TIDMCAT
RNS Number : 1700X
CATCo Reinsurance Opps Fund Ltd
10 February 2012
10 February 2012
CATCo Reinsurance Opportunities Fund Ltd. ("the Company")
Annual Financial Report
For the period 20 December 2010 to 31 December 2011
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.
-- Successful listing on the Specialist Fund Market, London
Stock Exchange raising $80.39 million
-- Dual listing on the Bermuda Stock Exchange
-- Four successful corporate transactions during the period
-- Net asset value $339.79 million as at 31 December 2011
-- Net asset value total return of Ordinary Shares 5.09%, net
asset value total return of C Shares 8.58%
-- Declared 2011 final dividend of $0.051 for Ordinary Shares and C Shares
CHAIRMAN'S STATEMENT
I am pleased to present to shareholders the Company's Annual
Financial Report for the period ended 31 December 2011.
The Company was admitted to trading on the Specialist Fund
Market, London Stock Exchange on 20 December 2010 raising $80.39
million from the issue of 80,392,000 Ordinary Shares in the
Company.
The Company's shares are now also listed on the Bermuda Stock
Exchange following the Secondary Listing on 20 May 2011. At 31
December 2011, the Company had 87,642,000 Ordinary Shares and
244,118,029 C Shares, respectively, with a net asset value of
$339.79 million.
Company Overview
The Company is established as a feeder fund that invests
substantially all of its assets, via the CATCo Reinsurance Fund
Ltd., CATCo Diversified Fund ("Master Fund"), in investments linked
to catastrophe reinsurance risks.
This is achieved principally by investing in traditional
reinsurance contracts accessed by investments in preferred shares
of CATCo Re Ltd., a Bermuda domiciled and regulated Class 3
reinsurer, which writes fully collateralised reinsurance
contracts.
In addition, the Master Fund has the ability to invest in a
variety of insurance-based instruments. The Master Fund spreads its
investment risk by having exposure to several non-correlated risk
categories such as residential and commercial property losses
caused by catastrophes such as hurricanes and earthquakes.
Investment Objective
The Company's investment objective is to seek to provide
investors with significant capital returns and long-term
distributions at a sustainable level. The Company targets an
internal rate of return in excess of LIBOR plus 12% to 15% per
annum.
Distribution Policy
The Company also targets distributions by way of a dividend in
respect of each Fiscal Year, of an amount equal to LIBOR plus 5% of
the Net Asset Value at the end of each Fiscal Year.
Corporate Activity in 2011
Following the IPO, the Company completed three additional fund
raisings to take advantage of higher premiums and increased demand
for retrocessional protection as a consequence of the natural
catastrophes in Australia, New Zealand and Japan during the
year.
The issue of C Shares enabled the Company to increase the
diversification of its underlying portfolio throughout the year and
benefit from increased retrocessional reinsurance pricing in the
market.
Details of the subsequent corporate transactions completed by
the Company are as follows:
-- On 31 March 2011, $7,358,750 was raised through an additional
issuance of 7,250,000 Ordinary Shares;
-- $124,446,737 was raised through the issuance of 124,446,737 C
Shares on 20 May 2011 and $850,000 was raised through the issuance
of 850,000 C Shares on 23 May 2011; and
-- A further $125,000,000 was raised through an additional
issuance of 118,821,292 C Shares on 16 December 2011.
The Company's Ordinary Shareholders are indirectly exposed to
potential losses arising from the New Zealand earthquake that
occurred on 22 February 2011 and the Japan earthquake on 11 March
2011 (respectively, "NZ Exposures" and "Japan Exposures"). Due to
the uncertainty in valuing this exposure and the tenure of these
contracts, the Master Fund's Board of Directors designated the
Master Fund's potential NZ Exposures and Japan Exposures as a Side
Pocket Investment ("SP Investment").
As a result, Master Fund Shares that were issued to Master Fund
Shareholders after 31 March 2011 would participate fully in the
Master Fund's portfolio, except that they will not have any NZ
Exposures or Japan Exposures and will accordingly not participate
in any losses or premiums attributable to such exposures.
The Company's C Shares operate in the same way and have no
exposure to these events. The Company's Investment Managers have
recently had meetings with the reinsurance counterparties that have
NZ and Japan Exposures included in the Side Pocket Investment and
further information has been received.
It was the Company's intention to settle the Master Fund's
exposure to the NZ and Japan Exposures before 31 December 2011 to
enable the Side Pocket Investment to be realised and for any C
Shares issued throughout 2011 to be converted into Ordinary Shares.
However, based on the new information received from our reinsurance
counterparties in mid-December the SP Investments will remain in
place until more conclusive information becomes available from the
reinsurance counterparties.
The Company and its Investment Portfolio
As at 31 December 2011, the net asset value ("NAV") per Ordinary
Share of the Company was $0.9999 and the NAV per C Share was
$1.0329. The share price of an Ordinary Share was $1.08 with a
premium to NAV per Ordinary Share of 8.01%. The share price of a C
Share was $1.08 with a premium to NAV per C Share of 4.56%.
On 15 November 2011 the Board declared a final dividend of
$0.051 in respect of the Ordinary Shares and a final dividend of
$0.051 in respect of the C Shares.
Outlook
2011 ranks as one of the two most expensive years for the
insurance industry with approximately $105bn in insured natural
catastrophe losses. This exceeds 2005's natural catastrophe losses
of $101bn, which included hurricanes Katrina, Wilma and Rita.
It is particularly pleasing that despite the year's events the
Company generated shareholder returns in its first year of
trading.
With the capital from the latest fund raising deployed, enhanced
portfolio diversification and premiums at higher levels due to the
severe industry losses in 2011, the Board fully expects to produce
significantly higher projected returns in 2012.
I look forward to welcoming shareholders to our first Annual
General Meeting to be held on 6 March 2012 at the offices of CATCo
Investment Management Ltd., 9 Par La Ville Road, Hamilton HM11,
Bermuda at 9.30am (local time).
Anthony Taylor
Chairman
Manager's Review
The insurance industry was faced with one of the most
challenging years in its lengthy history due to a record number of
natural catastrophes resulting in multi-billion dollar insured
losses. Ignoring inflation adjustments, 2011 will go down as the
most costly year ever for the insurance industry and, on an
inflation-adjusted basis, it rivals 2005, the year of US hurricanes
Katrina, Wilma and Rita.
The total insured losses resulting from natural catastrophes
exceeded $100 billion as compared to the trended 30-year average,
which is closer to $25 billion. 2011 is the first year to bear
witness to three natural catastrophes of more than $10 billion
each, which included the 22 February New Zealand earthquake, the 11
March Japan earthquake and the Thailand flooding beginning in July
and continuing into December.
Despite the inordinate amount of catastrophic activity that
occurred during 2011, the Company's portfolio held up exceedingly
well with positive annual returns generated for all of the
Company's shareholders. Further, the retrocessional reinsurance
capacity available to the reinsurance industry was significantly
depleted. As a result, retrocessional reinsurance pricing increased
significantly and the Company's capital base more than quadrupled
since its launch less than 12 months earlier.
Performance
The Net Asset Value total return of Ordinary Shares was 5.09%
for 2011. In addition, a significant amount of capital was raised
during May of 2011.These C Share investors received a Net Asset
Value total return of 8.58%. Hedging costs, related to US hurricane
protections, were incurred in June 2011 and impacted returns
negatively by roughly 2%.
Outlook
The 2012 retrocessional reinsurance investment portfolio has
been largely finalised, with all of the Company's available capital
deployed, and includes more than 35 non-correlated risk perils.
With the exception of the offshore marine pillar, the portfolio is
largely comprised of storm and earthquake risks diversified
geographically across the world's insured properties.
The 2012 projected no-loss portfolio returns are significantly
higher as compared to the 2011 portfolio, with a lower average risk
level. On a gross basis, all possible worst-case, single-event loss
scenarios result in positive returns. Therefore, if the world
experiences a more tolerable level of natural catastrophes in 2012,
then the Company's shareholders can look forward to higher returns
in the year ahead. Concerning future corporate activity, the
Managers do not envision any further capital raising activity for
the Company for 2012, barring significant catastrophic events.
The Company's assets under management now stand at approximately
$350m and the total funds invested by the Managers now exceed $1
billion. Annual expected organic growth, as well as private fund
investment, will satisfy any additional reinsurance buyer demand
for CATCo-Re Ltd.'s retrocessional protections.
Anthony Belisle
Director
Directors' Responsibilities
In accordance with Chapter 4 of the Disclosure and Transparency
Rules, and to the best of their knowledge, each Director of CATCo
Reinsurance Opportunities Fund Ltd. confirms that the financial
statements have been prepared in accordance with the applicable set
of accounting standards and give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company.
Furthermore, each Director certifies that the report of the
Directors includes a fair review of the development and performance
of the business and the position of the Company, together with a
description of the principal risks and uncertainties that the
Company faces.
AUDITED STATEMENT OF ASSETS AND LIABILITIES
(Expressed in United States Dollars) 31 December 2011
--------------------------------------------- -----------------
Assets
Investment in CATCo Reinsurance Fund Ltd.- $ 227,981,444
CATCo Diversified Fund, at fair value (cost
$206,435,090)
Cash and cash equivalents 123,194,026
Other assets 7,260
Total assets 351,182,730
Liabilities
Dividend payable 10,859,876
Accrued expenses and other liabilities 456,858
Management fee payable 72,184
Total liabilities 11,388,918
Net assets $ 339,793,812
See accompanying notes to audited financial statements
AUDITED STATEMENT OF OPERATIONS
Period from 20 December 2010 (commencement of operations) to 31
December 2011
(Expressed in United States Dollars)
-------------------------------------------------------- ----------------
Net investment loss allocated from
CATCo Reinsurance Fund Ltd. - CATCo Diversified Fund
Performance fee $ (2,739,375)
Management fee (2,537,082)
Professional fees and other (185,807)
Administrative fee (177,249)
Miscellaneous expenses (48,469)
Total net investment loss allocated from
CATCo Reinsurance Fund Ltd. - CATCo Diversified Fund (5,687,982)
Fund investment income
Interest 515
Fund expenses
Professional fees and other (617,174)
Management fee (145,142)
Administrative fee (33,000)
Total Fund expenses (795,316)
Net investment loss (6,482,783)
Net realised and net change in unrealised gain on
securities allocated from CATCo Reinsurance Fund Ltd.
- CATCo Diversified Fund
Net realised gain (loss) on securities -
Net change in unrealised gain on securities 27,234,336
Net gain on investments 27,234,336
Net increase in net assets resulting from operations $ 20,751,553
See accompanying notes to audited financial statements
AUDITED STATEMENT OF CHANGES IN NET ASSETS
Period from 20 December 2010 (commencement of operations) to 31
December 2011
(Expressed in United States Dollars)
------------------------------------------------------- --------------
Operations
Net investment loss $ (6,482,783)
Net realised gain (loss) on securities -
Net change in unrealised gain on securities 27,234,336
Net increase in net assets resulting from operations 20,751,553
Capital share transactions
Issuance of shares 338,047,487
Dividend declared (10,859,876)
Offering costs (8,145,352)
Net change in net assets resulting from capital share
transactions 319,042,259
Net change in net assets 339,793,812
Net assets, beginning of period -
Net assets, end of period $ 339,793,812
See accompanying notes to audited financial statements
AUDITED STATEMENT OF CASH FLOWS
Period from 20 December 2010 (commencement of operations) to 31
December 2011
(Expressed in United States Dollars)
------------------------------------------------------------- --------------
Cash flows from operating activities
Net increase in net assets resulting from operations $ 20,751,553
Adjustments to reconcile net increase in net
assets resulting
from operations to net cash used in operating
activities:
Net investment loss, net realised gain (loss)
and change in
unrealised gain on securities allocated from
CATCo Reinsurance Fund Ltd. - CATCo Diversified
Fund (21,546,354)
Changes in operating assets and liabilities:
Purchase of investment in CATCo Reinsurance Fund
Ltd.- (206,435,090)
CATCo Diversified Fund
Other assets (7,260)
Accrued expenses and other liabilities 456,858
Management fee payable 72,184
Net cash used in operating activities (206,708,109)
Cash flows from financing activities
Proceeds from issuance of shares 338,047,487
Offering costs (8,145,352)
Net cash provided by financing activities 329,902,135
Net change in cash 123,194,026
Cash, beginning of period -
Cash, end of period $ 123,194,026
See accompanying notes to audited financial statements
1. Nature of operations and summary of significant accounting policies
Nature of Operations
CATCo Reinsurance Opportunities Fund Ltd. (the "Fund") 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 Fund was organized 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 the Investment Manager.
Pursuant to an investment management agreement, the Fund is managed
by CATCo Investment Management Ltd. (the "Investment Manager").
Refer to the Fund's prospectus for more information.
The Fund's Shares are listed and traded on the Specialist Fund
Market, a market operated by the London Stock Exchange. The Fund'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 preferred 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 preferred shares) in CATCo-Re Ltd. (the
"Reinsurer"). The Fund's ownership is greater than 50% of the
Master Fund at 31 December 2011.
The Reinsurer is a Bermuda licensed Class 3 reinsurance company,
registered as a segregated accounts company under the SAC Act,
through which the Master Fund accesses all of its reinsurance risk
exposure. The Reinsurer will form a segregated account that
corresponds solely to the Master Fund's investment in the Reinsurer
with respect to each particular reinsurance agreement.
The Reinsurer focuses primarily on property catastrophe
insurance and may be exposed to losses arising from hurricanes,
earthquakes, typhoons, hailstorms, floods, tsunamis, tornados,
windstorms, extreme temperatures, aviation accidents, fires,
explosions, marine accidents and other perils.
The financial statements of the Fund should be read and
considered in conjunction with the annual audited financial
statements of the Master Fund.
Basis of Presentation
The financial statements are expressed in United States dollars
and have been prepared in conformity with accounting principles
generally accepted in the United States of America ("GAAP") as
detailed in the Financial Accounting Standards Board's Accounting
Standards Codification.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments, such as money market funds, that are readily
convertible to known amounts of cash and have original maturities
of three months or less.
Valuation of Investment in CATCo Diversified Fund
The Fund records its investment in the Master Fund at fair
value. Valuation of investments held by the Master Fund, including,
but not limited to the valuation techniques used and classification
within the fair value hierarchy of investments held are discussed
as follows.
Fair Value - Definition and Hierarchy (Master Fund)
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the "exit
price") in an orderly transaction between market participants at
the measurement date.
In determining fair value, the Master Fund uses various
valuation approaches. A fair value hierarchy for inputs is used in
measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the
most observable inputs are to be used when available. Observable
inputs are those that market participants would use in pricing the
asset or liability based on market data obtained from sources
independent of the Master Fund. Unobservable inputs reflect the
Master Fund's assumptions about the inputs market participants
would use in pricing the asset or liability developed based on the
best information available in the circumstances. The fair value
hierarchy is categorized into three levels based on the inputs as
follows:
Level 1 - Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Master Fund
has the ability to access. Valuation adjustments are not applied to
Level 1 investments. Since valuations are based on quoted prices
that are readily and regularly available in an active market,
valuation of these investments does not entail a significant degree
of judgment.
Level 2 - Valuations based on quoted prices in markets that are
not active or for which all significant inputs are observable,
either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs
can vary from investment to investment and are affected by a wide
variety of factors, including the type of investment, whether the
investment is new and not yet established in the marketplace, and
other characteristics particular to the transaction. To the extent
that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair
value requires more judgment. Those estimated values do not
necessarily represent the amounts that may be ultimately realised
due to the occurrence of future circumstances that cannot be
reasonably determined. Because of the inherent uncertainty of
valuation, those estimated values may be materially higher or lower
than the values that would have been used had a ready market for
the investments existed. Accordingly, the degree of judgment
exercised by the Master Fund in determining fair value is greatest
for investments categorized in Level 3. 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.
During 2010, the Master Fund adopted Accounting Standard Update
("ASU") No. 2010-06, "Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements",
which provides guidance on how investment assets and liabilities
are to be valued and disclosed. The adoption of this pronouncement
did not have a material impact on the Master Fund's financial
statements.
In May 2011, the Financial Accounting Standard Board ("FASB")
issued ASU 2011-04, "Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs",
which expands on current guidance relating to valuation
methodologies for investments that are categorized within level 3
of the fair value hierarchy. The amendments are effective during
interim and annual periods beginning after 15 December 2011. The
Investment Manager is evaluating the impact of this update on its
current disclosures.
Fair Value - Valuation Techniques and Inputs
Investments in Securities (Master Fund)
The value of preferred 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 preferred 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 preferred 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).
The value of preferred shares issued by the Reinsurer will also
recognize 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.
Investments in Securities held by the Reinsurer
Industry Loss Warranties ("ILWs")
ILWs will be marked similar to preferred shares held with
respect to reinsurance agreements, except that following a Covered
Event, loss information from the index provider on the trade will
be used.
Insurance-Linked Securities ("ILS")
Cat Bonds and other ILS will be valued at the average of the
bids from the pricing sheets or indicative bids provided by at
least two broker-dealers or other market makers.
Risk Transfer Derivative Agreements
Risk transfer derivative agreements will be marked similar to
ILWs except that following a Covered Event, loss information
provided by the Investment Manager or the counterparty will be
used.
Earned Premiums
Premiums shall be considered earned with respect to computing
the Master Fund's Net Asset Value in direct proportion to the
percentage of the risk that is deemed to have expired year-to-date.
Generally, all premiums shall be earned uniformly over each month
of the risk period. However, for certain risks, there is a clearly
demonstrable seasonality associated with these risks. Accordingly,
Seasonality Factors are utilized for the establishment of certain
instruments, including preferred 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
Market 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 reinsurance agreement of the Reinsurer.
As the Reinsurer's reinsurance agreements are fully collateralized,
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 the
Administrator where practicable, using what the Investment Manager
believes in its discretion are appropriate techniques consistent
with market practices for the relevant type of investment. Fair
valuation in this context depends on the facts and circumstances of
the particular investment, including but not limited to prevailing
market and other relevant conditions, and refers to the amount for
which a financial instrument could be exchanged between
knowledgeable, willing parties in an arm's length transaction.
Fair value is not the amount that an entity would receive or pay
in a forced transaction or involuntary liquidation.
The process used to estimate a fair value for an investment may
include a single technique or, where appropriate, multiple
valuation techniques, and may include (without limitation and in
the discretion of the Investment Manager, or in the discretion of
the Administrator subject to review by the Investment Manager where
practicable) the consideration of one or more of the following
factors (to the extent relevant): the cost of the investment to the
Master Fund, a review of comparable sales (if any), a discounted
cash flow analysis, an analysis of cash flow multiples, a review of
third-party appraisals, other material developments in the
investment (even if subsequent to the valuation date), and other
factors.
For each Fair Value Instrument, the Investment Manager and/or
the Administrator, may as practicable, endeavor to obtain quotes
from broker-dealers that are market makers in the related asset
class, counterparties, the Master Fund's prime brokers or lending
agents and/or pricing services. The Investment Manager, may, but
will not be required to, input pricing information into models
(including models that are developed by the Investment Manager or
by third parties) to determine whether the quotations accurately
reflect fair value.
In addition, the Investment Manager, may in its discretion,
consult with the members of the investment team to determine the
appropriate valuation of an instrument or additional valuation
techniques that may be helpful to such valuation.
From time to time, the Investment Manager may change its fair
valuation technique as applied to any investment if the change
would result in an estimate that the Investment Manager in good
faith believes is more representative of fair value under the
circumstances. The determination of fair value is inherently
subjective in nature, and the Investment Manager has a conflict of
interest in determining fair value in light of the fact that the
valuation determination may affect the amount of the Investment
Manager's Performance Fee.
At any given time, a substantial portion of the Master Fund's
portfolio positions may be valued by the Investment Manager using
the Fair Value Pricing policies. Prices assigned to portfolio
positions by the Administrator or the Investment Manager may not
necessarily conform to the prices assigned to the same financial
instruments if held by other accounts or by affiliates of the
Investment Manager.
The Board of Directors of the Master Fund (the "Board"), in
consultation with the Investment Manager, may classify certain
Insurance-Linked Instruments as investments in which only persons
which are Shareholders at the time of such classification can
participate ("Side Pocket Investments"). This typically will happen
if a Covered Event has recently occurred or seems likely to occur
under an Insurance-Linked Instrument, because determining the level
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
Statement of Assets and Liabilities at their fair value as
determined in good faith by the board of directors following
consultation with the Investment Manager.
Financial Instruments
The fair values of the Fund's assets and liabilities, which
qualify as financial instruments under ASC 825, Financial
Instruments, approximate the carrying amounts presented in the
statement of assets and liabilities.
Investment Transactions and Related Investment Income and
Expense
The Fund records its proportionate share of the Master Fund's
income, expenses, and realised and changes in unrealised gains and
losses on a monthly basis. In addition, the Fund 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 recognized 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 statement of operations.
The Fund does not isolate the portion of the results of
operations arising from the effect of changes in foreign exchange
rates on investments from fluctuations arising from changes in
market prices of investments held. Such fluctuations are included
in net gain (loss) on investments in the statement of
operations.
Income Taxes
Under the laws of Bermuda, the Fund is generally not subject to
income taxes, until 31 March 2035. 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 Fund 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 recognized 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 recognized
results in the Fund recording a tax liability that reduces ending
net assets. Based on its analysis, the Fund has determined that it
has not incurred any liability for unrecognized tax benefits as of
31 December 2011. However, the Fund'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 Fund recognizes interest and penalties related to
unrecognized tax benefits in interest expense and other expenses,
respectively. No interest expense or penalties have been recognized
as of and for the period ended 31 December 2011.
Generally, the Fund is subject to income tax examinations by
major taxing authorities for all tax years since its inception.
The Fund 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.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the Fund's management to make estimates and
assumptions that affect the amounts disclosed in the financial
statements and accompany notes. Actual results could differ from
those estimates.
Offering costs
The costs associated with each capital raise are expensed as
incurred.
2. Schedule of the Fund's share of the investments held in the
Master Fund and fair value measurements
The following table reflects the Fund's proportionate share of
the market value of investments in the Reinsurer held by the Master
Fund at 31 December 2011:
Investments in securities, at fair Fair Value
value
Preferred Shares
Investments in CATCo-Re Ltd.
Class A preferred Shares $ 26,123,929
Class B preferred Shares 6,573,657
Class C preferred Shares 31,889,016
Class D preferred Shares 21,494,602
Class E preferred Shares 16,077,344
Class F preferred Shares 34,447,557
Class G preferred Shares 10,124,083
Class H preferred Shares 22,008,743
Class I preferred Shares 5,288,068
Class J preferred Shares 43,356,315
Class K preferred Shares 24,881
Class L preferred Shares -
Class SP preferred Shares 10,573,249
Total Investments in CATCo-Re Ltd. $227,981,444
The Fund's assets and liabilities recorded at fair value have
been categorized based upon a fair value hierarchy as described in
the Fund's significant accounting policies in Note 1. The following
table presents information about the Fund's assets measured at fair
value as of 31 December 2011:
Level 1 Level 2 Level 3 Total
Assets (at fair value)
Investments in securities
Preferred shares $ - $ - $ 227,981,444 $ 227,981,444
Total Investments in
securities $ - $ - $ 227,981,444 $ 227,981,444
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 recognized by the Fund at
the end of each reporting period.
There were no transfers between levels for the period ended 31
December 2011.
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 Fund has classified within the Level 3 category.
As a result, the unrealised gains and losses for assets and
liabilities within the Level 3 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 period
ended 31 December 2011 were as follows:
Change
in
Unrealised
Gains
for
Change in Securities
Beginning Realised Still
Balance & Transfers Ending held
20 Unrealised In/(Out) Balance 31 Dec
December, Gains Level 31 December 2011
2010 (Losses)(a) Purchases Sales Settlements 3 2011 (b)
------------- ----------- ------------- -------------- ------ ------------ ---------- ------------- ------------
Assets (at
fair value)
Investments
in
Preferred $
shares $ - $ 21,546,354 $ 206,435,090 - $ - $ - $227,981,444 $21,546,354
------------- ----------- ------------- -------------- ------ ------------ ---------- ------------- ------------
(a) Realised and change in unrealised gains are all included in
net gain (loss) on securities in the statement of operations.
(b) (The change in unrealised gains for the period ended 31
December 2011 for securities still held at 31 December 2011 are
reflected in the net change in unrealised gains on securities in
the statement of operations.)
3. Concentration of credit risk
In the normal course of business, the Fund maintains its cash
balances in financial institutions, which at times may exceed
federally insured limits. The Fund is subject to credit risk to the
extent any financial institution with which it conducts business is
unable to fulfill contractual obligations on its behalf. Management
monitors the financial condition of such financial institutions and
does not anticipate any losses from these counterparties. At 31
December 2011 cash is held with HSBC Bank Bermuda Ltd. which has a
credit rating of A+.
4. Concentration of reinsurance risk
The following table illustrates the diversified risk profile of
the Reinsurer's portfolio by geography and peril, with the
percentage exposure representing the relative weighting of each
event risk against the Reinsurer's portfolio as a whole:
Event Risk % Exposure Event Risk % Exposure
US/Canada Quake 13% GA to VA Wind 3%
US/Caribbean Wind 13% Florida Wind 3%
2(nd) Event Protections 12% US 2(nd) Event Wind 3%
Japan/Caribbean Quake 9% US 3(rd) Event Wind 3%
Marine Non Elemental 8% Japan Wind 2%
Europe All Natural
Perils 6% CA Quake 2%
Florida 2(nd) Event US Excluding CA
Wind 5% Quake 2%
Gulf of Mexico Wind 5% Europe Wind 2%
Japan All Natural
Northeast Wind 5% Perils 1%
Rest of World 3%
1. Not all of the 19 Event Risks listed above are fully
non-correlated. However, no single event exposure is greater than
18%.
2. The 2(nd) event risk pillar provides additional coverage for
the risk pillars excluding US 3(rd) event wind above at the same
attachment points and in the same percentage exposure as the 1(st)
event coverage.
5. Loss reserves
The reserve for unpaid losses and loss expenses recorded by the
Reinsurer includes estimates for losses incurred but not reported
as well as losses pending settlement.
The Reinsurer makes a provision for losses on contracts only
when an event that is covered by the contract has occurred. When a
potential loss event has occurred, the Reinsurer obtains and uses
assessments from counterparties as a baseline, incorporating its
own models and historical data regarding loss development, to
determine the level of reserves required.
Future adjustments to the amounts recorded as of period-end,
resulting from the continual review process, as well as differences
between estimates and ultimate settlements, will be reflected in
the Reinsurer's statement of operations in future periods when such
adjustments become known. Future developments may result in losses
and loss expenses materially greater or less than the reserve
provided.
During 2011, the Reinsurer paid claims of $1,165,933 net of
additional loss premium of $1,875,000 pertaining to the Tohoku,
Japan earthquake in March 2011. At 31 December 2011, the Reinsurer
established net reserves of $11,622,167 associated with the 2011
earthquakes in Christchurch, New Zealand and Tohoku, Japan.
6. Capital share transactions
As of 31 December 2011, the Fund has authorized capital stock of
500,000,000 unclassified shares of par value $0.0001 per share.
The Fund had an initial placing which closed on 20 December 2010
raising $80,392,000 through the issuance of 80,392,000 Ordinary
Shares. On 31 March 2011 a further $7,358,750 was raised through an
additional issuance of 7,250,000 Ordinary Shares. The Fund had a
further placing opening on 18 May 2011 resulting in $124,446,737
being raised through the issuance of 124,446,737 C Shares on 20 May
2011 and $850,000 being raised through the issuance of 850,000 C
Shares on 23 May 2011. A further $125,000,000 was raised through an
additional issuance of 118,821,292 C Shares on 16 December
2011.
As of 31 December 2011, the Fund has issued 87,642,000 Class 1
Ordinary Shares and 244,118,029 Class 2 C Shares (collectively the
"Shares").
Transactions in Shares during the period, and the Shares
outstanding and the net asset value ("NAV") per Share as of 31
December 2011 is as follows:
Beginning Shares Shares Ending
Shares Issued Redeemed Shares
-------------------- ----------- ------------ ---------- ------------
Class 1 - Ordinary
shares - 87,642,000 - 87,642,000
Class 2 - C Shares - 244,118,029 - 244,118,029
Beginning Amounts Amounts Ending Ending NAV
Shares Issued Redeemed Net Assets Per Share
--------------------- ----------- ------------- ---------- ------------- -----------
Class 1 - Ordinary
shares $ - $87,750,750 $ - $87,633,736 $0.9999
Class 2 - C Shares $ - $250,296,737 $ - $252,160,076 $1.0329
The Fund 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 Fund 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 of Directors of the Fund (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 Fund will issue further Ordinary
Shares.
The Reinsurer has entered into fully collateralized reinsurance
contracts under which it is potentially exposed to losses arising
from the New Zealand earthquake on 22 February 2011 and the Japan
earthquake on 11 March 2011 (respectively, "NZ Exposures" and
"Japan Exposures"). Due to the uncertainty in valuing these
investments and the tenure of these contracts, the Master Fund's
Board has designated the Master Fund's potential NZ Exposures and
Japan Exposures as a Side Pocket Investment, represented by a new
Class of shares ("SP Shares"). Accordingly, SP Shares have been
issued as at 1 April 2011 to each Master Fund Shareholder by way of
the conversion of a pro rata proportion of their Master Fund Class
A, B and C Shares into SP Shares. In this way, Master Fund shares
that are issued to Master Fund shareholders after 31 March 2011
will participate fully in the Master Fund's portfolio, except that
they will not have any NZ Exposures or Japan Exposures for the
events that have already occurred and will accordingly not
participate in any losses or premiums attributable to such
exposures.
Once the loss position in respect of the NZ and Japan Exposures
is clarified, the Side Pocket Investment will be realised and the
SP Shares will be exchanged for Master Fund Class A, B and C
Shares.
Following the realization of the Side Pocket Investment in such
circumstances, it is expected that any Class C Shares which have
been issued will be converted into Ordinary Shares and will
accordingly participate in any losses or premiums attributable to
such Ordinary Shares.
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 Fund and to
exercise full discretion in the management of the trading,
investment transactions and related borrowing activities of the
Fund in order to implement such strategy.
8. Related party transactions
The Investment Manager of the Fund is also the Investment
Manager of the Master Fund and the Reinsurer.
The Investment Manager is entitled to a management fee,
calculated and payable monthly in arrears equal to1/12 of 1.5% of
the net asset value of the Fund which is not attributable to the
Fund's investment in the Master Fund Shares as at the last calendar
day of each calendar month. Performance fees are charged in the
Master Fund.
Qatar Insurance Company, an affiliate of the Investment Manager,
holds 31.4% of voting rights of the Ordinary Shares issued in the
Fund. In addition, the Directors of the Fund are also Shareholders
of the Fund.
9. Administrative Fee
Prime Management Limited (the "Administrator") serves as the
Fund's Administrator and performs certain administrative and
clerical services on behalf of the Fund. For the provision of the
service under the Administration Agreement, the Administrator
receives an annual flat fee.
10. Financial highlights
Financial highlights for the Ordinary Shares are for the period
20 December 2010 (commencement of operations) to 31 December 2011
while the C Shares are for the period 20 May 2011 to 31 December
2011 and are as follows:
Class 1 Class 2
Ordinary Shares C Shares
United States Dollar United States Dollar
Per share operating performance
Net asset value, beginning of
period 1.0000 1.0000
Offering costs (0.0231) (0.0389)
Income (loss) from investment
operations:
Net investment loss (0.0360) (0.0255)
Net gain on investments 0.1086 0.1383
Total from investment operations 0.0726 0.1128
Premium 0.0014 0.0100
Dividend * (0.0510) (0.0510)
Net asset value, end of period 0.9999 1.0329
Total return
Total return before performance
fee 8.82% 12.98%
Performance fee** (1.39) (1.29)
Total return after performance
fee 7.43% 11.69%
Ratio to average net assets
Expenses other than performance
fee (2.15)% (1.18)%
Performance fee** (1.30) (1.01)
Total expenses after performance
fee (3.45)% (2.19)%
Net investment loss (3.60)% (2.55)%
The ratios to weighted average net assets are calculated for
each Class of Share taken as a whole. An individual shareholder's
return and ratios to weighted average net assets may vary from
these amounts based on the timing of capital transactions. Returns
and ratios shown above are for the period ended 31 December 2011
and have not been annualized.
* Subject to shareholder approval
** The performance fee is charged in the Master Fund.
11. Indemnifications or warranties
In the ordinary course of its business, the Fund may enter into
contracts or agreements that contain indemnifications or
warranties. Future events could occur that lead to the execution of
these provisions against the Fund. Based on its history and
experience, management believes that the likelihood of such an
event is remote.
12. Subsequent events
On 1 January 2012, the Fund subscribed $110,500,000 in Class C
Shares of the Master Fund.
These financial statements were approved by management and
available for issuance on 30 January 2012. Subsequent events have
been evaluated through this date.
The Directors of CATCo Reinsurance Opportunities Fund Limited
confirm that the annual report and financial statements of the
Company (the "Annual Report") for the year ended 31 December 2011
have been posted to shareholders today.
The Annual Report is available on the Company's website,
www.catcoim.com
For further information, please
contact:
CATCo Investment Management Ltd
Jason Bibb, Director
Telephone: +1 441 531 2227
Email: jason.bibb@catcoim.com
Mark Way, Corporate Communications
Telephone: +44 7786 116991
Email: mark.way@catcoim.com
Numis Securities Limited
David Benda / Hugh Jonathan
Telephone: +44 (0) 20 7260 1000
Prime Management Ltd
Michael Toyer / John Whiley
Tel: +1 (441) 295 0329
- Ends -
This information is provided by RNS
The company news service from the London Stock Exchange
END
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