars) 2015 2014
---------------------------------- ------------- -------------
$ $
---------------------------------- ------------- -------------
Operations
---------------------------------- ------------- -------------
Net investment loss (12,332,267) (12,264,777)
---------------------------------- ------------- -------------
Net realised gain on securities 51,154,113 78,813,489
---------------------------------- ------------- -------------
Net (decrease) / increase
in unrealised appreciation
on securities (2,445,883) (18,697,603)
---------------------------------- ------------- -------------
Net increase in net assets
resulting from operations 36,375,963 47,851,109
---------------------------------- ------------- -------------
Capital share transactions
---------------------------------- ------------- -------------
Issuance of Class C Shares 91,838,761 -
---------------------------------- ------------- -------------
Dividend declared (17,999,434) (23,748,656)
---------------------------------- ------------- -------------
Return of value distribution (34,997,045) (63,536,808)
---------------------------------- ------------- -------------
Offering costs (1,840,444) -
---------------------------------- ------------- -------------
Share buyback - (5,871,713)
---------------------------------- ------------- -------------
Net increase/(decrease)
in net assets resulting
from capital share transactions 37,001,838 (93,157,177)
---------------------------------- ------------- -------------
Net increase / (decrease)
in net assets 73,377,801 (45,306,068)
---------------------------------- ------------- -------------
Net assets, at 1 January
2015 363,725,627 409,031,695
---------------------------------- ------------- -------------
Net assets, at 31 December
2015 437,103,428 363,725,627
---------------------------------- ------------- -------------
See accompanying Notes to Financial Statements
AUDITED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
(Expressed in United States 31 December 31 December
Dollars) 2015 2014
-------------------------------------------- ------------- -------------
$ $
-------------------------------------------- ------------- -------------
Cash flows from operating
activities
-------------------------------------------- ------------- -------------
Net increase in net assets
resulting from operations 36,375,963 47,851,109
-------------------------------------------- ------------- -------------
Adjustments to reconcile
net increase in net assets
resulting from operations
to net cash (used in)/provided
by operating activities:
-------------------------------------------- ------------- -------------
Net investment loss, net
realised gain and net decrease
in unrealised appreciation
on securities allocated
from CATCo Reinsurance
Fund Ltd. - CATCo Diversified
Fund (38,916,827) (49,573,425)
-------------------------------------------- ------------- -------------
Sale of investment in
CATCo Reinsurance Fund
Ltd. - CATCo Diversified
Fund 55,200,000 104,902,113
-------------------------------------------- ------------- -------------
Purchase of investment
in
CATCo Reinsurance Fund
Ltd. -
CATCo Diversified Fund - (10,300,000)
-------------------------------------------- ------------- -------------
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Changes in operating assets
and liabilities:
-------------------------------------------- ------------- -------------
Other assets 441 36,466
-------------------------------------------- ------------- -------------
Advance subscription in
Markel CATCo Reinsurance
Fund Ltd. - Markel CATCo
Diversified Fund (88,000,000) -
-------------------------------------------- ------------- -------------
Accrued expenses and other
liabilities 71,728 61,273
-------------------------------------------- ------------- -------------
Management fee payable - (254)
-------------------------------------------- ------------- -------------
Net cash (used in)/provided
by operating activities (35,268,695) 92,977,282
-------------------------------------------- ------------- -------------
Cash flows from financing
activities
-------------------------------------------- ------------- -------------
Issuance of Class C Shares 91,838,761 -
-------------------------------------------- ------------- -------------
Dividend paid (17,999,434) (23,748,656)
-------------------------------------------- ------------- -------------
Return of value distribution
paid (34,997,045) (63,536,808)
-------------------------------------------- ------------- -------------
Offering costs (1,840,444) -
-------------------------------------------- ------------- -------------
Share buyback - (5,871,713)
-------------------------------------------- ------------- -------------
Net cash provided by/(used
in) financing activities 37,001,838 (93,157,177)
-------------------------------------------- ------------- -------------
Net increase/(decrease)
in cash and cash equivalents 1,733,143 (179,895)
-------------------------------------------- ------------- -------------
Cash and cash equivalents,
at 1 January 2015 106,162 286,057
-------------------------------------------- ------------- -------------
Cash and cash equivalents,
at 31 December 2015 1,839,305 106,162
-------------------------------------------- ------------- -------------
See accompanying Notes to Financial Statements
NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2015
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 Master Fund 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. and its
segregated account, Aquilo Re (the "Reinsurer"). At 31 December
2015, the Company's ownership is 15% of the Master Fund (19% at 31
December 2014).
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, fires, explosions,
marine and other perils.
On 10 September 2015, Markel Corporation ("Markel") and the
Investment Manager jointly announced that they had entered into an
agreement (the "Acquisition") whereby Markel would acquire
substantially all of the assets of the Investment Manager.
On 8 December 2015, the Acquisition was completed and
substantially all of the assets of the Investment Manager were
acquired by Markel. As a result of the Acquisition, Markel CATCo
Investment Management Ltd. ("Markel CATCo") commenced operation and
the Investment Manager's management team, led by Chief Executive
Officer Anthony Belisle, has transitioned into commensurate roles
at Markel CATCo and continues to operate the business from its
Hamilton, Bermuda headquarters, now under Markel's ultimate
ownership.
On 8 December 2015, Markel CATCo entered into a Run-Off Services
Agreement with CATCo Investment Management Ltd., under which the
former will provide services relating to the management of the
run-off business of CATCo Investment Management Ltd.
As a result of the completion of the Acquisition, effective 1
January 2016, the Company will conduct substantially all of its
investment activities through the Markel CATCo Diversified Fund
(the "Markel CATCo Master Fund"), a segregated account of Markel
CATCo Reinsurance Fund Ltd. (the "Markel CATCo SAC"), instead of
the Master Fund. Meanwhile, the Company will retain an interest in
any run-off business of the Master Fund until such business is
liquidated.
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"). The Company is an investment company and follows the
accounting and reporting guidance contained within Topic 946 of the
Financial Accounting Standards Board's Accounting Standards
Codification ("ASC").
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, 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 Investment Manager 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 Investment Manager. Unobservable inputs reflect
the assumptions of the Investment Manager in conjunction with the
Board of Directors of the Master Fund (the "Board of the Master
Fund") 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.
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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 Investment Manager 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); minus
(v) the amount of any risk margin considered necessary to re ect
uncertainty and to compensate a market participant for bearing the
uncertainty of cash ows in an exit of the transaction.
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.
Derivative Financial Instruments
The Master Fund uses derivative financial instruments such as
ILWs, which are recorded at fair value as at the reporting date.
Realised and unrealised appreciation or depreciation in fair values
are included in net gain on securities and derivatives in the
Statements of Operations in the period in which the changes
occur.
The fair value of derivative financial instruments at the
reporting date generally reflects the amount that the Master Fund
would receive or pay to terminate the contract at the reporting
date. These derivative financial instruments used by the Master
Fund are fair valued similar to preference shares held with respect
to reinsurance agreements, unless otherwise unavailable, except
that following a Covered Event, loss information from the index
provider on the trade will be used.
Investments in Securities held by the Reinsurer
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, net of acquisition costs, 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 management and 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 Pocket Investments
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The Board of the Master Fund, 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 Statements of
Assets and Liabilities at their fair value as determined in good
faith by the Investment Manager.
Financial Instruments
The fair values of the Company's assets and liabilities, which
qualify as nancial 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, realised gains and losses and increases and
decreases in unrealised appreciation 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 (decrease)/increase in unrealised appreciation on securities
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 2015. 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 years ended 31 December 2015 and 2014.
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 years ended 31 December 2015 and 2014.
Use of Estimates
The preparation of Financial Statements in conformity with GAAP
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
against paid-in capital 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 2015.
Preference Shares - $ Fair
Investments in CATCo-Re Ltd. Value
Class AE Preference Shares 1,223,811
Class AF Preference Shares 711,469
Class AH Preference Shares 895,303
Class BE Preference Shares 673,307
Class BF Preference Shares 770,068
Class BJ Preference Shares 1,548,021
Class BV Preference Shares 5,263,700
Class BW Preference Shares 866,351
Class CF Preference Shares 1,420,588
Class CG Preference Shares 1,425,306
Class CJ Preference Shares 5,706,906
Class CL Preference Shares 2,446,006
Class CM Preference Shares 1,158,793
Class CY Preference Shares 714,540
Class CZ Preference Shares 8,429,733
Class DA Preference Shares 1,395,503
Class DB Preference Shares 5,597,618
Class DC Preference Shares 5,021,051
Class DE Preference Shares 1,593,616
Class DF Preference Shares 7,534,096
Class DG Preference Shares 2,392,942
Class DH Preference Shares 8,841,186
Class DI Preference Shares 3,772,307
Class DJ Preference Shares 19,751,999
Class DK Preference Shares 14,738,984
Class DL Preference Shares 20,926,012
Class DM Preference Shares 4,636,909
Class DN Preference Shares 15,010,496
Class DO Preference Shares 29,617,064
Class DP Preference Shares 15,745,974
Class DQ Preference Shares 2,943,777
Class DR Preference Shares 4,336,655
Class DS Preference Shares 44,816,134
Class DU Preference Shares 2,943,540
Class DV Preference Shares 7,477,724
Class DX Preference Shares 7,366,567
Class DZ Preference Shares 1,775,307
Class EA Preference Shares 9,873,258
Class EB Preference Shares 1,541,880
Class ED Preference Shares 125,845
Class EF Preference Shares 539,505
Class EQ Preference Shares 2,941,917
Class ES Preference Shares 5,193,364
Class ET Preference Shares 2,210,704
Class FL Preference Shares 1,376,670
Class FM Preference Shares 363,857
Class FN Preference Shares 710,910
Class FO Preference Shares 14,124,277
Class FP Preference Shares 132,965
Class KK Preference Shares 1,026,955
Class W Preference Shares 1,193
Total Investments in CATCo-Re Ltd. $301,652,663
Investments in Aquilo Re $ Fair
Value
Aquilo Re Series AQ001 221,134
Aquilo Re Series AQ002 2,984,020
Aquilo Re Series AQ003 1,141,892
Aquilo Re Series AQ004 329,592
Total Investments in Aquilo Re $4,676,638
Total Investments in Preference Shares $306,329,301
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 2014.
Preference Shares - $ Fair Value
Investments in CATCo-Re
Ltd.
CLASS AA Preference Shares 16,495,985
CLASS CC Preference Shares 1,482,939
CLASS KK Preference Shares 1,317,978
CLASS S Preference Shares 1,631,152
CLASS T Preference Shares 4,393,771
CLASS W Preference Shares 1,745
CLASS X Preference Shares 113,161
CLASS Z Preference Shares 1,717
CLASS SP Preference Shares 6,922
Class AE Preference Shares 9,537,737
Class AF Preference Shares 4,026,172
Class AH Preference Shares 18,487,683
Class AI Preference Shares 11,545,265
Class AK Preference Shares 21,492,687
Class AO Preference Shares 7,539,690
Class AP Preference Shares 11,310,765
Class AQ Preference Shares 983,913
Class AR Preference Shares 9,613,666
Class AT Preference Shares 4,711,550
Class AU Preference Shares 2,825,849
Class BE Preference Shares 855,429
Class BF Preference Shares 848,257
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Class BI Preference Shares 57,317,785
Class BJ Preference Shares 9,765,769
Class BK Preference Shares 2,636,985
Class BL Preference Shares 25,263,307
Class BM Preference Shares 2,167,473
Class BN Preference Shares 24,509,144
Class BO Preference Shares 34,879,376
Class BP Preference Shares 940,292
Class BQ Preference Shares 2,259,750
Class BR Preference Shares 663,950
Class BS Preference Shares 167,207
Class BT Preference Shares 3,344,267
Class BU Preference Shares 3,768,530
Class BV Preference Shares 6,690,382
Class BW Preference Shares 917,428
Class CE Preference Shares 9,425,138
Class CF Preference Shares 1,826,878
Class CG Preference Shares 1,823,736
Class CH Preference Shares 24,238
Class CI Preference Shares 4,574,054
Class CJ Preference Shares 3,626,957
Class CK Preference Shares 1,883,649
Class CL Preference Shares 2,756,983
Class CM Preference Shares 3,520,926
Class CN Preference Shares 2,746,540
Class CO Preference Shares 941,062
Class CP Preference Shares 1,884,111
Class CQ Preference Shares 4,240,764
Class CR Preference Shares 6,076,446
Class CS Preference Shares 3,769,077
Class CT Preference Shares 3,769,438
Class CU Preference Shares 98,186
Class CV Preference Shares 2,319,849
Class CY Preference Shares 900,403
Total Investments in CATCo-Re
Ltd. $360,724,113
Included within the Company's investment in the Master Fund is
cash and cash equivalents held in trust by the Master Fund
representing the Company's proportionate share of derivative
transactions entered into by the Master Fund amounting to
approximately $42,730,882 (2014 - nil). The total balance of
investments held in the Master Fund of $347,516,987 is net of
undeployed cash, performance fee and management fee accruals
recorded by the Master Fund.
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 2015
Level Level Level 3 Total
1 2
Assets (at fair
value)
Investments in
securities
Investment in Master
Fund - - $347,516,987 $347,516,987
Total Investments
in securities - - $347,516,987 $347,516,987
Year ended 31 December 2014
Level Level Level 3 Total
1 2
Assets (at fair
value)
Investments in
securities
Investment in Master
Fund - - $363,800,160 $363,800,160
Total Investments
in securities - - $363,800,160 $363,800,160
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 2015 and 2014.
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 2015 were as follows:
Unrealised
Appreciation
on Securities
Realised held
Beginning and Unrealised Ending at
Balance Appreciation Balance 31 Dec.
1 Jan. on Securities 31 Dec. 2015
2015 (a) Purchases Sales 2015 (b)
------------- ------------- ---------------- ---------- -------------- --------------- ---------------
Assets (at fair
value)
Investments
in
Master
Fund $363,800,160 $38,916,827 $(55,200,000) $347,516,987 $38,916,827
------------- ------------- ---------------- ---------- -------------- --------------- ---------------
(a) Realised and unrealised appreciation on securities are both
included in net investment loss allocated from the Master Fund and
net gain on securities in the Statements of Operations.
(b) The unrealised appreciation for the year ended 31 December
2015 for securities held at 31 December 2015 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 2014 were as follows:
Unrealised
Realised Appreciation
Beginning and Unrealised Ending on Securities
Balance Appreciation Balance held at
1 Jan. on Securities 31 Dec. 31 Dec.
2014 (a) Purchases Sales 2014 2014 (b)
------------- ------------- ---------------- ------------ ---------------- ------------- ----------------
Assets (at fair
value)
Investments
in
Master
Fund $408,828,848 $49,573,425 $10,300,000 $ (104,902,113) $363,800,160 $47,043,025
------------- ------------- ---------------- ------------ ---------------- ------------- ----------------
(a) Realised and unrealised appreciation on securities are both
included in net investments loss allocated from the Master Fund and
net gain on securities in the Statements of Operations.
(b) The unrealised appreciation for the year ended 31 December
2014 for securities still held at 31 December 2014 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:
Type of Valuation Unobservable Range
Investment Technique Input
Preference Premium Premiums earned - straight 12 months
Shares earned line for uniform perils 5 to 6 months
Premiums earned - seasonality 0 to contractual
Loss reserves adjusted for non-uniform limit
Risk margin perils 0% to 15%
Loss reserves*
Risk margin
*Based on 'from ground up' losses as reported by cedants
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
nancial institutions, which at times may exceed federally insured
limits. The Company is subject to credit risk to the extent any
nancial institution with which it conducts business is unable to
ful ll contractual obligations on its behalf. Management monitors
the nancial condition of such nancial institutions and does not
anticipate any losses from these counterparties. At 31 December
2015 and 2014, cash and cash equivalents are held with HSBC Bank
Bermuda Ltd. which has a credit rating of A- as issued by Standard
& Poor's.
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
2015.
2015 Retrocessional Reinsurance Portfolio
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Geographic Distribution Exposure by Risk Peril
1. North America/Caribbean 47% 1. Wind 41%
2. All Other 11% 2. Earthquake 21%
3. Global Backup Protections 10% 3. Any Natural Peril 12%
4. Europe 9% 4. Backup Protections 10%
Global Marine/Energy/Terrorism/ Marine/Energy/Aviation/
5. Aviation/Satellite 7% 5. Satellite 4%
Mexico/Central America/South Severe Convective
6. America 6% 6. Storms 3%
7. Japan 6% 7. Terrorism 3%
8. Australia/New Zealand 4% 8. Winterstorm/Wildfire 3%
9. Flooding 2%
The following table illustrates the diversified risk profile of
the Reinsurer's portfolio by geography and peril as at 31 December
2014.
2014 Retrocessional Reinsurance Portfolio
Geographic Distribution Exposure by Risk Peril
1. North America/Caribbean 32% 1. Wind 44%
2. All Other 25% 2. Earthquake 27%
Global Marine/Energy/Terrorism/
3. Aviation 9% 3. Marine/Energy/Aviation 9%
4. Global Backup Protections 8% 4. Backup Protections 8%
Severe Convective
5. Europe 7% 5. Storms 5%
6. Australia/New Zealand 7% 6. Winterstorm/Wildfire 3%
7. Japan 6% 7. Flooding 2%
Mexico/Central America/South
8. America 6% 8. Terrorism 2%
5. LOSS RESERVES
The following disclosures on loss reserves are included for
information and relate speci cally to the Reinsurer and are re
ected 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 uses its own
models and historical loss analysis data as well as assessments
from counter-parties to estimate the level of reserves required. In
addition, the Reinsurer records risk margin to re ect uncertainty
surrounding cash ows relating to loss reserves.
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 re ected 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 2015, the Reinsurer paid claims of $53,182,138 (2014
$41,921,429) pertaining to Superstorm Sandy in October 2012. In
addition, $24,390,527 (2014 $10,128,514) was paid in relation to
2014 and 2015 U.S. Severe Convective Storm and U.S. Winterstorm
exposures.
6. CAPITAL SHARE TRANSACTIONS
As of 31 December 2014, the Company has authorised share capital
of US$74,019,867.40 divided into 500,000,000 unclassified shares of
US$0.0001 each and B Shares of such nominal value as the Board of
Directors of the Company (the "Board") may determine upon issue. On
28 October 2015, the Board re-designated the authorised share
capital of the Company such that it is divided into 1,500,000,000
unclassified shares of US$0.0001 each and B Shares of such nominal
value as the Board may determine upon issue.
As of 31 December 2015 and 2014, the Company has issued
273,224,673 and 303,582,970 Class 1 Ordinary Shares (the "Shares"),
respectively. On 2 November 2015, the Company issued 88,435,018 C
Shares (the "C Shares"). In addition, the Company issued an
additional 3,400,000 C Shares on 7 December 2015, resulting in a
total of 91,835,018 C Shares as at 31 December 2015.
Transactions in Shares during the year, and the Shares
outstanding and the Net Asset Value ("NAV") per Share are as
follows:
31 December 2015
Beginning Adjustment Share Ending Ending Ending
Shares following Issuance Shares Net Assets NAV
Share Per Share
Capital
Consolidation
----------- -------------- --------------- ----------- -------------- --------------- -----------
Class
1 -
Ordinary
Shares 303,582,970 (30,358,297) - 273,224,673 $347,105,110 $1.2705
Class
C Shares - - 91,835,018 91,835,018 $89,998,318 $0.9800
-------------- --------------- ----------- -------------- --------------- -----------
$437,103,428
31 December 2014
Beginning Adjustment Share Ending Ending Ending NAV
Shares following Buyback Shares Net Assets Per Share
Share
Capital
Consolidation
--------------- ------------ --------------- ------------ ------------ ------------- -----------
Class
1 - Ordinary
Shares 369,849,337 (60,566,367) (5,700,000) 303,582,970 $363,725,627 $1.1981
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 5 January 2015, the Board declared a dividend of $0.05929 per
Share in respect of the Ordinary Shares with a record date of 16
January 2015 and was paid on 30 January 2015.
In addition, the Board announced on 5 January 2015 that the
proposed return of value to Shareholders of $0.11528 per existing
Ordinary Share, equivalent to approximately $35,000,000, and the
subsequent share capital consolidation was approved. Following the
share capital consolidation, a total of 273,224,673 Ordinary Shares
were in issue effective 30 January 2015 and the return of value
paid to Shareholders on 9 February 2015 amounted to
$34,997,045.
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. The Investment Manager
earns a fee for providing such services (see Note 8).
8. RELATED PARTY TRANSACTIONS
The Investment Manager of the Company is also the Investment
Manager of the Master Fund. 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's
Shares as at the last calendar day of each calendar month.
Management fees related to the investment in the Master Fund's
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.
The Investment Manager is also the Insurance Manager of the
Reinsurer.
Qatar Insurance Company, which holds the entire share capital of
the Investment Manager, held 2.51% and 5.39% of the voting rights
of the Ordinary Shares issued in the Company as of 31 December 2015
and 31 December 2014 respectively. Furthermore, Markel held 27.22%
of the voting rights of the C Shares issued in the Company as of 31
December 2015.
The Company made an advance subscription of $88mn to Markel
CATCo Reinsurance Fund Ltd. - Markel CATCo Diversified Fund on 30
December 2015.
In addition, three of the Directors of the Company are also
Shareholders of the Company.
9. ADMINISTRATION FEE
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