TIDMCAT
RNS Number : 9976G
CATCo Reinsurance Opps Fund Ltd
12 August 2016
12 August 2016
CATCo Reinsurance Opportunities Fund Ltd. (the "Fund")
Interim Financial Report
For the Six Months Ended 30 June 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.
CHAIRMAN'S STATEMENT
Welcome to the 2016 Interim Report of CATCo Reinsurance
Opportunities Fund Ltd. (the "Company"). The Company has, in spite
of the uptick in catastrophe losses around the globe, enjoyed a
solid performance over the past six months, reflecting its highly
diversified and significantly de-risked 2016 portfolio.
Despite a highly competitive reinsurance market, Markel CATCo Re
Ltd. (the "Reinsurer"), through which the Company gains its
reinsurance exposure via its investment in Markel CATCo Reinsurance
Fund Ltd., maintained its robust book of business and at the same
time took advantage of the plentiful capacity available to purchase
additional catastrophe protection. As a result, the likelihood of
losses being incurred has been significantly reduced, with the
portfolio's average risk profile down approximately 20 per cent
compared to the 2015 portfolio.
Faced with this period of a protracted soft reinsurance market,
the Company's strategy continues to be one of prudent capital
management whereby any excess capital will be returned to
Shareholders if it cannot be effectively deployed.
However, in view of its proven reputation in the retrocessional
reinsurance sector, now reinforced by the strength of the Markel
brand, the Reinsurer saw an increase in demand from reinsurance
clients leading to 100 per cent of the Company's available capital
being deployed as of 1 January 2016.
In addition to the capital raised in 2015, the Company raised an
additional $10.89 million in March 2016 to meet a proportion of
this new demand from reinsurance clients which occurred prior to
the mid-year reinsurance contract renewals.
The Reinsurer's success lies in the flexibility of its product
enabling it to meet the individual preferences of each client,
through a broad selection of geographic risk pillars which in turn
provides diversification and reduced exposure to any one event. The
benefit of this diversification is demonstrated by the fact that
major insurance catastrophe losses in recent months are unlikely to
have a significant impact on the 2016 portfolio, including the Fort
McMurray wildfire, which is set to be Canada's largest ever
insurance loss.
As the Company enters the latter six months of 2016, the
Investment Manager continues to target a 2016 net return in excess
of LIBOR plus 9 to 12 per cent per annum.
Financial Performance
The NAV return for the Ordinary Shares for the first six months
of 2016 was 4.86 per cent (2015: 4.47 per cent), benefiting from
the release in the first quarter of 2016 of the loss reserve
relating to the 2015 UK flood Side Pocket Investment. The NAV
return for the C shares for the first six months of 2016 was 3.81
per cent.
The NAV Total Returns since Inception to 30 June 2016 of the
Ordinary Shares issued on 20 December 2010, the C Shares issued on
20 May 2011, the C Shares issued on 16 December 2011 and the C
Shares issued on 2 November 2015 were, respectively, 69.62 per
cent, 94.43 per cent, 74.73 per cent and 3.81 per cent.
An annual dividend of $0.06619 for the year to 31 December 2015
in respect of Ordinary Shares was paid to holders of the Ordinary
Shares on 26 February 2016.
Attritional Loss Reserve
As a consequence of the increasing diversity of the Company's
portfolio, the Reinsurer typically picks up a number of small
('attritional') losses. Notifications of a proportion of these
losses are occasionally received towards the end of the financial
year, an extended time after the event.
To offset this concentration of losses, which impacts the NAV
towards the end of the year, the Company introduced a monthly
attritional loss reserve of approximately 0.15 per cent. This was
first included in the January 2016 NAV, and will result in an
approximate 2 per cent reduction to be recorded in the NAV for the
full year 2016. Any un-utilised attritional loss reserve will be
reversed in December 2016.
Loss Reserves and Side Pocket Investment Releases
In January 2016, the Investment Manager announced that a
proportion of the Side Pocket Investments ("SPI's") established in
December 2015 would cover potential losses from the UK floods.
During the first quarter of 2016, the Investment Manager was able
to close the side pocket exposure to the UK floods and the related
loss reserves were simultaneously released resulting in a 1 per
cent appreciation in the Ordinary Share NAV.
On 1 May 2016, a wildfire started near Fort McMurray, Alberta
and subsequently led to over 88,000 people being evacuated. The
wildfire caused an estimated $3.2 billion in insured damage
(source: PCS Canada(R)). Following recent discussions with the
Reinsurer's reinsurance clients, the Investment Manager recorded a
specific loss reserve for the wildfire of approximately 1 per cent
of NAV. The Investment Manager will continue to monitor the impact
of the Canadian wildfire as clients release any additional loss
information, and expects that any further loss development will be
absorbed by the attritional loss reserve.
On 20 March 2016, oil production at the Jubilee Oil Field off
the coast of Ghana halted, resulting in a potentially significant
insured loss for the industry, which will be more accurately
quantified when official estimates are forthcoming. The Investment
Manager is monitoring the possible impact of this loss on the
Company's portfolio.
C Share Conversion
As at 30 June 2016, the SPI's established in 2014 remain at
approximately 1.5 per cent of the Ordinary Share NAV (31 Dec 2015:
1.5 per cent) whilst the SPI's established in 2015 represent 3.8
per cent of the Ordinary Share NAV (31 Dec 2015: 5.5 per cent).
As such, the combined 2014 and 2015 SPI's amount to 5.3 per cent
of the Ordinary Share NAV, which the Board deems to be a material
amount as it relates to the potential impact on a C Share
conversion.
The reinsurance clients have the option to hold collateral in
relation to prior events, which is in accordance with the terms of
their contracts. The Investment Manager currently does not expect
any further significant releases to be made during the remainder of
2016.
However, the Board intends to consider again, in the fourth
quarter of 2016, the materiality of the SPI's and the possible
timing of the consolidation of the C Shares into a single share
class along with the existing Ordinary Shares.
2016 Catastrophic Activity to Date
Industry insured catastrophe losses increased significantly
during the first half of 2016 compared to the same period the
previous year. Losses for the first six months of 2016 are
estimated by Munich Re to be approximately $27 billion (2015: $19
billion).
In April, Japan was struck by two earthquakes on the island of
Kyushu causing a combined loss of approximately $5 billion (source:
Aon Benfield). The Fort McMurray wildfire in Alberta, Canada, began
on 1 May causing approximately $3.2 billion of insured losses and
was declared the largest catastrophe in Canadian history. Prior to
this wildfire, the costliest insured disaster in Canadian history
was the Alberta floods of 2013 which caused a loss of $1.8
billion.
Other notable events were the hailstorms that struck the San
Antonio area of Texas which are expected to be the costliest
hailstorm in the state's history, with insured losses from this
single event expected to surpass $2 billion (source: Insurance
Council of Texas).
During May and June, parts of Europe experienced widespread
flooding from Storm Elvira. Some of the worst hit areas were in
Germany and France where floods along the River Seine, including
Paris, caused approximately $3.4 billion of combined insured losses
(source: Aon Benfield).
UK Brexit Referendum
On 23 June 2016, the UK held a referendum in which it voted to
leave the EU ("Brexit"). The longer-term impact on the Company,
and, more particularly, its investors, of the result of the Brexit
referendum in the UK, is unclear. It is dependent on the terms of
the settlement between the UK and the EU which will govern the UK's
post-Brexit relationship with the EU. While Brexit is not
inevitable until the UK's withdrawal arrangements are agreed, it is
politically highly likely.
In the meantime, EU law and regulations currently in place or
implemented in the UK before Brexit will still be binding,
although, in the longer-term, there will, almost certainly, be an
overhaul. However, the most likely short-term effects of the
referendum will be economic. Changes in the value of Sterling,
inflation rates, yields on gilts and bonds, stock market
fluctuations and hence, increased market volatility, will provide
challenges for the Company, including its ability to raise money in
the UK capital markets. However, there may also be opportunities,
as the largely non-correlated nature of the Company's returns may
prove to be attractive to investors.
The Board will continue both to monitor the effect of the
referendum and subsequent developments leading towards Brexit, and
to ensure that the appropriate steps are being taken in order to
identify and mitigate any resultant risks to the Company, and to
identify and capitalise upon any opportunities that may present
themselves.
Outlook
The excess capacity in the property catastrophe reinsurance and
retrocession markets continues to prove a challenge, with signs
that the reinsurance cycle is permanently changing given the more
fungible nature of capital flows. In anticipation of a protracted
soft market, the Investment Manager is practising disciplined
underwriting, using its modeling and underwriting expertise to
select the most attractive and diversified risks at risk adequate
prices.
In a low interest rate environment, the appetite of capital
market investors for catastrophe risk remains strong and there
appears to be no sign of this waning. Property catastrophe risk
offers pension funds and other institutional investors an asset
class that is uncorrelated to equity investments, and which
continues to offer attractive returns, in spite of ongoing
competitive pressures.
Encouraging signs are being seen that other ILS managers are
taking a disciplined approach to underwriting, with a willingness
to turn down business that is not priced adequately. This is
reflected in the slowing of rate reductions at the mid-year
June/July 2016 renewals. Willis Re have noted that "standalone
insurance-linked securities (ILS) funds showed discipline through
the first quarter of 2016".
Despite the more recent increase in insured losses during 2016,
insured losses over the past three years have been significantly
below average, with exceptionally quiet Atlantic hurricane seasons.
US landfall hurricanes have historically been the biggest
contributor to annual catastrophe claims. $37 billion of global
insurance losses were caused from natural catastrophes in 2015,
well below the $62 billion average of the previous ten years
(according to Swiss Re sigma).
Despite the relatively low occurrence of major catastrophic loss
activity, the experience of the past six months has once again been
a reminder of the potential for substantial losses emanating from a
wide range of catastrophic perils, including floods, windstorms,
earthquakes, wildfires and severe convective storms.
In spite of the competitive forces currently present in the
market, the reinsurer's unique product enables it to continue to
command a higher premium, shielding the Company from the effects of
large year-on-year price reductions seen in the traditional
reinsurance market.
Nigel Barton
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
12 August 2016
DIRECTORS' REPORT
Risks and Uncertainties
The Board of Directors has identified a number of key risks that
affect the Company's business. The principal risks are:
Reinsurance Risk
The objective of the Company and of Markel CATCo Reinsurance
Fund Ltd. - Markel CATCo Diversified Fund (the "Markel CATCo Master
Fund"), the fund through which the Company conducts substantially
all of its investment activities, 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
preferred shares of the Reinsurer, Markel CATCo Re Ltd. The Markel
CATCo Master Fund spreads 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 Company's 2015 Annual Report, on page 16, explains in
detail how the Company and the Markel CATCo Master Fund ensure that
appropriate diversification is achieved.
Risks related to the Company's investment activities
These risks include, but are not limited to, market price,
counterparty, interest rate, liquidity and credit risk. Such key
risks relating to investment underwriting and strategy including,
for example, inappropriate asset allocation or borrowing are
managed through investment policy guidelines and restrictions, and
by oversight at each Board meeting. Operational disruption,
accounting and legal risks are also covered annually, and
regulatory compliance is reviewed at each Board meeting. The risks
arising from the UK's decision to leave the EU ("Brexit") are
discussed in the Chairman's Statement.
In the view of the Board, except for the risks relating to
Brexit referred to above, there have not been any changes to the
fundamental nature of these risks since the previous report, and
these principal risks and uncertainties are equally applicable to
the remaining six months of the financial year as they were to the
six months under review.
Related Party Disclosure and Transactions with the Investment
Manager
The Investment Manager is regarded as a related party and
details of the management fees payable are set out in the unaudited
Statement of Operations and note 7.
Going Concern Status
The Company's business activities, together with the factors
likely to affect its future development, performance and position,
are set out in the Chairman's Statement.
In accordance with the Financial Reporting Council's guidance on
going concern and liquidity risk issued in October 2009, the Board
of Directors have undertaken a rigorous review of the Company's
ability to continue as a going concern.
The Company's assets consist of cash and a diverse portfolio of
retrocessional reinsurance investments, including Industry Loss
Warranties, which, in most circumstances, are fully liquid at the
end of their contractual term.
The Board of Directors have reviewed forecasts and they believe
that the Company has adequate financial resources to continue its
operational existence for the foreseeable future and at least one
year from the date of this interim report. Accordingly, the
Directors continue to adopt the going concern basis in preparing
these accounts.
Directors' Responsibility Statement
The Directors are responsible for preparing the Half-Yearly
Financial Report in accordance with applicable law and regulations.
The Directors confirm that, to the best of their knowledge:
1. The condensed set of Financial Statements contained within
the Half-Yearly Financial Report has been prepared in accordance
with the applicable accounting standards.
2. The Chairman's Statement, the Financial Highlights and the
notes to the unaudited Financial Statements provides a fair review
of the information required by rule 4.2.7R of the Disclosure and
Transparency Rules (being an indication of important events that
have occurred during the first six months of the financial year and
their impact on the condensed set of Financial Statements and a
description of the principal risks and uncertainties for the
remaining six months of the financial year) and rule 4.2.8R (being
related party transactions that have taken place during the first
six months of the financial year and that have materially affected
the financial position of the Company during that period; and any
changes in the related party transactions described in the last
Annual Report that could do so).
The Half-Yearly Financial Report was approved by the Board on 12
August 2016 and the above responsibility statement was signed on
its behalf by the Chairman.
Nigel Barton
Chairman,
For and on behalf of the Board
12 August 2016
UNAUDITED STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United 30 June 30 June 2015 31 Dec.
States Dollars) 2016 2015 (Audited)
------------------------------ -------------- -------------- ----------------
$ $ $
------------------------------ -------------- -------------- ----------------
Assets
------------------------------ -------------- -------------- ----------------
Investment in Master
Funds, at fair value
(See Note 3) 440,388,784 323,618,163 347,516,987
------------------------------ -------------- -------------- ----------------
Cash and cash equivalents 9,353,923 1,342,284 1,839,305
------------------------------ -------------- -------------- ----------------
Advance subscription
in Markel CATCo Reinsurance
Fund Ltd.-
Markel CATCo Diversified
Fund - - 88,000,000
------------------------------ -------------- -------------- ----------------
Other assets 30,702 114,067 30,125
------------------------------ -------------- -------------- ----------------
Total assets 449,773,409 325,074,514 437,386,417
------------------------------ -------------- -------------- ----------------
Liabilities
------------------------------ -------------- -------------- ----------------
Accrued expenses
and other liabilities 360,945 89,638 282,989
------------------------------ -------------- -------------- ----------------
Management fee payable 11,280 1,708 -
------------------------------ -------------- -------------- ----------------
Total liabilities 372,225 91,346 282,989
------------------------------ -------------- -------------- ----------------
Net assets 449,401,184 324,983,168 437,103,428
------------------------------ -------------- -------------- ----------------
NAV per Share (see note 5)
See accompanying notes to unaudited Financial Statements
UNAUDITED STATEMENTS OF OPERATIONS
(Expressed in Six months Six months Year ended
United States to to 30 June 31 Dec. 2015
Dollars) 30 June 2016 2015 (Audited)
------------------------- -------------- -------------- --------------
$ $ $
------------------------- -------------- -------------- --------------
Net investment
loss allocated
from Investments
in Master Funds
(See Note 3)
------------------------- -------------- -------------- --------------
Interest income 243,151 5,044 7,768
------------------------- -------------- -------------- --------------
Other income - - 2,992
------------------------- -------------- -------------- --------------
Management fee (3,249,246) (2,389,613) (4,987,744)
------------------------- -------------- -------------- --------------
Performance fee (2,243,654) (1,542,079) (4,274,137)
------------------------- -------------- -------------- --------------
Interest fee (203,299) - -
------------------------- -------------- -------------- --------------
Professional
fees and other (179,927) (148,653) (383,083)
------------------------- -------------- -------------- --------------
Administrative
fee (114,463) (80,980) (157,199)
------------------------- -------------- -------------- --------------
Net investment
loss allocated
from Investments
in Master Funds (5,747,438) (4,156,281) (9,791,403)
------------------------- -------------- -------------- --------------
Company expenses
------------------------- -------------- -------------- --------------
Professional
fees and other (751,691) (724,419) (2,468,689)
------------------------- -------------- -------------- --------------
Management fee (73,633) (12,564) (18,175)
------------------------- -------------- -------------- --------------
Administrative
fee (58,000) (27,000) (54,000)
------------------------- -------------- -------------- --------------
Total Company
expenses (883,324) (763,983) (2,540,864)
------------------------- -------------- -------------- --------------
Net investment
loss (6,630,762) (4,920,264) (12,332,267)
------------------------- -------------- -------------- --------------
Net realised
gain and net
decrease in unrealised
appreciation
on securities
allocated from
Master Funds
(See Note 3)
------------------------- -------------- -------------- --------------
Net realised
gain on securities 57,967,193 45,577,396 51,154,113
------------------------- -------------- -------------- --------------
Net decrease
in unrealised
appreciation
on securities (31,665,229) (26,403,112) (2,445,883)
------------------------- -------------- -------------- --------------
Net gain on securities 26,301,964 19,174,284 48,708,230
------------------------- -------------- -------------- --------------
Net increase
in net assets
resulting from
operations 19,671,202 14,254,020 36,375,963
------------------------- -------------- -------------- --------------
See accompanying notes to unaudited Financial Statements
UNAUDITED STATEMENTS OF CHANGES IN NET ASSETS
(Expressed in United States Six months Six months Year ended
Dollars) to 30 June to
2016
30 June 31 Dec.
2015 2015
(Audited)
---------------------------------- --------------- --------------- --------------
$ $ $
---------------------------------- --------------- --------------- --------------
Operations
---------------------------------- --------------- --------------- --------------
Net investment loss (6,630,762) (4,920,264) (12,332,267)
---------------------------------- --------------- --------------- --------------
Net realised gain on securities 57,967,193 45,577,396 51,154,113
---------------------------------- --------------- --------------- --------------
Net decrease in unrealised
appreciation on securities (31,665,229) (26,403,112) (2,445,883)
---------------------------------- --------------- --------------- --------------
Net increase in net assets
resulting from operations 19,671,202 14,254,020 36,375,963
---------------------------------- --------------- --------------- --------------
Capital share transactions
---------------------------------- --------------- --------------- --------------
Issuance of Class C Shares 10,920,014 - 91,838,761
---------------------------------- --------------- --------------- --------------
Dividend declared (18,084,741) (17,999,434) (17,999,434)
---------------------------------- --------------- --------------- --------------
Offering costs (208,719) - (1,840,444)
---------------------------------- --------------- --------------- --------------
Return of value distribution - (34,997,045) (34,997,045)
---------------------------------- --------------- --------------- --------------
Net (decrease) / increase
in net assets resulting
from capital share transactions (7,373,446) (52,996,479) 37,001,838
---------------------------------- --------------- --------------- --------------
Net increase / (decrease)
in net assets 12,297,756 (38,742,459) 73,377,801
---------------------------------- --------------- --------------- --------------
Net assets, beginning of
period 437,103,428 363,725,627 363,725,627
---------------------------------- --------------- --------------- --------------
Net assets, end of period 449,401,184 324,983,168 437,103,428
---------------------------------- --------------- --------------- --------------
See accompanying notes to unaudited Financial Statements
UNAUDITED STATEMENTS OF CASH FLOWS
(Expressed in United States Six months Six months Year ended
Dollars) to to 31 Dec.
30 June 30 June 2015 (Audited)
2016 2015
--------------------------------------------- ---------------- --------------- ----------------
$ $ $
--------------------------------------------- ---------------- --------------- ----------------
Cash flows from operating
activities
--------------------------------------------- ---------------- --------------- ----------------
Net increase in net assets
resulting from operations 19,671,202 14,254,020 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 (20,554,526) (15,018,003) (38,916,827)
--------------------------------------------- ---------------- --------------- ----------------
Sale of investment in CATCo
Reinsurance Fund Ltd.-
CATCo Diversified Fund 332,882,729 55,200,000 55,200,000
--------------------------------------------- ---------------- --------------- ----------------
Purchase of investment
in Markel CATCo Reinsurance
Fund Ltd. - (405,200,000) - -
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 (577) (83,501) 441
--------------------------------------------- ---------------- --------------- ----------------
Accrued expenses and other
liabilities 77,956 (121,623) 71,728
--------------------------------------------- ---------------- --------------- ----------------
Management fee payable 11,280 1,708 -
--------------------------------------------- ---------------- --------------- ----------------
Net cash provided by /
(used in) operating activities 14,888,064 54,232,601 (35,268,695)
--------------------------------------------- ---------------- --------------- ----------------
Cash flows from financing
activities
--------------------------------------------- ---------------- --------------- ----------------
Issuance of Class C Shares 10,920,014 - 91,838,761
--------------------------------------------- ---------------- --------------- ----------------
Dividend paid (18,084,741) (17,999,434) (17,999,434)
--------------------------------------------- ---------------- --------------- ----------------
Offering costs (208,719) - (1,840,444)
--------------------------------------------- ---------------- --------------- ----------------
Return of value distribution
paid - (34,997,045) (34,997,045)
--------------------------------------------- ---------------- --------------- ----------------
Net cash (used in) / provided
by financing activities (7,373,446) (52,996,479) 37,001,838
--------------------------------------------- ---------------- --------------- ----------------
Net increase in cash and
cash equivalents 7,514,618 1,236,112 1,733,143
--------------------------------------------- ---------------- --------------- ----------------
Cash and cash equivalents,
beginning of period 1,839,305 106,162 106,162
--------------------------------------------- ---------------- --------------- ----------------
Cash and cash equivalents,
end of period 9,353,923 1,342,284 1,839,305
--------------------------------------------- ---------------- --------------- ----------------
See accompanying notes to unaudited Financial Statements
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(Expressed in United States Dollars)
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 "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. The assets attributable to each segregated account of the
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. ("Markel CATCo") commenced operation and CIML's management
team, led by Chief Executive Officer Anthony Belisle, has
transitioned into commensurate roles at Markel CATCo and continues
to operate the business from its Hamilton, Bermuda headquarters,
now under Markel's ultimate ownership. Pursuant to an investment
management agreement, the Company is now being managed by Markel
CATCo (the "Investment Manager"). Refer to the Company's prospectus
for more information.
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 "Markel CATCo Master Fund"), a segregated account of Markel
CATCo Reinsurance Fund Ltd. (the "Markel CATCo SAC"), instead of
the Master Fund. Meanwhile, the Company will retain an interest in
any run-off business of the Master Fund, overseen by CIML, until
such business is liquidated. See Note 3.
The Company's Shares are listed and traded on the Specialist
Fund Market ("SFM"), a market operated by the London Stock
Exchange. The Company's Shares are also listed on the Bermuda Stock
Exchange following the Secondary Listing on 20 May 2011.
The objective of the Master Fund and the Markel CATCo Master
Fund (together the "Master Funds") 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 Funds would be exposed to reinsurance risk,
insurance-linked securities (such as notes, swaps and other
derivatives), and other nancial instruments. All of the Master
Funds' exposure to reinsurance risk is obtained through its
investment (via preferred shares) in CATCo-Re Ltd. (the "CATCo
Reinsurer") and Markel CATCo Re Ltd (the "Markel CATCo Reinsurer"),
respectively (together the "Reinsurers").
The Reinsurers are Bermuda licensed Class 3 reinsurance
companies, registered as segregated accounts companies under the
SAC Act, through which the Master Funds access all 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, oods, tsunamis, tornados, windstorms, winter
storms, extreme temperatures, aviation accidents, res, explosions,
marine accidents and other perils.
Basis of Presentation
The unaudited Financial Statements are expressed in United
States dollars and have been prepared in conformity with accounting
principles generally accepted in the United States of America
("GAAP"). The Company is an investment company and follows the
accounting and reporting guidance contained within Topic 946 of the
Financial Accounting Standards Board's Accounting Standards Codi
cation ("ASC").
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments, such as money market funds, that are readily
convertible to known amounts of cash and have original maturities
of three months or less.
Valuation of Investment in Master Fund
The Company records its investments in the Master Funds at fair
value based upon an estimate made by the Investment Manager, in
good faith and in consultation or coordination with Prime
Management Limited (the "Administrator") where practicable, using
what the Investment Manager believes in its discretion are
appropriate techniques consistent with market practices for the
relevant type of investment. Fair valuation in this context depends
on the facts and circumstances of the particular investment,
including but not limited to prevailing market and other relevant
conditions, and refers to the amount for which a financial
instrument could be exchanged between knowledgeable, willing
parties in an arm's length transaction. Fair value is not the
amount that an entity would receive or pay in a forced transaction
or involuntary transaction.
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
unaudited Statement 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 is recognised on the accrual basis.
Translation of Foreign Currency
Assets and liabilities denominated in foreign currencies are
translated into United States dollar amounts at the period-end
exchange rates. Transactions denominated in foreign currencies,
including purchases and sales of investments, and income and
expenses, are translated into United States dollar amounts on the
transaction date. Adjustments arising from foreign currency
transactions are re ected in the unaudited Statement 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
decrease in unrealised appreciation on securities in the unaudited
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 per cent 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 30 June 2016. 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 expense or penalties have been recognised
as of and for the period ended 30 June 2016.
Generally, the Company is subject to income tax examinations by
major taxing authorities for all tax years since its inception.
The Company may be subject to potential examination by U.S.
federal or foreign jurisdiction authorities in the areas of income
taxes. These potential examinations may include questioning the
timing and amount of deductions, the nexus of income among various
tax jurisdictions and compliance with U.S. federal or foreign tax
laws. The Company was not subjected to any tax examinations during
the period ended 30 June 2016.
Use of Estimates
The preparation of Financial Statements in conformity with GAAP
requires the Company's management to make estimates and assumptions
that affect the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Financial
Statements. Actual results could differ from those estimates.
Offering Costs
The costs associated with each capital raise are expensed
against paid-in capital as incurred.
2. CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company maintains its cash
balances (not assets supporting retrocessional transactions) in
financial institutions, which at times may exceed federally insured
limits. The Company is subject to credit risk to the extent any
financial institution with which it conducts business is unable to
fulfill contractual obligations on its behalf. Management monitors
the financial condition of such financial institutions and does not
anticipate any losses from these counterparties. At 30 June 2016,
cash and cash equivalents are held with HSBC Bank Bermuda Limited
which has a credit rating of A- as issued by Standard &
Poor's.
3. INVESTMENTS IN MASTER FUNDS, AT FAIR VALUE
The following table summarises the Company's Investments in
Master Funds:
(Expressed in United States Dollars) 30 June 2016
---------------------------------------- -------------
$
---------------------------------------- -------------
Investment in Markel CATCo Reinsurance
Fund Ltd.- Markel CATCo Diversified
Fund, at fair value 421,521,023
---------------------------------------- -------------
Investment in CATCo Reinsurance
Fund Ltd.- CATCo Diversified Fund,
at fair value 18,867,761
---------------------------------------- -------------
Investments in Master Funds, at
fair value 440,388,784
---------------------------------------- -------------
From 1 January to 30 June 2016, the net investment loss
allocated from Investments in Master Funds, and the net realised
gain and net decrease in unrealised appreciation on securities
allocated from Master Funds in the unaudited Statement of
Operations consisted of the combined results from the Company's
Investments in the Master Funds as detailed below:
(Expressed in United Total Investment Investment
States Dollars) in Markel in Master
CATCo Master Fund
Fund
----------------------------- ------------ -------------- -----------
$ $ $
----------------------------- ------------ -------------- -----------
Interest Income 243,151 241,838 1,313
----------------------------- ------------ -------------- -----------
Management fee (3,249,246) (3,079,213) (170,033)
----------------------------- ------------ -------------- -----------
Performance fee (2,243,654) (1,813,447) (430,207)
----------------------------- ------------ -------------- -----------
Interest fee (203,299) (203,299) -
----------------------------- ------------ -------------- -----------
Professional fees
and other (179,927) (155,586) (24,341)
----------------------------- ------------ -------------- -----------
Administrative fee (114,463) (98,577) (15,886)
----------------------------- ------------ -------------- -----------
Net investment loss
allocated from Investments
in Master Funds (5,747,438) (5,108,284) (639,154)
----------------------------- ------------ -------------- -----------
Total Investment Investment
in Markel in Master
CATCo Master Fund
Fund
----------------------------- ------------- -------------- -------------
$ $ $
----------------------------- ------------- -------------- -------------
Net realised gain
on securities 57,967,193 1,140,404 56,826,789
----------------------------- ------------- -------------- -------------
Net decrease in unrealised
appreciation on securities (31,665,229) 20,288,904 (51,954,133)
----------------------------- ------------- -------------- -------------
Net realised gain
and net increase
in unrealised appreciation
on securities allocated
from Master Funds 26,301,964 21,429,308 4,872,656
----------------------------- ------------- -------------- -------------
4. LOSS RESERVES
The following disclosures on loss reserves are included for
information 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 re ect uncertainty
surrounding cash ows relating to loss reserves.
Future adjustments to the amounts recorded as of period-end,
resulting from the continual review process, as well as differences
between estimates and ultimate settlements, will be re ected in the
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.
In the six months to 30 June 2016, the CATCo Reinsurer paid
claims of $20,386,806 pertaining predominantly to the U.S. Severe
Convective Storm and U.S. winter storm exposures in 2014 and 2015.
Moreover, the Markel CATCo Reinsurer paid claims amounting to
$4,890,608 relating to various 2016 losses.
5. CAPITAL SHARE TRANSACTIONS
As of 30 June 2016, the Company has authorised share capital
that is divided into 1,500,000,000 unclassified shares of par value
US$0.0001 per share.
As of 30 June 2016, the Company has issued 273,224,673 Class 1
Ordinary Shares and 102,510,018 Class C Shares.
Transactions in Shares during the period, and the Shares
outstanding and the Net Asset Value ("NAV") per Share as of 30 June
2016 is as follows:
Beginning Ending Net Ending NAV
Shares Share Issuance Ending Shares Assets Per Share
Class 1
-
Ordinary
Shares 273,224,673 - 273,224,673 $345,114,389 $1.2631
Class C
Shares 91,835,018 10,675,000 102,510,018 $104,286,795 $1.0173
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 of Directors of the Company (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 Markel CATCo 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.
6. 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 providing such services (see Note 7).
7. RELATED PARTY TRANSACTIONS
The Investment Manager of the Company is also the Investment
Manager of the Markel CATCo Master Fund and the Insurance Manager
of the Markel CATCo Reinsurer. In addition 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.
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.
Qatar Insurance Company (QIC), which holds the entire share
capital of CIML, holds 1.43% of the voting rights of the total
Shares issued in the Company as of 30 June 2016.
Markel, which holds the entire share capital of the Investment
Manager, holds 6.65% of the voting rights of the total Shares
issued in the Company as of 30 June 2016.
In addition, three of the Directors of the Company are also
Shareholders of the Company.
8. ADMINISTRATIVE FEE
Prime Management Limited, a division of SS&C GlobeOp, serves
as the Company's Administrator and performs certain administrative
services on behalf of the Company. For the provision of the service
under the Administration Agreement, the Administrator receives a
xed fee.
9. FINANCIAL HIGHLIGHTS FOR THE ORDINARY SHARES
Financial highlights for the Ordinary Shares for the period 1
January 2016 to 30 June 2016 are as follows:
Class 1
Per share operating performance Ordinary Class C Shares
Shares
------------------------------------------ --------- ----------------
Net Asset Value, beginning of period $1.2705 $0.9800
------------------------------------------ --------- ----------------
Income/(loss) from investment operations:
------------------------------------------ --------- ----------------
Net investment loss (0.0056) (0.0025)
------------------------------------------ --------- ----------------
Performance fee (0.0061) (0.0044)
------------------------------------------ --------- ----------------
Management fee (0.0093) (0.0074)
------------------------------------------ --------- ----------------
Net gain on investments 0.0798 0.0516
------------------------------------------ --------- ----------------
Total from investment operations 0.0588 0.0373
------------------------------------------ --------- ----------------
Dividend (0.0662) -
------------------------------------------ --------- ----------------
Net Asset Value, end of period $1.2631 $1.0173
------------------------------------------ --------- ----------------
Total Net Asset Value return 4.69%
------------------------------------------ --------- ----------------
Total Net Asset Value return before
performance fee 5.12% 4.26%
------------------------------------------ --------- ----------------
Performance fee* (0.48)% (0.45)%
------------------------------------------ --------- ----------------
Total Net Asset Value return after
performance fee 4.64%** 3.81%
------------------------------------------ --------- ----------------
Ratio to average net assets (1.07)%
------------------------------------------ --------- ----------------
Expenses other than performance
fee (1.33)% (1.05)%
------------------------------------------ --------- ----------------
Performance fee* (0.52)% (0.43)%
------------------------------------------ --------- ----------------
Total expenses after performance
fee (1.85)% (1.48)%
------------------------------------------ --------- ----------------
Net investment loss (1.65)% (1.46)%
------------------------------------------ --------- ----------------
* The performance fee is charged in the Master Funds.
** Adjusting the opening capital to reflect the dividend
declared on 29 January 2016, the normalized return for the period 1
January 2016 to 30 June 2016 is equivalent to 4.86%.
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 30 June 2016 and
have not been annualised. The per share amounts and ratios reflect
income and expenses allocated from the Master Funds.
10. INDEMNIFICATIONS OR WARRANTIES
In the ordinary course of its business, the Company may enter
into contracts or agreements that contain indemnifications or
warranties. Future events could occur that lead to the execution of
these provisions against the Company. Based on its history and
experience, management believes that the likelihood of such an
event is remote.
11. SUBSEQUENT EVENTS
The Investment Manager is monitoring the possible impact of the
loss of oil production at the Jubilee Oil Field off the coast of
Ghana, that began on 20 March 2016.
The unaudited Financial Statements were approved by management
and Board of Directors and available for issuance on 12 August
2016. Subsequent events have been evaluated from the period under
review to this date, and no further significant matters requiring
disclosure have been identified.
For further information:
Markel CATCo Investment
Management Ltd.
Judith Wynne, General Counsel
Mobile: +44 7986 205364
Telephone: +1 441 493 9005
Email: judith.wynne@markelcatco.com
Mark Way, Chief Operating
Officer
Mobile: +1 441 504 9178
Telephone: +1 441 493 9001
Email: mark.way@markelcatco.com
Numis Securities Limited
David Benda / Hugh Jonathan
Telephone: +44 (0) 20 7260
1000
- Ends -
This information is provided by RNS
The company news service from the London Stock Exchange
END
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