TIDMCAT
RNS Number : 3415Z
CATCo Reinsurance Opps Fund Ltd
14 September 2022
14 September 2022
CATCo Reinsurance Opportunities Fund Ltd. (the "Company")
Interim Financial Report
For the Six Months Ended 30 June 2022
To: Specialist Fund Segment, London Stock Exchange and Bermuda
Stock Exchange
Chairman's Statement
As the investment portfolios of CATCo Reinsurance Opportunities
Fund Ltd. (the "Company") are in run-off (the "Run-Off"), all
remaining investments are exposed to risk relating to reinsurance
contracts entered into from 2017 to 2019, and Markel CATCo
Investment Management Ltd. (the "Investment Manager") remains
focused on proactively managing the trapped capital and returning
it to Shareholders in as timely and orderly a manner as
possible.
BUY-OUT TRANSACTION
On 27 September 2021, the Company announced a proposal for a
Buy-Out Transaction, which successfully completed in Q1 of 2022 and
provided for, inter alia, an accelerated return of substantially
all the net asset value ("NAV") in Markel CATCo Reinsurance Fund
Ltd. (the "Master Fund SAC") and the Company (together, the
"Funds") to investors in exchange for mutual releases more fully
described in the announcement. The Buy-Out Transaction terms were
improved on 26 October 2021, and it was implemented with funding
provided by Markel Corporation through Bermuda schemes of
arrangement (the "Schemes") proposed by both the Company and the
Master Fund SAC.
To support the implementation of the Buy-Out Transaction through
the Schemes, each of the Company, the Master Fund SAC, the
Investment Manager and Markel CATCo Re Ltd. (the "Reinsurer") filed
applications with the Supreme Court of Bermuda for the appointment
of joint provisional liquidators with limited powers (the "JPLs").
The JPLs were appointed on 1 October 2021. On 5 October 2021, the
JPLs petitioned for the provisional liquidation proceedings to be
recognised by the United States Bankruptcy Court in the Southern
District of New York. This request was subsequently granted along
with other ancillary relief.
The appointment of the JPLs and the United States recognition
allowed, along with the necessary investor support, for the smooth
implementation of the Buy-Out Transaction and approval of the
Schemes. The Company did not make any further returns of capital
while the JPLs were appointed and the Buy-Out Transaction was being
considered and implemented. Following completion of the Buy-Out
Transaction, the JPLs were discharged effective 10 June 2022.
Under the improved terms of the Buy-Out Transaction, investors
in the Funds retained the right to receive any possible upside at
the end of the applicable run-off period if currently held reserves
exceed the amounts ultimately necessary to pay claims and after the
repayment of the "Buy-Out Amount" provided by affiliates of Markel
Corporation to fund the return of NAV to investors.
On 7 March 2022 at scheme meetings convened by Bermuda Court
order, the Funds' respective investors voted overwhelmingly to
approve the Schemes to implement the Buy-Out Transaction. On 11
March 2022, the Supreme Court of Bermuda entered orders approving
the Schemes. On 16 March 2022, the United States Bankruptcy Court
for the Southern District of New York entered orders approving the
enforcement in the United States of the Bermuda court sanctioning
orders pursuant to Chapter 15 of the United States Bankruptcy Code.
The Closing Date of the Buy-Out Transaction occurred on 28 March
2022 in accordance with the terms of the Schemes.
Under the Buy-Out Transaction, the Funds' investors received an
accelerated return of 100% of the NAV of the Funds as at 31 January
2022, with investors retaining the right to any upside at the end
of the applicable run-off period if currently-held reserves exceed
the amounts advanced by affiliates of Markel Corporation to fund
the return of capital after ultimate claims related to reinsurance
loss events have been settled. Investors in the Master Fund SAC,
including the Company, also received their pro rata share of an
additional cash contribution of approximately $54 million from a
Markel Corporation affiliate, which will be used to off-set
transaction costs and future running costs of the Master Fund SAC,
and to provide additional cash consideration to investors.
In relation to the Company, the Buy-Out Transaction was
implemented by way of a redemption of 99% of the holdings of each
investor, the proceeds of which were paid to investors on 11 April
2022, amounting to $51.7m and $53.9m for the Ordinary Shares and C
Shares respectively.
Investors remain entitled, through their retained interest in
the Company, to receive the remaining assets of the Company (as and
when such assets become available for distribution and the Board
determines it is appropriate to make such distributions), including
any surplus from the existing cash reserves held by the Company and
any upside following the repayment of the Buy-Out Amount and
settlement of reinsurance claims.
RETURN OF CAPITAL TO SHAREHOLDERS
Following the successful commutation of a number of 2017, 2018
and 2019 contracts during the period from 1 January 2022 to 30 June
2022, the Company expects to return approximately $4.4m and $12.6m
of capital to Ordinary Shareholders and C Shareholders
respectively, by means of compulsory share redemption. This, it is
currently anticipated, will take place in the final quarter of
2022, and further details will be announced by the Company in due
course.
From the commencement of the Run-Off (26 March 2019) to 30 June
2022, the Company has successfully returned $396.1m of capital to
Shareholders by means of dividends, tender offer, share buybacks,
compulsory share redemptions and completion of the Buy-Out
Transaction.
Form of Return Payment or Redemption Ordinary C Shares Total
Date / Period Shares ($m) ($m)
($m)
------------------------------ ---------------------- -------- -------- -----
25 February
Dividend 2019 10.4 24.3 34.7
------------------------------ ---------------------- -------- -------- -----
23 September
Tender Offer 2019 15.3 28.0 43.3
------------------------------ ---------------------- -------- -------- -----
Interim Dividend 1 November 2019 4.0 11.9 15.9
------------------------------ ---------------------- -------- -------- -----
Share Buyback Oct to Dec 2019 1.9 5.9 7.8
------------------------------ ---------------------- -------- -------- -----
Partial Compulsory Redemption
1 20 April 2020 5.3 24.0 29.3
------------------------------ ---------------------- -------- -------- -----
Partial Compulsory Redemption
2 18 May 2020 4.6 14.2 18.8
------------------------------ ---------------------- -------- -------- -----
Partial Compulsory Redemption
3 1 July 2020 3.6 12.2 15.8
------------------------------ ---------------------- -------- -------- -----
Partial Compulsory Redemption
4 1 August 2020 7.0 30.9 37.9
------------------------------ ---------------------- -------- -------- -----
Partial Compulsory Redemption
5 7 October 2020 15.9 78.6 94.5
------------------------------ ---------------------- -------- -------- -----
Partial Compulsory Redemption
6 11 January 2021 2.0 6.0 8.0
------------------------------ ---------------------- -------- -------- -----
Partial Compulsory Redemption
7 11 May 2021 3.4 15.8 19.2
------------------------------ ---------------------- -------- -------- -----
Buy-out Transaction 11 April 2022 51.7 53.9 105.6
------------------------------ ---------------------- -------- -------- -----
Total Capital Return 114.7 281.4 396.1
------------------------------------------------------ -------- -------- -----
COMMUTATIONS
The Investment Manager is continuing to proactively pursue the
run-off of the remaining 2018-2019 risk portfolios, having
successfully, at the date of this report, commuted the 2016 and
2017 contracts. Whilst the underlying risk contracts typically have
a 36-month reporting period post expiry of the risk period, the
Investment Manager has the discretion to either commute the
contract or continue to hold it open if they consider that to do so
is in the best interest of investors.
Approximately 50 per cent of the remaining 2018 Side Pocket
Investments ("SPIs") were subject to commutation at 31 December
2021 and the other 50 per cent became due for negotiation from 30
June 2022. Finally, the remaining 2019 SPIs are subject to
commutation negotiation from 31 December 2022.
NET ASSET VALUE ("NAV")
The Company opened the year with a total NAV of $106.8m which
consisted of $50.6m Ordinary Share NAV and $56.2m of C Share NAV.
During the first half of the year, the NAV reduced to $18.1m, of
which $4.7m relates to the Ordinary Share NAV and $13.4m to the C
Share NAV.
The overall reduction in the NAV is due to the Buy-Out
Transaction. This was implemented by way of a redemption of 99
percent of the holdings of each investor, the proceeds of which
were paid to investors on 11 April 2022 amounting to $51.7m and
$53.9m for the Ordinary Shares and C Shares respectively, offset by
a reduction in claims and favourable development on the loss
reserves related to 2017-2019 catastrophe events.
2022 Ordinary Shares NAV ($m)
---------------------------------------------------------------
Opening balance 1 January 2022 $50.6
----------------------------------------------------- --------
Redemptions paid from 1 January - 30 June 2022 ($51.7)
----------------------------------------------------- --------
Investment appreciation net of expenses and buy-out
related gains $5.8
----------------------------------------------------- --------
Closing balance 30 June 2022 $4.7
----------------------------------------------------- --------
2022 C Shares NAV ($m)
---------------------------------------------------------------
Opening balance 1 January 2022 $56.2
----------------------------------------------------- --------
Redemptions paid from 1 January - 30 June 2022 $(53.9)
----------------------------------------------------- --------
Investment appreciation net of expenses and buy-out
related gains $11.1
----------------------------------------------------- --------
Closing balance 30 June 2022 $13.4
----------------------------------------------------- --------
SIDE POCKET INVESTMENTS ("SPIs")
As at 30 June 2022, the SPIs in total represent c. 76.42 per
cent of Ordinary Share NAV (31 December 2021: c. 97.66 per cent)
and c. 68.30 per cent of the C Share NAV (31 December 2021: c.
92.36 per cent).
The position of the 2017, 2018 and 2019 SPIs as at 30 June 2022
were as follows:
-- 2017 SPIs, principally relating to Hurricanes Harvey, Irma
and Maria and the 2017 California Wildfires, amount to c. 38.61 per
cent of the Company's Ordinary Share NAV (31 December 2021: c.
67.28 per cent of Ordinary Share NAV)
-- 2018 SPIs, principally relating to Hurricanes Michael and
Florence, Typhoon Jebi and the 2018 California Wildfires, amount to
c. 19.17 per cent of Ordinary Share NAV and c. 40.66 per cent of C
Share NAV (31 December 2021: c. 12.38 per cent and c. 62.41 per
cent of Ordinary Share and C Share NAV respectively)
-- 2019 SPIs relating to Hurricane Dorian, Typhoons Faxai and
Hagibis and the Australian bushfires, amount to c. 18.65 per cent
of Ordinary Share NAV and c. 27.64 per cent of C Share NAV (31
December 2021: c. 8.06 per cent and c. 29.95 per cent of Ordinary
Share and C Share NAV respectively).
In respect of the underlying investments related to underwriting
years 2017-2019, the Investment Manager relies on the latest
available claim information from cedants which, at this point in
time, post the loss events, supersedes the modelled losses or the
insured loss estimates provided by third parties. Whilst the
Investment Manager deems the existing loss reserves are sufficient,
there is an ongoing element of uncertainty in relation to
underlying prior year loss event contracts which may lead to
favourable or adverse loss development in the future.
Overview of Investments
The following table outlines the investments held by the
Ordinary Shares and C Shares respectively:
Investments Held by Share Class:
SPI's % of Share NAV Value in millions
---------------- -------------- -----------------
Ordinary Shares
---------------- -------------- -----------------
SPI 2017 38.61% 1.9
---------------- -------------- -----------------
SPI 2018 19.17% 0.9
---------------- -------------- -----------------
SPI 2019 18.66% 0.8
---------------- -------------- -----------------
C Shares
---------------- -------------- -----------------
SPI 2018 40.66% 5.5
---------------- -------------- -----------------
SPI 2019 27.64% 3.7
---------------- -------------- -----------------
Additionally, as at 30 June 2022, cash of $1.1m and $4.2m is
held by the Ordinary Shares and C Shares respectively. Whilst it is
not now possible to determine the ultimate value of SPIs to be
realised, the Investment Manager will continue to report the fair
value of underlying investments through the issuance of Ordinary
and C Share NAVs.
QUARTERLY NAV REPORTING
The Investment Manager has successfully implemented a move to
quarterly reporting of the NAV since it estimates this will
generate appropriate cost savings and, because all of the remaining
cedants report their losses on a quarterly basis, changing the
Funds' NAV reporting frequency enables the Investment Manager to
track the information received from the Reinsurer's cedants at the
same pace.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
For and on behalf of the Board
14 September 2022
Directors' Report
EFFICIENT CAPITAL MANAGEMENT DURING RUN-OFF OF PORTFOLIO AND
DISTRIBUTIONS
During the period from inception of the Company to 26 March
2019, the investment objective of the Company and the Master Fund
SAC was to give their investors the opportunity to participate in
the returns from investments linked to catastrophe reinsurance
risks, principally by investing in fully collateralised Reinsurance
Agreements accessed by investments in Preference Shares of the
Reinsurer.
With effect from 26 March 2019, the Company's Shareholders
approved an amendment to the Company's investment policy so as to
allow an orderly Run-Off of the Company's portfolios with the
effect that the Company's investment policy is now limited to
realising the Company's assets and distributing any net proceeds to
the relevant Shareholders (after repayment of the Buy-Out Amount,
as described below). Consequently, the Company exercised a special
redemption right in respect of 100 per cent of its holding (the
"Master Fund Shares") in the Markel CATCo Diversified Fund (the
"Master Fund"), a segregated account of the Master Fund SAC, with
effect from 30 June 2019 (the "Special Redemption").
The Investment Manager announced on 25 July 2019 that it would
cease accepting new investments in the Master Fund SAC and would
not write any new business going forward through the Reinsurer. The
Investment Manager then commenced the orderly Run-Off of the
Reinsurer's existing portfolio, which is expected to take
approximately three years from 1 January 2020. As part of this
Run-Off, the Master Fund SAC will return capital to its investors,
including the Company (after repayment of the Buy-Out Amount, as
described below).
The Company distributed the net proceeds of the Special
Redemption received during the year ended 31 December 2019 by means
of special dividend, tender offer and share buybacks. On 6 April
2020, Shareholders approved the proposals set out in the
Shareholder Circular dated 13 March 2020 to permit the Company to
return further capital to Shareholders by means of compulsory share
redemptions. During the year ended 31 December 2021, the Company
returned $27.2m to Shareholders by means of compulsory share
redemptions. On 27 September 2021, the Company announced a proposal
for a buy-out transaction (the "Buy-Out Transaction") that
successfully completed in Q1 2022 and provided for, inter alia, an
accelerated return of substantially all the net asset value (NAV)
in the Master Fund SAC and the Company (together, the "Funds") to
investors. In order to implement the Buy-Out Transaction, Schemes
of Arrangement in Bermuda (the "Schemes") were overwhelmingly
approved by the Funds' respective investors at scheme meetings
convened by Bermuda court order on 7 March 2022, and sanctioned by
the Bermuda court on 11 March 2022. The "Closing Date" of the
Buy-Out Transaction occurred on 28 March 2022 in accordance with
the terms of the Schemes. Under the Buy-Out Transaction, the Funds'
investors received an accelerated return of 100% of the net asset
value (NAV) of the Funds as at 31 January 2022, with investors
retaining the right to any upside at the end of the applicable
run-off period if currently-held reserves exceed the amounts
advanced by affiliates of Markel Corporation to fund the return of
capital (the "Buy-Out Amount") after the settlement of reinsurance
related claims.
Investors in the Master Fund SAC, including the Company, also
received their pro rata share of an additional cash contribution of
approximately $54 million from a Markel Corporation affiliate to
offset transaction costs and future running costs of the Master
Fund SAC and to provide additional cash consideration to
investors.
In relation to the Company, the Buy-Out Transaction was
implemented by way of a redemption of 99% of the holdings of each
investor, the proceeds of which were paid to investors via CREST on
11 April 2022. Investors remain entitled, through their retained
interest in the Company, to receive the remaining assets of the
Company (as and when such assets become available for distribution
and the Board determines it is appropriate to make such
distributions), including any surplus from the existing cash
reserves held by the Company and any upside following the repayment
of the Buy-Out Amount.
The Directors have concluded that the Company will not raise
further capital in any circumstances, and so the Company is being
wound down by means of a managed process leading to liquidation in
due course. Accordingly, the only further business that will be
undertaken is that necessary to complete the Run-Off of each of the
Company's portfolios.
The Directors remain of the view that it is currently in the
best interests of the Company for the Investment Manager to
continue to manage the Run-Off, rather than to commence a formal
members' voluntary liquidation. The Directors will keep this
approach under review and currently anticipate that they will not
look to put the Company into members' voluntary liquidation until
the Run-Off is substantially completed. At such time, a further
circular will be delivered to Shareholders to convene a further
meeting at which the Shareholders will be asked to approve the
liquidation.
MANAGEMENT OF RISK
The Board of Directors regularly reviews the major strategic and
emerging risks that the Board and the Investment Manager have
identified, and against these, the Board sets out the delegated
controls designed to manage those risks.
The principal risks facing the Company relate to share price,
liquidity and interest rate risk and the efficient management of
the Run-Off process. Such key risks relating to investment
underwriting and strategy are managed through investment policy
guidelines and restrictions, and by the process of formal 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 emergence of the coronavirus
("COVID-19") at the start of January 2020 has not to date had a
significant financial impact on the Company, and is not expected to
do so in the foreseeable future (please refer to Note 3 to the
Financial Statements ("COVID-19 Considerations"). The Board is
assured that the operational activities of the Investment Manager
continue to be substantially unaffected by COVID-19 in terms of
quality and continuity, that there are sufficient systems and
controls in place to ensure the continuity and adequacy of the
services provided by the Investment Manager, and that the Run-Off
process, including returns of capital to Shareholders (after
repayment of the Buy-Out Amount, as described above) and the
management of costs and expenses, will continue to be managed
efficiently. Additionally, emerging risks in the reinsurance market
are not relevant to the underlying portfolio that is in
Run-Off.
In the view of the Board, 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.
SHARE CAPITAL
The Company's issued share capital at 1 January 2022 amounted to
149,305,187 Ordinary Shares and 83,230,467 C Shares. As at the date
of this Report, the Company's issued share capital amounted to
1,493,131 Ordinary Shares and 832,376 C Shares, this reduction
being due to the Buy-Out Transaction, which closed on 28 March 2022
with proceeds being paid to Shareholders on 11 April 2022.
CAPITAL RELATED PARTY DISCLOSURE AND TRANSACTIONS WITH THE
INVESTMENT MANAGER
The Investment Manager, which was appointed as the Company's
Investment Manager on 8 December 2015, is also the investment
manager of the Master Fund SAC and the insurance manager of the
Reinsurer. The Company entered into a new investment management
agreement with the Investment Manager on 28 March 2022 (the
"Investment Management Agreement") in connection with the Buy-Out
Transaction. The terms of the Investment Management Agreement
substantially reflect the terms of the investment management
agreement between the Company and the Investment Manager entered
into on 8 December 2015. In July 2022, following the move to
quarterly reporting announced on 14 July 2022, the Investment
Manager is entitled to a management fee, calculated and payable
quarterly in arrears equal to 1/4 of 1.5 per cent of the net asset
value of the Company which was not attributable to the Company's
investment in the Master Fund Shares as at the last calendar day of
each calendar quarter. In addition, the Investment Manager was
entitled to a monthly fee payable for secretarial, accounting and
administrative services of 1/12 of $275,000. This latter fee will
no longer be charged to the Company with effect from 1 January
2022.
On 28 January 2021, the Company announced the continuation of
its decision in 2020 to consent to a partial waiver of 50.00%
(one-half) of the management fee paid by the Master Fund SAC to the
Investment Manager in respect of such of its Master Fund Shares
that are exposed to side pocket investments (the "SP Management
Fees") for the period 1 January 2021 to 31 December 2021, resulting
in an effective management fee of 0.75% per annum for that period.
That partial waiver will now continue in force for the foreseeable
future. Performance fees are also payable to the Investment Manager
by the Master Fund SAC, subject to certain performance targets
being met. As at the date of this report, Markel Corporation
("Markel"), which holds the entire share capital of the Investment
Manager, holds, through its asset management subsidiary, 4.24 per
cent of the total voting rights of the Ordinary Shares and C Shares
issued by the Company.
In addition, one of the Directors of the Company is also a
Shareholder of the Company.
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.
After due and careful consideration of the Company's
circumstances and objectives as described elsewhere in this
document, the Directors have concluded 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 half-yearly report or until such time as the Board considers
it appropriate, having taking advice, to place the Company into
voluntary liquidation. Accordingly, the Board continues 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 unaudited Half-Yearly Financial Report has been prepared in
accordance with U.S. Generally Accepted Accounting Principles
("U.S. GAAP"). These Financial Statements present fairly, in all
material respects, the assets, liabilities, financial position and
profit or loss of the Company.
2. The Chairman's Statement, the Directors' Report, the
Financial Highlights and the notes to the Condensed Interim
Financial Statements provide a fair review of the information
required by rule 4.2.7R of the Disclosure Guidance 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 unaudited 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 current financial year and that have materially
affected the financial position or performance 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
14 September 2022, and the above responsibility statement was
signed on its behalf by the Chairman.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
For and on behalf of the Board
14 September 2022
CONDENSED STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States Six months Six months Year ended
Dollars) to 30 June to 30 June 31 Dec. 2021
2022 (Unaudited) 2021 (Unaudited) (Audited)
$ $ $
Assets
Investments in Master Fund,
at fair value (Note 4) 12,790,043 85,118,306 101,307,151
Cash and cash equivalents
(Note 2) 8,831,376 6,405,020 5,606,161
Other assets 45,416 31,884 59,963
------------------------------------------- --------------- ----------------- -------------
Total assets 21,666,835 91,555,210 106,973,275
------------------------------------------- --------------- ----------------- -------------
Liabilities
Management fee payable 79,387 3,709 3,420
Accrued expenses and other
liabilities 132,452 502,786 193,343
Due to Markel CATCo Reinsurance 200,920 - -
Fund Ltd. - Markel CATCo Diversified
Fund
Schemes of Arrangement Buy-Out 167,813 - -
Transaction Costs (Note 6
and Note 12)
Schemes of Arrangement Buy-Out 2,932,754 - -
Ordinary Course Fees (Note
6 and Note 12)
------------------------------------------- --------------- ----------------- -------------
Total liabilities 3,513,326 506,495 196,763
------------------------------------------- --------------- ----------------- -------------
Net assets 18,153,509 91,048,715 106,776,512
------------------------------------------- --------------- ----------------- -------------
NAV per Share (Note 6)
CONDENSED STATEMENTS OF OPERATIONS
(Expressed in United States Six months Six months Year ended
Dollars) to 30 June to 30 June 31 Dec. 2021
2022 (Unaudited) 2021 (Unaudited) (Audited)
$ $ $
Net investment loss allocated
from
Master Fund (Note 4)
Interest income 4,482 708 1,074
Schemes of Arrangement Buy-Out
Transaction Costs (Note 6
and Note 12) (27,380) (3,677,284) (4,437,070)
Schemes of Arrangement Buy-Out (961,225) - -
Ordinary Course Fees (Note
6 and Note 12)
Management fee waived (Note
8) 84,924 337,865 684,764
Management fee (Note 8) (169,848) (675,730) (1,369,528)
Professional fees and other (37,204) (56,419) (116,558)
Administrative fee (43,651) (48,998) (112,234)
----------------------------------------- --------------- ----------------- --------------
Net investment loss allocated
from Master Fund (1,149,902) (4,119,858) (5,349,552)
----------------------------------------- --------------- ----------------- --------------
Investment income
Interest 8,453 347 657
----------------------------------------- --------------- ----------------- --------------
Total investment income 8,453 347 657
----------------------------------------- --------------- ----------------- --------------
Company expenses
Management fee waived (Note
8) 152,073 35,121 56,526
Professional fees and other (376,974) (486,685) (659,723)
Management fee (Note 8) (304,146) (70,242) (113,052)
Administrative fee (Note
9) (37,500) (37,500) (75,000)
Schemes of Arrangement Buy-Out
Transaction Costs (Note 6
and Note 12) (368,733) - (229,415)
Schemes of Arrangement Buy-Out (2,932,754) - -
Ordinary Course Fees (Note
6 and Note 12)
----------------------------------------- --------------- ----------------- --------------
Total Company expenses (3,868,034) (559,306) (1,020,664)
------------------------------------- ------------------- ----------------- --------------
Net investment loss (5,009,483) (4,678,817) (6,369,559)
------------------------------------- ------------------- ----------------- --------------
Net realised loss and net
change in unrealised loss
on securities allocated
from Master Fund (Note 4)
Realised gain on Schemes 9,204,153 - -
of Arrangement Buy-Out Transaction
Net realised loss on securities (17,788,652) (8,088,046) (63,096,478)
Net change in unrealised
loss on securities 30,555,616 19,169,097 91,596,068
------------------------------------- ------------------- ----------------- --------------
Net gain / (loss) on securities
allocated from Master Fund 21,971,117 11,081,051 28,499,590
------------------------------------- ------------------- ----------------- --------------
Net increase / (decrease)
in net assets resulting
from operations 16,961,634 6,402,234 22,130,031
------------------------------------- ------------------- ----------------- --------------
CONDENSED STATEMENTS CHANGE IN NET ASSETS
(Expressed in United States Six months Six months Year ended
Dollars) to to 30 June 31 Dec. 2021
2021 (Unaudited)
30 June (Audited)
2022 (Unaudited)
$ $ $
Operations
Net investment loss (5,009,483) (4,678,817) (6,369,559)
Realised gain on Schemes 9,204,153 - -
of Arrangement Buy-Out Transaction
Net realised loss on securities
allocated from Master Fund (17,788,652) (8,088,046) (63,096,478)
Net change in unrealised
loss on securities allocated
from Master Fund 30,555,616 19,169,097 91,596,068
------------------------------------- ------------------ ----------------- --------------
Net increase / (decrease)
in net assets resulting
from operations 16,961,634 6,402,234 22,130,031
------------------------------------- ------------------ ----------------- --------------
Capital share transactions
Repurchase of Class Ordinary
Shares (Note 6) (51,727,869) (5,399,961) (5,399,961)
Repurchase of Class C Shares
(Note 6) (53,856,768) (21,799,929) (21,799,929)
------------------------------------- ------------------ ----------------- --------------
Net decrease in net assets
resulting from capital share
transactions (105,584,637) (27,199,890) (27,199,890)
------------------------------------- ------------------ ----------------- --------------
Net decrease in net assets (88,623,003) (20,797,656) (5,069,859)
------------------------------------- ------------------ ----------------- --------------
Net assets, beginning of
period 106,776,512 111,846,371 111,846,371
------------------------------------- ------------------ ----------------- --------------
Net assets, end of period 18,153,509 91,048,715 106,776,512
------------------------------------- ------------------ ----------------- --------------
CONDENSED STATEMENTS OF CASH FLOW
(Expressed in United States Six months Six months Year ended
Dollars) to to 31 Dec. 2021
(Audited)
30 June 30 June 2021
2022
(Unaudited) (Unaudited)
$ $ $
Cash flows from operating
activities
Net increase / (decrease)
in net assets resulting from
operations 16,961,634 6,402,234 22,130,031
Adjustments to reconcile
net decrease in net assets
resulting from operations
to net cash provided by operating
activities
Net investment loss, net
realised loss on
securities and net change
in unrealised loss on securities
allocated from Master Fund (20,821,215) (6,961,193) (23,150,038)
Sale of investment in Markel
CATCo Reinsurance Fund Ltd.
- Markel CATCo Diversified
Fund 109,338,323 19,212,976 19,212,976
Changes in operating assets
and liabilities
Due from Markel CATCo Reinsurance
Fund Ltd. - Markel CATCo
Diversified Fund 200,920 10,696,244 10,696,244
Other assets 14,547 21,485 (6,594)
Schemes of Arrangement Buy-Out
Transaction Costs (Note 6
and Note 12) 167,813 - -
Schemes of Arrangement Buy-Out
Ordinary Course Fees (Note
6 and Note 12) 2,932,754 - -
Management fee payable 75,967 (5,344) (5,633)
Accrued expenses and other
liabilities (60,891) (29,878) (339,321)
----------------------------------- -------------- -------------- --------------
Net cash provided by operating
activities 108,809,852 29,336,524 28,537,665
----------------------------------- -------------- -------------- --------------
Cash flows from financing
activities
Repurchase of Class Ordinary
Shares (51,727,869) (5,399,961) (5,399,961)
Repurchase of Class C Shares (53,856,768) (21,799,929) (21,799,929)
----------------------------------- -------------- -------------- --------------
Net cash used in financing
activities (105,584,637) (27,199,890) (27,199,890)
----------------------------------- -------------- -------------- --------------
Net increase in cash and
cash equivalents 3,225,215 2,136,634 1,337,775
----------------------------------- -------------- -------------- --------------
Cash and cash equivalents,
beginning of period 5,606,161 4,268,386 4,268,386
----------------------------------- -------------- -------------- --------------
Cash and cash equivalents,
end of period 8,831,376 6,405,020 5,606,161
----------------------------------- -------------- -------------- --------------
NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS - 30 JUNE
2022
(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 mutual fund company, registered and incorporated as an
exempted mutual fund company under the laws of Bermuda on 30
November 2010, which commenced operations on 20 December 2010. The
Company is organised as a feeder fund to invest substantially all
of its assets in Markel CATCo Diversified Fund (the "Master Fund").
The Master Fund is a segregated account of Markel CATCo Reinsurance
Fund Ltd. (the "Master Fund SAC"), 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"). Markel CATCo Reinsurance Fund Ltd. establishes a
separate account for each class of shares comprised in each
segregated account (each, a "SAC Fund"). Each SAC Fund is a
separate individually managed pool of assets constituting, in
effect, a separate fund with its own investment objective and
policies. The assets attributable to each SAC Fund of Markel CATCo
Reinsurance Fund Ltd. shall only be available to creditors in
respect of that segregated account.
The objective of the Master Fund is to provide Shareholders the
opportunity to participate in the investment returns of various
fully-collateralised reinsurance-based instruments, securities
(such as notes, swaps and other derivatives), and other financial
instruments. The majority of the Master Fund's exposure to
reinsurance risk is obtained through its investment (via preference
shares) in Markel CATCo Re Ltd. (the "Reinsurer"). At 30 June 2022,
the Company's ownership is 15.54 per cent of the Master Fund.
On 25 July 2019, the Board of Directors (the "Board") announced
that the Company will cease accepting new investments and will not
write any new business going forward through the Reinsurer. As of
this date, the Investment Manager commenced the orderly Run-Off
(the "Run-Off") of the Reinsurer's existing portfolio, which is
reasonably expected to be completed in the first half of 2023. As
part of this Run-Off, the Company will return capital (which will
continue to be subject to side pockets) to investors as such
capital becomes available (after repayment of the Buy-Out Amount,
as described below). Refer to Going Concern Considerations under
Basis of Presentation below.
On 27 September 2021, the Company announced a proposal for a
buy-out transaction (the "Buy-Out Transaction") that would provide
for, inter alia, an accelerated return of substantially all the net
asset value ("NAV") in the Master Fund SAC and the Company
(together, the "Funds") to investors (further details of the
Buy-Out Transaction appear in the Chairman's Statement and the
Directors' Report). To support the implementation of the Buy-Out
Transaction through the Schemes of Arrangement in Bermuda (the
"Schemes"), each of the Company, the Master Fund SAC, the
Investment Manager and the Reinsurer filed applications with the
Supreme Court of Bermuda for the appointment of joint provisional
liquidators with limited powers (the "JPLs"). On 1 October 2021 the
JPLs were appointed. On 5 October 2021, the JPLs petitioned for the
provisional liquidation proceedings to be recognised by the U.S.
Bankruptcy Court in the Southern District of New York, which
request was subsequently granted along with other ancillary
relief.
The appointment of the JPLs and U.S. recognition allowed, along
with the necessary investor support, for the smooth implementation
of the Buy-Out Transaction and approval of the Schemes. The Company
did not make any further returns of capital while the JPLs were
appointed and the Buy-Out Transaction was being considered and
implemented.
Upon the expiry of the "Early Consent Deadline" for the Buy-Out
Transaction on 22 October 2021, investors representing over 90% of
the Master Fund SAC and investors representing over 95% of the
Company had entered into support undertakings or otherwise
indicated their support for the Buy-Out Transaction.
On 26 October 2021, it was announced that Markel Corporation had
agreed to increase the funding it would provide, to facilitate
certain improvements to the terms of the Buy-Out Transaction. The
improvements resulted in the buy-out of all segregated accounts of
the Funds, plus an additional cash distribution to investors by way
of an increased consent fee and other cash consideration provided
by Markel Corporation and its affiliates. On 28 October 2021, the
Funds launched the Schemes to implement the Buy-Out
Transaction.
Under the improved terms of the Buy-Out Transaction, investors
in the Funds retained the right to receive any possible upside at
the end of the applicable Run-Off period if currently held reserves
exceed the amounts ultimately necessary to pay claims and after the
repayment of the "Buy-Out Amount" provided by affiliates of Markel
Corporation to fund the return to NAV of investors. The affiliates
of Markel Corporation financing the Buy-Out Transaction expect to
receive a return of all the Buy-Out Amount by the end of the
Run-Off periods.
On 3 February 2022, the Investment Manager, the Master Fund SAC
and Markel Corporation entered into a settlement agreement with
certain investors that had opposed the Schemes (the "Litigation
Claimants"), which resolved their opposition to the Schemes and
certain litigation brought against a former officer of the
Investment Manager in the U.S. (the "Settlement"). Pursuant to the
Settlement, the Litigation Claimants withdrew their opposition to
the Schemes and, following the Closing Date of the Buy-Out
Transaction, the Litigation Claimants received (i) the NAV of their
Master Fund SAC shares in full and final satisfaction of their
interests in the Master Fund SAC and (ii) an aggregate additional
payment of $20 million funded by Markel Corporation and D&O
insurance coverage in consideration for granting the releases of
their claims and dismissing with prejudice the U.S. litigation.
On 7 March 2022 at scheme meetings convened by Bermuda court
order, the Funds' respective investors voted overwhelmingly to
approve the Schemes to implement the Buy-Out Transaction. On 11
March 2022, the Supreme Court of Bermuda entered orders approving
the Schemes. On 16 March 2022, the United States Bankruptcy Court
for the Southern District of New York entered orders approving the
enforcement in the United States of the Bermuda court sanctioning
orders pursuant to Chapter 15 of the United States Bankruptcy Code.
The Closing Date of the Buy-Out Transaction occurred on 28 March
2022 in accordance with the terms of the Schemes.
Under the Buy-Out Transaction, the Funds' investors received an
accelerated return of 100% of the NAV of the Funds as at 31 January
2022, with investors retaining the right to any upside at the end
of the applicable Run-Off period if currently held reserves exceed
the amounts advanced by affiliates of Markel Corporation to fund
the return of capital after the ultimate claims related to
reinsurance loss events have been settled. Investors in the Master
Fund SAC, including the Company, also received their pro rata share
of an additional cash contribution of approximately $54 million
from a Markel Corporation affiliate to off-set transaction costs
and future running costs of the Master Fund SAC and to provide
additional cash consideration to investors.
In relation to the Company, the Buy-Out Transaction was
implemented by way of a redemption of 99% of the holdings of each
investor in the Master Fund, the proceeds of which, along with all
additional consideration, were paid to investors on 11 April 2022
amounting to $51.7m and $53.9m for Ordinary Shares and C Shares
respectively.
Investors remain entitled, through their retained interest in
the Company, to receive the remaining assets of the Company (as and
when such assets become available for distribution and the Board
determines it is appropriate to make such distributions), including
any surplus from the existing cash reserves held by the Company and
any upside following the repayment of the Buy-Out Amount.
The Investment Manager is subject to the ultimate supervision of
the Board, and is responsible for all of the Company's investment
decisions. On 1 January 2020, the Investment Manager entered into a
Run-Off Services Agreement with Lodgepine Capital Management
Limited ("LCML"), under which LCML will provide services relating
to the management of the Run-Off business of the Investment
Manager. On 15 November 2021, Markel announced its intention to
wind down LCML, its retrocessional Insurance Linked Securities
(ILS) fund manager based in Bermuda.
The Reinsurer is a Bermuda licensed Class 3 reinsurance company,
registered as a segregated account company under the SAC Act,
through which the Master Fund accesses the majority of its
reinsurance risk exposure. The Reinsurer forms 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, winter storms, floods, tsunamis,
tornados, windstorms, extreme temperatures, aviation accidents,
fires, wildfires, explosions, marine accidents, terrorism,
satellite, energy and other perils.
The Company's shares are listed and traded on the Specialist
Fund Segment of the Main Market of the London Stock Exchange
("SFS"). The Company's shares are also listed on the Bermuda Stock
Exchange ("BSX").
Basis of Presentation
The interim condensed Financial Statements are expressed in
United States dollars and have been prepared in conformity with
accounting principles generally accepted in the United States of
America ("U.S. GAAP") for interim nancial information. Accordingly,
certain information and footnote disclosures normally included in
the nancial statements prepared in accordance with U.S. GAAP have
been condensed pursuant to such guidance. These interim condensed
nancial statements should be read in conjunction with the annual
nancial statements and related notes as of 31 December 2021 which
are readily available on the Regulatory News Service ("RNS") of the
London Stock Exchange. The Company is an investment company and
follows the accounting and reporting guidance contained within
Topic 946, "Financial Services Investment Companies", of the
Financial Accounting Standards Board ("FASB") Accounting Standards
Codi cation ("ASC").
Going Concern Considerations
In accordance with ASC 205-40-50, Presentation of Financial
Statements-Going Concern, the Investment Manager and the Board have
reviewed the Company's ability to continue as a going concern and
have confirmed their intent to continue to Run-Off the Company's
portfolios as a going concern with no imminent plans to liquidate
the Company. The Investment Manager and the Board have concluded
that the Company has sufficient financial resources to continue as
a going concern based on the following key considerations: (i) the
Company holds investments in the Master Fund which are supported by
underlying fully collateralised reinsurance contracts in the
Reinsurer that are expected to be settled on or around 31 December
2022, and (ii) the Investment Manager and the Board have reviewed
the Company's cash forecast for 18 months from the date of this
report and have determined that the Company has sufficient cash to
adequately meet operational expenses. Based on the aforementioned
reasons, the Company continues to adopt the going concern basis in
preparing the financial statements for the six-month period ended
30 June 2022.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments, such as money market funds, that are readily
convertible to known amounts of cash and have original maturities
of three months or less.
Valuation of Investments in the Master Fund
The Company records its investments in the Master Fund at fair
value based upon an estimate made by the Investment Manager, in
good faith and in consultation or coordination with Centaur Fund
Services (Bermuda) Limited (the "Administrator"), as defined in
Note 4, 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
value 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.
Financial Instruments
The fair values of the Company's assets and liabilities, which
qualify as financial instruments under ASC 825, "Financial
Instruments", approximate the carrying amounts presented in the
Statements of Assets and Liabilities.
Investment Transactions and Related Investment Income and
Expenses
The Company records its proportionate share of the Master Fund's
income, expenses, realised and unrealised gains and losses on
investment in securities on a monthly basis through 30 June 2022
and will do so on a quarterly basis going forward. In addition, the
Company incurs and accrues its own income and expenses.
Investment transactions of the Master Fund are accounted for on
a trade-date basis. Realised gains or losses on the sale of
investments are calculated using the specific identification method
of accounting. Interest income and expense are recognised on the
accrual basis.
Translation of Foreign Currency
Assets and liabilities denominated in foreign currencies are
translated into United States dollar amounts at the period-end
exchange rates. Transactions denominated in foreign currencies,
including purchases and sales of investments, and income and
expenses, are translated into United States dollar amounts on the
transaction date. Adjustments arising from foreign currency
transactions are reflected in the Statements of Operations.
The Company does not isolate the portion of the results of
operations arising from the effect of changes in foreign exchange
rates on investments from fluctuations arising from changes in
market prices of investments held. Such fluctuations are included
in net gains or losses on securities in the Statements of
Operations.
Income Taxes
Under the laws of Bermuda, the Company is generally not subject
to income taxes. The Company has received an undertaking from the
Minister of Finance of Bermuda, under the Exempted Undertakings Tax
Protection Act 1966, that in the event that there is enacted in
Bermuda any legislation imposing income or capital gains tax, such
tax shall not until 31 March 2035 be applicable to the Company.
However, certain United States dividend income and interest income
may be subject to a 30% withholding tax. Further, certain United
States dividend income may be subject to a tax at prevailing treaty
or standard withholding rates with the applicable country or local
jurisdiction.
The Company is required to determine whether its tax positions
are more likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related
appeals or litigation processes, based on the technical merits of
the position. The tax benefit recognised is measured as the largest
amount of benefit that has a greater than fifty per cent likelihood
of being realised upon ultimate settlement with the relevant taxing
authority. De-recognition of a tax benefit previously recognised
results in the Company recording a tax liability that reduces
ending net assets. Based on its analysis, the Company has
determined that it has not incurred any liability for unrecognised
tax benefits as of 30 June 2022. However, the Company's conclusions
may be subject to review and adjustment at a later date based on
factors including, but not limited to, on-going analyses of and
changes to tax laws, regulations and interpretations thereof.
The Company recognises interest and penalties related to
unrecognised tax benefits in interest expense and other expenses,
respectively. No tax-related interest expense or penalties have
been recognised as of and for the period ended 30 June 2022.
Generally, the Company may be subjected to income tax
examinations by relevant major taxing authorities for all tax years
since its inception.
The Company may be subject to potential examination by United
States federal or foreign jurisdiction authorities in the areas of
income taxes. These potential examinations may include questioning
the timing and amount of deductions, the nexus of income among
various tax jurisdictions and compliance with United States federal
or foreign tax laws. The Company was not subjected to any tax
examinations during the six month period ended 30 June 2022.
Use of Estimates
The preparation of Financial Statements in conformity with U.S.
GAAP requires the Company's management to make estimates and
assumptions in determining the reported amounts of assets and
liabilities, including fair value of investments, the disclosure of
contingent assets and liabilities as of the date of the Financial
Statements, and the reported amounts of income and expenses during
the reported period. Actual results could differ from those
estimates.
Offering Costs
The costs associated with each capital raise are expensed
against paid-in capital and the Company's existing cash reserves as
incurred.
Premium and Discount on Share Issuance
Issuance of shares at a price in excess of the Net Asset Value
(the "NAV") per share at the transaction date results in a premium
and is recorded as paid-in capital. Discounts on share issuance are
treated as a deduction from paid-in capital.
Other Matters
Markel CATCo Governmental Inquiries
Markel Corporation previously reported that the U.S. Department
of Justice, U.S. Securities and Exchange Commission and Bermuda
Monetary Authority (together, the "Governmental Authorities") had
been conducting inquiries (the "Markel CATCo Inquiries") into loss
reserves recorded in late 2017 and early 2018 at the Investment
Manager and its subsidiaries (collectively, "Markel CATCo"). Those
reserves were held at Markel CATCo Re Ltd., an unconsolidated
subsidiary of the Investment Manager. The Markel CATCo Inquiries
were limited to Markel CATCo and did not involve Markel Corporation
or its other subsidiaries.
Markel Corporation retained outside counsel to conduct an
internal review of Markel CATCo's loss reserving in late 2017 and
early 2018. The internal review was completed in April 2019 and
found no evidence that Markel CATCo personnel acted in bad faith in
exercising business judgment in the setting of reserves and making
related disclosures during late 2017 and early 2018. Markel
Corporation's outside counsel met with the Governmental Authorities
and reported the findings from the internal review.
On 27 September 2021, Markel Corporation was notified by the
U.S. Securities and Exchange Commission that it had concluded its
investigation and it did not intend to recommend an enforcement
action against Markel CATCo. Additionally, On 28 September 2021,
the U.S. Department of Justice advised Markel Corporation that it
had concluded its investigation and would not take any action
against Markel CATCo. There are currently no pending requests from
the Bermuda Monetary Authority.
California Bankruptcy Court and the PG&E Settlement (at
August 2022)
The Investment Manager believes that any subrogation benefitting
Markel CATCo was substantially realised as at 31 December 2021
through reductions in updated cedant loss reports. Therefore, the
Investment Manager is of the view that the benefits of such
subrogation are reflected in the Company's investments in the
underlying participating shares of the Reinsurer.
2. CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company maintains its cash
balances (not assets supporting retrocessional reinsurance
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 2022, cash and cash equivalents
were held with HSBC Bank Bermuda Ltd., which has a credit rating of
A-/A-2, and with HSBC Global Asset Management (USA) Inc., which has
a credit rating of A/A-2 as issued by Standard & Poor's.
3. COVID-19 CONSIDERATIONS
As at 30 June 2022, the Board and the Investment Manager have
concluded that the recent outbreak of the novel Coronavirus
("COVID-19") at the start of January 2020 did not have a
significant financial impact on the Company's going concern
assessment. There was minimal disruption in operational activities.
The fluidity of COVID-19 precludes any prediction to its ultimate
impact, which may have a continued adverse impact on economic and
market conditions and trigger a period of global economic
slowdown.
The Investment Manager continues to monitor developments
relating to COVID-19 and is coordinating its operational response
based on existing business continuity plans and on guidance from
global health organisations, relevant governments, and general
pandemic response best practices.
4. INVESTMENTS IN MASTER FUND, AT FAIR VALUE
The following table summarises the Company's Investment in the
Master Fund as at 30 June 2022:
(Expressed in United States Dollars) 30 June 2022
$
-------------------------------------------------- -------------
Investment in Markel CATCo Reinsurance Fund Ltd.
-
Markel CATCo Diversified Fund, at fair value 12,790,043
-------------------------------------------------- -------------
During this period, the net investment loss, and net realised
loss on securities allocated from the Master Fund in the Statements
of Operations included gross realised gains on securities of
$15,334,984 and gross realised loss on securities of $33,123,636.
Over the same period, the net change in unrealised gain on
securities allocated from the Master Fund included gross unrealised
gains of $37,104,410 and gross unrealised loss of $6,548,794.
5. LOSS RESERVES
The following disclosures on loss reserves are included for
information purposes and relate specifically to the Reinsurer and
are reflected through the valuations of investments held by the
Company through the Master Fund.
The reserve for unpaid losses and loss expenses recorded by the
Reinsurer includes estimates for losses incurred but not reported
as well as losses pending settlement. The Reinsurer makes a
provision for losses on contracts only when an event that is
covered by the contract has occurred. When a potential loss event
has occurred, the Reinsurer uses the underlying cedant loss
notifications along with management's judgement as deemed
appropriate to estimate the level of reserves required. The process
of estimating loss reserves is a complex exercise, involving many
variables and a reliance on actuarial modeled catastrophe loss
analysis. However, there is no precise method for evaluating the
adequacy of loss reserves when industry loss estimates are not
final, and actual results could differ from original estimates. In
addition, the Reinsurer's reserves may include an implicit risk
margin to reflect uncertainty surrounding cash flows relating to
loss reserves. The risk margin is set by the actuarial team of the
Investment Manager.
Future adjustments to the amounts recorded as of 30 June 2022,
resulting from the continual review process, as well as differences
between estimates and ultimate settlements, will be reflected in
the Reinsurer's 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.
Markel CATCo Investment Management Ltd., (the "Insurance
Manager"), believes that the total loss reserve established from
the previous years is sufficient to provide for all unpaid losses
and loss expenses based on best estimates of ultimate settlement
values and on the industry loss information currently available.
Inherent uncertainty with regard to the final insured loss impact
of the 2018 and 2019 loss events continues. Therefore, actual
results may materially differ if actual reinsured client losses
differ from the established loss reserves. This could result in the
need to further adjust loss reserves, either in the event that
reserves are found to be insufficient or, conversely, if loss
reserves are found to be too conservative.
As part of the ongoing reserving process, the Insurance Manager
reviews loss reserves on a monthly basis and will make adjustments,
if necessary, and such future adjustments in loss reserves could
have further material impact either favourably or adversely on
investor earnings.
In the six-month period ended 30 June 2022, the Reinsurer paid
net claims of $90,778,724. Of this amount, $57,733,505 related to
the 2017 loss events, $23,776,501 related to the 2018 loss events
and $9,268,718 was paid in respect of 2019 loss events.
6. CAPITAL SHARE TRANSACTIONS
As of 30 June 2022, the Company has authorised share capital of
1,500,000,000 unclassified shares of US$0.0001 each and Class B
Shares ("B Shares") of such nominal value as the Board may
determine upon issue.
As of 30 June 2022, the Company had issued 1,493,131 Class 1
Ordinary Shares (the "Ordinary Shares"), and 832,376 Class C Shares
(the "C Shares").
Transactions in shares during the year, shares outstanding, NAV
and NAV per share are as follows:
Ending
Beginning Share Share Ending Ending Net NAV Per
30 June 2022 Shares Redemptions Issuance Shares Assets Share
---------------- ------------ --------------- ---------- ---------- ------------- ---------
Class 1 -
Ordinary
Shares 149,305,187 (147,812,056) - 1,493,131 $4,797,522 $3.2131
---------------- ------------ --------------- ---------- ---------- ------------- ---------
Class C Shares 83,230,467 (82,398,091) - 832,376 $13,355,987 $16.0456
---------------- ------------ --------------- ---------- ---------- -------------
Total 232,535,654 (230,210,147) - 2,325,507 $18,153,509
---------------- ------------ --------------- ---------- ---------- -------------
The Company has been established as a closed-ended mutual fund
and, as such, Shareholders do not have the right to redeem their
shares. The shares are held in trust by Link Market Services (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.
The Board has the ability to issue one or more classes of C
Share during any period when the Master Fund has designated one or
more investments as Side Pocket Investments. This typically will
happen if a covered or other pre-determined event has recently
occurred or seems likely to occur under an Insurance-Linked
Instrument. In such circumstances, only those Shareholders on the
date that the investment has been designated as a Side Pocket
Investment will participate in the potential losses and premiums
attributable to such Side Pocket Investment. Any shares issued when
Side Pocket Investments exist will be as one or more classes of C
Share that will participate in all of the Master Fund's portfolio
other than in respect of potential losses and premiums attributable
to any Side Pocket Investments in existence at the time of issue.
If no Side Pocket Investments are in existence at the time of
proposed issue, it is expected that the Company will issue further
Ordinary Shares.
The Company's existing portfolio is currently in Run-Off and as
a result only SPI Shares are outstanding.
The Company issued a circular to Shareholders dated 28 February
2019 (the "February 2019 Circular") concerning the proposed
implementation of the orderly Run-Off of the Company's portfolios
by means of a change to the Company's investment policy to enable
the Company to redeem all of the Company's Master Fund Shares
attributable to the Ordinary or C Shares, as the case may be (the
"Proposals"), and distributing the net proceeds thereof to the
relevant class of Shareholders. The Proposals were approved at
class meetings of the Ordinary and C Shareholders of the Company
held on 26 March 2019.
On 13 March 2020 the Company issued a circular to Shareholders
announcing that the Company will not raise further capital in any
circumstances, and so the Company is being terminated by means of a
managed process ("Compulsory Redemptions") leading to liquidation
in due course. As discussed in Note 1, on 27 September 2021 the
Company announced the terms of the Buy-Out Transaction, which
facilitated an accelerated return of substantially all the net
asset value to the Shareholders of the Company.
Following the completion of the necessary applicable conditions
precedent to complete the Buy-Out of the Company's portfolios, the
Closing Date of the Schemes of Arrangement to implement the Buy-Out
Transaction occurred on 28 March 2022. Under the Buy-Out
Transaction, the Company received an accelerated return of 100% of
the NAV of its investment in the Master Fund as at 31 January 2022,
with investors retaining the right to any upside at the end of the
applicable Run-Off period if currently held reserves exceed the
Buy-Out Amount; and their pro rata share of an additional cash
contribution of approximately $54 million from a Markel Corporation
affiliate, to off-set transaction costs and future running costs of
the Master Fund SAC and to provide additional cash consideration to
investors.
In relation to the Company, the Buy-Out Transaction was
implemented by way of a redemption of 99% of the holdings of each
investor.
Consent Fees
The Early Consent Fee due to investors was paid on 30 March 2022
mostly through CREST to the accounts of holders of shares that
issued a valid Transfer to Escrow Instruction, irrespective of
whether such accounts continue to hold Public Fund Shares.
The Early Consent Fee paid per Share was:
Early Consent Fee per Ordinary Share: $0.00676446
Early Consent Fee per C Share: $0.01347267
Redemption of Shares
On 6 April 2022, the Company redeemed 147,812,056 Ordinary
Shares at a rate of USD 0.349957 per Ordinary Share (approximately
USD 0.3465 per Ordinary Share held on the basis of 100% of each
Shareholder's then outstanding Shares) and 82,398,091 C Shares at a
rate of USD 0.653616 per C Share (approximately USD 0.6471 per C
Share held on the basis of 100% of each Shareholder's then
outstanding Shares). Following this redemption, the Company now has
1,493,131 Ordinary Shares in issue and 832,376 C Shares in issue
with the Company's Ordinary Shares trading under the new ISIN
number BMG1961Q4075 and the C Shares will trade under the new ISIN
number BMG1961Q5064.
The resulting proceeds from the redemption, amounting to $51.7m
for Ordinary Shares and $53.9m for C Shares, were paid to
Shareholders on 11 April 2022.
7. INVESTMENT MANAGEMENT AGREEMENT
Prior to the implementation of the Buy-Out Transaction, the
Company's investments were managed pursuant to an Investment
Management Agreement dated 8 December 2015 (the "Old Investment
Management Agreement"). In connection with the Buy-Out Transaction,
on 28 March 2022 the Old Investment Management Agreement was
terminated and the Company and the Investment Manager entered into
a new Investment Management Agreement (the "Investment Management
Agreement"), the terms of which substantially mirrored those of the
Old Investment Management Agreement. Pursuant to the Investment
Management Agreement, the Investment Manager is empowered to
formulate the overall investment strategy to be carried out by the
Company and to exercise full discretion in the management of the
trading, investment transactions and related borrowing activities
of the Company in order to implement such strategy. The Investment
Manager earns a fee for such services (Note 8).
The Investment Manager also acts as the Master Fund SAC's
investment manager and the Reinsurer's insurance manager.
On 1 January 2020, the Investment Manager entered into a Run-Off
Services Agreement with Lodgepine Capital Management Limited
("LCML"), a subsidiary of Markel Corporation, under which, LCML
will provide services relating to the management of the Run-Off
business of the Investment Manager. LCML earns a fee from the
Investment Manager for such services. On 15 November 2021, Markel
announced its intention to wind down LCML, its retrocessional
Insurance Linked Securities ("ILS") fund manager based in Bermuda,
effective 1 January 2022.
8. RELATED PARTY TRANSACTIONS
The Investment Manager is entitled to a management fee,
calculated and payable monthly in arrears equal to 1/12 of 1.5 per
cent of the net asset value, which is not attributable to the
Company's investment in the Master Fund's shares as at the last
calendar day of each calendar month. Management fees related to the
investment in the Master Fund shares are charged in the Master Fund
and allocated to the Company. Performance fees are charged in the
Master Fund and allocated to the Company. The fees payable under
the Investment Management Agreement are the same as those which had
been payable under the Old Investment Management Agreement.
On 28 January 2021, the Investment Manager agreed to maintain
the partial waiver of 50.00 per cent of the annual Management Fee
on Side Pocket Investments of the original fee of 1.50 per cent.
This is equal to an annual Management Fee of 0.75 per cent. This
partial waiver has been maintained for the six months ended 30 June
2022 and will continue in force for the foreseeable future.
Markel Corporation, which holds the entire share capital of the
Investment Manager, holds 6.61 per cent of the voting rights of the
Ordinary Shares and 0.00 per cent of the voting rights of the C
Shares issued in the Company as of 30 June 2022. This equates to a
holding of 4.24 per cent of the combined voting rights of the
Company's Ordinary and C Shares in issue.
As noted in Note 7, on 1 January 2020, the Investment Manager
entered into a Run-Off Services Agreement with LCML, a subsidiary
of Markel Corporation. LCML receives a monthly service fee of 75.00
per cent of the net management fees due to the Investment
Manager.
In addition, as at 30 June 2022, one of the Directors is also a
Shareholder of the Company. The Director's holdings are immaterial,
representing below 1.00 per cent of the Company NAV.
9. ADMINISTRATIVE FEE
Centaur Fund Services (Bermuda) Limited serves as the Company's
Administrator. As a licensed fund administrator pursuant to the
provisions of the Bermuda Investment Funds Act, the Administrator
performs certain administrative services on behalf of the Company.
The Administrator receives a fixed monthly fee.
10. FINANCIAL HIGHLIGHTS
Financial highlights for the period from 1 January to 30 June
2022 are as follows:
Class 1 - Class C
Ordinary Shares Shares
Per share operating performance
Net asset value, beginning of period $ 0.3389 0.6750
------------------------------------------------ --- --------- ---------
Income (loss) from investment operations
Net investment income (loss) (0.0079) (0.0056)
Management fee charged (0.0047) (0.0183)
Net gain on investments 1.9964 7.3114
----------------------------------------------------- --------- ---------
Total Income from investment operations 1.9838 7.2875
----------------------------------------------------- --------- ---------
Discount on Buy-Out Transaction 0.8904 8.0831
----------------------------------------------------- --------- ---------
Net asset value, end of period $ 3.2131 16.0456
------------------------------------------------ --- --------- ---------
Total net asset value return
Total net asset value return before performance
fee 585.36% 1079.63%
Performance fee 0.00% 0.00%
----------------------------------------------------- --------- ---------
Total net asset value return after performance
fee^ 585.36% 1079.63%
----------------------------------------------------- --------- ---------
Ratios to average net assets
Expenses other than performance fee ** -4.52% -5.33%
Performance fee 0.00% 0.00%
----------------------------------------------------- --------- ---------
Total expenses after performance fee -4.52% -5.33%
----------------------------------------------------- --------- ---------
Net investment income (loss) -3.72% -3.54%
Management fee waived -0.24% -0.25%
^ Adjusting the opening capital to reflect the Buy-Out
Transaction redemptions paid in April 2022, the normalised total
return for 2022 is equivalent to 241.13% and 139.84% for the
Ordinary and C Shares respectively.
** Expenses presented above is net of management fees waived by
the Master Fund (Note 8). Financial highlights are calculated for
each class of shares. An individual Shareholder's return may vary
based on the timing of capital transactions. Returns and ratios
shown above are for the six-month period ended 30 June 2022 and
have not been annualised. The per share amounts and ratios reflect
income and expenses allocated from the Master Fund.
11. INDEMNITIES OR WARRANTIES
In the ordinary course of its business, the Company may enter
into contracts or agreements that contain indemnifications or
warranties. Future events could occur that lead to the execution of
these provisions against the Company. Based on its history and
experience, management believes that the likelihood of such an
event is remote.
12. SCHEMES OF ARRANGEMENT COST
For the six-month period ended 30 June 2022, the Master Fund
recorded an amount of $178,592, in addition to the $27,232,774
incurred in 2021, for legal fees and restructuring costs in
relation to the Schemes of Arrangement, of which $27,380 and
$4,437,070 were allocated to the Company in 2022 and 2021,
respectively. Additionally, the Company incurred direct expenses
relating to the finalisation of the Schemes of Arrangement in the
amount of $368,733 and $229,415 in 2022 and 2021, respectively.
Per the Schemes of Arrangement Buy-Out agreement, after closing
of the Schemes no additional fees or expenses will be deducted from
distributions of the Closing NAV and there will be no continuing
management fees charged by the Investment Manager (any such fees
will have been accelerated and included in the Ordinary Course Fees
for the Run-Off of the Funds). Post-closing of the Schemes with the
Closing NAV effective 31 January 2022, the Company incurred
operational costs totaling $452,198 which were charged against the
$3,384,953 total accelerated reserves Schemes of Arrangement
Buy-Out Ordinary Course Fees as disclosed on the condensed
Statements of Assets and Liabilities.
13. SUBSEQUENT EVENTS
Effective 1 July 2022, the Investment Manager successfully
implemented a move to quarterly reporting as one of the Company's
cost savings mechanisms. The move to quarterly reporting also
aligns the Master portfolio results with cedants' quarterly loss
reporting.
On 11 August 2022, the Company released a portfolio update
advising of a further release of Side Pocket Investment ("SPI")
capital which is expected to be paid to the Company towards the end
of Q4 2022, and which the Company intends to use to carry out an
eighth compulsory partial redemption of its issued share
capital.
These Financial Statements were approved by the Board and
available for issuance on 14 September 2022. Subsequent events have
been evaluated through this date.
For further information:
Markel CATCo Investment Management
Ltd.
Judith Wynne, General Counsel
Telephone: +1 441 493 9005
Email: judith.wynne@markelcatco.com
Mark Way, Chief of Investor Marketing
Telephone: +1 441 493 9001
Email: mark.way@markelcatco.com
Numis Securities Limited
David Benda / Hugh Jonathan
Telephone: +44 (0) 20 7260 1000
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