TIDMCAT
RNS Number : 6489X
CATCo Reinsurance Opps Fund Ltd
12 February 2013
12 February 2013
CATCo Reinsurance Opportunities Fund Ltd. ("the Company")
Annual Financial Report
For the 12 month period 1 January 2012 to 31 December 2012
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 our 2012 Annual Report. In my first statement as
Chairman, the twelve month period to 31 December 2012 has been a
period of continued progress for the Company. During 2012, the
CATCo Group of Companies (the "Group") consolidated its position as
one of the leading companies within the retrocessional reinsurance
industry.
Having deployed in excess of $2 billion of collateralised
retrocession reinsurance capacity at the beginning of 2013 the
CATCo Reinsurance Fund Ltd (the "Master Fund"), demonstrated it is
one of the largest providers in its industry.
This is a significant milestone for the Group after two years of
operation and demonstrates the demand the industry already has for
the type of products the Group offers in a relatively short period
of time.
In addition, CATCo Diversified Fund (the Master Fund) and other
segregated accounts managed by the Managers, received new
investments of approximately USD330 million which were deployed 1
January 2013.
CATCo Reinsurance Opportunities Fund had, at the end of the
year, a Net Asset Value of USD353.8 million.
Catastrophic Activity in 2012
Overall, reinsurance industry losses were significantly lower in
2012 than in the previous year, when record figures were posted due
to the earthquakes in Japan and New Zealand and severe floods in
Thailand.
Global natural disasters in 2012 combined to cause economic
losses of $200 billion, just above the ten year average of $187
billion. In total there were 295 separate events during the year,
compared to an average of 257. These disasters caused insured
losses of $72 billion, about 36% above the ten year run-rate of $53
billion.
Losses in 2012 represented a welcome reduction after the extreme
economic and insured losses of 2011. In contrast to 2011, when the
largest events occurred in the Asia-Pacific region, the two largest
global events of 2012 occurred in the US: Hurricane Sandy and a
year long drought. These two events accounted for nearly half of
economic losses but, owing to higher insurance penetration in the
U.S., 67% of total insured losses globally.
The costliest events outside of the U.S. in 2012 were two
earthquakes in Italy's Emilia-Romagna region during May that struck
within nine days of each other and caused significant damage. Flood
events in China, typhoon landfalls in Asia and flooding in the
United Kingdom were additional notable economic loss events in
2012.
The only other notable non-elemental disaster of 2012 was the
partial sinking of the Italian cruise ship Costa Concordia when it
ran aground at Isola del Giglio, Tuscany.
Convergence of Capital Markets in the Reinsurance Sector
The convergence of traditional reinsurance and capital markets
capacity continues. The influence of capital markets capacity is
set to expand strongly over the next few years in the reinsurance
sector. This development will provide carriers with additional
flexibility to offload and diversify risk and establish capital
market solutions as a sustainable complement to traditional
reinsurance.
Over the course of 2012, fifty three new international insurers,
four new insurance agencies, five new insurance managers and two
insurance brokerages were launched in Bermuda alone.
Of the insurers, twenty seven were Special Purpose Insurers and
most of these have been formed to undertake some kind of fully
collateralised reinsurance often with third-party capital backing
them. This clearly shows how popular reinsurance activity has
become as an asset class among third-party capital investors.
However, very few of these new entrants were retrocessionnaires
and as a consequence do not compete with the Company's investment
strategy.
Total Returns and NAV Performance
The 2012 investment portfolio generated a total return of 7.06
percent to Shareholders without exposure to the 2011 New Zealand
and Japan earthquakes (previously C Share investors). See note 10
for performance breakdown of differing share classes.
Since CATCo's inception the Company has completed three
significant fund raisings leading to NAV total return calculations
for differing share classes. The NAV calculations included both the
2011 dividend and the deduction of the 2012 Sandy Loss Reserve.
The NAV total returns by share class, with their event
exposures, are listed below:
. Ordinary Shares issued on 20 December 2010: +2.41% (Exposed to
Japan/NZ Quakes, Costa Concordia, Hurricane Sandy)
. C Shares Issued on 20 May 2011: +19.51% (Exposed to Costa Concordia and Hurricane Sandy)
. C Shares issued on 16 December 2011: +7.40% (Exposed to Costa Concordia and Hurricane Sandy)
Conversion of C Shares
In August 2012 the Board announced it had completed the
consolidation of the Company's share classes into one class of
Ordinary Shares.
2012 Annual Dividend
At the launch of the Company, the Board of Directors indicated
its intention to pay an annual dividend in respect of any Fiscal
Year of an amount equal to LIBOR plus 5 per cent of the Net Asset
Value as at the end of the relevant Fiscal Year.
On 9 January 2013, the Board of Directors indicated their
intention to pay an annual dividend of $0.05006 in respect of the
Ordinary Shares.
The record date for this dividend was 18 January 2013. It is
expected that this final dividend will be paid to shareholders in
March 2013, subject to shareholder approval at the forthcoming
Annual General Meeting.
Good Corporate Governance
The Board of Directors is resolved to maintain high corporate
governance standards with particular focus on ensuring that the
Company is operating in the best possible interests of
shareholders. This includes regularly evaluating the relationship
and effectiveness of the Investment Manager. During 2012, The
Bermuda Monetary Authority completed a full audit of the Investment
Manager without any significant matters being raised. The Board
places a high emphasis on risk management and assesses internal
controls each year.
The Company has complied with the recommendations of the AIC
Code and the relevant provisions of Section 1 of the Governance
Code, except the Governance Code provisions relating to:
-- The role of the Chief Executive (A.1.2)
-- Executive Directors' remuneration (B.2.1 and B.2.2)
-- The need for an internal audit function (C.3.5)
For the reasons set out in the AIC Guide, and as explained in
the UK Corporate Governance Code, the Board considers these
provisions are not relevant to the position of CATCo Reinsurance
Opportunities Fund Ltd., being an externally managed investment
company.
The Company has therefore not reported further in respect of
these provisions.
Acknowledgement and Board Changes
I would like to acknowledge the valuable contribution and
support provided to the Board of Directors, and Managers, by
Anthony Taylor our retiring Chairman.
The Board of Directors was strengthened in May 2012 with the
appointment of Ms Margaret Gadow who has over twenty three years'
experience in investment management. Her appointment compliments
the Board's experience and broadens its knowledge of the
industry.
Regular dialogue with the Company's shareholders is encouraged
and I would like to remind shareholders that CATCo will be
repeating its Investor Day presentation in London again during
September 2013 and, my Directors and Managers would welcome your
attendance.
2013 Investment Portfolio Deployment
The Managers, on behalf of CATCo Re Ltd., have agreed terms on
retrocessional reinsurance transactions with multiple reinsurance
counterparties predominantly with Lloyds of London Syndicates and
traditional reinsurers that have utilised approximately 98% of the
available capital received from existing and new investment in the
Company, the Master Fund and other separately managed Investment
Funds.
The Company and Master Fund's reinsurance portfolio contains a
significantly diverse set of global risk pillars. The Company's
diversified portfolio exposure, including reinsurance protections,
ensures that the impact to a single loss event, no matter the
magnitude of the event, results in positive net portfolio returns
for investors in 2013 with the exception of the worst US Hurricane
event which results in a potentially small negative net return.
Shareholders
I would like to thank shareholders for their continued support
and please do not hesitate to contact the Company, or our Managers,
if you have any questions regarding your Company.
You are invited to attend the Annual Investor Day in London,
United Kingdom in September when I will have a chance to meet you
as well as receive the latest update from the Manager.
Nigel Barton
Chairman
Manager's Review
I am pleased to be able to confirm to shareholders that CATCo
Reinsurance Opportunities Fund (the "Company") had a good year in
the circumstances, continuing its strong financial total return
performance while increasing its market share of the global
retrocessional reinsurance sector. Shareholders without exposure to
the 2011 New Zealand and Japan earthquakes (previously C Share
investors) achieved a total return of 7.06 percent for the year. In
addition, the Company's 2012 investment portfolio achieved
significant premium rate increases and better diversification as
compared to the 2011 investment portfolio.
After 10 months of benign natural catastrophe activity, the
reinsurance market had begun to assume that 2012 would be a year
when natural catastrophes played no part in financial results and
that strong underwriting revenues could be generated.
Unfortunately, with the year-end in sight, these expectations were
muted by Hurricane Sandy, a freakish combination of storms that
included an unprecedented sharp left turn resulting in a direct hit
on the New York City area.
2012 Portfolio Update
Nine of the top ten insured loss events occurred in the United
States during 2012, six related to severe weather, two were
tropical cyclones and one was a drought. Hurricane Sandy, which
made landfall in New Jersey as a post-tropical cyclone, was the
costliest insured event of the year, though the prolonged drought
in the U.S. also prompted a significant level of claims and crop
insurance payments.
During 2012, there were two significant events that impacted the
Company's 2012 investment portfolio. Firstly, Hurricane Sandy,
which is expected to be the second costliest Atlantic hurricane on
record, affected the Company's US Hurricane risk pillar exposure.
Secondly, the cruise ship Costa Concordia, which ran aground off
the Italian coast resulting in the most expensive marine disaster,
impacted the Company's Offshore Marine risk pillar exposure.
The Company's Ordinary Shareholders are exposed to potential
losses arising from both of these events. All other 2012 investment
exposures have been released by the Company's reinsurance
counterparties with the exception of the twelve month reinsurance
transactions issued mid-year during 2012 and representing less than
4% of the Company's 2013 reinsurance exposures.
Hurricane Sandy ("Sandy") Update
On 31 October and 10 December 2012, the Board of Directors
released two separate announcements concerning the potential impact
from Sandy. The Investment Managers had modeled the projected loss
distribution for Sandy across CATCo-Re Ltd's (the "Reinsurance
Company") 2012 portfolio based upon Property Claims Services
("PCS") estimated industry loss as well as varying average expected
industry insured losses suggested by Eqecat, AIR Worldwide and
RMS.
The Board of Directors of the Reinsurance Company and CATCo
Reinsurance Fund ("the Master Fund") have taken a cautious approach
to estimating the exposure to Hurricane Sandy and a retrocessional
reinsurance loss reserve provision was included in the Net Asset
Value calculation at 30 November 2012 based on a best estimate of
the insured industry loss of $20 billion as at that time.
This is primarily a retrocessional reinsurance loss reserve, and
not a crystalised loss, as the Reinsurer's protections are based on
the reinsurance counterparties actual paid claims. The Board of
Directors of the Reinsurance Company, the Master Fund or the
Investment Managers have no reason, at this time, to change the
retrocessional reinsurance loss reserve.
PCS, an independent company which investigates reported
disasters and determines the extent and type of damage, dates of
occurrence and geographic areas affected, primarily within the US,
published a re-survey in January 2013 of their initial November
2012 loss estimate from affected insurers resulting from the events
of Hurricane Sandy which began on 23 October 2012. The revised loss
estimate was $18.75 billion.
The existing retrocessional reinsurance loss reserve provision
that is included in the Company's Net Asset Value calculation was
based on an insured industry loss of $20 billion. The Board of
Directors remains of the opinion that there is no need to amend the
existing retrocessional reinsurance loss reserve provision that is
currently in place. Shareholders should note that this is a loss
reserve, and not a crystalised loss, as CATCo-Re's protections are
based on the actual paid claims.
The majority of the Company's catastrophic property exposure is
through Ultimate Net Loss contracts ("UNLs") and therefore any
losses that may be suffered by the Company will be based on actual
losses of the insured counterparties rather than industry loss
triggers as is the case for Industry Loss Warranty contracts
("ILWs"). However, the magnitude of the industry insured losses
provides a reasonable guide as to the expected level of UNL
claims.
PCS will conduct a re-survey in approximately 60 days following
their new estimate and will update the loss estimate at that time
with new data gained from affected insurers. It is the Directors
intention to update the Company's shareholders with any additional
information when this information is released.
Costa Concordia Update
On 21 December 2012, The Insurance Insider reported that, the
International Group (IG)'s insured loss estimate for the protection
and indemnity portion of the Costa Concordia in- sured loss had
increased to USD744 million. This brings the total insured loss
estimate, including the hull value, to roughly USD1.25 billion. The
Reinsurance Company and Master Fund's investment portfolio exposure
to this marine event is triggered at industry losses equal to or
greater than USD1.25 billion. The increased loss estimate is
largely due to the estimated increase in clean up costs. The wreck
removal plan had an original timeline that assumed the parbuckling
and refloating would be completed in January of 2013, but is now
projected to be completed three to four months later, at
significant additional cost.
The Company's maximum 2012 exposure to Offshore Marine risk was
4% of the 'expected' 2012 gross returns, assuming a total loss to
this cover from this event. In November 2012, the Investment
Managers had reached agreement to fully and finally commute 100% of
the exposure with respect to one of two reinsurance counterparties
(representing approximately 40% of the total Offshore Marine
portfolio exposure), at a cost which represents approximately 1.5%
of the 2012 gross return.
This commutation was a settlement agreement reached between the
reinsured counterparty and the Reinsurance Company by which the
reinsurance obligation was terminated by an agreement by the
reinsurer to pay funds at present value that are not yet due under
the reinsurance agreement.
As a result of the IG's increased loss estimate, the Master
Fund's Board of Directors have decided to include a retrocessional
reinsurance loss reserve provision in the Net Asset Value
calculation at 31 December 2012 representing 100% of the remaining
Costa Concordia exposure. Reinsurance Opportunities Fund Ltd.
Impact of Side Pocket Investments
The current retrocessional reinsurance loss reserves, included
in the Net Asset Value calculation, at 31 December 2012 equate to
7.52 percent of shareholder funds.
Capital Raising
The Master Fund and other segregated accounts managed by the
Investment Managers have received new investments of approximately
$330 million for deployment at 1 January 2013.
2013 Investment Portfolio
We are excited about the prospects of the 2013 investment
portfolio. Not only has the portfolio been modestly de-risked
compared to the 2012 portfolio, but greater Risk Pillar
diversification has also been achieved along with a significant
increase in potential shareholder returns.
The management team has maintained a measured and client-centric
approach to the Company's investment portfolio by providing
adequate capacity to buyers, together with an increasingly
differentiated approach at a client and class-specific level. Final
terms and conditions have, in most cases, been in line with both
client and manager expectations. In the absence of Hurricane Sandy
and Costa Concordia, the managers would have expected some degree
of buyer pressure for price concessions. However, Sandy's impact
has assisted market pricing on an overall basis and demand remains
strong in terms of capacity and continuity.
CATCo Investment Team
Our people play a vital role in the success of our business and
they are our most valuable resource. We have added a number of key
individuals to both our investment and operational processes and
this has already started to pay dividends. Continued build out of
the management team's experience and expertise has been, and
remains, a key priority. We have continued to make good progress
during the year in recruitment, development of our staff and
enhancement of our systems and internal controls.
Anthony Belisle
Director
Directors' Responsibilities
In accordance with Chapter 4 of the Disclosure and Transparency
Rules, and to the best of their knowledge, each Director of CATCo
Reinsurance Opportunities Fund Ltd. confirms that the financial
statements have been prepared in accordance with the applicable set
of accounting standards and give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company.
Furthermore, each Director certifies that the report of the
Directors includes a fair review of the development and performance
of the business and the position of the Company, together with a
description of the principal risks and uncertainties that the
Company faces.
AUDITED STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States 31 December 31 December
Dollars) 2012 2011
---------------------------------------- --------------- ---------------
$ $
Assets
---------------------------------------- --------------- ---------------
Investment in CATCo Reinsurance
Fund Ltd.-
CATCo Diversified Fund, at
fair value (cost 2012 - $316,940,120;
2011 - $206,435,090) $353,330,814 $227,981,444
---------------------------------------- --------------- ---------------
Cash and cash equivalents 710,727 123,194,026
---------------------------------------- --------------- ---------------
Other assets 25,403 7,260
---------------------------------------- --------------- ---------------
Total assets 354,066,944 351,182,730
---------------------------------------- --------------- ---------------
Liabilities
---------------------------------------- --------------- ---------------
Dividend payable - 10,859,876
---------------------------------------- --------------- ---------------
Accrued expenses and other
liabilities 253,439 456,858
---------------------------------------- --------------- ---------------
Management fee payable 603 72,184
---------------------------------------- --------------- ---------------
Total liabilities 254,042 11,388,918
---------------------------------------- --------------- ---------------
Net assets 353,812,902 339,793,812
---------------------------------------- --------------- ---------------
NAV Per Share (See note 6)
See accompanying notes
AUDITED STATEMENTS OF OPERATIONS
(Expressed in United States Dollars) For the For the
12 month period 20
period to December
31 December 2010 to
2012 31 December
2011
------------------------------------------- -------------- --------------------
$ $
------------------------------------------- -------------- --------------------
Net investment loss allocated from
CATCo Reinsurance Fund Ltd. - CATCo
Diversified Fund
------------------------------------------- -------------- --------------------
Interest 5,030 -
------------------------------------------- -------------- --------------------
Management fee (5,413,680) (2,537,082)
------------------------------------------- -------------- --------------------
Administrative fee (340,305) (177,249)
------------------------------------------- -------------- --------------------
Professional fees and other (241,542) (185,807)
------------------------------------------- -------------- --------------------
Miscellaneous expenses (24,415) (48,469)
------------------------------------------- -------------- --------------------
Performance fee - (2,739,375)
------------------------------------------- -------------- --------------------
Total net investment loss allocated
from
CATCo Reinsurance Fund Ltd. - CATCo
Diversified Fund (6,014,912) (5,687,982)
------------------------------------------- -------------- --------------------
Fund investment income
------------------------------------------- -------------- --------------------
Interest - 515
------------------------------------------- -------------- --------------------
Fund expenses
------------------------------------------- -------------- --------------------
Professional fees and other (762,379) (617,174)
------------------------------------------- -------------- --------------------
Administrative fee (54,000) (33,000)
------------------------------------------- -------------- --------------------
Management fee (13,901) (145,142)
------------------------------------------- -------------- --------------------
Total Fund expenses (830,280) (795,316)
------------------------------------------- -------------- --------------------
Net investment loss (6,845,192) (6,482,783)
------------------------------------------- -------------- --------------------
Net realised and net change in unrealised
gain on securities allocated from
CATCo Reinsurance Fund Ltd. - CATCo
Diversified Fund
------------------------------------------- -------------- --------------------
Net realised gain on securities 18,490,351 -
------------------------------------------- -------------- --------------------
Net change in unrealised gain on
securities 2,373,931 27,234,336
------------------------------------------- -------------- --------------------
Net gain on investments 20,864,282 27,234,336
------------------------------------------- -------------- --------------------
Net increase in net assets resulting
from operations 14,019,090 20,751,553
------------------------------------------- -------------- --------------------
See accompanying notes
AUDITED STATEMENTS OF CHANGES IN NET ASSETS
(Expressed in United States Dollars) For the For the period
12 month 20 December
period to 2010 to 31
31 December December 2011
2012
-------------------------------------- -------------- ---------------
$ $
-------------------------------------- -------------- ---------------
Operations
-------------------------------------- -------------- ---------------
Net investment loss (6,845,192) (6,482,783)
-------------------------------------- -------------- ---------------
Net realised gain on securities 18,490,351 -
-------------------------------------- -------------- ---------------
Net change in unrealised gain on
securities 2,373,931 27,234,336
-------------------------------------- -------------- ---------------
Net increase in net assets resulting
from operations 14,019,090 20,751,553
-------------------------------------- -------------- ---------------
Capital share transactions
-------------------------------------- -------------- ---------------
Transfer of Class 2 - C Shares (276,563,190) -
(see note 6)
-------------------------------------- -------------- ---------------
Transfer to Class 1 - Ordinary 276,563,190 -
Shares (see note 6)
-------------------------------------- -------------- ---------------
Issuance of shares - 338,047,487
-------------------------------------- -------------- ---------------
Dividend declared - (10,859,876)
-------------------------------------- -------------- ---------------
Offering costs - (8,145,352)
-------------------------------------- -------------- ---------------
Net change in net assets resulting
from capital share transactions - 319,042,259
-------------------------------------- -------------- ---------------
Net change in net assets 14,019,090 339,793,812
-------------------------------------- -------------- ---------------
Net assets, beginning of period 339,793,812 -
-------------------------------------- -------------- ---------------
Net assets, end of period 353,812,902 339,793,812
-------------------------------------- -------------- ---------------
See accompanying notes
AUDITED STATEMENTS OF CASH FLOWS
(Expressed in United States For the 12 For the period
Dollars) month period 20 December
to 31 December 2010 to 31 December
2012 2011
-------------------------------------------- ---------------- ---------------------
$ $
-------------------------------------------- ---------------- ---------------------
Cash flows from operating activities
-------------------------------------------- ---------------- ---------------------
Net increase in net assets
resulting from operations 14,019,090 20,751,553
-------------------------------------------- ---------------- ---------------------
Adjustments to reconcile net
increase in net assets resulting
from operations to net cash
used in operating activities:
-------------------------------------------- ---------------- ---------------------
Net investment loss, net realised
gain and net change in unrealised
gain on securities allocated
from CATCo Reinsurance Fund
Ltd. - CATCo Diversified Fund (14,849,370) (21,546,354)
-------------------------------------------- ---------------- ---------------------
Changes in operating assets
and liabilities:
-------------------------------------------- ---------------- ---------------------
Purchase of investment in CATCo
Reinsurance Fund Ltd.- CATCo
Diversified Fund (110,500,000) (206,435,090)
-------------------------------------------- ---------------- ---------------------
Other assets (18,143) (7,260)
-------------------------------------------- ---------------- ---------------------
Accrued expenses and other
liabilities (203,419) 456,858
-------------------------------------------- ---------------- ---------------------
Management fee payable (71,581) 72,184
-------------------------------------------- ---------------- ---------------------
Net cash used in operating
activities (111,623,423) (206,708,109)
-------------------------------------------- ---------------- ---------------------
Cash flows from financing activities
-------------------------------------------- ---------------- ---------------------
Dividends paid (10,859,876) -
-------------------------------------------- ---------------- ---------------------
Proceeds from issuance of shares - 338,047,487
-------------------------------------------- ---------------- ---------------------
Offering costs - (8,145,352)
-------------------------------------------- ---------------- ---------------------
Net cash provided by financing
activities (10,859,876) 329,902,135
-------------------------------------------- ---------------- ---------------------
Net change in cash (122,483,299) 123,194,026
-------------------------------------------- ---------------- ---------------------
Cash, beginning of period 123,194,026 -
-------------------------------------------- ---------------- ---------------------
Cash, end of period 710,727 123,194,026
-------------------------------------------- ---------------- ---------------------
See accompanying notes
1. Nature of operations and summary of significant accounting policies
Nature of Operations
CATCo Reinsurance Opportunities Fund Ltd. (the "Fund") is a
closed-ended fund, registered and incorporated as an exempted
mutual fund company in Bermuda on 30 November 2010 and commenced
operations on 20 December 2010. The Fund was organised as a feeder
fund to invest substantially all of its assets in CATCo Diversified
Fund (the "Master Fund"). The Master Fund is a segregated account
of CATCo Reinsurance Fund Ltd., a mutual fund company incorporated
in Bermuda and registered as a segregated account company under the
Segregated Accounts Company Act 2000, as amended (the "SAC Act").
The Master Fund will establish a separate account for each class of
shares comprised in each segregated account (each, an "Account").
Each Account is a separate individually managed pool of assets
constituting, in effect, a separate fund with its own investment
objective and policies and overseen by the Investment Manager.
Pursuant to an investment management agreement, the Fund is managed
by CATCo Investment Management Ltd. (the "Investment Manager").
Refer to the Fund's prospectus for more information.
The Fund's Shares are listed and traded on the Specialist Fund
Market ("SFM"), a market operated by the London Stock Exchange. The
Fund's Shares are also listed on the Bermuda Stock Exchange
following the Secondary Listing on 20 May 2011.
The objective of the Master Fund is to give the shareholders the
opportunity to participate in the investment returns of various
insurance-based instruments, including preference shares through
which the Master Fund would be exposed to reinsurance risk,
insurance-linked securities (such as notes, swaps and other
derivatives), and other financial instruments. All of the Master
Fund's exposure to reinsurance risk is obtained through its
investment (via preference shares) in CATCo-Re Ltd. (the
"Reinsurer"). The Fund's ownership is less than 50% of the Master
Fund at 31 December 2012.
The Reinsurer is a Bermuda licensed Class 3 reinsurance company,
registered as a segregated accounts company under the SAC Act,
through which the Master Fund accesses all of its reinsurance risk
exposure. The Reinsurer will form a segregated account that
corresponds solely to the Master Fund's investment in the Reinsurer
with respect to each particular reinsurance agreement.
The Reinsurer focuses primarily on property catastrophe
insurance and may be exposed to losses arising from hurricanes,
earthquakes, typhoons, hailstorms, floods, tsunamis, tornados,
windstorms, extreme temperatures, aviation accidents, fires,
explosions, marine accidents and other perils.
Basis of Presentation
The financial statements are expressed in United States dollars
and have been prepared in conformity with accounting principles
generally accepted in the United States of America ("GAAP") as
detailed in the Financial Accounting Standards Board's Accounting
Standards Codification.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid
investments, such as money market funds, that are readily
convertible to known amounts of cash and have original maturities
of three months or less.
Valuation of Investment in Master Fund
The Fund records its investment in the Master Fund at the net
asset value as reported by the Master Fund. The Fund records its
investment in the Master Fund at fair value which is the Fund's
proportionate interest in the net assets of the Master Fund. The
performance of the Fund is directly affected by the performance of
the Master Fund and is subject to the same risks to which the
Master Fund is subject. Valuation of investments held by the Master
Fund, including, but not limited to the valuation techniques used
and classification within the fair value hierarchy of investments
held are discussed as follows:
Fair Value - Definition and Hierarchy (Master Fund)
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the "exit
price") in an orderly transaction between market participants at
the measurement date.
In determining fair value, the Master Fund uses various
valuation approaches. A fair value hierarchy for inputs is used in
measuring fair value that maximises the use of observable inputs
and minimises the use of unobservable inputs by requiring that the
most observable inputs are to be used when available. Observable
inputs are those that market participants would use in pricing the
asset or liability based on market data obtained from sources
independent of the Master Fund. Unobservable inputs reflect the
Master Fund's assumptions about the inputs market participants
would use in pricing the asset or liability developed based on the
best information available in the circumstances. The fair value
hierarchy is categorised into three levels based on the inputs as
follows:
Level 1 - Valuations based on unadjusted quoted prices in active
markets for identical assets or liabilities that the Master Fund
has the ability to access. Valuation adjustments are not applied to
Level 1 investments. Since valuations are based on quoted prices
that are readily and regularly available in an active market,
valuation of these investments does not entail a significant degree
of judgment.
Level 2 - Valuations based on quoted prices in markets that are
not active or for which all significant inputs are observable,
either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and
significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs
can vary from investment to investment and are affected by a wide
variety of factors, including the type of investment, whether the
investment is new and not yet established in the marketplace, and
other characteristics particular to the transaction. To the extent
that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair
value requires more judgment. Those estimated values do not
necessarily represent the amounts that may be ultimately realised
due to the occurrence of future circumstances that cannot be
reasonably determined. Because of the inherent uncertainty of
valuation, those estimated values may be materially higher or lower
than the values that would have been used had a ready market for
the investments existed. Accordingly, the degree of judgment
exercised by the Master Fund in determining fair value is greatest
for investments categorised in Level 3. In certain cases, the
inputs used to measure fair value may fall into different levels of
the fair value hierarchy. In such cases, for disclosure purposes,
the level in the fair value hierarchy within which the fair value
measurement falls in its entirety, is determined based on the
lowest level input that is significant to the fair value
measurement.
Fair value is a market-based measure considered from the
perspective of a market participant rather than an entity-specific
measure. Therefore, even when market assumptions are not readily
available, the Master Fund's own assumptions are set to reflect
those that market participants would use in pricing the asset or
liability at the measurement date. The Master Fund uses prices and
inputs that are current as of the measurement date, including
periods of market dislocation. In periods of market dislocation,
the observability of prices and inputs may be reduced for many
investments. This condition could cause an investment to be
reclassified to a lower level within the fair value hierarchy.
During 2011, the Financial Accounting Standard Board ("FASB")
issued ASU 2011-04, "Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs",
which expands on current guidance relating to valuation
methodologies for investments that are categorised within level 3
of the fair value hierarchy. The amendments are effective during
interim and annual periods beginning after 15 December 2011. The
adoption of this pronouncement resulted in additional disclosures
in the Master Fund's financial statements.
Fair Value - Valuation Techniques and Inputs
Investments in Securities (Master Fund)
The value of preference shares issued by the Reinsurer and
subscribed for by the Master Fund and held with respect to a
reinsurance agreement will equal:
(i) the amount of capital invested in such preference shares;
plus
(ii) the amount of earned premium (as described below) that has
been earned period-to-date for such contract; plus
(iii) the amount of the investment earnings earned to date on
both the capital invested in such preference shares and the
associated reinsurance premiums in respect of such contract;
minus
(iv) the amount of any loss estimates associated with potential
claims triggering covered events (see "Covered Event Estimates"
below).
The value of preferred shares issued by the Reinsurer will also
recognise expenses which are directly attributable to the Master
Fund as a result of the Reinsurer conducting reinsurance activities
that inure to the benefit or detriment of the Master Fund.
Investments in Securities held by the Reinsurer
Industry Loss Warranties ("ILWs")
ILWs will be marked similar to preference shares held with
respect to reinsurance agreements, unless otherwise unavailable,
except that following a Covered Event, loss information from the
index provider on the trade will be used.
Insurance-Linked Securities ("ILS")
Cat Bonds and other ILS will be valued at the average of the
bids from the pricing sheets or indicative bids provided by at
least two broker-dealers or other market makers.
Risk Transfer Derivative Agreements
Risk transfer derivative agreements will be marked similar to
ILWs except that following a Covered Event, loss information
provided by the Investment Manager or the counterparty will be
used.
Earned Premiums
Premiums shall be considered earned with respect to computing
the Master Fund's Net Asset Value in direct proportion to the
percentage of the risk that is deemed to have expired year-to-date.
Generally, all premiums shall be earned uniformly over each month
of the risk period. However, for certain risks, there is a clearly
demonstrable seasonality associated with these risks. Accordingly,
seasonality factors are utilised for the establishment of certain
instruments, including preference shares relating to reinsurance
agreements, ILWs and risk transfer derivative agreements, where
applicable. Prior to the investment in any seasonal contract, the
Investment Manager is required to produce a schedule of seasonality
factors, which will govern the income recognition and related fair
value price for such seasonal contract in the absence of a covered
event. The Investment Manager may rely on catastrophe modeling
software, historical catastrophe loss information or other
information sources it deems reliable to produce the seasonality
factors for each seasonal contract.
Covered Event Estimates
The Investment Manager provides monthly loss estimates for all
incurred loss events ("Covered Events") potentially affecting
investments relating to a reinsurance agreement of the Reinsurer.
As the Reinsurer's reinsurance agreements are fully collateralised,
any loss estimates above the contractual thresholds as contained in
the reinsurance agreements will require capital to be held in a
continuing reinsurance trust account with respect to the maximum
contract exposure with respect to the applicable Covered Event.
"Fair Value" Pricing used by the Master Fund
Any investment that cannot be reliably valued using the
principles set forth above (a "Fair Value Instrument") is marked at
its fair value, based upon an estimate made by the Investment
Manager, in good faith and in consultation or coordination with
Prime Management Limited (the "Administrator") where practicable,
using what the Investment Manager believes in its discretion are
appropriate techniques consistent with market practices for the
relevant type of investment. Fair valuation in this context depends
on the facts and circumstances of the particular investment,
including but not limited to prevailing market and other relevant
conditions, and refers to the amount for which a financial
instrument could be exchanged between knowledgeable, willing
parties in an arm's length transaction. Fair value is not the
amount that an entity would receive or pay in a forced transaction
or involuntary liquidation.
The process used to estimate a fair value for an investment may
include a single technique or, where appropriate, multiple
valuation techniques, and may include (without limitation and in
the discretion of the Investment Manager, or in the discretion of
the Administrator subject to review by the Investment Manager where
practicable) the consideration of one or more of the following
factors (to the extent relevant): the cost of the investment to the
Master Fund, a review of comparable sales (if any), a discounted
cash flow analysis, an analysis of cash flow multiples, a review of
third-party appraisals, other material developments in the
investment (even if subsequent to the valuation date), and other
factors.
For each Fair Value Instrument, the Investment Manager and/or
the Administrator, may as practicable, endeavor to obtain quotes
from broker-dealers that are market makers in the related asset
class, counterparties, the Master Fund's prime brokers or lending
agents and/or pricing services. The Investment Manager, may, but
will not be required to, input pricing information into models
(including models that are developed by the Investment Manager or
by third parties) to determine whether the quotations accurately
reflect fair value.
In addition, the Investment Manager, may in its discretion,
consult with the members of the investment team to determine the
appropriate valuation of an instrument or additional valuation
techniques that may be helpful to such valuation.
From time to time, the Investment Manager may change its fair
valuation technique as applied to any investment if the change
would result in an estimate that the Investment Manager in good
faith believes is more representative of fair value under the
circumstances. The determination of fair value is inherently
subjective in nature, and the Investment Manager has a conflict of
interest in determining fair value in light of the fact that the
valuation determination may affect the amount of the Investment
Manager's performance fee.
At any given time, a substantial portion of the Master Fund's
portfolio positions may be valued by the Investment Manager using
the fair value pricing policies. Prices assigned to portfolio
positions by the Administrator or the Investment Manager may not
necessarily conform to the prices assigned to the same financial
instruments if held by other accounts or by affiliates of the
Investment Manager.
Side Pockets
The Board of Directors of the Master Fund (the "Board"), in
consultation with the Investment Manager, may classify certain
Insurance-Linked Instruments as investments in which only persons
which are shareholders at the time of such classification can
participate ("Side Pocket Investments"). This typically will happen
if a Covered Event has recently occurred or seems likely to occur
under an Insurance-Linked Instrument, because determining the level
of losses once a Covered Event has occurred under an
Insurance-Linked Instrument is often both a highly uncertain and a
protracted process. Side Pocket Investments are valued in the
statement of assets and liabilities at their fair value as
determined in good faith by the Board following consultation with
the Investment Manager.
Financial Instruments
The fair values of the Fund's assets and liabilities, which
qualify as financial instruments under ASC 825, Financial
Instruments, approximate the carrying amounts presented in the
statement of assets and liabilities.
Investment Transactions and Related Investment Income and
Expense
The Fund records its proportionate share of the Master Fund's
income, expenses, and realised and changes in unrealised gains and
losses on a monthly basis. In addition, the Fund incurs and accrues
its own income and expenses.
Investment transactions of the Master Fund are accounted for on
a trade-date basis. Realised gains or losses on the sale of
investments are calculated using the specific identification method
of accounting. Interest is 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 statement of operations.
The Fund does not isolate the portion of the results of
operations arising from the effect of changes in foreign exchange
rates on investments from fluctuations arising from changes in
market prices of investments held. Such fluctuations are included
in net gain (loss) on investments in the statement of
operations.
Income Taxes
Under the laws of Bermuda, the Fund is generally not subject to
income taxes, until 31 March 2035. However, certain United States
dividend income and interest income may be subject to a 30%
withholding tax. Further, certain United States dividend income may
be subject to a tax at prevailing treaty or standard withholding
rates with the applicable country or local jurisdiction.
The Fund is required to determine whether its tax positions are
more likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related
appeals or litigation processes, based on the technical merits of
the position. The tax benefit recognised is measured as the largest
amount of benefit that has a greater than fifty percent likelihood
of being realised upon ultimate settlement with the relevant taxing
authority. De-recognition of a tax benefit previously recognised
results in the Fund recording a tax liability that reduces ending
net assets. Based on its analysis, the Fund has determined that it
has not incurred any liability for unrecognised tax benefits as of
31 December 2012 and as of 31 December 2011. However, the Fund's
conclusions may be subject to review and adjustment at a later date
based on factors including, but not limited to, ongoing analyses of
and changes to tax laws, regulations and interpretations
thereof.
The Fund recognises interest and penalties related to
unrecognised tax benefits in interest expense and other expenses,
respectively. No interest expense or penalties have been recognised
as of and for the year ended 31 December 2012 and 31 December
2011.
Generally, the Fund is subject to income tax examinations by
major taxing authorities for all tax years since its inception.
The Fund may be subject to potential examination by U.S. federal
or foreign jurisdiction authorities in the areas of income taxes.
These potential examinations may include questioning the timing and
amount of deductions, the nexus of income among various tax
jurisdictions and compliance with U.S. federal or foreign tax
laws.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires the Fund's management to make estimates and
assumptions that affect the amounts disclosed in the audited
financial statements and accompany notes. Actual results could
differ from those estimates.
Offering Costs
The costs associated with each capital raise are expensed as
incurred.
2. Schedule of the Fund's share of the investments held in the
Master Fund and fair value measurements
The following table reflects the Fund's proportionate share of
the fair value of investments in the Reinsurer held by the Master
Fund at 31 December 2012:
Preferred Shares
Investments in CATCo-Re Ltd.
Class M preferred Shares $18,076,018
Class N preferred Shares 40,097,989
Class O preferred Shares 16,870,658
Class P preferred Shares 34,750,348
Class Q preferred Shares 10,276,065
Class R preferred Shares 4,064,605
Class S preferred Shares 48,026,408
Class T preferred Shares 21,085,490
Class U preferred Shares 13,556,340
Class V preferred Shares 42,168,817
Class W preferred Shares 8,073,758
Class X preferred Shares 4,064,810
Class Y preferred Shares 2,514
Class Z preferred Shares 9,486,883
Class AA preferred Shares 12,755,634
Class BB preferred Shares 17,614,960
Class CC preferred Shares 8,048,037
Class JJ preferred Shares 1,472
Class KK preferred Shares 2,106,198
Class MM1 preferred Shares 1,378,727
Class MM2 preferred Shares 1,378,732
Class NN preferred Shares 6,017,296
Class OO preferred Shares 6,774,069
Class PP preferred Shares 6,553,697
Class UU preferred Shares 2,558,923
Class VV preferred Shares 902,475
Class WW preferred Shares 1,805,268
Class XX preferred Shares 1,504,185
Class YY preferred Shares 1,354,253
Class ZZ preferred Shares 2,708,448
Class AAA preferred Shares 1,504,203
Class BBB preferred Shares 2,708,165
Class CCC preferred Shares 1,382,070
Class DDD preferred Shares 1,503,719
Class EEE preferred Shares 1,409,127
Class FFF preferred Shares 751,841
Class SP preferred Shares 8,612
Total Investments in CATCo-Re Ltd. 353,330,814
The following table reflects the Fund's proportionate share of
the fair value of investments in the Reinsurer held by the Master
Fund at 31 December 2011.
Preferred Shares
Investments in CATCo-Re Ltd.
Class A preferred Shares $ 26,123,929
Class B preferred Shares 6,573,657
Class C preferred Shares 31,889,016
Class D preferred Shares 21,494,602
Class E preferred Shares 16,077,344
Class F preferred Shares 34,447,557
Class G preferred Shares 10,124,083
Class H preferred Shares 22,008,743
Class I preferred Shares 5,288,068
Class J preferred Shares 43,356,315
Class K preferred Shares 24,881
Class L preferred Shares -
Class SP preferred Shares 10,573,249
Total Investments in CATCo-Re Ltd. $227,981,444
The Fund's assets and liabilities recorded at fair value have
been categorised based upon a fair value hierarchy as described in
the Fund's significant accounting policies in Note 1. The following
table presents information about the Fund's assets measured at fair
value:
Year ended 31 December 2012
Level 1 Level 2 Level 3 Total
Assets (at fair value)
Investments in securities
Preferred shares $ - $ - $ 353,330,814 $ 353,330,814
Total Investments in
securities $ - $ - $ 353,330,814 $ 353,330,814
Year ended 31 December 2011
Level 1 Level 2 Level 3 Total
Assets (at fair value)
Investments in securities
Preferred shares $ - $ - $ 227,981,444 $ 227,981,444
Total Investments in
securities $ - $ - $ 227,981,444 $ 227,981,444
Transfers between Levels 1 and 2 generally relate to whether a
market becomes active or inactive. Transfers between Levels 2 and 3
generally relate to whether significant relevant observable inputs
are available for the fair value measurements in their entirety.
See Note 1 for additional information related to the fair value
hierarchy and valuation techniques and inputs. All transfers are
recognised by the Fund at the end of each reporting period.
There were no transfers between levels for the year ended 31
December 2012 and the year ended 31 December 2011.
The following table presents additional information about Level
3 assets and liabilities measured at fair value. Both observable
and unobservable inputs may be used to determine the fair value of
positions that the Fund has classified within the Level 3 category.
As a result, the unrealised gains and losses for assets and
liabilities within the Level 3 category may include changes in fair
value that were attributable to both observable and unobservable
inputs.
Changes in Level 3 assets measured at fair value for the period
ended 31 December 2012 were as follows:
Change
in
Unrealised
Gains
for
Change in Securities
Beginning Realised Still
Balance & Transfers Ending held
1 Unrealised In/(Out) Balance 31 Dec
January Gains Level 31 December 2012
2012 (Losses)(a) Purchases Sales Settlements 3 2012 (b)
------------- -------------- ------------ -------------- ------ ------------ ---------- ------------- ------------
Assets (at
fair value)
Investments
in
Preferred $
shares $ 227,981,444 $14,849,370 $ 110,500,000 - $ - $ - $353,330,814 $14,849,370
------------- -------------- ------------ -------------- ------ ------------ ---------- ------------- ------------
(a) Realised and change in unrealised gains are all included in
net gain (loss) on securities in the statement of operations.
(b) (The change in unrealised gains for the period ended 31
December 2012 for securities still held at 31 December 2012 are
reflected in the net change in unrealised gains on securities in
the statement of operations.)
Changes in Level 3 assets measured at fair value for the period
ended 31 December 2011 were as follows:
Change
in
Unrealised
Gains
for
Change in Securities
Beginning Realised Still
Balance & Transfers Ending held
20 Unrealised In/(Out) Balance 31 Dec
December, Gains Level 31 December 2011
2010 (Losses)(c) Purchases Sales Settlements 3 2011 (d)
------------- ----------- ------------- -------------- ------ ------------ ---------- ------------- ------------
Assets (at
fair value)
Investments
in
Preferred $
shares $ - $ 21,546,354 $ 206,435,090 - $ - $ - $227,981,444 $21,546,354
------------- ----------- ------------- -------------- ------ ------------ ---------- ------------- ------------
(c) Realised and change in unrealised gains are all included in
net gain (loss) on securities in the statement of operations.
(d) (The change in unrealised gains for the period ended 31
December 2011 for securities still held at 31 December 2011 are
reflected in the net change in unrealised gains on securities in
the statement of operations.)
The table below summarises information about the significant
unobservable inputs used in determining the fair value of the
Fund's Level 3 assets:
Valuation Unobservable
Technique Input Range
---------------- ------------------------------- ------------------
Preferred Premium Premiums earned - straight 12 months
Shares earned line 5 to 6 months
+ investment Premiums earned - seasonality 0.10% to 0.15%
income adjusted 0 to contractual
- Loss reserve Investment income limit
Loss Reserves
---------- ---------------- ------------------------------- ------------------
3. Concentration of credit risk
In the normal course of business, the Fund maintains its cash
balances in financial institutions, which at times may exceed
federally insured limits. The Fund is subject to credit risk to the
extent any financial institution with which it conducts business is
unable to fulfill contractual obligations on its behalf. Management
monitors the financial condition of such financial institutions and
does not anticipate any losses from these counterparties. At 31
December 2012 and 31 December 2011 cash is held with HSBC Bank
Bermuda Ltd. which has a credit rating of A+.
4. Concentration of reinsurance risk
The following table illustrates the diversified risk profile of
the Reinsurer's portfolio by geography and peril, with the
percentage exposure representing the relative impact on the net
return of each event risk against the Reinsurer's portfolio as a
whole:
2012 Retrocessional Reinsurance Portfolio
Event Risk % Net Return Event Risk % Net Return
No losses 23%
New Zealand Wind 23% Central America Quake 15%
South East Asia Quake 23% Hong Kong Wind 14%
Guam Wind 23% Taiwan Quake 14%
Guam Quake 23% India Quake 14%
Onshore Energy 23% Mexico Wind 11%
Terrorism 23% Europe Flood 10%
US Wildfire 22% Japan Wind 8%
Canada Wind 22% Mexico Quake 8%
China Wind/Flood 22% Europe Quake 8%
South Africa Quake 21% South America Quake 5%
Indonesia Quake 20% Caribbean Quake 5%
China Quake 20% Caribbean Wind 5%
US/Canada Winterstorm 19% Japan Quake 4%
Philippines Wind 19% Europe Wind 3%
South Korea Wind 19% Australia Wind 2%
Taiwan Wind 19% Australia Quake 2%
Israel Quake 18% New Zealand Quake 2%
Offshore Marine/Energy 15% US/Canada Quake 2%
US Severe Convective
Storms 15% US Wind -1%
2011 Retrocessional Reinsurance Portfolio
Event Risk % Exposure Event Risk % Exposure
US/Canada Quake 13% GA to VA Wind 3%
US/Caribbean Wind 13% Florida Wind 3%
2(nd) Event Protections 12% US 2(nd) Event Wind 3%
Japan/Caribbean Quake 9% US 3(rd) Event Wind 3%
Marine Non-Elemental 8% Japan Wind 2%
Europe All Natural
Perils 6% CA Quake 2%
Florida 2(nd) Event
Wind 5% US Excluding CA Quake 2%
Gulf of Mexico Wind 5% Europe Wind 2%
Northeast Wind 5% Japan All Natural Perils 1%
Rest of World 3%
1. Not all of the 19 Event Risks listed above are fully
non-correlated. However, no single event exposure is greater than
18%.
2. The 2(nd) event risk pillar provides additional coverage for
the risk pillars excluding US 3(rd) event wind above at the same
attachment points and in the same percentage exposure as the 1(st)
event coverage.
5. Loss reserves
The following disclosures on loss reserves are included for
information and relate specifically to the reinsurer and are
reflected through the valuations of investments held by the
Company.
The reserve for unpaid losses and loss expenses recorded by the
Reinsurer includes estimates for losses incurred but not reported
as well as losses pending settlement.
The Reinsurer makes a provision for losses on contracts only
when an event that is covered by the contract has occurred. When a
potential loss event has occurred, the Reinsurer obtains and uses
assessments from counterparties as a baseline, incorporating its
own models and historical data regarding loss development, to
determine the level of reserves required.
Future adjustments to the amounts recorded as of period-end,
resulting from the continual review process, as well as differences
between estimates and ultimate settlements, will be reflected in
the Reinsurer's statement of operations in future periods when such
adjustments become known. Future developments may result in losses
and loss expenses materially greater or less than the reserve
provided.
During 2012, the Reinsurer paid claims of $42,115,317 pertaining
to the Tohoku, Japan earthquake in March 2011, Christchurch
earthquake in February 2011, Costa Concordia disaster in January
2012 and Hurricane Sandy in October 2012 . The Reinsurer increased
the gross and net loss reserve by $16,714,300 in June 2012 to
record a total loss on the respective contracts for Japan and
Christchurch earthquake. The Reinsurer recorded a net loss reserve
of $140,000,000 for Hurricane Sandy and $37,500,000 for Costa
Concordia.
In 2011, the Reinsurer paid claims of $1,165,933 net of
additional loss premium of $1,875,000 pertaining to the Tohoku,
Japan earthquake in March 2011. At 31 December 2011, the Reinsurer
established net reserves of $11,622,167 associated with the 2011
earthquakes in Christchurch, New Zealand and Tohoku, Japan.
6. Capital share transactions
As of 31 December 2012 and 31 December 2011, the Fund has
authorised capital stock of 500,000,000 unclassified shares of par
value $0.0001 per share.
As of 31 December 2012, the Fund has issued 369,849,337 Class 1
Ordinary Shares (the "Shares"). As of 31 December 2011, the Fund
had issued 87,642,000 Class 1 Ordinary Shares and 244,118,029 Class
2 C Shares (collectively the "Shares").
Transactions in Shares during the year, and the Shares
outstanding and the net asset value ("NAV") per share as of 31
December 2012 is as follows:
2012
Beginning Shares Shares Ending
Shares Issued Converted Shares
-------------------- ------------ ------------ -------------- ------------
Class 1 - Ordinary
shares 87,642,000 282,207,337 - 369,849,337
Class 2 - C Shares 244,118,029 - (244,118,029) -
Beginning Amounts Amounts Ending Ending NAV
Amounts Issued Converted Net Assets Per Share
---------------------- -------------- ------------- --------------- ------------- -----------
Class 1 - Ordinary
shares $ 87,750,750 $276,563,190 - $353,812,902 $0.9566
Class 2 - C Shares $ 250,296,737 - $(276,563,190)
2011
Beginning Shares Shares Ending
Shares Issued Redeemed Shares
-------------------- ----------- ------------ ---------- ------------
Class 1 - Ordinary
shares - 87,642,000 - 87,642,000
Class 2 - C Shares - 244,118,029 - 244,118,029
Beginning Amounts Amounts Ending Ending NAV
Amounts Issued Redeemed Net Assets Per Share
---------------------- ----------- ------------- ---------- ------------- -----------
Class 1 - Ordinary
shares $ - $87,750,750 $ - $87,633,736 $0.9999
Class 2 - C Shares $ - $250,296,737 $ - $252,160,076 $1.0329
The Fund has been established as a closed-ended fund and, as
such, shareholders do not have the right to redeem their Shares.
The Shares are held in trust by Capita IRG Trustees Limited (the
"Depository") in accordance with a depository agreement between the
Fund and the Depository. The Depository holds the Shares and in
turn issues depository interests in respect of the underlying
Shares which have the same rights and characteristics of the
Shares.
The Board of Directors of the Fund (the "Board") has the ability
to issue C Shares during any period when the Master Fund has
designated one or more investments as "Side Pocket Investments".
This typically will happen if a covered or other pre-determined
event has recently occurred or seems likely to occur under an
Insurance- Linked Instrument. In such circumstances, only those
shareholders on the date that the investment has been designated as
a side pocket investment will participate in the potential losses
and premiums attributable to such side pocket investment. Any
shares issued when side pockets exist will be as C Shares that will
participate in all of the Master Fund's portfolio other than in
respect of potential losses and premiums attributable to any side
pocket investments in existence at the time of issue. If no Side
Pocket Investments are in existence at the time of proposed issue,
it is expected that the Fund will issue further Ordinary
Shares.
On 2 August 2012 the Board of the Fund announced that it has
declared a distribution (the "Distribution") to Ordinary
Shareholders of any proceeds it receives in connection with that
part of its investment in the Master Fund which is exposed to
potential losses arising from the Master Fund's investment in
reinsurance contracts linked to the NZ and Japan Exposures.
The Distribution will be made to Ordinary Shareholders on its
register of members on 10 August 2012 (the "Record Date") pro rata
to the number of Ordinary Shares held on the Record Date, as soon
as practicable following receipt of any proceeds from the Master
Fund.
Subsequent to the declaration of the Distribution, the Board
announced on 8 August 2012 that the Master Fund in which the Fund
invests has closed its side pocket associated with the NZ and Japan
Exposures. As described in the Prospectus, this triggers the
conversion of C Shares into Ordinary Shares. The conversion of
244,118,029 C Shares into 282,207,337 Ordinary Shares was effective
close of business 10 August 2012 with the admission for the new
Ordinary shares effective 13 August 2012.
7. Investment management agreement
Pursuant to the Investment Management Agreement dated 16
December 2010, the Investment Manager is empowered to formulate the
overall investment strategy to be carried out by the Fund and to
exercise full discretion in the management of the trading,
investment transactions and related borrowing activities of the
Fund in order to implement such strategy.
8. Related party transactions
The Investment Manager of the Fund is also the Investment
Manager of the Master Fund and the Reinsurer. The Investment
Manager is entitled to a management fee, calculated and payable
monthly in arrears equal to 1/12 of 1.5% of the net asset value of
the Fund, which is not attributable to the Fund's investment in the
Master Fund Shares as at the last calendar day of each calendar
month. Performance fees are charged in the Master Fund.
Qatar Insurance Company, an affiliate of the Investment Manager,
holds 7.44% as of 31 December 2012 and 31.4% as of 31 December 2011
of voting rights of the Ordinary Shares issued in the Fund. In
addition, the directors of the Fund are also shareholders of the
Fund.
9. Administrative Fee
Prime Management Limited (the "Administrator") serves as the
Fund's Administrator and performs certain administrative and
clerical services on behalf of the Fund. For the provision of the
service under the administration agreement, the Administrator
receives a fixed annual fee.
10. Financial highlights
For the period 1 January 2012 to 31 December 2012
Class 1 Class 2
Ordinary Shares C Shares
United States Dollar United States Dollar
Per share operating performance
Net asset value, beginning of
period $ 0.9999 $ 1.0329
Offering costs - -
Income (loss) from investment
operations:
Net investment loss (0.0039) (0.0023)
Performance Fee 0.0120 (0.0112)
Management Fee (0.0146) (0.0096)
Net gain on investments (0.0368) 0.1231
Total from investment operations (0.0433) 0.1000
Premium - -
Dividend - -
Net asset value, end of period $ 0.9566 $ 1.1329**
Total return
Total return before performance
fee (5.52)% 10.77%
Performance fee** 1.20% (1.09)%
Total return after performance
fee (4.32)% 9.68%
Ratio to average net assets
Expenses other than performance
fee (1.29)% (1.29)%
Performance fee*# 0.90% (1.22)%
Total expenses after performance
fee (0.39)% (2.51)%
Net investment loss (0.39)% (2.51)%
*The performance fee is charged in the Master Fund.
** Net asset value before conversion. C Shares were converted to
Ordinary Shares on 10 August 2012. The total return and ratios have
not been annualised
#At the time of the collapse of the Class 2 C Shares into the
Class 1 Ordinary Shares, there was a performance fee accrued on the
Class 2 C Shares that did not become payable on the collapse of the
Class 2 C Shares, but became attached to the exchanged Class 1
Ordinary Shares. Subsequent to the date of the collapse, the
accrued performance fee that attached to the exchanged Class 1
Ordinary Shares was reversed due to the performance of the Fund. As
a result, the performance fee numbers and ratios for the Class 1
Ordinary shares appear as income/recovery and not expense.
For the period 20 December 2010 to 31 December 2011
Class 1 Class 2
Ordinary Shares C Shares
United States Dollar United States Dollar
Per share operating performance
Net asset value, beginning of
period $ 1.0000 $ 1.0000
Offering costs (0.0231) (0.0389)
Income (loss) from investment
operations:
Net investment loss (0.0360) (0.0255)
Net gain on investments 0.1086 0.1383
Total from investment operations 0.0726 0.1128
Premium 0.0014 0.0100
Dividend (0.0510) (0.0510)
Net asset value, end of period $ 0.9999 $ 1.0329
Total return
Total return before performance
fee 8.82% 12.98%
Performance fee* (1.39)% (1.29)%
Total return after performance
fee 7.43% 11.69%
Ratio to average net assets
Expenses other than performance
fee (2.15)% (1.18)%
Performance fee* (1.30)% (1.01)%
Total expenses after performance
fee (3.45)% (2.19)%
Net investment loss (3.45)% (2.19)%
*The performance fee is charged in the Master Fund.
11. Indemnifications or warranties
In the ordinary course of its business, the Fund may enter into
contracts or agreements that contain indemnifications or
warranties. Future events could occur that lead to the execution of
these provisions against the Fund. Based on its history and
experience, management believes that the likelihood of such an
event is remote.
12. Subsequent events
On 9 January 2013, the Board of Directors declared a final
dividend of $0.05006 in respect of the Ordinary Shares with a
record date of 18 January 2013. It is expected that this final
dividend will be paid to shareholders in March 2013.
These financial statements were approved by the Board of
Directors and were available for issuance on 8 February 2013. All
significant subsequent events have been considered and evaluated
through this date.
For further information, please
contact:
CATCo Investment Management Ltd
Jason Bibb, Director
Telephone: +1 441 531 2227
Email: jason.bibb@catcoim.com
Mark Way, Corporate Communications
Telephone: +44 7786 116991
Email: mark.way@catcoim.com
Numis Securities Limited
David Benda / Hugh Jonathan
Telephone: +44 (0) 20 7260 1000
Prime Management Ltd
Matthew Charleson / John Whiley
Tel: +1 (441) 295 0329
- Ends -
This information is provided by RNS
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Catco Reinsurance Opport... (LSE:CAT)
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