TIDMCAT
RNS Number : 2887Y
CATCo Reinsurance Opps Fund Ltd
02 March 2017
2 March 2017
CATCo Reinsurance Opportunities Fund Ltd. (the "Company")
Annual Financial Report
For the 12 month period 1 January 2016 to 31 December 2016
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.
2016 Highlights
-- Net Asset Value Return of 8.12% (Ordinary Shares) and 7.27% (C Shares)
-- NAV total return since inception of 74.81%
-- 2016 annual dividend of $0.07180 per share in respect of
Ordinary Shares and $0.05795 in respect of the C Shares
-- Outperformed industry benchmark by 57% (Ordinary Shares) and 40% (C Shares)
CHAIRMAN'S STATEMENT
Welcome to the 2016 Annual Report for CATCo Reinsurance
Opportunities Fund Ltd. (the "Company"). For the year ended 31
December 2016 the Company achieved a net return for Shareholders of
8.12 percent for the Ordinary Shares and 7.27 percent for the C
Shares. This is despite the number of significant catastrophic
events that occurred during the year, making 2016 the worst year
for insured losses since 2012 (Source: Munich Re).
The Company's Ordinary and C Shares significantly outperformed
the industry benchmark, the Eurekahedge ILS Advisors Index (2016:
5.18 percent), by 57 percent and 40 percent respectively. This is
the sixth year in a row that the financial performance of the
Company has significantly exceeded the index.
Furthermore, 2016 represented continued solid performance with a
NAV total return since inception of 74.81 percent, which includes
the annual dividend (at a rate of LIBOR plus 5 percent of the
Company's Net Asset Value ("NAV")) and the prior year's return of
value. The Company forms part of the Markel CATCo group of
companies ("the Group") which now has combined private and public
fund assets under management ("AUM") of approximately $4.3
billion.
In 2014, Side Pocket Investments ("SPI's") were created as a
result of U.S. severe convective storm events, amounting to
approximately 3.5 percent of the Company's NAV at the time. As at
31 December 2016, these SPI's represented approximately 1.6 percent
of the Ordinary Share NAV (31 December 2015: 1.5 percent).
In 2015, SPI's were created principally as a result of the
winter storms in the U.S. and Canada, the Tianjin explosion in
China and the UK floods. In the first quarter of 2016, the
Investment Manager was able to release the entire Side Pocket
Investment and loss reserve in relation to the UK floods, resulting
in a 1 percent appreciation in the Ordinary Share NAV. As at 31
December 2016, the remaining SPI's represented approximately 3.2
percent of the Ordinary Share NAV (31 December 2015: 5.5 percent).
The combined 2014 and 2015 SPI's amount to 4.8 percent of the
Ordinary Share NAV as at 31 December 2016.
SPI's were also created for 2016 as a result of the Fort
McMurray wildfire in Canada, the Jubilee oil field off the coast of
Ghana, Hurricane Matthew in Southeast United States and the South
Island earthquake in New Zealand. As at 31 December 2016, the SPI's
established in relation to the 2016 portfolio represented
approximately 7.1 percent of both the Ordinary and C Share NAV's.
These 2016 SPI's represent capital held by reinsurance
counterparties in excess of the loss reserves and reflect the above
average catastrophic events during the year.
The combined 2014, 2015 and 2016 SPI's amount to 11.5 percent of
the Ordinary Share NAV. Further information about the loss reserves
is included in the Manager's Review.
Capital Raising
Following the raise of $91.84 million of new capital in the
fourth quarter of 2015 the Company raised a further $10.89 million
in March 2016. This new capital was used to meet a proportion of
new demand from reinsurance clients which occurred prior to the
mid-year reinsurance contract renewals.
Your Board believes that it is important for the Company to be
able to raise additional capital, should there be an appropriate
level of demand from both reinsurance clients and potential new and
existing investors. In addition, therefore, to the authority which
the Board seeks annually from Shareholders to allot Ordinary Shares
up to a maximum of 10 percent of the number of Ordinary Shares in
issue at the date of the AGM, your Board is seeking a similar
authority in relation to the C Shares. The issuance of either
Ordinary Shares or C Shares will only take place at a premium to
the prevailing NAV.
Any C Shares issued under this shareholder authority would, in
due course, be consolidated into a single class, following Board
approval, with the Ordinary Shares along with the pre-existing C
Shares in issue.
C Share Conversion
Your Board continually keeps under review the materiality of
SPI's and the possible timing for conversion of the C shares into
Ordinary Shares and will only do when the SPI's have either been
released or are deemed immaterial, thus limiting the exposure of
new capital to past losses.
As at the date of publication of this Annual Report, that
remains the case, however a further release of the 2014 and 2015
SPI's is expected during 2017 and, subsequent to such releases, the
Board will consider the remaining materiality of the SPI's and the
possible timing of the conversion of the C Shares.
Tender Offer and Dividend
As set out in the Circular to Shareholders dated 29 September
2015, the Company has implemented a Return of Value Tender with the
objective of making an investment in the Company more attractive to
a wider range of investors.
The Tender Offer is offered at the Board's discretion and only
if the Company's shares trade at a discount on the day the NAV per
share, as at 31 October in a particular year, is announced. The
Company's Ordinary Shares and C Shares traded at a 0.25 percent
discount and a 0.53 percent discount respectively, to the Net Asset
Value as at 14 November 2016. After consulting with major
Shareholders, and in light of the narrow discount to the Net Asset
Value, the Board decided not to implement the Return of Value
Tender for either class of share.
An annual dividend of $0.07180 in respect of Ordinary Shares and
$0.05795 in respect of the C Shares was paid to Shareholders on 17
February 2017 as announced on 26 January 2017.
Shareholders
I would like to notify Shareholders that it is my intention to
stand down from the Board of Directors at the Company's forthcoming
AGM in order to become Chairman of the Markel CATCo Reinsurance
Fund Ltd. I believe that, with my experience of the reinsurance
industry, this new role will allow me to best serve the interests
of all of the Group's stakeholders.
It is proposed that James Keyes will replace me as Chairman of
the Company. Also, it is the Board's intention to appoint an
additional director in order to maintain the number of directors on
the Board at four.
I would like to thank not only Shareholders for the support they
have given me as their Chairman, but also the Investment Manager
for their exemplary performance. During this period of my tenure as
Chairman, the Company has grown its NAV by over 30 percent,
returned profits of over $98 million and has paid a dividend each
year equal to LIBOR plus 5 percent of the Net Asset Value.
On behalf of all of the directors I would like to express our
gratitude to the Investment Management team for their continued
hard work during 2016, which has resulted in another positive year
for the Company and strong prospects for the future.
Nigel Barton
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
2 March 2017
Manager's Review
Under the new ownership of Markel Corporation ("Markel"), Markel
CATCo Investment Management Ltd. ("MCIM" or the "Investment
Manager") successfully achieved significant growth in terms of both
demand from its reinsurance clients and its assets under management
("AUM"). AUM as at 1 January 2017 increased by over 20 percent to
$4.3 billion compared to the previous year, the new capital being
used to meet additional reinsurance buyer demand for the 1 January
2017 renewal season.
The integration process between MCIM and Markel was completed in
August 2016 during which a number of synergies between the two
organisations were identified. Markel has provided significant
benefits to MCIM through scale and financial and operational
support. Much of the success of the integration was due to the
similar cultures of the two companies and their joint focus on
providing the best service possible to clients. The Investment
Manager continues to enjoy strong support from its parent
company.
In response to the Group's growth, and in order to provide
additional resource, MCIM has invested in its team and during the
year appointed additional key personnel including Alissa Fredricks
as Chief Risk Officer and John Whiley as Chief Compliance Officer.
The Investment Manager also appointed a new Senior Actuary,
Kimberly Kerivan who previously worked for the international
catastrophe modeling company, AIR Worldwide. These appointments
strengthen the management team and help the Investment Manager to
develop and focus on providing its reinsurance buyers with the
leading edge innovative products available in the retrocessional
reinsurance industry. The Investment Manager will continue to
invest in resources in line with the development of its
business.
2016 Significant Loss Events Update
Following three years of relatively low natural catastrophe
activity, economic loss figures for the past twelve months were
nearly as high as the estimated figure for 2012 of $180 billion.
According to Munich Re, total economic losses due to natural
catastrophes in 2016 amounted to approximately $175 billion. Almost
30 percent of the losses, or approximately $50 billion, were
insured. This makes 2016 one of the five worst years for insured
losses due to natural disasters. The share of uninsured losses,
known as the protection gap, highlights that a key growth
opportunity exists for both the insurance and reinsurance markets
to expand into new regions and perils.
The costliest natural catastrophe of the year was the April
earthquake in Kumamoto, Japan, which resulted in $5.9 billion of
insured loss. While a significant event for the region, loss levels
are expected to remain significantly below our coverage levels.
Hurricane Matthew, which impacted the Caribbean and Southeast
United States, was the largest event to impact North America in
2016, with claims currently estimated at $3.8 billion. North
America was also impacted by other extreme events, including the
Fort McMurray wildfire which became the largest catastrophe to ever
impact Canada with cumulative insured losses of approximately $2.9
billion.
Another significant earthquake event occurred in November in
South Island, New Zealand, with current insured loss estimates of
approximately $2 billion.
The most costly manmade disaster in 2016 was associated with the
Jubilee oil field offshore energy loss off the coast of Ghana.
Current estimates related to business interruption, joint hull and
machinery losses for this event are in the range of $1.2 billion to
$1.5 billion.
Loss Reserves
During 2016 the Investment Manager established total loss
reserves of 9.5 percent for the following events; Jubilee oil field
3.5 percent, Canada wildfire 3 percent, Hurricane Matthew 1
percent, the New Zealand earthquake 1 percent and attritional
losses 1 percent.
As previously highlighted in our interim report, during the
first quarter of 2016, the Investment Manager released the entire
loss reserves related to the 2015 UK floods, resulting in a 1
percent appreciation in the Ordinary Share NAV.
Attritional Loss Reserve
As a consequence of the increasing size and diversity of the
Company's portfolio, inevitably a number of small ('attritional')
losses will be incurred. Notifications of a proportion of these
losses are occasionally received an extended time after the loss
event and towards the end of the Company's financial year.
To offset this concentration of loss reporting that impacts the
NAV towards the end of the year, the Company introduced a monthly
attritional loss reserve of approximately 0.15 percent with effect
from January 2016.
2017 Outlook
With 2016 producing the highest level of catastrophe losses
since 2012, the Investment Manager has been able to improve terms
and conditions for its reinsurance clients. Despite the challenging
soft market, client retentions remain at very high levels and a
number of new clients were successfully added to the portfolio.
According to Guy Carpenter, traditional reinsurance pricing
continued to see downwards pricing pressure of approximately 3.7
percent, as at 1 January 2017, compared to a decrease of 8.8
percent in the previous year. The most significant movement in the
sector has been within the Cat Bond market which has seen rate
reductions of up to 30 percent during the fourth quarter of 2016.
Despite this backdrop, the Group has successfully maintained its
premium rates due principally to its unique pillared product that
can be personalised for each individual client.
The low price environment and the continued growth of the ILS
market has again enabled the Investment Manager to purchase broader
balance sheet protections for 2017, mainly in the form of ILWs that
were purchased at similar price levels to 2016. These protections
reduce the Company's exposure to potential losses from significant
catastrophic events.
Demand for the Group's product is at its highest point since the
Company's inception, which has allowed the Investment Manager to
deploy 100 percent of its available capital during the 2017 renewal
process. With a broad geographic spread, a balanced exposure to
differing risk perils and with portfolio protections in place, the
Investment Manager has successfully built a stronger investment
portfolio for 2017 with a return and risk profile which is similar
to that of the 2016 portfolio.
Anthony Belisle
Chief Executive Officer
Markel CATCo Investment Management Ltd.
2 March 2017
REVIEW OF BUSINESS
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, Markel CATCo
Reinsurance Fund Ltd. (the "Master Fund") and CATCo Reinsurance
Fund Ltd. (the "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. The Company's
investment policy and Manager's Review appear below and explain 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 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 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 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 2016, 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 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.
A portfolio review by the Investment Manager is given in the
Manager's Review.
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.
Share Capital
The Company's issued share capital at 1 January 2017 amounted to
273,224,673 Ordinary Shares and 102,510,018 C Shares. On 24 March
2016, the Company issued 10,675,000 C Shares, resulting in a total
of 102,510,018 C Shares as at 1 January 2017.
Note 7 to the Financial Statements contains further details
relating to the C Shares..
Total Assets and Net Asset Value
At 31 December 2016, the Company had Total Assets of $463.62mn
and a Net Asset Value per Ordinary and C Share of $1.3024 and
$1.0512 respectively.
Borrowing
The Company will not borrow for investment purposes, although it
may borrow for temporary cash ow purposes such as for satisfying
working capital requirements. The Master Fund and the 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 consists 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 reviews 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.
Results and Dividends
The total return attributable to Ordinary Shareholders for the
year amounted to 8.12 percent (2015 - 11.58 percent) and 7.27
percent for the C Shares.
An annual dividend of $0.07180 in respect of Ordinary Shares and
$0.05795 in respect of the C Shares was paid to Shareholders on 17
February 2017 as announced on 26 January 2017.
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.
The record date for this dividend was 3 February 2017 and the
Ordinary and C Shares went ex-dividend on 2 February 2017. The
dividend was paid to Shareholders on 17 February 2017.
DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL
STATEMENTS
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.
Furthermore, each Director confirms that, to the best of his or
her knowledge, the management report (which consists of the
Chairman's Report, the Manager's Review, the Strategic Report and
the Directors' Report) 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
2 March 2017
AUDITED STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States 31 Dec. 31 Dec.
Dollars) 2016 2015
---------------------------------------- ------------ ------------
$ $
---------------------------------------- ------------ ------------
Assets
---------------------------------------- ------------ ------------
Investments in Master Funds,
at fair value (see Note 5) 463,116,346 347,516,987
---------------------------------------- ------------ ------------
Cash and cash equivalents 819,558 1,839,305
---------------------------------------- ------------ ------------
Advance subscription in Markel
CATCo Reinsurance Fund Ltd.
- Markel CATCo Diversified Fund - 88,000,000
---------------------------------------- ------------ ------------
Other assets 20,257 30,125
---------------------------------------- ------------ ------------
Total assets 463,956,161 437,386,417
---------------------------------------- ------------ ------------
Liabilities
---------------------------------------- ------------ ------------
Accrued expenses and other liabilities 339,036 282,989
---------------------------------------- ------------ ------------
Total liabilities 339,036 282,989
---------------------------------------- ------------ ------------
Net assets 463,617,125 437,103,428
---------------------------------------- ------------ ------------
NAV per Share (see Note 7)
See accompanying Notes to Financial Statements
AUDITED STATEMENTS OF OPERATIONS
Year ended Year ended
31 Dec. 31 Dec.
(Expressed in United States Dollars) 2016 2015
---------------------------------------- --------------- ---------------
$ $
---------------------------------------- --------------- ---------------
Net investment loss allocated
from Master Funds
(see Note 5)
---------------------------------------- --------------- ---------------
Interest 142,741 7,768
---------------------------------------- --------------- ---------------
Miscellaneous Income 11,874 2,992
---------------------------------------- --------------- ---------------
Management fee (6,739,718) (4,987,744)
---------------------------------------- --------------- ---------------
Performance fee (3,906,968) (4,274,137)
---------------------------------------- --------------- ---------------
Professional fees and other (312,932) (383,083)
---------------------------------------- --------------- ---------------
Administrative fee (229,233) (157,199)
---------------------------------------- --------------- ---------------
Net investment loss allocated
from Master Funds (11,034,236) (9,791,403)
---------------------------------------- --------------- ---------------
Company expenses
---------------------------------------- --------------- ---------------
Professional fees and other (1,412,957) (2,468,689)
---------------------------------------- --------------- ---------------
Administrative fee (99,000) (54,000)
---------------------------------------- --------------- ---------------
Management fee (80,620) (18,175)
---------------------------------------- --------------- ---------------
Total Company expenses (1,592,577) (2,540,864)
---------------------------------------- --------------- ---------------
Net investment loss (12,626,813) (12,332,267)
---------------------------------------- --------------- ---------------
Net realised gain and net decrease
in unrealised appreciation on
securities allocated from Master
Funds
(see Note 5)
---------------------------------------- --------------------------------
Net realised gain on securities 57,663,896 51,154,113
---------------------------------------- --------------- ---------------
Net decrease in unrealised appreciation
on securities (11,149,939) (2,445,883)
---------------------------------------- --------------- ---------------
Net gain on securities allocated
from Master Funds 46,513,957 48,708,230
---------------------------------------- --------------- ---------------
Net increase in net assets resulting
from operations 33,887,144 36,375,963
---------------------------------------- --------------- ---------------
See accompanying Notes to Financial Statements
AUDITED STATEMENTS OF CHANGES IN NET ASSETS
Year Year
ended ended
31 Dec. 31 Dec.
(Expressed in United States Dollars) 2016 2015
---------------------------------------- ------------------ ----------------
$ $
---------------------------------------- ------------------ ----------------
Operations
---------------------------------------- ------------------ ----------------
Net investment loss (12,626,813) (12,332,267)
---------------------------------------- ------------------ ----------------
Net realised gain on securities
allocated from Master Funds 57,663,896 51,154,113
---------------------------------------- ------------------ ----------------
Net decrease in unrealised appreciation
on securities allocated from
Master Funds (11,149,939) (2,445,883)
---------------------------------------- ------------------ ----------------
Net increase in net assets resulting
from operations 33,887,144 36,375,963
---------------------------------------- ------------------ ----------------
Capital share transactions
---------------------------------------- ------------------ ----------------
Issuance of Class C Shares 10,920,013 91,838,761
---------------------------------------- ------------------ ----------------
Dividend declared (18,084,741) (17,999,434)
---------------------------------------- ------------------ ----------------
Offering costs (208,719) (1,840,444)
---------------------------------------- ------------------ ----------------
Return of value distribution - (34,997,045)
---------------------------------------- ------------------ ----------------
Net (decrease) / increase in
net assets resulting from capital
share transactions (7,373,447) 37,001,838
---------------------------------------- ------------------ ----------------
Net increase in net assets 26,513,697 73,377,801
---------------------------------------- ------------------ ----------------
Net assets, at 1 January 437,103,428 363,725,627
---------------------------------------- ------------------ ----------------
Net assets, at 31 December 463,617,125 437,103,428
---------------------------------------- ------------------ ----------------
See accompanying Notes to Financial Statements
AUDITED STATEMENTS OF CASH FLOWS
Year Year
ended ended
31 Dec. 31 Dec.
(Expressed in United States Dollars) 2016 2015
---------------------------------------------------- ----------------------- -----------------------
$ $
---------------------------------------------------- ----------------------- -----------------------
Cash flows from operating activities
---------------------------------------------------- ----------------------- -----------------------
Net increase in net assets resulting
from operations 33,887,144 36,375,963
---------------------------------------------------- ----------------------- -----------------------
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 decrease in unrealised
appreciation on securities allocated
from Master Funds (35,479,721) (38,916,827)
---------------------------------------------------- ----------------------- -----------------------
Sale of investment in CATCo Reinsurance
Fund Ltd. - CATCo Diversified
Fund 334,580,362 55,200,000
---------------------------------------------------- ----------------------- -----------------------
Purchase of investment in Markel (414,700,000) -
CATCo Reinsurance Fund Ltd. -
Markel CATCo Diversified Fund
---------------------------------------------------- ----------------------- -----------------------
Changes in operating assets and
liabilities:
---------------------------------------------------- ----------------------- -----------------------
Advance subscription in Markel
CATCo Reinsurance Fund Ltd. -
Markel CATCo Diversified Fund 88,000,000 (88,000,000)
---------------------------------------------------- ----------------------- -----------------------
Other assets 9,868 441
---------------------------------------------------- ----------------------- -----------------------
Accrued expenses and other liabilities 56,047 71,728
---------------------------------------------------- ----------------------- -----------------------
Net cash provided by / (used
in) operating activities 6,353,700 (35,268,695)
---------------------------------------------------- ----------------------- -----------------------
Cash flows from financing activities
---------------------------------------------------- ----------------------- -----------------------
Issuance of Class C Shares 10,920,013 91,838,761
---------------------------------------------------- ----------------------- -----------------------
Dividend paid (18,084,741) (17,999,434)
---------------------------------------------------- ----------------------- -----------------------
Offering costs (208,719) (1,840,444)
---------------------------------------------------- ----------------------- -----------------------
Return of value distribution
paid - (34,997,045)
---------------------------------------------------- ----------------------- -----------------------
Net (used in) / provided by
financing activities (7,373,447) 37,001,838
---------------------------------------------------- ----------------------- -----------------------
Net (decrease) / increase in
cash and cash equivalents (1,019,747) 1,733,143
---------------------------------------------------- ----------------------- -----------------------
Cash and cash equivalents, at
1 January 1,839,305 106,162
---------------------------------------------------- ----------------------- -----------------------
Cash and cash equivalents, at
31 December 819,558 1,839,305
---------------------------------------------------- ----------------------- -----------------------
See accompanying Notes to Financial Statements
NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2017
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 originally
organised as a feeder fund to invest substantially all of its
assets in CATCo Diversi ed Fund (the "CATCo Master Fund"). The
CATCo 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 CATCo Master Fund
will establish a separate account for each class of shares
comprised in each segregated account (each, a "SAC Fund"). Each SAC
Fund is a separate individually managed pool of assets
constituting, in effect, a separate fund with its own investment
objective and policies. The assets attributable to each segregated
account of the CATCo Master Fund shall only be available to
creditors in respect of that segregated account.
On 10 September 2015, Markel Corporation ("Markel") and CATCo
Investment Management Ltd. ("CIML") jointly announced that they had
entered into an agreement (the "Acquisition") whereby Markel would
acquire substantially all of the assets of CIML.
On 8 December 2015, the Acquisition was completed and
substantially all of the assets of CIML were acquired by Markel. As
a result of the Acquisition, Markel CATCo Investment Management
Ltd. ("MCIM") commenced operation and CIML's management team, led
by Chief Executive Officer Anthony Belisle, transitioned into
commensurate roles at MCIM and continues to operate the business
from its Hamilton, Bermuda headquarters, now under Markel's
ultimate ownership.
Pursuant to an investment management agreement, the Company is
now being managed by MCIM (the "Investment Manager"), a Bermuda
based limited liability company. Subject to the ultimate
supervision of the Company's Board of Directors (the "Board"), the
Investment Manager is responsible for all of the Company's
investment decisions. The Investment Manager commenced operations
on 8 December 2015 (see Note 8).
On 8 December 2015, the Investment Manager entered into a
Run-Off Services Agreement with CIML, under which the former will
provide services relating to the management of the run-off business
of CIML.
As a result of the completion of the Acquisition, effective 1
January 2016, the Company conducts substantially all of its
investment activities through the Markel CATCo Diversified Fund
(the "Master Fund"), a segregated account of Markel CATCo
Reinsurance Fund Ltd., instead of the CATCo Master Fund. Meanwhile,
the Company will retain an interest in any run-off business of the
CATCo Master Fund, overseen by CIML, until such business is
liquidated. The Master Fund and the CATCo Master Fund are hereafter
referred to as the "Master Funds".
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.
The objective of the Master Funds 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 Funds would be exposed to reinsurance risk,
insurance-linked securities (such as notes, swaps and other
derivatives), and other nancial instruments. The majority of the
Master Fund's exposure to reinsurance risk is obtained through its
investment (via preference shares) in Markel CATCo Re Ltd (the
"Reinsurer"). At 31 December 2016, the Company's ownership is 16%
of the Master Fund (31 December 2015: 0%) and 16% of the CATCo
Master Fund (31 December 2015: 15%).
The Reinsurer and CATCo-Re Ltd. (the "CATCo Reinsurer"),
(together the "Reinsurers") are Bermuda licensed Class 3
reinsurance companies, registered as a segregated accounts
companies under the SAC Act, through which the Master Funds access
the majority of their reinsurance risk exposure. The Reinsurers
will form a segregated account that corresponds solely to the
Master Funds' investment in the Reinsurers with respect to each
particular reinsurance agreement.
The Reinsurers focus primarily on property catastrophe insurance
and may be exposed to losses arising from hurricanes, earthquakes,
typhoons, hailstorms, winterstorms, oods, tsunamis, tornados,
windstorms, extreme temperatures, aviation accidents, res,
wildfires, explosions, marine accidents, terrorism, satellite,
energy and other 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
("U.S. GAAP"). The Company is an investment company and follows the
accounting and reporting guidance contained within Topic 946,
"Financial Services Investment Companies", of the Financial
Accounting Standards Board ("FASB") 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 Investments in Master Funds
The Company records its investments in the Master Funds at the
net asset value as reported by the Master Funds, which is the
Company's proportionate interest in the net assets of the Master
Funds. The performance of the Company is directly affected by the
performance of the Master Funds and is subject to the same risks to
which the Master Funds are subject. Valuation of investments held
by the Master Funds, including, but not limited to the valuation
techniques used and classi cation within the fair value hierarchy
of investments held are discussed as follows:
Fair Value - Definition and Hierarchy (Master Funds)
Fair value is de ned 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 re ect
the assumptions of the Investment Manager in conjunction with both
Board of Directors of each of the respective Master Funds (the
"Board of the Master Funds") 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 Funds
have 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 signi cant degree
of judgment.
Level 2 - Valuations based on quoted prices in markets that are
not active or for which all signi cant inputs are observable,
either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and
signi cant 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 signi cant to
the fair value measurement.
Fair value is a market-based measure considered from the
perspective of a market participant rather than an entity-speci c
measure. Therefore, even when market assumptions are not readily
available, the Master Funds' own assumptions are set to re ect
those that market participants would use in pricing the asset or
liability at the measurement date. The Master Funds use 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
reclassi ed to a lower level within the fair value hierarchy.
Fair Value - Valuation Techniques and Inputs
Investments in Securities (Master Funds)
The value of preference shares issued by the Reinsurers and
subscribed for by the Master Funds 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 net 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 amount 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 reflect
uncertainty and to compensate a market participant for bearing the
uncertainty of cash flows in an exit of the reinsurance
transaction.
Protections
Included within the Master Fund's investment in the Reinsurer
are certain preference shares issued by the Reinsurer and
subscribed for by the Master Fund is in relation to reinsurance
protections ("Protections") purchased by the Master Fund. The
Protections are purchased in order to meet the desired level of
risk based on the strategy deemed appropriate by the Investment
Manager. The premium payment associated with the Protections is
fair valued over the duration of the contract. The Protections are
valued at nil representing the amount of unamortized paid premium
held as at 31 December 2016 (31 December 2015: nil). No claims were
recovered in relation to these Protections during 2016 or 2015.
Derivative Financial Instruments
The Master Funds use derivative financial instruments such as
industry loss warranties ("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
in the Statements of Operations in the year in which the changes
occur.
The fair value of derivative financial instruments at the
reporting date generally reflects the amount that the Master Funds
would receive or pay to terminate the contract at the reporting
date. These derivative financial instruments used by the Master
Funds are fair valued similar to preference shares held with
respect to reinsurance agreements, unless otherwise unavailable,
except that following a Covered Event (as defined below), loss
information from the index provider on the trade will be used.
Investments in Securities held by the Reinsurers
Earned Premiums
Premiums shall be considered earned with respect to computing
the Master Funds' 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
recognition of certain instruments, 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.
Covered Event Estimates
The Investment Manager provides monthly loss estimates for all
incurred loss events ("Covered Events") potentially affecting
investments relating to a retrocessional reinsurance agreement of
the Reinsurers. As the Reinsurers' 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 Funds
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 the
Administrator, as defined in Note 10, 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 nancial 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 Funds, a review of comparable sales (if any), a discounted
cash ow analysis, an analysis of cash ow 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 Funds' 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 re
ect 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 con ict 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 Funds'
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 nancial
instruments if held by other accounts or by affiliates of the
Investment Manager.
Side Pocket Investments
The Board of the Master Funds, 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 classi cation 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
of losses 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 Board of the Master Funds following
consultation with 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 Funds'
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 Funds are accounted for on
a trade-date basis. Realised gains or losses on the sale of
investments are calculated using the speci c identi cation method
of accounting. Interest income and expense are 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 re ected 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 uctuations arising from changes in market
prices of investments held. Such uctuations are included in net
gain 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 bene t recognised is measured as the largest
amount of bene t that has a greater than fty percent likelihood of
being realised upon ultimate settlement with the relevant taxing
authority. De-recognition of a tax bene t 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 bene ts as of 31 December 2016 and 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 bene ts in interest expense and other expenses,
respectively. No interest tax-related expense or penalties have
been recognised as of and for the years ended 31 December 2016 and
2015.
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 United
States 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 United States federal
or foreign tax laws. The Company was not subjected to any tax
examinations during the years ended 31 December 2016 and 2015.
Use of Estimates
The preparation of Financial Statements in conformity with U.S.
GAAP requires the Company's management to make estimates and
assumptions that affect the reported 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 FUNDS AND FAIR VALUE MEASUREMENTS
The following table re ects the Company's proportionate share of
the fair value of investments in the Reinsurers held by the Master
Funds at 31 December 2016.
Preference Shares $ Fair Value
- Investments in Markel CATCo Re Ltd.
Class A Preference Shares 27,444,563
Class B Preference Shares 11,714,124
Class C Preference Shares 4,217,525
Class D Preference Shares 20,768,970
Class E Preference Shares 1,456,100
Class F Preference Shares 34,081,333
Class G Preference Shares 20,923,116
Class H Preference Shares 6,239,253
Class I Preference Shares 22,049,112
Class J Preference Shares 6,246,001
Class K Preference Shares 2,163,040
Class L Preference Shares 9,368,899
Class M Preference Shares 3,244,520
Class N Preference Shares 4,679,440
Class O Preference Shares 5,152,761
Class P Preference Shares 47,467,366
Class Q Preference Shares 7,336,796
Class R Preference Shares 4,415,684
Class S Preference Shares 5,933,215
Class T Preference Shares 8,466,064
Class U Preference Shares 3,119,626
Class V Preference Shares 5,211,726
Class W Preference Shares 1,478,259
Class X Preference Shares 1,093,007
Class Y Preference Shares 5,929,661
Class Z Preference Shares 2,370,483
Class BA Preference Shares 793,206
Class BB Preference Shares 7,151,367
Class BC Preference Shares 791,816
Class BD Preference Shares 2,379,027
Class BE Preference Shares 7,726,069
Class BF Preference Shares 9,371,882
Class BM Preference Shares 1,137,365
Class BN Preference Shares 2,284,789
Class BO Preference Shares 2,280,551
Class BP Preference Shares 5,753,082
Class BQ Preference Shares 6,027,176
Class BR Preference Shares 1,411,318
Class BS Preference Shares 8,922,565
Class BT Preference Shares 27,215,619
Class BU Preference Shares 780,567
Class BV Preference Shares 2,253,634
Class BW Preference Shares 2,268,713
Expense Cell Preference Shares 128,019
Total Investments in Markel
CATCo Re Ltd. $361,247,409
Preference Shares $ Fair
- Investments in CATCo-Re Value
Ltd.
Class AE Preferred Shares 1,536,115
Class AF Preferred Shares 898,753
Class BF Preferred Shares 705,363
Class BJ Preferred Shares 1,739,074
Class BW Preferred Shares 582,346
Class CM Preferred Shares 711,384
Class DC Preferred Shares 248,639
Class DE Preferred Shares 114,245
Class DF Preferred Shares 373,316
Class DG Preferred Shares 171,725
Class DL Preferred Shares 1,455,090
Class DM Preferred Shares 907,344
Class DN Preferred Shares 1,042,388
Class DP Preferred Shares 2,502,853
Class DV Preferred Shares 567,772
Class DZ Preferred Shares 332,657
Total Investments in CATCo-Re
Ltd. $13,889,064
Investments in Markel CATCo $ Fair
Re Ltd. Value
- Aquilo Re
Aquilo Re Series AQ002 77,841
Aquilo Re Series AQ003 29,584
Aquilo Re Series AQ004 8,571
Total Investments in Markel
CATCo Re Ltd. - Aquilo Re $115,996
Total Investments in Preference
Shares $375,252,469
The following table re ects the Company's proportionate share of
the fair value of investments in the CATCo Reinsurer held by the
CATCo Master Fund at 31 December 2015.
Preference Shares $ Fair Value
- Investments in CATCo-Re
Ltd
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 CATCo-Re Ltd. $ Fair
- Aquilo Re 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 CATCo-Re
Ltd. - Aquilo Re $4,676,638
Total Investments in Preference
Shares $306,329,301
Included within the Company's investment in Master Funds is cash
and cash equivalents held in trust by the Master Funds representing
the Company's proportionate share of derivative transactions
entered into by the Master Funds amounting to approximately
$85,882,181 (31 December 2015: $42,730,882) as of 31 December
2016.
As of 31 December 2016, the total balance of investments held in
the Master Funds of $463,116,346 (31 December 2015: $347,516,987)
is net of undeployed cash, performance fee and management fee
accruals recorded by the Master Funds.
As at 31 December 2016, Side Pocket Investments represent 10.50%
of total investment in the Master Funds (31 December 2015:
7.27%).
In accordance with FASB ASC Sub-topic 820-10, certain
investments that are measured at fair value using the net asset
value per share (or its equivalent) practical expedient are not
required to be classified within the fair value hierarchy. As the
Company investments as at 31 December 2016 comprised solely of
investments in other investment companies, namely the Master Funds,
which are valued using the net asset value per share (or its
equivalent) practical expedient, no fair value hierarchy has been
disclosed.
The Company considers all short-term investments with daily
liquidity as cash equivalents and are classified as Level 1 within
the fair value hierarchy. No cash equivalents were held as at 31
December 2016 (31 December 2015: $Nil).
The table below summarises information about the signi cant
unobservable inputs used in determining the fair value of the
Master Funds' Level 3 assets:
Type of Investment Valuation Unobservable Range
Technique Input
------------------- -------------- ----------------- ----------------
Preference Premium Premiums 12 months
Shares earned earned -
straight
line for
uniform
perils
-------------- ----------------- ----------------
Premiums 5 to 6 months
earned -
seasonality
adjusted
for non-uniform
perils
-------------- ----------------- ----------------
Loss reserves Loss reserves* 0 to contractual
limit
-------------- ----------------- ----------------
Risk margin Risk margin 0% to 15%
* Based on 'from ground-up' losses as reported by Reinsurance
clients.
As described in Note 6, signi cant increases or decreases in
loss reserves of the Reinsurers would result in a signi cantly
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 reinsurance
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 2016 and 2015, 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 diversi ed risk pro le of
the Reinsurers' portfolio by geography and peril as at 31 December
2016 and 31 December 2015.
Geographic Distribution
31 31
Dec. Dec.
2016 2015
1. North America/Caribbean 39% 47%
2. All Other 17% 11%
3. Europe 10% 9%
4. Global Backup Protection 9% 10%
5. Japan 7% 6%
Mexico/Central America/
6. South America 6% 6%
7. Global Marine/Energy/Terrorism/Aviation/Satellite 6% 7%
8. Australia/New Zealand 4% 4%
9. Asia Excluding Japan 2% 0%
Exposure by Risk Peril
31
Dec. 31 Dec.
2016 2015
1. Wind 35% 41%
2. Backup Protection 21% 10%
3. Earthquake 21% 21%
4. Any Natural Peril 8% 12%
5. Marine/Energy/Aviation/Satellite 4% 4%
6. Winterstorm/Wildfire 3% 3%
7. Severe Convective Storm 2% 3%
8. Other 2% 0%
9. Terrorism 2% 3%
10. Flood 2% 2%
5. INVESTMENTS IN MASTER FUNDS, AT FAIR VALUE
The following table summarises the Company's Investments in
Master Funds:
31 Dec. 2016 31 Dec.
2015
------------ -------------
Investment in Markel CATCo
Reinsurance Fund Ltd. - Markel
CATCo Diversified Fund, at
fair value $446,049,992 -
Investment in CATCo Reinsurance
Fund Ltd. - CATCo Diversified
Fund, at fair value 17,066,354 347,516,987
Investments in Master Funds,
at fair value $463,116,346 $347,516,987
------------ -------------
From 1 January to 31 December 2016, the net investment loss
allocated from Master Funds, and the net realised gain and net
decrease in unrealised appreciation on securities allocated from
Master Funds in the Statements of Operations consisted of the
combined results from the Company's Investments in the Master Funds
as detailed below:
Investment Investment Total
in Master in CATCo
Fund Master Fund $
$ $
---------------------------- ------------------------ ----------------------- ----------------------
Net investment loss
allocated from Master
Funds
---------------------------- ------------------------ ----------------------- ----------------------
Interest 141,428 1,313 142,741
---------------------------- ------------------------ ----------------------- ----------------------
Miscellaneous income - 11,874 11,874
---------------------------- ------------------------ ----------------------- ----------------------
Management fee (6,435,246) (304,472) (6,739,718)
---------------------------- ------------------------ ----------------------- ----------------------
Performance fee (3,483,332) (423,636) (3,906,968)
---------------------------- ------------------------ ----------------------- ----------------------
Professional fees
and other (270,343) (42,589) (312,932)
---------------------------- ------------------------ ----------------------- ----------------------
Administrative fee (201,816) (27,417) (229,233)
---------------------------- ------------------------ ----------------------- ----------------------
Net investment loss
allocated from Master
Funds (10,249,309) (784,927) (11,034,236)
---------------------------- ------------------------ ----------------------- ----------------------
Net realised gain
and net decrease in
unrealised appreciation
on securities allocated
from Master Funds
---------------------------- -------------------------------------------------------------------------
Net realised gain
on securities (a) 4,672,504 52,991,392 57,663,896
---------------------------- ------------------------ ----------------------- ----------------------
Net decrease in unrealised
appreciation on securities
(b) 36,926,797 (48,076,736) (11,149,939)
---------------------------- ------------------------ ----------------------- ----------------------
Net gain on securities
allocated from Master
Funds 41,599,301 4,914,656 46,513,957
---------------------------- ------------------------ ----------------------- ----------------------
a) Includes gross realized gain on securities of $63,572,316
(2015: $ 61,241,411) and gross realized loss on securities of
$5,908,420 (2015: $10,087,298).
b) Includes gross increase in unrealized appreciation on
securities of $70,091,133 (2015: $66,132,036) and gross decrease in
unrealized appreciation on securities of $81,241,072 (2015:
$68,577,919).
6. LOSS RESERVES
The following disclosures on loss reserves are included for
information purposes and relate speci cally to the Reinsurers and
are re ected through the valuations of investments held by the
Company.
The reserve for unpaid losses and loss expenses recorded by the
Reinsurers includes estimates for losses incurred but not reported
as well as losses pending settlement. The Reinsurers make 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 Reinsurers use their own models and historical
loss analysis data as well as assessments from counter-parties to
estimate the level of reserves required. In addition, the
Reinsurers record risk margin to reflect uncertainty surrounding
cash flows relating to loss reserves.
Future adjustments to the amounts recorded as of year-end,
resulting from the continual review process, as well as differences
between estimates and ultimate settlements, will be re ected in the
Reinsurers' Statements 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 2016, the Reinsurer paid claims of $50,431,965 (31
December 2015: $Nil) predominantly in relation to the Jubilee Oil
Field and Canada Wildfire events. The CATCo Reinsurer paid claims
of $32,007,856 (31 December 2015: $77,572,664) predominantly in
relation to the Tianjin Explosion and United States Severe
Convective Storm events.
7. CAPITAL SHARE TRANSACTIONS
As of 31 December 2016, the Company has authorised share capital
of 1,500,000,000 (31 December 2015: 1,500,000,000) unclassified
shares of US$0.0001 each and Class B Shares ("B Shares") of such
nominal value as the Board may determine upon issue.
As of 31 December 2016, the Company has issued 273,224,673 (31
December 2015: 273,224,673) Class 1 ordinary shares (the "Ordinary
Shares") and 102,510,018 (31 December 2015: 91,835,018) Class C
Shares ("C Shares").
Transactions in shares during the year, and the shares
outstanding and the net asset value ("NAV") per share are as
follows:
31 December
2016
Beginning Adjustment Share Ending Ending Ending
shares following Issuance Shares Net Assets NAV
Share Per
Capital Share
Consolidation
Class 1 Ordinary $
Shares 273,224,673 - - 273,224,673 $ 355,855,825 1.302
$
Class C Shares 91,835,018 - 10,675,000 102,510,018 $ 107,761,300 1.051
----------------- -------------------- --------------- ------------- --------------- --------
$ 463,617,125
---------------
31 December
2015
Beginning Adjustment Share Ending Ending Ending
Shares following Issuance Shares Net Assets NAV
Share Per
Capital Share
Consolidation
Class 1 Ordinary $
Shares 303,582,970 (30,358,297) - 273,224,673 $ 347,105,110 1.271
$
Class C Shares - - 91,835,018 91,835,018 $ 89,998,318 0.980
----------------- -------------------- --------------- ------------- --------------- --------
$ 437,103,428
---------------
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 Pocket Investments 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 29 January 2016, the Board declared a dividend of $0.06619
per share in respect of the Ordinary Shares with a record date of
12 February 2016 and the ex-dividend date was on 11 February 2016.
The dividend was paid to shareholders on 26 February 2016.
8. INVESTMENT MANAGEMENT AGREEMENT
Pursuant to the Investment Management Agreement dated 8 December
2015, 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 such services (see Note 9).
As discussed in Note 1, prior to completion of the Acquisition,
the Company was managed by CIML as investment manager pursuant to
the Investment Management Agreement dated 16 December 2010.
9. RELATED PARTY TRANSACTIONS
The Investment Manager of the Company is also the Investment
Manager of the Master Fund and the Insurance Manager of the
Reinsurer. CIML is the Investment Manager of the CATCo Master Fund
and the Insurance Manager of the CATCo 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 Funds' shares as at the last
calendar day of each calendar month. Management fees related to the
investment in the Master Funds shares are charged in the Master
Funds and allocated to the Company. Performance fees are charged in
the Master Funds and allocated to the Company.
Markel, which holds the entire share capital of the Investment
Manager, holds 24.39% (31 December 2015: 27.22%) of the voting
rights of the C Shares issued in the Company as of 31 December
2016.
Qatar Insurance Company ("QIC"), which holds the entire share
capital of CIML, holds 0% (31 December 2015: 2.51%) of the voting
rights of the Ordinary Shares issued in the Company as of 31
December 2016.
In addition, three of the Directors of the Company are also
shareholders of the Company.
10. ADMINISTRATIVE FEE
Prime Management Limited, a division of SS&C GlobeOp serves
as the Company's administrator (the "Administrator") and performs
certain administrative services on behalf of the Company. On 31
October 2016, Prime Management Limited merged with SS&C Fund
Services (Bermuda) Ltd., another division of SS&C GlobeOp
operating in Bermuda. The combined companies now operate as one
single entity under the name of SS&C Fund Services (Bermuda)
Ltd., a licensed fund administrator pursuant to the provisions of
the Bermuda Investment Funds Act. The Administrator receives a xed
monthly fee.
11. FINANCIAL HIGHLIGHTS
Financial highlights for the years ended 31 December 2016 and
2015 are as follows:
2016 2015
------------------------------------ ---------------------- ----------------------
Class 1 Class Class Class
Ordinary C Shares 1 C Shares
United States Dollar Shares Ordinary
Shares
------------------------------------ ---------- ---------- ---------- ----------
Per Share operating
performance
------------------------------------ ---------- ---------- ---------- ----------
Net Asset Value,
beginning of year $1.2705 $0.9800 $1.1981 $1.0000
------------------------------------ ---------- ---------- ---------- ----------
Income (loss) from
investment operations:
------------------------------------ ---------- ---------- ---------- ----------
Net investment
loss (0.0065) (0.0044) (0.0127) -
------------------------------------ ---------- ---------- ---------- ----------
Performance Fee* (0.0105) (0.0083) (0.0156) -
------------------------------------ ---------- ---------- ---------- ----------
Management Fee (0.0191) (0.0153) (0.0183) -
------------------------------------ ---------- ---------- ---------- ----------
Net gain on investments 0.1342 0.0992 0.1783 -
------------------------------------ ---------- ---------- ---------- ----------
Total from investment
operations 0.0981 0.0712 0.1317 -
------------------------------------ ---------- ---------- ---------- ----------
Dividend (0.0662) - (0.0593) -
------------------------------------ ---------- ---------- ---------- ----------
Issuance cost - - - (0.0200)
------------------------------------ ---------- ---------- ---------- ----------
Net Asset Value,
end of year $1.3024 $1.0512 $1.2705 $0.9800
------------------------------------ ---------- ---------- ---------- ----------
Total net asset
value return
------------------------------------ ---------- ---------- ---------- ----------
Total net asset
value return before
performance fee 8.56% 8.12% 12.42% -
------------------------------------ ---------- ---------- ---------- ----------
Performance fee* (0.83)% (0.85)% (1.31)% -
------------------------------------ ---------- ---------- ---------- ----------
Total net asset
value return after
performance fee 7.73%^ 7.27% 11.11%+ -
------------------------------------ ---------- ---------- ---------- ----------
Ratios to average
net assets
------------------------------------ ---------- ---------- ---------- ----------
Expenses other
than performance
fee (2.24)% (2.05)% 2.45% -
------------------------------------ ---------- ---------- ---------- ----------
Performance fee*
^ (0.88)% (0.80)% 1.30% -
------------------------------------ ---------- ---------- ---------- ----------
Total expenses
after performance
fee (3.12)% (2.85)% 3.75% -
------------------------------------ ---------- ---------- ---------- ----------
Net investment
loss (2.84)% (2.86)% 3.89% -
------------------------------------ ---------- ---------- ---------- ----------
+ Adjusting the opening capital to reflect the dividend declared
on 5 January 2015, the normalised total return for 2015 is
equivalent to 11.58%
^ Adjusting the opening capital to reflect the dividend declared
on 29 January 2016, the normalised total return for 2016 is
equivalent to 8.12%
* The performance fee is charged in the Master Funds
The ratios to weighted average net assets are calculated for
each class of shares 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 years ended 31 December 2016 and
2015. The per share amounts and ratios re ect income and expenses
allocated from the Master Funds.
12. INDEMNIFICATIONS OR WARRANTIES
In the ordinary course of its business, the Company may enter
into contracts or agreements that contain indemni cations 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.
13. SUBSEQUENT EVENTS
On 26 January 2017 the Board declared a nal dividend of $0.07180
per share in respect of the Ordinary Shares and $0.05795 per share
in respect of the C shares. The record date for these dividends was
3 February 2017 and the ex-dividend date was 2 February 2017. These
final dividends were paid to shareholders on 17 February 2017.
Effective 1 February 2017, the Investment Manager released a
proportion of the 2014 and 2015 Side Pocket Investments. As a
result, the remaining 2014 and 2015 Side Pocket Investments
represent approximately 3.7% of the Company's Ordinary Share
NAV.
These Financial Statements were approved by the Board and
available for issuance on 2 March 2017. Subsequent events have been
evaluated through this date.
For further information:
Judith Wynne
General Counsel
Markel CATCo Investment Management Ltd.
Telephone: +1 441 493 9005
Email: judith.wynne@markelcatco.com
Mark Way
Chief Operating Officer
Markel CATCo Investment Management Ltd.
Telephone: +1 441 493 9001
Email: mark.way@markelcatco.com
David Benda / Hugh Jonathan
Numis Securities Limited
Telephone: +44 (0) 20 7260 1000
This information is provided by RNS
The company news service from the London Stock Exchange
END
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