TIDMCAT
RNS Number : 4543X
CATCo Reinsurance Opps Fund Ltd
26 April 2023
26 April 2023
CATCo Reinsurance Opportunities Fund Ltd. (the "Company")
Annual Financial Report
For the 12 month period 1 January 2022 to 31 December 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 2018 to 2019.
Markel CATCo Investment Management Ltd. (the "Investment
Manager") continues to be focused on proactively managing the
trapped capital and returning it to Shareholders in as timely and
cost effective 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.
Under the terms of the Schemes of Arrangement Buy-Out agreement,
estimated ordinary course fees, including estimated fees for the
remaining Run-Off period of the Company, were accelerated and
formed part of the investor Buy-Out settlement. As such, these fees
have been recognised as Scheme of Arrangement Ordinary Course fees
in the statements of assets and liabilities and the related
statements of operations, changes in net assets and cash flows.
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.
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 year, the NAV reduced to $9.0m, of which $1.5m relates
to the Ordinary Share NAV and $7.5m to the C Share NAV. The overall
reduction in the NAV is due to the completion of the Buy-Out
Transaction which resulted in payment to investors on 11 April 2022
amounting to $51.7m and $53.9m for the Ordinary Shares and C Shares
respectively and a subsequent distribution of capital in the amount
of $17.8m derived from favorable loss reserve development in the
underlying portfolio as highlighted in the sub-section Return of
Capital to Shareholders. These distributions were offset by further
upside recorded in Q4 2022 relating to positive development on the
2018 and 2019 reinsurance portfolios resulting in a closing NAV per
share of $13.22 and $96.08 for Ordinary Shares and C Shares
respectively.
2022 Ordinary Shares NAV ($m)
---------------------------------------- -----------------
Opening balance 1/1/22 $ 50.6
---------------------------------------- -----------------
Buy-Out Transaction (51.7)
---------------------------------------- -----------------
Partial Compulsory Redemption 8 (4.6)
---------------------------------------- -----------------
Investment appreciation net of expenses 7.2
---------------------------------------- -----------------
Closing balance 12/31/22 $ 1.5
---------------------------------------- -----------------
2022 C Shares NAV ($m)
---------------------------------------- -----------------
Opening balance 1/1/22 $ 56.2
---------------------------------------- -----------------
Buy-Out Transaction (53.9)
---------------------------------------- -----------------
Partial Compulsory Redemption 8 (13.2)
---------------------------------------- -----------------
Investment appreciation net of expenses 18.4
---------------------------------------- -----------------
Closing balance 12/31/22 $ 7.5
---------------------------------------- -----------------
RETURN OF CAPITAL TO SHAREHOLDERS
Following the Buy-Out Transaction and the successful commutation
of all of 2017 contracts and a number of 2018 and 2019 contracts,
the Company returned $4.6m and $13.2m of capital to Ordinary
Shareholders and C Shareholders respectively, by means of a
compulsory share redemption in November 2022.
From the commencement of the Run-Off (26 March 2019) to 31
December 2022, the Company has successfully returned $413.9m of
capital to Shareholders by means of dividends, tender offer, share
buybacks, compulsory share redemptions and a Buy-Out
Transaction.
During the period from 1 January 2022 to 31 December 2022, the
Company returned $123.4m of capital to Shareholders by means of a
Buy-Out Transaction and a compulsory share redemption.
Total Capital Return since 26 March 2019 (date on which
Shareholders approved the Run-Off) to 31 December 2022:
Form of Return Payment or Ordinary C Shares Total
Redemption Date Shares ($m) ($m) ($m)
------------------------------ ------------------ ------------- --------- ------
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 2 September 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
------------------------------ ------------------ ------------- --------- ------
Partial Compulsory Redemption
8 29 November 2022 4.6 13.2 17.8
------------------------------ ------------------ ------------- --------- ------
Total Capital Return 119.3 294.6 413.9
-------------------------------------------------- ------------- --------- ------
Commutations
The Investment Manager is continuing to proactively pursue the
run-off of the remaining 2018 and 2019 risk portfolios, having
successfully, at the date of this report, commuted all 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 it considers that to do so
is in the best interest of Shareholders.
At the time of this report, there were 10 open contracts
remaining at the Reinsurer, of which seven related to the 2018
underwriting year and three to the 2019 underwriting year. As at 31
December 2022, all open contracts are subject to commutation
negotiations.
Overview of Investments
The following table outlines the investments held by the
Ordinary Shares and C Shares respectively.
Investments Held by Share Class as at 31 December 2022:
SPIs % of Share NAV Value in $m
Ordinary Shares
---------------- ---------------------------
SPI 2018 66.58% 1.0
---------------- -------------- -----------
SPI 2019 10.58% 0.2
---------------- -------------- -----------
C Shares
---------------- -------------- -----------
SPI 2018 75.94% 5.7
---------------- -------------- -----------
SPI 2019 8.75% 0.7
---------------- -------------- -----------
Additionally, as at 31 December 2022, cash of $0.3m and $1.1m is
held by the Ordinary Shares and C Shares respectively.
Whilst it is not possible to determine the ultimate value of
Side Pocket Investments ("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 on a
quarterly basis as explained further in this statement.
sIDE POCKET INVESTMENTS
As at 31 December 2022, the SPIs in total represent c. 77.16 per
cent of Ordinary Share NAV (31 December 2021: c. 97.66 per cent)
and c. 84.69 per cent of the C Share NAV (31 December 2021: c.
92.36 per cent).
After the successful commutation of all 2016 and 2017 SPIs
during the year, the position of the 2018 and 2019 SPIs as at 31
December 2022 was as follows:
2018 SPIs, principally relating to Hurricanes Michael and
Florence, Typhoon Jebi and the 2018 California Wildfires, amount to
c. 66.58 per cent of Ordinary Share NAV and c. 75.94 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. 10.58 per cent
of Ordinary Share NAV and c. 8.75 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).
As previously disclosed, in respect of the underlying
investments related to underwriting years 2018 and 2019, the
Investment Manager relies on the latest available claim information
provided by cedants which, at this point in time, post the loss
events, supersedes the modelled losses or the insured loss
estimates provided by third parties.
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. The implementation of a
quarterly NAV was effective from 1 July 2022.
OUTLOOK
The Board is pleased with the progress made during 2022 in terms
of distributing funds to Shareholders in the most efficient manner
possible whether as a result of the Buy-Out Transaction or derived
through further releases of trapped capital subsequent to the
Buy-Out Transaction.
The Board continues to meet with the Investment Manager to
determine the outlook for the Company and evaluate the future
potential for further upside from the underlying portfolio.
As the Company has reported before, whilst it is not possible to
determine the ultimate future value of the remaining contracts, the
Investment Manager is confident that it is likely that additional
commutations will be achieved within the next six to 12 months.
Consistent with the upside achieved in 2022, any further
possible upside will be reflected in the future reported NAVs and
such proceeds will be distributed to Shareholders thereafter.
In the meantime, the Investment Manager is committed to working
on the remaining commutations with the cedants in the best interest
of Shareholders.
Board and ongoing costs
The Board has been working with the Investment Manager to reduce
the ongoing operational expenses of the Company and will continue
to ensure that these expenses are kept as low as possible in order
to maximise value for Shareholders.
During the year, the Board reduced in size from three to two as
part of this exercise, and achieved operational costs savings
during 2022 where possible.
The Board has previously considered the benefits of maintaining
a UK listing. While a number of contracts remain open and the
possibility for valuation upside remains, the Board has determined,
once again, that it is appropriate to remain listed at this point
in time.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
26 April 2023
REVIEW OF BUSINESS
A review of the Company's activities is given in the Chairman's
Statement. This includes a review of the business of the Company
and its principal activities, and likely future developments of the
business.
The Company is a limited liability closed ended fund, registered
and incorporated as an exempted mutual fund company in Bermuda with
an indefinite life. The Company's Ordinary Shares and C Shares are
admitted to trading on the special fund segment of the London Stock
Exchange.
STRATEGY
The management of the investment portfolio is conducted by the
Investment Manager. The Company is a feeder fund and invests
substantially all of its assets in Markel CATCo Diversified Fund
(the "Master Fund"), a segregated account of the Master Fund SAC, a
segregated accounts company incorporated in Bermuda. The Investment
Manager also manages the Master Fund and the Master Fund SAC. The
Master Fund in turn accesses all of its exposure to fully
collateralised Reinsurance Agreements through the Reinsurer. As
noted in the section below headed "Efficient Capital Management
during Run-Off of Portfolio and Distributions", the Company has
elected to redeem 100% of its Master Fund Shares and will
distribute the proceeds of any such redemption to shareholders of
the applicable class (after payment of any costs and save for any
amount required for reserves in respect of anticipated liabilities
and for working capital purposes).
The Board is responsible for the stewardship of the Company,
including overall strategy, investment policy, borrowings,
dividends, corporate governance procedures and risk management.
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
was to give their Shareholders the opportunity to participate in
the returns from investments linked to catastrophe reinsurance
risks, principally by investing in fully collateralised Reinsurance
Agreements accessed by investments in Preference Shares of the
Reinsurer.
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 in the
Master Fund (the "Master Fund Shares") 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 reasonably expected to be
completed in the course of 2024. 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
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 via CREST on
11 April 2022.
A further return of capital to Shareholders by way of a
compulsory share redemption took place on 29 November 2022. Further
details appear in the Chairman's Statement.
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 member's 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.
REVIEW OF PERFORMANCE
An outline of the performance, market background, investment
activity and portfolio during the year under review, as well as the
investment outlook, are provided in the Chairman's Statement. The
distribution of the Company's investments is shown in Note 6 to the
Financial Statements.
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 novel 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.. 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. In the view of the Board, there have not
been any changes to the fundamental nature of these risks since the
previous Report. Additionally, emerging risks in the reinsurance
market are not relevant to the underlying portfolio that is in
Run-Off.
DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL
STATEMENTS
The Board is responsible for preparing the annual report and the
financial statements in accordance with applicable law and
regulations.
The Companies Act 1981 of Bermuda, as amended, requires the
Board to prepare financial statements for each financial year.
Under those laws, the Board has elected to prepare the financial
statements in accordance with US Generally Accepted Accounting
Principles ("US GAAP"). The financial statements are required by
the Bermuda Companies Act 1981 to present fairly in all material
respects the state of affairs of the Company and of the profit or
loss of the Company for that year. In preparing these financial
statements, the Board is required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable and prudent; and
-- state whether applicable Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements.
The Board is responsible for keeping proper accounting records
that are sufficient to disclose the Company's transactions and that
disclose with reasonable accuracy at any time the financial
position of the Company and enable them to ensure that the
financial statements comply with the Bermuda Companies Act. The
Board is also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Board considers that the Annual Report and Financial
Statements, taken as a whole, are fair, balanced and
understandable, and provide the information necessary for
Shareholders to assess the Company's performance, business model
and strategy.
The financial statements will be published on
www.catcoreoppsfund.com, which is maintained by the Investment
Manager, Markel CATCo Investment Management Ltd. The maintenance
and integrity of the website maintained by the Investment Manager
is, so far as it relates to the Company, the responsibility of the
Investment Manager.
The Board is responsible for the maintenance and integrity of
the corporate and financial information included on the Company's
website. Legislation in Bermuda governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
In accordance with Chapter 4 of the Disclosure Guidance and
Transparency Guidance, and to the best of their knowledge, each
Director confirms that the financial statements have been prepared
in accordance with the applicable set of accounting standards and
present fairly the assets, liabilities, financial position and
profit or loss of the Company.
Furthermore, each Director confirms that, to the best of his
knowledge, the management report (which consists of the Chairman's
Report, the Strategic Report and the Directors' Report) includes a
fair review of the development and performance of the business and
the position of the Company, together with a description of the
principal risks and uncertainties that the Company faces.
Arthur Jones
Chairman of the Audit Committee
26 April 2023
STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States Dollars) 31 Dec. 2022 31 Dec. 2021
$ $
Assets
Investments in Markel CATCo Reinsurance
Fund -
Markel CATCo Diversified Fund, at fair
value (Notes 2 and 6) 7,537,919 101,307,151
Cash and cash equivalents (Note 3) 4,395,950 5,606,161
Other assets 44,665 59,963
---------------------------------------- ------------- -------------
Total assets 11,978,534 106,973,275
---------------------------------------- ------------- -------------
Liabilities
Management fee payable (Note 10) 2,806 3,420
Accrued expenses and other liabilities 160,717 193,343
Schemes of Arrangement Buy-Out Ordinary
Course Fees
(Note 1, Note 8 and Note 15) 2,780,635 -
---------------------------------------- ------------- -------------
Total liabilities 2,944,158 196,763
---------------------------------------- ------------- -------------
Net assets 9,034,376 106,776,512
---------------------------------------- ------------- -------------
NAV per Share (Note 8)
STATEMENTS OF operations
(Expressed in United States Dollars) 31 Dec. 2022 31 Dec.
2021
$ $
Net investment loss allocated from Master
Fund (Note 6)
Income from Buy-Out Transaction 9,204,154 -
Interest income 11,098 1,074
Schemes of Arrangement Buy-Out Transaction
Cost (Note 14) 68,627 (4,437,070)
Management fee waived (Note 10) 125,575 684,764
Management fee (Note 10) (251,150) (1,369,528)
Administrative fee (Note 11) (79,383) (112,234)
Professional fees and other (42,944) (116,558)
Schemes of Arrangement Buy-Out Ordinary
Course Fees (Note 15) (346,325) -
----------------------------------------------- ------------ ------------
Net investment gain/(loss) allocated from
Master Fund 8,689,652 (5,349,552)
----------------------------------------------- ------------ ------------
Investment income
Income from Buy-Out Transaction (Note 8) 1,482,176 -
Interest 115,955 657
----------------------------------------------- ------------ ------------
Total investment income 1,598,131 657
----------------------------------------------- ------------ ------------
Company expenses
Schemes of Arrangement Buy-Out Transaction
Cost (Note 14) (245,245) (229,415)
Schemes of Arrangement Buy-Out Ordinary
Course Fees (Note 15) (2,780,635) -
Management fee waived (Note 10) 165,018 56,526
Professional fees and other (622,637) (659,723)
Management fee (Note 10) (330,036) (113,052)
Administrative fee (Note 11) (54,500) (75,000)
----------------------------------------------- ------------ ------------
Total Company expenses (3,868,035) (1,020,664)
----------------------------------------------- ------------ ------------
Net investment gain/(loss) 6,419,748 (6,369,559)
----------------------------------------------- ------------ ------------
Net realised loss and net change in unrealised
gain /
(loss) on securities allocated from Master
Fund
Net realised loss on securities (12,399,264) (63,096,478)
Net change in unrealised loss on securities 33,103,014 91,596,068
----------------------------------------------- ------------ ------------
Net gain on securities allocated from Master
Fund 20,703,750 28,499,590
----------------------------------------------- ------------ ------------
Net increase in net assets resulting from
operations 27,123,498 22,130,031
----------------------------------------------- ------------ ------------
STATEMENTS OF changes in net assets
(Expressed in United States Dollars) Year ended Year ended
31 Dec. 31 Dec.
2022 2021
$ $
Operations
Net investment gain (loss) 6,419,748 (6,369,559)
Net realised loss on securities allocated
from Master Fund (12,399,264) (63,096,478)
Net change in unrealised loss on securities
allocated from
Master Fund 33,103,014 91,596,068
-------------------------------------------- ------------- ------------
Net increase in net assets resulting from
operations 27,123,498 22,130,031
-------------------------------------------- ------------- ------------
Capital share transactions
Repurchase of Class Ordinary Shares (Note
8) (56,327,613) (5,399,961)
Repurchase of Class C Shares (Note 8) (67,055,845) (21,799,929)
Dividends paid (Note 8) (1,482,176) -
-------------------------------------------- ------------- ------------
Net decrease in net assets resulting from
capital share transactions (124,865,634) (27,199,890)
-------------------------------------------- ------------- ------------
Net decrease in net assets (97,742,136) (5,069,859)
-------------------------------------------- ------------- ------------
Net assets, at 1 January 106,776,512 111,846,371
-------------------------------------------- ------------- ------------
Net assets, at 31 December 9,034,376 106,776,512
-------------------------------------------- ------------- ------------
STATEMENTS OF cash flows
Year ended Year ended
31 Dec. 2022 31 Dec.
(Expressed in United States Dollars) 2021
$ $
Cash flows from operating activities
Net increase in net assets resulting from
operations 27,123,498 22,130,031
Adjustments to reconcile net increase in
net assets resulting from operations to
net cash provided by operating activities:
Net investment gain/(loss), net realised
loss and net change in unrealised gain/(loss)
on securities allocated from Master Fund (29,393,399) (23,150,038)
Sale of investment in Master Fund 114,022,425 19,212,976
Dividends from Buy-Out Transactions 9,140,206 -
Changes in operating assets and liabilities:
Due from Markel CATCo Reinsurance Fund
Ltd. -
Markel CATCo Diversified Fund - 10,696,244
Other assets 15,298 (6,594)
Management fee payable (614) (5,633)
Schemes of Arrangement Buy-Out Ordinary
Course Fees
(Note 15) 2,780,635 -
Accrued expenses and other liabilities (32,626) (339,321)
------------------------------------------------- ------------- ------------
Net cash provided by operating activities 123,655,423 28,537,665
------------------------------------------------- ------------- ------------
Cash flows from financing activities
Repurchase of Class Ordinary Shares (56,327,613) (5,399,961)
Repurchase of Class C Shares (67,055,845) (21,799,929)
Dividends paid (Note 8) (1,482,176) -
------------------------------------------------- ------------- ------------
Net cash used in financing activities (124,865,634) (27,199,890)
------------------------------------------------- ------------- ------------
Net (decrease) / increase in cash and cash
equivalents (1,210,211) 1,337,775
------------------------------------------------- ------------- ------------
Cash and cash equivalents, at 1 January 5,606,161 4,268,386
------------------------------------------------- ------------- ------------
Cash and cash equivalents, at 31 December 4,395,950 5,606,161
------------------------------------------------- ------------- ------------
NOTES TO THE FINANCIAL STATEMENTS - 31 December 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 31 December
2022, the Company's ownership is 17.33 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 now
reasonably expected to be completed in the course of 2024. 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 (the "Private Fund") and
the Company (together, the "Funds") to investors (further details
of the Buy-Out Transaction appear in the Chairman's Statement. To
support the implementation of the Buy-Out Transaction through the
Schemes of Arrangement in Bermuda (the "Schemes"), each of the
Company, the Private Fund, 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 Private Fund 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 repay 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 3 February 2022, the Manager, the Private Fund 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 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 Private Fund
shares in full and final satisfaction of their interests in the
Private Fund 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 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 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 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.
In June 2022, the Reinsurer repaid an amount of $24m to the
affiliates of Markel Corporation who financed the Buy-Out Amount
for the Master Fund.
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 Company is an investment company and follows the accounting
and reporting guidance contained within Topic 946, "Financial
Services Investment Companies", of the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC").
The audited Financial Statements are expressed in United States
dollars and have been prepared in conformity with accounting
principles generally accepted in the United States of America
("U.S. GAAP"), except for the recognition of future operating
expenses in the financial statements.
Under the terms of the Schemes of Arrangement Buy-Out agreement,
estimated ordinary course fees, including estimated fees for the
remaining Run-Off period of the Company, were accelerated and
formed part of the investor Buy-Out settlement. As such, these fees
have been recognised as Scheme of Arrangement Ordinary Course fees
(Note 15) in the statements of assets and liabilities and the
related statements of operations, changes in net assets and cash
flows.
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
2023, and (ii) the Investment Manager and the Board have reviewed
the Company's cash forecast for 12 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 year ended 31 December
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 11, 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.
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 Investment Manager uses various
valuation approaches. A fair value hierarchy for inputs is used in
measuring fair value that maximises the use of observable inputs
and minimises the use of unobservable inputs by requiring that the
most observable inputs are to be used when available. Observable
inputs are those that market participants would use in pricing the
asset or liability based on market data obtained from sources
independent of the Investment Manager. Unobservable inputs reflect
the assumptions of the Investment Manager in conjunction with the
Board of Directors of the Master Fund (the "Board of the Master
Fund") 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
Investment Manager in determining fair value is greatest for
investments categorised in Level 3 of the fair value hierarchy. In
certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for
disclosure purposes, the level in the fair value hierarchy within
which the fair value measurement falls in its entirety, is
determined based on the lowest level input that is 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.
Fair Value - Valuation Techniques and Inputs
Investments in Securities (Master Fund)
The value of preference shares issued by the Reinsurers and
subscribed for by the Master Funds and held with respect to a
reinsurance agreement will equal:
i. the amount of capital invested in such preference shares; plus
ii. the amount of net earned premium (as described below) that
has been earned period-to-date for such contract; plus
iii. the amount of the investment earnings earned to date on
both the capital invested in such preference shares and the
associated reinsurance premiums in respect of such contract;
minus
iv. the amount of any loss estimates associated with potential
claims triggering covered events (see "Estimates" below); minus
v. the amount of any risk margin considered necessary to reflect
uncertainty and to compensate a market participant for bearing the
uncertainty of cash flows in an exit of the reinsurance
transaction.
As a result of the Reinsurer conducting reinsurance activities,
it incurs expenses. The Reinsurer established a separate preference
share (the "Expense Cell") to allocate these expenses to the Master
Fund. To the extent that the inputs into the valuation of
preference shares are unobservable, the preference shares would be
classified as Level 3 within the fair value hierarchy.
Reinsurance Protections
The Reinsurer also issues preference shares in relation to
reinsurance protections purchased specifically to meet the desired
level of risk as set out in the Master Fund's investment strategy
("Reinsurance Protections"). The Master Fund subscribes for
Protections on behalf of itself and the Feeder Fund. The underlying
premiums are amortised over the duration of the contracts.
As of 31 December 2022 and 2021, the Master Fund has no
remaining reinsurance protections.
Derivative Financial Instruments
The Master Fund invests in derivative financial instruments such
as industry loss warranties ("ILWs"), which are recorded at fair
value as at the reporting date. The Master Fund generally records a
realised gain or loss on the expiration, termination or settlement
of a derivative financial instrument. Changes in the fair value of
derivative financial instruments are recorded as net change in
unrealised gain or loss on derivative financial instruments in the
Statement of Operations in the year.
The fair value of derivative financial instruments at the
reporting date generally reflects the amount that the Master Fund
would receive or pay to terminate the contract at the reporting
date.
These derivative financial instruments used by the Master Fund
are fair valued similar to preference shares held with respect to
reinsurance agreements, unless otherwise unavailable, except that
following a Covered Event (as defined below), loss information from
the index provider on the trade will be used.
As of 31 December 2022 and 2021, the Master Fund held no ILW
contracts.
Investment in Securities issued by the Reinsurer and subscribed
to by the Master Fund
This section identifies the inputs and considerations used in
the fair value determination of the Investment in Preference of the
Reinsurer held by the Master Fund. Refer to note 2 & 7 for
further discussion on the unobservable inputs.
Earned Premiums
Premiums are 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, net of acquisition costs, are earned
uniformly over each month of the risk period. However, for certain
risks, there is a clearly demonstrable seasonality associated with
these risks. Accordingly, seasonality factors are utilised for the
recognition of certain instruments, including preference shares
relating to reinsurance agreements, ILWs and risk transfer
derivative agreements, where applicable. Prior to the investment in
any seasonal contract, the Investment Manager is required to
produce a schedule of seasonality factors, which will govern the
income recognition and related fair value price for such seasonal
contract in the absence of a covered event. The Investment Manager
may rely on catastrophe modeling software, historical catastrophe
loss information or other information sources it deems reliable to
produce the seasonality factors for each seasonal contract. As a
result of the Run-Off of the Company's existing portfolio, as
discussed in Note 1, no new premiums were written in 2022 and
2021.
Estimates
The Investment Manager provides monthly loss estimates of all
incurred loss events ("Covered Events") potentially affecting
investments relating to a retrocessional reinsurance agreement of
the Reinsurer to the Administrator for review. 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 the
Administrator, as defined in Note 10, where practicable, using what
the Investment Manager believes in its discretion are appropriate
techniques consistent with market practices for the relevant type
of investment. Fair valuation in this context depends on the facts
and circumstances of the particular investment, including but not
limited to prevailing market and other relevant conditions, and
refers to the amount for which a 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 Funds, 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.
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
management and performance fee. This risk of conflict of interest
is mitigated through the rigorous quarterly loss reserving process,
which includes a review of the loss reserves by Markel
Corporation's executives.
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 Pocket Investments
The Board of the Master Fund, in consultation with the
Investment Manager, may classify certain Insurance-Linked
Instruments as Side Pocket Investments in which only investors who
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 fair value
of losses once a Covered Event has occurred under an
Insurance-Linked Instrument is often both a highly uncertain and a
protracted process. When a Side Pocket Investment is established,
the Master Fund converts a corresponding portion of each investor's
Ordinary Shares into Side Pocket Shares (Note 7).
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 quarterly basis effective 1 July 2022
(previously a monthly basis to 30 June 2022) - Note 10. In
addition, the Company incurs and accrues its own income and
expenses.
Investment transactions of the Master Funds are accounted for on
a trade-date basis. Realised gains or losses on the sale of
investments are calculated using the 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
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 31 December 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 years ended 31 December 2022 and
2021.
Generally, the Company may be subjected to income tax
examinations by relevant major taxing authorities for all tax years
since its inception.
The Company may be subject to potential examination by United
States federal or foreign jurisdiction authorities in the areas of
income taxes. These potential examinations may include questioning
the timing and amount of deductions, the nexus of income among
various tax jurisdictions and compliance with United States federal
or foreign tax laws.
The Company was not subjected to any tax examinations during the
years ended 31 December 2022 and 2021.
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) are
conducting inquiries into loss reserves recorded in late 2017 and
early 2018 at our Markel CATCo. Those reserves are held at Markel
CATCo Re Ltd., an unconsolidated subsidiary of Markel CATCo
Investment Management ("MCIM"). The Markel CATCo Inquiries are
limited to MCIM and its subsidiaries (together, "Markel CATCo") and
do not involve other Markel Corporation 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 has met with the Governmental
Authorities and reported the findings from the internal review.
On September 27, 2021, Markel Corporation was notified by the,
U.S. Securities and Exchange Commission that it has concluded its
investigation and it does not intend to recommend an enforcement
action against MCIM. Additionally, On September 28, 2021, the U.S.
Department of Justice advised Markel Corporation that it has
concluded its investigation and will not take any action against
MCIM. There are currently no pending requests from the Bermuda
Monetary Authority.
California Bankruptcy Court and the PG&E Settlement (at 19
April 2022)
The Investment Manager closely monitored the procedural
developments in the California Bankruptcy Court with the assistance
of external counsel. Further detailed information regarding the
PG&E chapter 11 case can be found on
https://restructuring.primeclerk.com/pge/. 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. SCHEDULE OF THE COMPANY'S SHARE OF THE INVESTMENTS HELD IN
THE MASTER FUND AND FAIR VALUE MEASUREMENTS
The following table reflects the Company's proportionate share
of the fair value of investments in the Reinsurer held by the
Master Fund at 31 December 2022.
Preference Shares - Investments Percentage
in Markel CATCo Re Ltd. of Net Fair
Number Cost Assets Value
of Shares ($) (%) ($)
----------------------------------- --- ----------- ---------- ----------- -----------
Class DE 955 647 0.99 89,427
---------------------------------------- ----------- ---------- ----------- -----------
Class DG 130,286 2,159 0.01 870
---------------------------------------- ----------- ---------- ----------- -----------
Class DR 23 721 20.87 1,885,266
---------------------------------------- ----------- ---------- ----------- -----------
Class DZ 441,208 20,692 14.48 1,308,305
---------------------------------------- ----------- ---------- ----------- -----------
Class EB - - 0.26 23,049
---------------------------------------- ----------- ---------- ----------- -----------
Class ED 46,205 2,008 30.59 2,763,770
---------------------------------------- ----------- ---------- ----------- -----------
Class EM 3 6 0.01 1,030
---------------------------------------- ----------- ---------- ----------- -----------
Class EQ 12,539 1,311 0.13 11,994
---------------------------------------- ----------- ---------- ----------- -----------
Class ER 2,280 1,091 2.12 191,201
---------------------------------------- ----------- ---------- ----------- -----------
Class EX 75 186 0.03 3,031
---------------------------------------- ----------- ---------- ----------- -----------
Class EY 213 384 1.80 162,641
---------------------------------------- ----------- ---------- ----------- -----------
Class FA - - 1.22 109,926
---------------------------------------- ----------- ---------- ----------- -----------
Class FB - - 0.81 73,284
---------------------------------------- ----------- ---------- ----------- -----------
Class FD 17 0 0.37 33,010
---------------------------------------- ----------- ---------- ----------- -----------
Class FE 6,841 36 6.51 588,028
---------------------------------------- ----------- ---------- ----------- -----------
Class FO - - 0.53 48,264
---------------------------------------- ----------- ---------- ----------- -----------
Expense Cell 13 1,134,897 1.78 160,862
---------------------------------------- ----------- ---------- ----------- -----------
Total Investments in Markel CATCo
Re Ltd. Preference Shares $ 1,164,138 82.51 7,453,958
----------------------------------- --- ----------- ---------- ----------- -----------
The following table reflects the Company's proportionate share
of the fair value of investments in the Reinsurer held by the
Master Fund at 31 December 2021.
Preference Shares - Fair Value Preference Shares Fair
Investments $ - Investments $ Value
in Markel CATCo Re Ltd. in Markel CATCo
Re Ltd.
------------------------- --- ----------- ------------------- -----------
Class P 3,332 Class DR 4,391
------------------------------ ----------- ------------------- -----------
Class Z 4 Class DS 25,857
------------------------------ ----------- ------------------- -----------
Class BY 189,729 Class DZ 2,481,453
------------------------------ ----------- ------------------- -----------
Class BZ 6 Class EB 827,397
------------------------------ ----------- ------------------- -----------
Class CB 9,468,390 Class ED 1,464
------------------------------ ----------- ------------------- -----------
Class CD 1,049,768 Class EG 210
------------------------------ ----------- ------------------- -----------
Class CE 2,112,789 Class EI 430
------------------------------ ----------- ------------------- -----------
Class CI 32 Class EK 2,646,721
------------------------------ ----------- ------------------- -----------
Class CL 2,893,982 Class EL 1,299
------------------------------ ----------- ------------------- -----------
Class CM 1,548,225 Class EM 198,735
------------------------------ ----------- ------------------- -----------
Class CQ 2,679,089 Class EQ 1,145
------------------------------ ----------- ------------------- -----------
Class CT 2,032,338 Class ER 1,036
------------------------------ ----------- ------------------- -----------
Class CW 743,309 Class EX 178
------------------------------ ----------- ------------------- -----------
Class DC 2,822,531 Class EY 190,901
------------------------------ ----------- ------------------- -----------
Class DE 5,572 Class FA 2,487,081
------------------------------ ----------- ------------------- -----------
Class DF 8 Class FB 1,658,063
------------------------------ ----------- ------------------- -----------
Class DG 829 Class FC 1,431
------------------------------ ----------- ------------------- -----------
Class DH 31 Class FD 2,099
------------------------------ ----------- ------------------- -----------
Class DI 21 Class FE 1,598,531
------------------------------ ----------- ------------------- -----------
Class DK 15 Class FG 1,195
------------------------------ ----------- ------------------- -----------
Class DL 795 Class FN 420,877
------------------------------ ----------- ------------------- -----------
Class DN 993 Class FO 213,371
------------------------------ ----------- ------------------- -----------
Class DO 2,588 Class FQ 672,968
------------------------------ ----------- ------------------- -----------
Class DQ 167 Expense Cell 104,161
------------------------------ ----------- ------------------- -----------
Total Investments in Markel CATCo Re Ltd. Preference
Shares $ 39,095,537
---------------------------------------------------------------- -----------
As at 31 December 2022, the Company's proportionate share of the
Master Fund's cash and cash equivalents was $485,924 (2021:
$1,169,848).
As at 31 December 2022 and 2021, 100.00 per cent of total
investments held by the Master Fund were classified as Side Pocket
Investments.
In accordance with FASB ASC Sub-topic 820-10, certain
investments that are measured at fair value using the NAV per share
(or its equivalent) practical expedient are not required to be
classified within the fair value hierarchy. As the Company's
investments as at 31 December 2022 comprised solely of investments
in another investment company, the Master Fund, which are valued
using the net asset value per share (or its equivalent) practical
expedient, no fair value hierarchy has been disclosed.
The Company considers all short-term investments with daily
liquidity as cash equivalents and are classified as Level 1 within
the fair value hierarchy.
As at 31 December 2022 and 2021, The Master Fund's investment in
securities are classified as Level 3 within the fair value
hierarchy. The table below summarises information about the
significant unobservable inputs used in determining the fair value
of the Master Fund's Level 3 assets:
Type of Investment Valuation Technique Unobservable Input Range
------------------- --------------------- ------------------------ -----------------
Preference Shares NAV of the Reinsurer Premium earned 12 months
- straight line
for uniform perils
--------------------- ------------------------ -----------------
Premium earned 5 to 6 months
- Seasonality adjusted
for
non-uniform perils
--------------------- ------------------------ -----------------
Loss reserves Loss reserves* 0 to contractual
limit
--------------------- ------------------------ -----------------
* Based on underlying cedant loss notifications with management
judgement applied as deemed appropriate
Master Fund's Other Assets and Liabilities
As at 31 December 2022, the Company's proportionate share in the
Master Fund's other net liabilities amounted to approximately
$474,375 (2021 net assets: $61,840,690) and is included in
'Investments in Markel CATCo Reinsurance Fund - Markel CATCo
Diversified Fund' on the Statement of Assets and Liabilities. This
includes net amounts due from other segregated accounts of the
Master Fund and amounts due to the Manager and other accrued
expenses.
3. 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. Cash and cash equivalents are held at major
financial institutions and are subject to credit risk to the extent
those balances exceed applicable Federal Deposit Insurance
Corporation (FDIC) or Securities Investor Protection Corporation
(SIPC) limitations. At 31 December 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-1 as issued by Standard & Poor's.
4. CONCENTRATION OF REINSURANCE RISK
The principal exposure of the Fund's portfolio is primarily
through its investment in the Reinsurer as the performance of the
Fund is directly affected by the performance of the Reinsurer and
its underlying reinsurance contracts. For the year ended 31
December 2022, the Reinsurer's unsettled contracts provided
reinsurance property protection against natural catastrophe perils
for financial years 2018 and 2019. Geographically, these contracts
cover locations including, but not limited to, the U.S. (43.00 per
cent; 2021: 49.00 per cent), Japan (47.00 per cent; 2021: 41.00 per
cent) and the rest of the world (10.00 per cent; 2021: 10.00 per
cent). Prior year comparatives have been reclassified to conform
with the current year presentation.
5. russia - ukraine War CONSIDERATIONS
The Russia-Ukraine war caused severe disruptions of the global
supply chain, putting significant pressure on inflation. The recent
commencement of war in Ukraine had an impact on international
financial markets, leading to a significant rise in the price of
oil and gas. The unpredictable outcome of this conflict could
inflict on the world economy significant and/or prolonged harm.
Recent Russian military actions in Ukraine have prompted and might
prompt further sanctions on Russia from the United States, the
European Union, and other nations. Despite the fact that the
Company has no direct exposure to Russia or the surrounding
regions, the military incursion by Russia and the sanctions that
follow could have a negative impact on the world's energy and
financial markets. The extent and duration of the military action,
sanctions and resulting market disruptions are impossible to
predict, but could be substantial. Any such disruptions caused by
Russian military action or resulting sanctions may magnify the
impact of other risks described herein.
6. INVESTMENTS IN MASTER FUND, AT FAIR VALUE
The net investment loss allocated from the Master Fund, and the
net realised loss and net change in unrealised loss on securities
allocated from Master Fund in the Statements of Operations
consisted of the results from the Company's Investments in the
Master Fund. Net realised loss on securities includes gross
realised gain on securities of $18,141,690 (2021: $15,332,410) and
gross realised loss on securities of $30,540,954 (2021:
$78,428,888). Net change in unrealised loss on securities includes
gross change in unrealised gain on securities of $41,903,442 (2021:
$104,247,330) and gross change in unrealised loss on securities of
$8,800,428 (2021: $12,651,262).
31 Dec. 31 Dec. 2021
2022
---------------------------------------- --- ---------- -------------
Investment in Markel CATCo Reinsurance
Fund Ltd. -
Markel CATCo Diversified Fund,
at fair value $ 7,537,919 $ 101,307,151
7. 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 judgment 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 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 year-end,
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' loss events mainly on the 2018 losses
pertaining to Hurricane Michael, Typhoon Jebi, Hurricane Florence,
and the 2018 California Wildfires, and 2019 losses pertaining
predominantly to Hurricane Dorian, Typhoon Faxai and Typhoon
Hagibis 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. The significant uncertainty underlying
the industry loss estimates 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.
As at 31 December 2022 and 2021, all of the Company's
investments were in Side Pocket Investments in the Master Fund,
which reflect the remaining investments held by the Master Fund in
respect of each investment year.
During 2022, the Reinsurer paid claims of $168,676,352 (December
2021: $395,922,603). Of this amount $59,093,141 related to the 2017
events, $64,905,059 related to the 2018 loss events and $44,678,152
was in respect of 2019 events.
8. CAPITAL SHARE TRANSACTIONS
As of 31 December 2022, the Company has authorised share capital
of 1,500,000,000 (31 December 2021: 1,500,000,000) unclassified
shares of US$0.0001 each and Class B Shares ("B Shares") of such
nominal value as the Board may determine upon issue.
As of 31 December 2022, the Company had issued 114,104 (31
December 2021: 149,305,187) Class 1 Ordinary Shares (the "Ordinary
Shares") and 78,324 (31 December 2021: 83,230,467) Class C Shares
(the "C Shares").
Transactions in shares during the year, shares outstanding, NAV
and NAV per share are as follows:
31 December
2022
----------------- ----------- -------------- ----------- ------------ ----------
Beginning Share Ending Ending Net Ending NAV
Shares Repurchase Shares Assets Per Share
----------------- ----------- -------------- ----------- ------------ ----------
Class 1 Ordinary
Shares 149,305,187 (149,191,083) 114,104 $ 1,508,702 $ 13.2222
Class C Shares 83,230,467 (83,152,143) 78,324 $ 7,525,674 $ 96.0839
------------
$ 9,034,376
------------
31 December
2021
----------------- ----------- -------------- ----------- ------------ ----------
Beginning Share Ending Ending Net Ending NAV
Shares Repurchase Shares Assets Per Share
----------------- ----------- -------------- ----------- ------------ ----------
Class 1 Ordinary
Shares 168,898,993 (19,593,806) 149,305,187 $ 50,598,834 $ 0.3389
Class C Shares 126,369,585 (43,139,118) 83,230,467 $ 56,177,678 $ 0.6750
------------
$ 106,776,512
------------
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 has only SPI Shares 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. Accordingly, the
only further business that will be undertaken is that necessary to
complete the Buy-Out of the Company's portfolios.
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 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, totaling $1,482,176, 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, to effect the Buy-Out Transaction, the Company
redeemed 147,812,056 Ordinary Shares at a rate of $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). The resulting proceeds
from the Buy-Out Transaction, amounting to $51.7m for Ordinary
Shares and $53.9m for C Shares, were paid to Shareholders on 11
April 2022.
On 29 November 2022, the Company completed Partial Compulsory
Redemption #8, redeeming 1,379,027 Ordinary Shares at a rate of
$3.3355 per Ordinary Share and 754,052 C Shares at a rate of
$17.5042 per C Share.
9. 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 10).
The Investment Manager also acts as the Master Fund'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 Markel CATCo Investment Management. 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.
10. RELATED PARTY TRANSACTIONS
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.
For the financial year ended 31 December 2021, the Investment
Manager agreed to maintain the partial waiver of 50.00 per cent of
the 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. The Investment Manager agreed to extend this reduction
for financial year 2022. Total management fees charged to the
Company for the year ended 31 December 2022, net of the 50.00 per
cent partial waiver, amounted to $165,018 of which $2,806 was
payable at year end.
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.
Markel Corporation, which holds the entire share capital of the
Investment Manager, holds 6.60 per cent (31 December 2021: 6.61 per
cent) of the voting rights of the Ordinary Shares and 0.00 per cent
(31 December 2021: 0.00 per cent) of the voting rights of the C
Shares issued in the Company as of 31 December 2022.
As noted in Note 9, on 1 January 2020, the Investment Manager
entered into a Run-Off Services Agreement with LCML, a subsidiary
of Markel Corporation. Prior to 1 January 2022, LCML received a
monthly service fee of 75.00 per cent of the net management fees
due to the Investment Manager. Effective 1 January 2022, this
Run-Off Services Agreement was amended to a fixed fee arrangement
between LCML and the Investment Manager.
In addition, as at 31 December 2022, one of the Directors is
also a shareholder of the Company. The Directors' holdings are
immaterial, representing below 1.00 per cent of the Company
NAV.
As at 31 December 2022 and 2021, the Company had no receivable
due from or payable due to Markel CATCo Diversified Fund.
11. 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.
12. FINANCIAL HIGHLIGHTS
Financial highlights for the years ended 31 December 2022 and
2021 are as follows:
2022 2021
Class
Class 1 1
Ordinary Class Ordinary Class
Shares C Shares Shares C Shares
Per share operating
performance
Net asset value, beginning
of year $ 0.3389$ 0.6750 $ 0.2828 $ 0.5071
Income (loss) from investment
operations:
Net investment gain (loss) 0.6973 1.8139 (0.0193) (0.0329)
Management fee (0.0287) (0.1941) (0.0022) (0.0038)
Net gain on investments 11.8392 86.5638 0.0763 0.2052
----------------------------- --------- --------- ---------- --------- --------- ---------
Total from investment
operations $ 12.5078$ 88.1836 $ 0.0548$ 0.1685
----------------------------- --------- --------- ---------- --------- --------- ---------
Dividend (0.5144) (0.8579) - -
----------------------------- --------- --------- ---------- --------- --------- ---------
Discount on Share Buy-Back 0.8899 8.0832 0.0013 (0.0006)
----------------------------- --------- --------- ---------- --------- --------- ---------
Net asset value, end of
year $ 13.2222$ 96.0839 $ 0.3389$ 0.6750
----------------------------- --------- --------- ---------- --------- --------- ---------
Total net asset value
return
Total net asset value
return before performance
fee* 3,690.71% 13,064.24% 19.38% 33.23%
Performance fee -% -% -% -%
----------------------------- --------- --------- ---------- --------- --------- ---------
Total net asset value
return after performance
fee 3,690.71% 13,064.24% 19.38% 33.23%
----------------------------- --------- --------- ---------- --------- --------- ---------
Ratios to average net assets
Expenses other than
performance
fee** (4.22)% (4.77)% (6.94)% (6.15)%
Performance fee -% -% -% -%
----------------------------- --------- --------- ---------- --------- --------- ---------
Total expenses after
performance
fee (4.22)% (4.77)% (6.94)% (6.15)%
----------------------------- --------- --------- ---------- --------- --------- ---------
Net investment gain (loss) 197.29% 239.97% (7.60)% (7.24)%
----------------------------- --------- --------- ---------- --------- --------- ---------
Management fee waived (0.25)% (0.35)% (0.76)% (0.76)%
----------------------------- --------- --------- ---------- --------- --------- ---------
* Exclusive of discount on share buy backs
** Expenses presented above is net of management fees waived by the Master Fund
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
years ended 31 December 2022 and 2021. The per share amounts and
ratios reflect income and expenses allocated from the Master
Funds.
13. 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.
14. SCHEMES OF ARRANGEMENT Cost
During the year, the Master Fund recorded a net amount of
$479,113 representing a reduction adjustment to the $27,232,774
incurred in 2021 for legal fees and restructuring cost in relation
to the Schemes of Arrangement. Of this reduction amount, a
reduction adjustment of $89,110 was allocated to the $4,437,070
incurred by the Company in 2021. Additionally, the Company incurred
direct expenses relating to the finalisation of the Schemes of
Arrangement in the amount of $245,245 (2021: $229,415).
15. schemes of arrangement ordinary course fees
Per the Schemes of Arrangement Buy-Out agreement, after closing
of the Schemes, no additional fees or 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 $772,131 in 2022 which were allocated against
unutilised Scheme of Arrangement costs of $167,813 and total
accelerated reserves Schemes of Arrangement Buy-Out Ordinary Course
Fees of $3,384,953. The acceleration of future operating expenses
is a departure from U.S. GAAP, specifically in relation to U.S.
GAAP conceptual framework of accrual accounting whereby the
financial effects of an entity's transactions and other events and
circumstances are recognised in the period in which those
transactions, events, and circumstances occur. As a result of this
U.S. GAAP departure, there is an amount of $2,780,635 excess
liability and expense in the Company's financial statements for the
year ended 31 December 2022. As the acceleration of future
operating expenses is in line with the Schemes of Arrangement
Buy-Out Agreement approved by investors, the Investment Manager has
included the estimated amount in the financial statements for the
year ended 31 December 2022.
16. SUBSEQUENT EVENTS
These Financial Statements were approved by the Board and
available for issuance on 26 April 2023. 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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