REG - CATCo Re-ins Opps Fd - 3rd Quarter Results
18/12/2024 07:00
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RNS Number : 5272Q CATCo Reinsurance Opps Fund Ltd 18 December 2024
17 December 2024
CATCo Reinsurance Opportunities Fund Ltd. (the "Company")
Interim Financial Report
For the 9 month period 1 January 2024 to 30 September 2024
To: Specialist Fund Segment, London Stock Exchange and Bermuda Stock
Exchange
CHAIRMAN'S STATEMENT
During the 9 month period to 30 September 2024 the run-off ("Run-Off") of the
investment portfolio of CATCo Reinsurance Opportunities Fund Ltd. (the
"Company") was completed following the commutation of the remaining 2018 to
2019 investments held by the Company in the Master Fund. As a result, the
Company no longer has exposure to any reinsurance contracts.
The Company has now redeemed the entirety of its interest in Markel CATCo
Diversified Fund (the "Master Fund") and distributed substantially all of the
redemption proceeds it has received.
Events since the period end
Return of Capital
Following the closure of the remaining reinsurance contracts, investors were
informed on 13 November 2024 that Markel CATCo Investment Management Ltd. (the
"Investment Manager") intended to return approximately $21 million to
investors derived from favourable loss development and interest income since
the previous redemption made in November 2022 by way of a ninth Partial
Compulsory Redemption.
Proceeds of the redemption were paid through CREST to holders of Ordinary
Shares and C Shares in uncertificated form on 27 November 2024, and paid by
cheque to holders of Ordinary Shares in certificated form on 29 November 2024.
Special General Meeting and Proposed Liquidation
Following the Board's decision to return approximately 96 per cent of
investors' capital, the Board determined to recommend that the Company be
placed into members' voluntary winding up and be wound up. On 18 November 2024
the Company announced the publication of a Circular providing information
relating to the proposed winding up and notice of Special General Meeting. The
Circular is available at www.catcoreoppsfund.com
(http://www.catcoreoppsfund.com) .
Shareholder approval is required for the Company to be wound up (and related
matters) and such approvals are being sought at the Special General Meeting to
be held at 9:00 a.m. (Bermuda time) on 18 December 2024. The appointment of
the liquidators (the "Liquidators") and the winding up of the Company will
commence immediately upon the passing of the first resolution with the
cancellation of the listing and trading of Shares on the London Stock Exchange
and the Bermuda Stock Exchange on 19th December 2024.
Upon the appointment of the Liquidators, all powers of the Board and officers
will cease, except so far as the Company in general meeting or the Liquidators
sanction the continuance thereof. Liquidators will assume responsibility for
the winding up of the Company, including the payment of fees, costs and
expenses, the discharging of the liabilities of the Company, and obtaining and
distributing the Company's surplus assets to the Shareholders.
The Company estimates that the costs and expenses of the proposed liquidation
will amount to approximately US$350,000, which include the fees of the
Liquidators and those of the Company's advisers and service providers in
connection with the winding up. As at 30 September 2024, the Company had a
cash reserve of approximately US$1.1m to pay the Company's anticipated future
operational costs, professional fees, the costs of liquidation and any unknown
contingencies. In addition, approximately 4 per cent of the NAV (in the form
of cash amounting to approximately US$960,000) was withheld from the
compulsory redemption that took place on 27 and 29 November 2024.
Once the Liquidators are satisfied that all actual and contingent liabilities
of the Company have been settled, any surplus will be distributed to the
Shareholders as a final redemption which is expected to be made at the
conclusion of the liquidation. When this is completed, the Company will be
dissolved. The precise timing and amount of the final redemption is uncertain,
but is expected to take place in Q1 2025, and the Liquidators' remuneration
and any expenses will be deducted prior to any final payment to Shareholders.
Net Asset Value ("NAV")
The Company opened the year with a total NAV of $14.5m which consisted of
$2.4m Ordinary Share NAV and $12.1m of C Share NAV and increased to $22.1m by
30 September 2024, of which $4.7m related to the Ordinary Share NAV and $17.4m
to the C Share NAV.
The increase in NAV was due to further upside recorded relating to positive
loss development recognized upon commutation of the contracts in the 2018 and
2019 reinsurance portfolios plus interest income. This resulted in a closing
NAV per share at 30 September 2024 of $41.6197 and $221.6594 for Ordinary
Shares and C Shares respectively.
2024 Ordinary Shares NAV ($m)
Opening balance 1 January 2024 $2.4
Investment appreciation net of expenses $2.3
Closing balance 30 September 2024 $4.7
2024 C Shares NAV ($m)
Opening balance 1 January 2024 $12.1
Investment appreciation net of expenses $5.3
Closing balance 30 September 2024 $17.4
RETURN OF CAPITAL TO SHAREHOLDERS
From the commencement of the Run-Off (26 March 2019) to 27 November 2024, the
Company has successfully returned $435.0m of capital to Shareholders by means
of dividends, tender offer, share buybacks, completion of the Buy-Out
Transaction and compulsory share redemptions.
Form of Return Payment or Redemption Date / Period Ordinary Shares C Shares Total
($m)
($m) ($m)
Tender Offer 23 September 2019 15.3 28.0 43.3
Interim Dividend 1 November 2019 4.0 11.9 15.9
Share Buyback Oct to Dec 2019 1.9 5.9 7.8
Partial Compulsory Redemption 1 20 April 2020 5.3 24.0 29.3
Partial Compulsory Redemption 2 18 May 2020 4.6 14.2 18.8
Partial Compulsory Redemption 3 1 July 2020 3.6 12.2 15.8
Partial Compulsory Redemption 4 1 August 2020 7.0 30.9 37.9
Partial Compulsory Redemption 5 7 October 2020 15.9 78.6 94.5
Partial Compulsory Redemption 6 11 January 2021 2.0 6.0 8.0
Partial Compulsory Redemption 7 11 May 2021 3.4 15.8 19.2
Buy-Out Transaction 11 April 2022 51.7 53.9 105.6
Partial Compulsory Redemption 8 29 November 2022 4.6 13.2 17.8
Partial Compulsory Redemption 9 27 November 2024 4.5 16.6 21.1
Total Capital Return 123.8 311.2 435.0
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 30 September 2024:
SPI's % of Share NAV Value in $ millions
Ordinary Shares
SPI 2018 48.7% 2.31
SPI 2019 20.2% 0.96
C Shares
SPI 2018 72.0% 12.49
SPI 2019 22.8% 3.96
Additionally, as at 30 September 2024, cash of $1.5m and $0.9m was held by the
Ordinary Shares and C Shares respectively. As at the date of this report the
2018 and 2019 Side Pocket Investments no longer existed and the remaining NAV
held consisted of cash net of expenses of $0.2m and $0.8m held by the Ordinary
Shares and C Shares respectively.
SIDE POCKET INVESTMENTS ("SPIs")
As at 30 September 2024, the SPIs in total represented c. 68.9 per cent of
Ordinary Share NAV (31 December 2023: c. 84.30 per cent) and c. 94.8 per cent
of the C Share NAV (31 December 2023: c. 89.00 per cent).
The positions of the 2018 and 2019 SPIs as at 30 September 2024 were as
follows:
· 2018 SPIs, principally relating to Hurricanes Michael and
Florence, Typhoon Jebi and the 2018 California Wildfires, amount to c. 48.7
per cent of Ordinary Share NAV and c. 72.0 per cent of C Share NAV (31
December 2023: c. 62.1 per cent and c. 70.8 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. 20.2 per cent of Ordinary
Share NAV and c. 22.8 per cent of C Share NAV (31 December 2023: c. 22.1 per
cent and c. 18.2 per cent of Ordinary Share and C Share NAV respectively).
CLOSING REMARKS
As the process of Run-Off and returning capital to investors draws to a close,
I would like to thank the Investment Manager for its dedication to ensuring a
significant amount of capital has been returned to investors since the Buy-Out
Transaction and we believe that the results achieved by the Investment Manager
have justified the patient approach taken to run off the underlying 2018 and
2019 portfolios.
Finally, I would like to thank Shareholders for supporting the actions of the
Investment Manager since the Buy-Out Transaction and allowing the Company to
deliver on its objective of maximizing the return of capital during the
Run-Off.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
17 December 2024
Directors' Report
EFFICIENT CAPITAL MANAGEMENT DURING RUN-OFF OF PORTFOLIO AND DISTRIBUTIONS
During the period from inception of the Company to 26 March 2019, the
investment objective of the Company and the Master Fund SAC was to give their
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 "Run-Off Inception Date"), when 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, the Company has taken a number of actions in order to progress
the Run-Off and return capital to Shareholders as efficiently as possible.
These actions are described in more detail in the Company's successive Annual
Reports for the years ended 31 December 2020 onwards, most recently in the
Annual Report for the year ended 31 December 2023 (the "2023 Annual Report"),
which is available on the Company's website. The Chairman's Statement
summarises these actions and all returns of capital to Shareholders for the
period from the Run-Off Inception Date to 30 September 2024. The Chairman's
Statement also summarises the Investment Manager's current activities in the
proposed winding up of the Company.
In view of the amendment to the Company's investment policy referred to above,
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
winding up of the Company.
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 and liquidity.
The Run-Off process was managed by the process of formal oversight at each
Board meeting, and by interim progress update reports provided by the
Investment Manager to the Board. Operational disruption, accounting and legal
risks were covered annually, and regulatory compliance was reviewed at each
Board meeting. The Board is assured that there were 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 in the 2023 Annual Report) and the management of costs and expenses,
were managed efficiently. Additionally, emerging risks in the reinsurance
market are not relevant to the underlying portfolio that is in Run-Off.
In the view of the Board, there have not been any changes to the fundamental
nature of these risks since the previous Report.
Share Capital
The Company's issued share capital at 1 January 2024 amounted to 114,104
Ordinary Shares and 78,324 C Shares. As at the date of this Report, the
Company's issued share capital is 4,858 Ordinary Shares and 3,478 C Shares.
Related party disclosure and transactions with the Investment Manager
The Investment Manager, which was appointed as the Company's Investment
Manager on 8 December 2015, is also the investment manager of the Master Fund
SAC and the insurance manager of the Reinsurer. The Company entered into a new
investment management agreement with the Investment Manager on 28 March 2022
(the "Investment Management Agreement") in connection with the Buy-Out
Transaction which completed on 11 April 2022 (as further detailed in the 2022
Annual Report). The terms of the Investment Management Agreement substantially
reflect the terms of the investment management agreement between the Company
and the Investment Manager entered into on 8 December 2015. The Investment
Manager is entitled to a management fee. Beginning in July 2022, following the
move to quarterly reporting announced on 14 July 2022, the management fee is
calculated and payable quarterly in arrears equal to 1/4 of 1.5 per cent of
the net asset value of the Company which was not attributable to the Company's
investment in the Master Fund Shares as at the last calendar day of each
calendar quarter.
On 28 January 2021, the Company announced the continuation of its decision in
2020 to consent to a partial waiver of 50.00% (one-half) of the management fee
paid by the Master Fund SAC to the Investment Manager in respect of such of
its Master Fund Shares that are exposed to side pocket investments (the "SP
Management Fees") for the period 1 January 2021 to 31 December 2021, resulting
in an effective management fee of 0.75% per annum for that period. That
partial waiver has continued since then and will continue in force for the
foreseeable future. Performance fees are also payable to the Investment
Manager by the Master Fund SAC, subject to certain performance targets being
met. No performance fees were payable to the Investment Manager for the year
ended 31 December 2023 or for the period ended 30 September 2024.
As at the date of this report, Markel Corporation ("Markel"), which holds the
entire share capital of the Investment Manager, holds, through its asset
management subsidiary, 3.79 per cent of the total voting rights of the
Ordinary Shares and C Shares issued by the Company.
In addition, one of the Directors of the Company is also a Shareholder of the
Company.
Going Concern status
The Company's business activities, together with the factors likely to affect
its future development, performance and position, are set out in the
Chairman's Statement.
After due and careful consideration of the Company's circumstances and
objectives as described elsewhere in this document, the Directors have
concluded that the Company has adequate financial resources to continue its
operational existence for the foreseeable future and to place the Company into
members voluntary liquidation which will be put forward to Shareholders in the
SGM on 18 December 2024. Accordingly, the Board continues to adopt the going
concern basis in preparing these accounts.
Directors' Responsibility Statement
The Directors are responsible for preparing the nine month Financial Report in
accordance with applicable law and regulations. The Directors confirm that, to
the best of their knowledge:
1. The set of Financial Statements contained within the audited nine month
Financial Report has been prepared in accordance with U.S. Generally Accepted
Accounting Principles ("U.S. GAAP"). These Financial Statements present
fairly, in all material respects, the assets, liabilities, financial position
and profit or loss of the Company.
2. The Chairman's Statement, the Directors' Report, the Financial
Highlights and the notes to the nine month Financial Statements provide a fair
review of the information required by rule 4.2.7R of the Disclosure Guidance
and Transparency Rules (being an indication of important events that have
occurred during the first nine months of the financial year and their impact
on the set of Financial Statements and a description of the principal risks
and uncertainties for the remaining three months of the financial year) and
rule 4.2.8R (being related party transactions that have taken place during the
first nine months of the current financial year and that have materially
affected the financial position or performance of the Company during that
period; and any changes in the related party transactions described in the
last Annual Report that could do so).
This ninth month period Financial Report was approved by the Board on 17
December 2024, and the above responsibility statement was signed on its behalf
by the Chairman.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
For and on behalf of the Board
17 December 2024
STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States Dollars) As at As at
30 Sept. 2024
31 Dec. 2023
$ $
Assets
Investments in Markel CATCo Reinsurance Fund - Markel CATCo Diversified Fund, 19,726,203 12,772,756
at fair value (Notes 2 and 5)
Cash and cash equivalents (Note 3) 3,487,620 4,111,158
Other assets - 38,928
Total assets 23,213,823 16,922,842
Liabilities
Redemptions Payable* 21,150,000 -
Management fee payable (Note 9) 3,354 3,192
Accrued expenses and other liabilities (Note 13) 1,100,243 265,772
Schemes of Arrangement Buy-Out Ordinary Course Fees (Notes 1 and 13) - 2,178,635
Total liabilities 22,253,597 2,447,599
Net assets* 960,226 14,475,243
NAV per Share (Note 7)
* Net assets include adjustment for the 9th partial compulsory redemption.
STATEMENTS OF operations
(Expressed in United States Dollars) Period ended Year ended
30 Sept. 2024 31 Dec. 2023
$ $
Net investment income allocated from Master Fund (Note 5)
Interest income 15,411 23,554
Management fee waived (Note 10) 99,840 79,529
Management fee (Note 9) (199,680) (159,058)
Administrative fee (89,938) (63,826)
Professional fees and other (Note 1) (57,352) (47,763)
Schemes of Arrangement Buy-Out Ordinary Course Fees 155,066 191,118
(Note 13)
Net investment gain / (loss) allocated from Master Fund (76,653) 23,554
Investment income
Interest 158,600 206,030
Total investment income 158,600 206,030
Company expenses
Schemes of Arrangement Buy-Out Ordinary Course Fees 2,178,635 602,000
(Note 13)
Management fee waived (Note 9) 10,036 12,166
Professional fees and other (Note 1) (1,041,495) (555,834)
Management fee (Note 9) (20,072) (24,332)
Administrative fee (Note 10) (48,500) (34,000)
Total Company income/(expenses) 1,078,604 -
Net investment gain 1,160,551 229,584
Net realised loss and net change in unrealised gain / (loss) on securities
allocated from Master Fund
Net realised loss on securities - -
Net change in unrealised loss on securities 6,474,432 5,211,283
Net gain on securities allocated from Master Fund 6,474,432 5,211,283
Net increase in net assets resulting from operations 7,634,983 5,440,867
STATEMENTS OF changes in net assets
(Expressed in United States Dollars) Period ended Year ended
30 Sept. 2024 31 Dec. 2023
$ $
Operations
Net investment gain 1,160,551 229,584
Net change in unrealised loss on securities allocated from Master Fund 6,474,432 5,211,283
Net increase in net assets resulting from operations 7,634,983 5,440,867
Capital share transactions
Redemptions (Note 4) (21,150,000) -
Net change in net assets resulting from capital share transactions (21,150,000) -
Net increase / (decrease) in net assets (13,515,017) 5,440,867
Net assets, at 1 January 14,475,243 9,034,376
Net assets, at end of period* 960,226 14,475,243
* Net assets include adjustment for the 9th partial compulsory redemption.
STATEMENTS OF cash flows
(Expressed in United States Dollars) Period ended Year ended
30 Sept. 2024 31 Dec. 2023
$ $
Cash flows from operating activities
Net increase in net assets resulting from operations 7,634,983 5,440,867
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by operating activities:
Net investment gain, net realised loss and net change in unrealised (6,397,779) (5,234,837)
gain/(loss) on securities allocated from Master Fund
Purchase of investment in Master Fund (555,668) -
Changes in operating assets and liabilities:
Other assets 38,928 5,737
Management fee payable 162 386
Schemes of Arrangement Buy-Out Ordinary Course Fees (2,178,635) (602,000)
(Note 13)
Accrued expenses and other liabilities 834,471 105,055
Net cash (used in) / provided by operating activities (623,538) (284,792)
Cash flows from financing activities
Redemptions paid - -
Dividends paid (Note 7) - -
Net cash used in financing activities - -
Net (decrease) in cash and cash equivalents (623,538) (284,792)
Cash and cash equivalents, at 1 January 4,111,158 4,395,950
Cash and cash equivalents, at end of period 3,487,620 4,111,158
NOTES TO THE FINANCIAL STATEMENTS - 30 September 2024
(Expressed in United States Dollars)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
CATCo Reinsurance Opportunities Fund Ltd. (the "Company") is a closed-ended
mutual fund company, registered and incorporated as an exempted mutual fund
company under the laws of Bermuda on 30 November 2010, which commenced
operations on 20 December 2010. The Company is organised as a feeder fund to
invest substantially all of its assets in Markel CATCo Diversified Fund (the
"Master Fund"). The Master Fund is a segregated account of Markel CATCo
Reinsurance Fund Ltd. (the "Master Fund SAC"), a mutual fund company
incorporated in Bermuda and registered as a segregated account company under
the Segregated Accounts Company Act 2000, as amended (the "SAC Act"). Markel
CATCo Reinsurance Fund Ltd. establishes a separate account for each class of
shares comprised in each segregated account (each, a "SAC Fund"). Each SAC
Fund is a separate individually managed pool of assets constituting, in
effect, a separate fund with its own investment objective and policies. The
assets attributable to each SAC Fund of Markel CATCo Reinsurance Fund Ltd.
shall only be available to creditors in respect of that segregated account.
The objective of the Master Fund is to provide shareholders the opportunity to
participate in the investment returns of various fully-collateralised
reinsurance-based instruments, securities (such as notes, swaps and other
derivatives), and other financial instruments. The majority of the Master
Fund's exposure to reinsurance risk is obtained through its investment (via
preference shares) in Markel CATCo Re Ltd. (the "Reinsurer"). At 30 September
2024, the Company's ownership is 16.47 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 previously in
the Chairman's Statement and the Directors' Report . To support the
implementation of the Buy-Out Transaction through the Schemes of Arrangement
in Bermuda (the "Schemes"), each of the Company, the 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 (renamed Markel
Group Inc.) 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 Corporation announced its intention to
wind down LCML, its retrocessional Insurance Linked Securities (ILS) fund
manager based in Bermuda. Nevertheless, as at the date of this report LCML
remains in operation and the Run-Off Services Agreement is still in place.
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").
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.
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 in 2022 and formed part of the
investor Buy-Out settlement. As such, these fees have been recognised as
Schemes of Arrangement Ordinary Course fees (Note 13) in the financial
statements.
Going Concern Considerations
In line with the Company's plan to distribute circa 96% of the 30 September
2024 NAV to shareholders by way of the 9th partial compulsory redemption and
thereafter to put the Company into liquidation, these financial statements
have been prepared for the period starting 1 January 2024 to 30 September
2024. Therefore, notwithstanding the Company's ability to meet its obligations
as they fall due, substantial doubt exists about the Company's intent to
continue as a going concern. However, in accordance with ASC 205, liquidation
is considered imminent when either (i) a plan for liquidation has been
approved by those with the authority to make such a plan effective, and the
likelihood is remote that the plan would be blocked by other parties and the
likelihood remote that the entity will return from liquidation and (ii) a plan
for liquidation is imposed by other forces such as involuntary bankruptcy. As
at 30 September 2024 and as at the date of this report the Company has not yet
proceeded with the process of de-listing and subsequent liquidation, and as
such the financial statements have been prepared on a going concern basis.
Notwithstanding these facts, please also refer to the subsequent events note
which refers to a circular being released on 18 November 2024 relating to an
upcoming special general meeting on 18 December 2024 regarding the winding up
of the Company.
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 Waystone Administration Solutions (BDA)
Limited, (formerly Centaur Fund Services (Bermuda) Limited) (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
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 Fund and held with respect to a reinsurance agreement will equal:
i. the amount of capital invested in such preference shares; plus
ii. the amount of 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 "Covered Event" 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 30 September 2024 and 31 December 2023, the Master Fund has no remaining
reinsurance protections.
Derivative Financial Instruments
The Master Fund invested in derivative financial instruments such as industry
loss warranties ("ILWs"), which were recorded at fair value as at the
reporting date. The Master Fund generally recorded 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 were
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 in the past
were 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 30 September 2024 and 31 December 2023, 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 & 6 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 2024 and
2023.
Covered Event Estimates
The Investment Manager provides quarterly 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 9, 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 6).
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 9. 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.
Redemptions Payable
Redemptions are recognised as liabilities when the redemption amount becomes
fixed, which generally occurs on the last day of the quarter. As a result,
redemptions paid after the end of the period, based on the NAV of the Company
at period-end, are included in the redemptions payable at 30 September 2024.
Redemptions for which the United States dollar amount is not fixed remain in
net assets until the NAV used to determine the redemption and share amounts is
determined.
Income Taxes
Under the laws of Bermuda, the Company is generally not subject to income
taxes. The Company has received an undertaking from the Minister of Finance of
Bermuda, under the Exempted Undertakings Tax Protection Act 1966 that in the
event that there is enacted in Bermuda any legislation imposing income or
capital gains tax, such tax shall not until 31 March 2035 be applicable to the
Company. However, certain United States dividend income and interest income
may be subject to a 30% withholding tax. Further, certain United States
dividend income may be subject to a tax at prevailing treaty or standard
withholding rates with the applicable country or local jurisdiction.
The Company is required to determine whether its tax positions are more likely
than not to be sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. The tax benefit recognised is measured
as the largest amount of benefit that has a greater than fifty per cent
likelihood of being realised upon ultimate settlement with the relevant taxing
authority. De-recognition of a tax benefit previously recognised results in
the Company recording a tax liability that reduces ending net assets. Based on
its analysis, the Company has determined that it has not incurred any
liability for unrecognised tax benefits as of 30 September 2024. However, the
Company's conclusions may be subject to review and adjustment at a later date
based on factors including, but not limited to, on-going analyses of and
changes to tax laws, regulations and interpretations thereof.
The Company recognises interest and penalties related to unrecognised tax
benefits in interest expense and other expenses, respectively. No tax-related
interest expense or penalties have been recognised as of and for the period
ended 30 September 2024 and the year ended 31 December 2023.
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 period ended
30 September 2024 and the year ended 31 December 2023.
On 27 December 2023, Bermuda enacted the Corporate Income Tax Act 2023 ("CIT
Act") which provides for the taxation of in-scope entities in respect of tax
years beginning on or after 1 January 2025. In-scope entities under the CIT
Act are the Bermuda constituent entities of multinational enterprises that
have revenue in excess of EUR 750 million for at least two of the last four
fiscal years. The Company is not expected to be subject to the Bermuda
corporate income tax regime once it is effective based on its current
structure as it is not part of a multinational enterprise and operates only in
Bermuda.
The Company was not required to recognize any amounts for uncertain tax
positions under FASB ASC Topic 740, Income Taxes, during the period ended 30
September 2024.
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.
Professional Fees and Other
Professional fees and other include costs incurred during the year for
services such as audit fees, corporate secretarial fees, legal fees, insurance
fees, Directors' fees, registrar fees and other similar fees. Such costs are
expensed as incurred and shown in the Statement of Operations.
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) were 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 27 September 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
28 September 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.
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 30 September
2024, prior to the 9th compulsory redemption.
Preference Shares - Investments Number of Shares Cost ($) Percentage of Net Assets (%) Fair Value
in Markel CATCo Re Ltd.
($)
Class DE 960 647 8.99 1,986,898
Class DG 131,028 2,171 0.00 877
Class DR 23 732 17.84 3,944,539
Class DZ 443,721 20,810 10.39 2,297,389
Class EB - - 3.63 802,610
Class ED 46,468 2,020 12.57 2,779,512
Class EM 3 7 5.36 1,184,865
Class EQ 12,611 1,319 0.26 58,359
Class ER 2,293 1,098 0.87 192,290
Class EX 75 187 0.04 8,198
Class EY 215 386 1.93 427,624
Class FA 0 - 0.49 107,821
Class FB 0 - 0.33 71,881
Class FD 17 - 8.07 1,784,503
Class FE 6,710 36 3.67 810,524
Class FO - - 8.40 1,857,317
Expense_Cell 13 1,431,000 4.52 998,940
Total Investments in Markel CATCo Re Ltd. Preference Shares $ 1,460,411 87.35 19,314,147
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
2023.
Preference Shares - Investments Number of Shares Cost ($) Percentage of Net Assets (%) Fair Value
in Markel CATCo Re Ltd.
($)
Class DE 954 646 5.76 833,381
Class DG 130,260 2,158 0.01 872
Class DR 23 721 17.35 2,511,984
Class DZ 441,119 20,688 9.13 1,320,959
Class EB 0 0 5.48 792,532
Class ED 46,196 2,008 19.09 2,763,212
Class EM 3 6 4.61 666,596
Class EQ 12,537 1,311 0.40 58,016
Class ER 2,279 1,091 1.32 191,162
Class EX 75 186 0.06 8,098
Class EY 213 384 1.43 207,589
Class FA 0 0 0.76 109,904
Class FB 0 0 0.51 73,269
Class FD 17 0 1.20 173,334
Class FE 6,840 36 4.11 594,816
Class FO 0 0 11.98 1,733,690
Expense_Cell 13 1,134,669 3.60 521,259
Total Investments in Markel CATCo Re Ltd. Preference Shares $ 1,163,904 86.77 12,560,673
As at 30 September 2024, the Company's proportionate share of the Master
Fund's cash and cash equivalents was $248,970 (2023: $443,964).
As at 30 September 2024 and 31 December 2023, 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 30 September 2024 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 30 September 2024, the Company's investment in the Master Fund
represents largely cash and cash equivalents to be redeemed in full.
Consequently, the fair value of investment in the Master Fund does not include
any significant unobservable inputs and can therefore be classified as Level 1
within the fair value hierarchy. As at 31 December 2023, The Master Fund's
investment in securities were 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 at 31 December 2023:
Type of Investment Valuation Technique Unobservable Input Range
Preference Shares NAV of the Reinsurer Premium earned - straight line for uniform perils 12 months
Premium earned - Seasonality adjusted for 5 to 6 months
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 30 September 2024, the Company's proportionate share in the Master
Fund's other net liabilities amounted to approximately $134,679 (2023:
$409,717) 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. As at 31 December 2023 and as at 30 September
2024, cash and cash equivalents were held with HSBC Bank Bermuda Ltd. and with
HSBC Global Asset Management (USA) Inc., both of which have a credit rating of
A-/A-2 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 contracts. As
at 30 September 2024, all contracts held by the Reinsurer have been commuted
and therefore no more reinsurance risk exists. For the year ended 31 December
2023, approximately 44 per cent of the contracts related to cover in the U.S.
and 46 per cent related to Japan with the remaining 10 per cent relating to
the rest of the world.
5. 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 $nil (2023: $nil) and gross
realised loss on securities of $nil (2023: $nil). Net change in unrealised
loss on securities includes gross decrease in unrealised loss on securities of
$6,876,052 (2023: $5,211,283) and gross increase in unrealised loss on
securities of $401,620 (2023: $nil).
30 Sept. 2024 31 Dec. 2023
Investment in Markel CATCo Reinsurance Fund Ltd. - Markel CATCo Diversified $ 19,726,203 $ 12,772,756
Fund, at fair value
6. 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.
As part of the ongoing reserving process, the Insurance Manager reviews loss
reserves on a quarterly 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.
During the period ending 30 September 2024, the Insurance Manager reviewed
loss reserves on a quarterly basis and made any adjustments, if necessary, to
loss reserves to reflect changes in underlying loss estimates or, ultimately,
commutation agreements. As at 30 September 2024, all investments in the
Reinsurer reflect the final commutation values with no remaining open
contracts. Therefore, there is no remaining volatility relating to loss events
in the value of the investments held by the Reinsurer. As such, all of the
Master Fund's investments held in Side Pocket Investments will be redeemed and
distributed to the Master Fund to allow for the distribution of 30 September
2024 NAV to shareholders, including the Company. As at 31 December 2023, all
of the Company's investments were in Side Pocket Investments in the Master
Fund, which reflected the remaining investments held by the Master Fund at
that time.
During 2024, the Reinsurer paid net claims of $58,165,671 (December 2023:
$16,404,303). Of this amount, $40,965,676 related to the 2018 loss events and
$17,199,995 was in respect of 2019 events.
7. CAPITAL SHARE TRANSACTIONS
As of 30 September 2024, the Company has authorised share capital of
1,500,000,000 (31 December 2023: 1,500,000,000) unclassified shares of
US$0.0001 each and Class B Shares ("B Shares") of such nominal value as the
Board may determine upon issue.
As of 30 September 2024, prior to the 9th compulsory redemption effective 1
October 2024, the Company had issued 114,104 (31 December 2023: 114,104) Class
1 Ordinary Shares (the "Ordinary Shares") and 78,324 (31 December 2023:
78,324) Class C Shares (the "C Shares").
Transactions in shares during the year, shares outstanding, NAV and NAV per
share are as follows:
30 September 2024 - Position before 1 October 2024 Redemptions
Beginning Share Ending Ending Net Assets Ending NAV Per Share
Shares
Repurchase
Shares
Class 1 Ordinary Shares 114,104 - 114,104 $ 4,748,978 $ 41.6197
Class C Shares 78,324 - 78,324 $ 17,361,248 $ 221.6594
$ 22,110,226
31 December 2023
Beginning Share Ending Ending Net Assets Ending NAV Per Share
Shares
Repurchase
Shares
Class 1 Ordinary Shares 114,104 - 114,104 $ 2,407,193 $ 21.0965
Class C Shares 78,324 - 78,324 $ 12,068,050 $ 154.0786
$ 14,475,243
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.
8. 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 9).
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 Corporation announced its intention to wind down LCML, its
retrocessional Insurance Linked Securities ("ILS") fund manager based in
Bermuda, effective 1 January 2022.
9. RELATED PARTY TRANSACTIONS
The Investment Manager is entitled to a management fee, calculated and payable
monthly in arrears equal to 1/12 of 1.5 per cent of the net asset value, which
is not attributable to the Company's investment in the Master Fund's shares as
at the last calendar day of each calendar month. Management fees related to
the investment in the Master Fund shares are charged in the Master Fund and
allocated to the Company. Performance fees are charged in the Master Fund and
allocated to the Company. The fees payable under the Investment Management
Agreement are the same as those which had been payable under the Old
Investment Management Agreement.
For the financial year ended 31 December 2023, 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 the partial waiver for the period ending 30 September 2024. During the
period ended 30 September 2024, the Company incurred management fees, net of
the 50.00 per cent partial waiver, amounting to $10,036 as reflected in the
Statement of Operations, of which $3,354 was payable at year end.
Markel Corporation, which holds the entire share capital of the Investment
Manager, holds 6.60 per cent (31 December 2023: 6.60 per cent) of the voting
rights of the Ordinary Shares and 0.00 per cent (31 December 2023: 0.00 per
cent) of the voting rights of the C Shares issued in the Company as of 30
September 2024.
As noted in Note 8, 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 30 September 2024, one of the Directors is also a
shareholder of the Company. The Director's holdings are immaterial,
representing below 1.00 per cent of the Company NAV.
As at 30 September 2024 and 31 December 2023, the Company had no receivable
due from or payable due to Markel CATCo Diversified Fund.
10. ADMINISTRATIVE FEE
Waystone Administration Solutions (BDA) Limited (formerly, Centaur Fund
Services (Bermuda) Limited) serves as the Company's Administrator (the
"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. During the period ended 30
September 2024, the Company accrued a fixed fee of $36,000 for the
Administrator, as reflected in the Statement of Operations, of which $20,000
was payable to the Administrator as of 30 September 2024.
11. FINANCIAL HIGHLIGHTS
Financial highlights for the period ended 30 September 2024 and the year ended
31 December 2023 are as follows:
2024 2023
Class 1 Class Class 1 Class
Ordinary Shares
C Shares
Ordinary Shares
C Shares
Per share operating performance
Net asset value, beginning of year $ 21.0965 $ 154.0786 $ 13.2222 $ 96.0839
Income (loss) from investment operations:
Net investment gain 10.8166 0.4623 0.4677 3.4206
Management fee (0.1570) (1.1741) (0.1340) (0.9755)
Net gain on investments 9.8636 68.2926 7.5406 55.5496
Total from investment operations $ 20.5232 $ 67.5808 $ 7.8743 $ 57.9947
Net asset value, end of year $ 41.6197 $ 221.6594 $ 21.0965 $ 154.0786
Total net asset value return 97.28 % 43.86 % 59.55 % 60.36 %
Ratios to average net assets
Expenses* 40.61 % (1.36) % - -
Total expenses 40.61 % (1.36) % - -
Net investment gain (loss) 50.53 % (0.46) % 2.52 % 2.54 %
Management fee waived (0.61) % (0.62) % (0.83) % (0.83) %
* Expenses presented above are 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 period ended 30 September 2024 and
the year ended 31 December 2023. The returns for the 9 month period ended 30
September 2024 have not been annualised as the underlying investments have
been closed out as at 30 September 2024 and the difference between 9 month and
12 month performance would not be materially different. The per share amounts
and ratios reflect income and expenses allocated from the Master Fund.
12. 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.
13. schemes of arrangement ordinary course fees
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 were accelerated in 2022 and included in the
Ordinary Course Fees for the Run-Off of the Funds. As at 1 January 2024, the
brought forward Schemes of Arrangement Buy-Out Ordinary Course fees accrual
was $2,178,635. During the period ended 30 September 2024, the Company
incurred actual, and accrued for any residual, operational costs totaling
$1,100,031 (2023: $602,000) and the net balance of $1,078,604 was released as
income to the NAV due to the fact that it was deemed surplus to requirement.
The Company also allocated actual and remaining estimated fees from the Master
Fund aggregating to $155,066, which were applied against the Schemes of
Arrangement Buy-Out Ordinary Course Fees and investments in Markel CATCo
Reinsurance Fund - Markel CATCo Diversified Fund, at fair value in the
financial statements, respectively.
The acceleration of future operating expenses in 2022 is a departure from U.S.
GAAP, specifically in relation to the 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 continuing departure for the
period ended 30 September 2024, the Company has reflected a liability relating
to all future known and anticipated operational and closing costs. The amount
of the liability recorded by the Company as at 30 September 2024 is
$1,103,599, of which $804,842 relates to fees to be incurred after 30
September 2024. The liability is now classified as management fees payable and
accrued expenses and other liabilities in the financial statements.
14. SUBSEQUENT EVENTS
On 13 November 2024, the Investment Manager announced the 9th compulsory
redemption of the Company which would result in a total redemption of
approximately $21.15m being distributed to shareholders in November 2024.
Further to the aforementioned announcement, the Investment Manager released a
circular on 18 November 2024 explaining that the Board has determined to
recommend that the Company be placed into members' voluntary winding up and be
wound up. Shareholder approval is required for the Company to be wound up and
such approvals are being sought at the Special General Meeting to be held at
9:00 a.m. (Bermuda time) on 18 December 2024.
On 21 November 2024, an amount of $19,726,203, representing the Company's
investment in the Master Fund, was received from the Master Fund and as a
consequence, the Company's investment in the Master Fund was reduced to $nil.
Subsequently, the 9th compulsory redemption proceeds amounting to $21,137,104
were distributed to Shareholders on 27 and 29 November 2024.
These Financial Statements were approved by the Board and available for
issuance on 17 December 2024. Subsequent events have been evaluated through
this date.
For further information:
Markel CATCo Investment Management Ltd.
Federico Candiolo, Chief Counsel
Telephone: +1 441 493 9008
Email: federico.candiolo@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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