REG - CATCo Re-ins Opps Fd - Final Results
28/04/2022 07:15
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RNS Number : 6203J CATCo Reinsurance Opps Fund Ltd 28 April 2022
27 April 2022
CATCo Reinsurance Opportunities Fund Ltd. (the "Company")
Annual Financial Report
For the 12 month period 1 January 2021 to 31 December 2021
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 held by
the Company are exposed to risk relating to reinsurance contracts entered into
from 2016 to 2019 only, and Markel CATCo Investment Management Ltd. (the
"Investment Manager") remains focused on proactively managing the trapped
capital and returning it to Shareholders in as timely and orderly a manner as
possible.
On 27 September 2021, the Company announced a buy-out transaction (the
"Buy-Out Transaction") which was subsequently improved. This was approved by
investors, sanctioned by the Bermuda court and implemented in March 2022. The
Buy-Out Transaction effected an early return to investors in the Company at a
premium to the NAV per share attributable to the Company's assets, while
allowing investors to retain the right to receive any upside at the end of the
run-off period if currently held reserves are more than sufficient to repay
the amount advanced to fund the early return of capital after ultimate claims
related to reinsurance loss events have been settled.
NET ASSET VALUE ("NAV")
The Company opened the year with a total NAV of $111.8m which consisted of
$47.8m Ordinary Share NAV and $64.0m of C Share NAV. During the year, the NAV
reduced to $106.8m, of which $50.6m relates to the Ordinary Share NAV and
$56.2m to the C Share NAV. The overall reduction in the NAV is due to the
return of capital to Shareholders in 2021 of $27.2m split between the Ordinary
Shares and the C Shares, offset by a reduction in claims and favourable
development on the loss reserves related to 2016-2019 catastrophe events.
During the same period, the NAV per Share of the Ordinary Shares increased to
$0.3389 ($0.2828: 1 Jan 2021) and the C Share NAV per Share increased to
$0.6750 ($0.5071: 1 Jan 2021).
The increase in the NAV per Ordinary Share and C Share, as reflected in the
December 2021 NAV, was due to the proactive management of the portfolio by the
Investment Manager combined with favourable developments in underlying loss
exposures.
Side Pocket Investments ("SPIs")
As at 31 December 2021, the SPIs in total represent c. 97.66 per cent of
Ordinary Share NAV (31 December 2020: c. 92.4 per cent) and c. 92.36 per cent
of the C Share NAV (31 December 2020: c. 83.07 per cent).
The position of the 2016, 2017, 2018 and 2019 SPIs was as follows, as at 31
December 2021:
• 2016 SPIs, initially established for the Fort McMurray
Wildfire, Jubilee Oil Field, Hurricane Matthew, and the South Island
earthquake in New Zealand, amount to c. 9.94 per cent of the Company's
Ordinary Share NAV (31 December 2020: c. 10.51 per cent of Ordinary Share NAV)
• 2017 SPIs, principally relating to Hurricanes Harvey,
Irma and Maria and the 2017 California Wildfires, amount to c. 67.28 per cent
of the Company's Ordinary Share NAV (31 December 2020: c. 58.38 per cent of
Ordinary Share NAV)
• 2018 SPIs, principally relating to Hurricanes Michael
and Florence, Typhoon Jebi and the 2018 California Wildfires, amount to c.
12.38 per cent of Ordinary Share NAV and c. 62.41 per cent of C Share NAV (31
December 2020: c. 10.56 per cent and c. 43.24 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. 8.06 per cent of
Ordinary Share NAV and c. 29.95 per cent of C Share NAV (31 December 2020: c.
12.95 per cent and c. 39.83 per cent of Ordinary Share and C Share NAV
respectively).
In respect of the underlying investments related to underwriting years
2016-2019, the Investment Manager relies on the latest available claim
information from cedants which, at this point in time, post the loss events,
supersedes the modelled losses or the insured loss estimates provided by third
parties. Whilst the Investment Manager deems the existing loss reserves are
sufficient, there is an ongoing element of uncertainty in relation to
underlying prior year loss event contracts which may lead to favourable or
adverse loss development in the future.
The Investment Manager believes at the time of this report that the benefit of
California wildfire subrogation recoveries on reported losses on indemnity
contracts has been substantially realised.
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 2021
SPIs % of Share NAV Value in $m
Ordinary Shares
SPI 2016 9.94% 5.0
SPI 2017 67.28% 34.0
SPI 2018 12.38% 6.3
SPI 2019 8.06% 4.1
C Shares
SPI 2018 62.41% 35.1
SPI 2019 29.95% 16.8
Additionally, as at 31 December 2021, cash of $1.2m and $4.3m was held for the
benefit of the Ordinary Shares and C Shares respectively.
Whilst it is not now possible to determine the ultimate value of SPIs to be
realised, the Investment Manager will continue to report the fair value of
underlying investments through the issuance of Ordinary and C Share NAVs.
RETURN OF CAPITAL TO SHAREHOLDERS
Prior to the completion of the Buy-Out Transaction in March 2022, the return
of capital to the Company by Markel CATCo Reinsurance Fund Ltd (the "Master
Fund SAC") was subject to the approval of the Bermuda Monetary Authority
("BMA") and driven by the contractual arrangements between cedants and Markel
CATCo Re Ltd. ("the Reinsurer"), with such cedants typically releasing capital
that is held in a Side Pocket Investment ("SPI") on the earlier of:
i. the capital no longer being needed to cover potential losses (in
accordance with the terms of the relevant reinsurance contract); or
ii. upon settlement commutation (the negotiation of which will begin no
later than 36 months after the end of the risk period).
From the commencement of the Run-Off (26 March 2019) to 31 December 2021, the
Company has successfully returned $290.5m of capital to Shareholders by means
of dividends, tender offer, share buybacks and compulsory share redemptions.
During the period from 1 January 2021 to 31 December 2021, the Company
returned $27.2m of capital to Shareholders by means of two compulsory share
redemptions.
Total Capital Return since 26 March 2019 (date on which Shareholders approved
the Run-Off) to
31 December 2021:
Form of Return Payment or Ordinary Shares ($m) C Shares Total
Redemption Date / Period
($m) ($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 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
Total Capital Return 63 227.5 290.5
CONCLUSION TO GOVERNMENT ENQUIRIES
On 6 December 2018, Markel Corporation reported that the U.S. Department of
Justice, U.S. Securities and Exchange Commission ("SEC") and the BMA
(collectively, the "Governmental Authorities") were conducting inquiries (the
"Markel CATCo Inquiries") into loss reserves recorded in late 2017 and early
2018 at the Investment Manager and its subsidiaries (collectively, "Markel
CATCo"). These inquiries were limited to Markel CATCo and did not involve
Markel Corporation or its other subsidiaries.
Markel Corporation previously disclosed that it had retained outside counsel
to conduct an internal review of Markel CATCo's loss reserving in late 2017
and early 2018. The internal review was completed in April 2019 and found no
evidence that Markel CATCo personnel acted in bad faith in exercising business
judgment in the setting of reserves and making related disclosures during late
2017 and early 2018. Markel Corporation's outside counsel met with the
Governmental Authorities and reported the findings from the internal review.
On 27 September 2021, the SEC notified Markel Corporation that it had
concluded its investigation and it did not intend to recommend an enforcement
action against Markel CATCo. On 28 September 2021, Markel was advised by the
U.S. Department of Justice ("DOJ") that it had concluded its investigation and
will not take any action against Markel CATCo.
Throughout the inquiries, the BMA was kept informed of the status of the SEC
and DOJ investigations, including the conclusion of those investigations.
There are currently no pending requests from the BMA and it has been over a
year since it has contacted Markel Corporation in relation to the governmental
inquiries.
Buy-OUT TRANSACTION
On 27 September 2021 the Company announced a proposal for a Buy-Out
Transaction, which would provide for, inter alia, an accelerated return of
substantially all the NAV in 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 was to be implemented with
funding provided by Markel Corporation, through Bermuda schemes of arrangement
(the "Schemes") to be proposed by both the Company and Markel CATCo
Reinsurance Fund Ltd. Investors were given the opportunity to undertake to
support the Buy-Out Transaction before the Early Consent Deadline, with
investors that did so being entitled to an additional consent fee at
completion.
To support the implementation of the Buy-Out Transaction through the Schemes,
each of the Company, the Master Fund SAC, the Investment Manager and the
Reinsurer filed applications with the Supreme Court of Bermuda for the
appointment of joint provisional liquidators with limited powers (the "JPLs").
On 1 October 2021 the JPLs were appointed. On 5 October 2021, the JPLs
petitioned for the provisional liquidation proceedings to be recognised by the
U.S. Bankruptcy Court in the Southern District of New York. This request was
subsequently granted along with other ancillary relief.
The appointment of the JPLs and U.S. recognition allowed, along with the
necessary investor support, for the smooth implementation of the Buy-Out
Transaction and approval of the Schemes. The Company did not make any further
returns of capital while the JPLs were appointed and the Buy-Out Transaction
was being considered and implemented.
Upon the expiry of the Early Consent Deadline for the Buy-Out Transaction on
22 October 2021, investors representing over 90% of the Master Fund SAC and
investors representing over 95% of the Company had entered into support
undertakings or otherwise indicated their support for the Buy-Out
Transaction.
On 26 October 2021, it was announced that Markel Corporation had agreed to
increase the funding it would provide in order 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 of arrangement
to implement the Buy-Out Transaction.
Under the improved terms of the Buy-Out Transaction, investors in the Funds
retained the right to receive any possible upside at the end of the applicable
run-off period if currently held reserves exceed the amounts ultimately
necessary to pay claims and after the repayment of the "Buy-Out Amount"
provided by affiliates of Markel Corporation to fund the return of NAV to
investors. The affiliates of Markel Corporation financing the Buy-Out
Transaction expect to receive a return of the Buy-Out Amount by the end of the
run-off periods.
On 3 February 2022, the Investment Manager, the Master Fund SAC and Markel
Corporation entered into a settlement agreement with certain investors that
had opposed the Schemes (the "Litigation Claimants"), which resolved their
opposition to the Schemes and certain litigation brought against a former
officer of the Manager in the US (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 shares in full and final satisfaction
of their interests in the Master Fund SAC and (ii) an aggregate additional
payment of $20 million funded by Markel Corporation and D&O insurance
coverage in consideration for granting the releases of their claims and
dismissing with prejudice the US 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 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
after ultimate claims related to reinsurance loss events have been settled.
Investors in the Master Fund SAC, including the Company, also received their
pro rata share of an additional cash contribution of approximately $54 million
from a Markel Corporation affiliate, which will be used to off-set transaction
costs and future running costs of the Master Fund SAC, and to provide
additional cash consideration to investors.
In relation to the Company, the Buy-Out Transaction was implemented by way of
a redemption of 99% of the holdings of each investor, the proceeds of which
were paid to investors on 11 April 2022 amounting to $51.7m and $53.9m for the
Ordinary Shares and C Shares respectively. Investors remain entitled, through
their retained interest in the Company, to receive the remaining assets of the
Company (as and when such assets become available for distribution and the
Board determines it is appropriate to make such distributions), including any
surplus from the existing cash reserves held by the Company and any upside
following the repayment of the Buy-Out Amount and settlement of reinsurance
claims.
Commutations
The Investment Manager is continuing proactively to pursue the run-off of the
remaining 2017-2019 risk portfolios having closed out the 2016 contracts and,
whilst the underlying risk contracts typically have a 36-month reporting
period post expiry of the risk period, the Investment Manager has the
discretion to either commute the contract or continue to hold it open if they
consider that to do so is in the best interest of the investors.
As at the time of this report, there were 18 open contracts remaining at the
Reinsurer, the majority of which relate to 2018 and 2019 underwriting years.
The 2017 SPIs were all subject to commutation negotiations on or before
mid-year 2021.
Approximately 50 per cent of the remaining 2018 SPIs were subject to
commutation at 31 December 2021 and the other 50 per cent due for negotiation
from 30 June 2022. Finally, the remaining 2019 SPIs are subject to commutation
negotiation from 31 December 2022.
OUTLOOK
The Board has been in regular discussion with the Investment Manager to
determine the outlook for the Company and evaluate the future potential for
further upside from the underlying portfolio. Whilst it is not possible to
determine the ultimate future value of these contracts, the Investment Manager
has indicated that it is likely that some commutations will be achieved within
the next six months. Any resulting upside (after repayment of the Buy-Out
Amount) will be reflected in the future reported NAVs and such proceeds will
be distributed to Shareholders thereafter. The Investment Manager will
continue to work on the remaining commutations with the cedants.
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
ongoing expenses are monitored carefully in order to maximise value for
Shareholders. The Board will be reducing in size from three to two.
The Board has sought to reduce the total cost of running the Fund and has
reduced costs materially which is expected to take annual costs down by
approximately 40 per cent.
The Company currently holds approximately $5m for working capital purposes,
and the Board believes that it is prudent to retain a material cash buffer on
account of projected run-off costs. As visibility on valuations, commutations
and any resulting upside become clear, any residual amount will be distributed
to Shareholders at the Board's discretion.
The Board has considered the benefits of maintaining a UK listing and, while a
number of contracts remain open and the scope for valuation upside remains,
the Board has determined it is appropriate to remain listed at this point in
time.
James Keyes
Chairman,
CATCo Reinsurance Opportunities Fund Ltd.
27 April 2022
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 specialist 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 has commenced the
orderly Run-Off of the Reinsurer's existing portfolio, which is expected to
take approximately three years from 1 January 2020. As part of this Run-Off,
the Master Fund SAC will return capital to its investors, including the
Company (after repayment of the Buy-Out Amount, as described below). The
Company distributed the net proceeds of the Special Redemption received during
the year ended 31 December 2019 by means of special dividend, tender offer and
share buybacks. On 6 April 2020, Shareholders approved the proposals set out
in the Shareholder Circular dated 13 March 2020 to permit the Company to
return further capital to Shareholders by means of compulsory share
redemptions. During the year ended 31 December 2021, the Company returned
$27.2m to Shareholders by means of compulsory share redemptions.
On 27 September 2021, the Company announced a proposal for a buy-out
transaction (the "Buy-Out Transaction") that would provide for, inter alia, an
accelerated return of substantially all the net asset value (NAV) in 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.
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 (please
refer to Note 5 to the Financial Statements ("COVID-19 Considerations"). The
Board is assured that the operational activities of the Investment Manager
continue to be substantially unaffected by COVID-19 in terms of quality and
continuity, that there are sufficient systems and controls in place to ensure
the continuity and adequacy of the services provided by the Investment
Manager, and that the Run-Off process, including returns of capital to
Shareholders (after repayment of the Buy-Out Amount, as described above) and
the management of costs and expenses, will continue to be managed efficiently.
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 or her 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
27 April 2022
STATEMENTS OF ASSETS AND LIABILITIES
(Expressed in United States Dollars) 31 Dec. 2021 31 Dec. 2020
$ $
Assets
Investments in Markel CATCo Reinsurance Fund - 101,307,151 97,370,089
Markel CATCo Diversified Fund, at fair value (Notes 2 and 6)
Cash and cash equivalents (Note 3) 5,606,161 4,268,386
Due from Markel CATCo Reinsurance Fund - - 10,696,244
Markel CATCo Diversified Fund (Note 10)
Other assets 59,963 53,369
Total assets 106,973,275 112,388,088
Liabilities
Management fee payable 3,420 9,053
Accrued expenses and other liabilities 193,343 532,664
Total liabilities 196,763 541,717
Net assets 106,776,512 111,846,371
NAV per Share (Note 8)
STATEMENTS OF operations
(Expressed in United States Dollars) Year ended Year ended
31 Dec. 2021 31 Dec. 2020
$ $
Net investment loss allocated from Master Fund
Interest income 1,074 436,586
Management fee waived (Note 10) 684,764 1,516,824
Management fee (Note 10) (1,369,528) (3,033,648)
Administrative fee (Note 11) (112,234) (181,302)
Professional fees and other (116,558) (150,707)
Schemes of arrangement cost (Note 14) (4,437,070) -
Net investment loss allocated from Master Fund (5,349,552) (1,412,247)
Investment income
Interest 657 53,416
Total investment income 657 53,416
Company expenses
Management fee waived (Note 10) 56,526 224,034
Professional fees and other (659,723) (1,415,303)
Management fee (Note 10) (113,052) (448,068)
Administrative fee (Note 11) (75,000) (75,000)
Schemes of arrangement cost (Note 14) (229,415) -
Total Company expenses (1,020,664) (1,714,337)
Net investment loss (6,369,559) (3,073,168)
Net realised loss and net change in unrealised gain / (loss) on securities
allocated from Master Fund
Net realised loss on securities (63,096,478) (169,722,417)
Net change in unrealised loss on securities 91,596,068 174,126,929
Net gain on securities allocated from Master Fund 28,499,590 4,404,512
Net increase in net assets resulting from operations 22,130,031 1,331,344
STATEMENTS OF changes in net assets
(Expressed in United States Dollars) Year ended Year ended
31 Dec. 2021 31 Dec. 2020
$ $
Operations
Net investment loss (6,369,559) (3,073,168)
Net realised loss on securities allocated from Master Fund (63,096,478) (169,722,417)
Net change in unrealised loss on securities allocated from 91,596,068 174,126,929
Master Fund
Net increase in net assets resulting from operations 22,130,031 1,331,344
Capital share transactions
Repurchase of Class Ordinary Shares (Note 8) (5,399,961) (36,433,899)
Repurchase of Class C Shares (Note 8) (21,799,929) (159,929,806)
Net decrease in net assets resulting from capital share transactions (27,199,890) (196,363,705)
Net decrease in net assets (5,069,859) (195,032,361)
Net assets, at 1 January 111,846,371 306,878,732
Net assets, at 31 December 106,776,512 111,846,371
STATEMENTS OF cash flows
(Expressed in United States Dollars) Year ended Year ended
31 Dec. 2021 31 Dec. 2020
$ $
Cash flows from operating activities
Net increase in net assets resulting from operations 22,130,031 1,331,344
Adjustments to reconcile net increase in net assets resulting from operations
to net cash provided by operating activities:
Net investment loss, net realised loss and net change in unrealised (23,150,038) (2,992,265)
gain/(loss) on securities allocated from Master Fund
Sale of investment in Master Fund 19,212,976 188,262,647
Changes in operating assets and liabilities:
Due from Markel CATCo Reinsurance Fund Ltd. - 10,696,244 11,428,695
Markel CATCo Diversified Fund
Other assets (6,594) 24,415
Management fee payable (5,633) 4,316
Accrued expenses and other liabilities (339,321) (61,780)
Net cash provided by operating activities 28,537,665 197,997,372
Cash flows from financing activities
Repurchase of Class Ordinary Shares (5,399,961) (36,433,899)
Repurchase of Class C Shares (21,799,929) (159,929,806)
Net cash used in financing activities (27,199,890) (196,363,705)
Net increase in cash and cash equivalents 1,337,775 1,633,667
Cash and cash equivalents, at 1 January 4,268,386 2,634,719
Cash and cash equivalents, at 31 December 5,606,161 4,268,386
NOTES TO THE FINANCIAL STATEMENTS - 31 December 2021
(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 "Private Fund"), 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
2021, the Company's ownership is 16.35 per cent of the Master Fund.
On 25 July 2019, the Board of Directors (the "Board") announced that the
Company will cease accepting new investments and will not write any new
business going forward through the Reinsurer. As of this date, the Investment
Manager commenced the orderly Run-Off (the "Run-Off") of the Reinsurer's
existing portfolio, which is reasonably expected to be completed in the first
half of 2023. As part of this Run-Off, the Company will return capital (which
will continue to be subject to side pockets) to investors as such capital
becomes available (after repayment of the Buy-Out Amount, as described
below). Refer to Going Concern Considerations under Basis of Presentation
below.
On 27 September 2021 the Company announced a proposal for a buy-out
transaction (the "Buy-Out Transaction") that would provide for, inter alia, an
accelerated return of substantially all the net asset value ("NAV") in the
Master Fund SAC and the Company (together, the "Funds") to investors
(further details of the Buy-Out Transaction appear in the Chairman's Statement
and the Directors' Report). To support the implementation of the Buy-Out
Transaction through the Schemes of Arrangement in Bermuda (the "Schemes"),
each of the Company, the 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 pay claims and after the repayment of the "Buy-Out Amount"
provided by affiliates of Markel Corporation to fund the return to NAV of
investors. The affiliates of Markel Corporation financing the Buy-Out
Transaction expect to receive a return of all the Buy-Out Amount by the end of
the Run-Off periods.
On 3 February 2022, the 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 US (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 US litigation.
On 7 March 2022 at scheme meetings convened by Bermuda court order, the Funds'
respective investors voted overwhelmingly to approve the Schemes to implement
the Buy-Out Transaction. On 11 March 2022, the Supreme Court of Bermuda
entered orders approving the Schemes. On 16 March 2022, the United States
Bankruptcy Court for the Southern District of New York entered orders
approving the enforcement in the United States of the Bermuda court
sanctioning orders pursuant to Chapter 15 of the United States Bankruptcy
Code. The Closing Date of the Buy-Out Transaction occurred on 28 March 2022 in
accordance with the terms of the Schemes.
Under the Buy-Out Transaction, the Funds' investors received an accelerated
return of 100% of the NAV of the Funds as at 31 January 2022, with investors
retaining the right to any upside at the end of the applicable Run-Off period
if currently-held reserves exceed the amounts advanced by affiliates of Markel
Corporation to fund the return of capital after the ultimate claims related to
reinsurance loss events have been settled. Investors in the Master Fund SAC,
including the Company, also received their pro rata share of an additional
cash contribution of approximately $54 million from a Markel Corporation
affiliate to off-set transaction costs and future running costs of the Master
Fund 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.
The Investment Management 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
access 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 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"). 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").
Going Concern Considerations
In accordance with ASC 205-40-50, Presentation of Financial Statements-Going
Concern, the Investment Manager and the Board have reviewed the Company's
ability to continue as a going concern and have confirmed their intent to
continue to Run-Off the Company's portfolios as a going concern with
no imminent plans to liquidate the Company. The Investment Manager and the
Board have concluded that the Company has sufficient financial resources to
continue as a going concern based on the following key considerations: (i) the
Company holds investments in the Master Fund which are supported by underlying
fully collateralised reinsurance contracts in the Reinsurer that are expected
to be settled on or around 31 December 2022, and (ii) the Investment Manager
and the Board have reviewed the Company's cash forecast for 18 months from the
date of this report and have determined that the Company has sufficient cash
to adequately meet operational expenses. Based on the aforementioned reasons,
the Company continues to adopt the going concern basis in preparing the
financial statements for the year ended 31 December 2021.
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 2021 and 2020, 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 2021 and 2020, the Master Fund held no ILW contracts.
Investment in Securities issued by the Reinsurer and subscribed to by the
Master Fund
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 2021 and
2020.
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 monthly basis. In addition, the Company incurs and accrues its own income
and expenses.
Investment transactions of the Master Funds are accounted for on a trade-date
basis. Realised gains or losses on the sale of investments are calculated
using the specific identification method of accounting. Interest income and
expense are recognised on the accrual basis.
Translation of Foreign Currency
Assets and liabilities denominated in foreign currencies are translated into
United States dollar amounts at the period-end exchange rates. Transactions
denominated in foreign currencies, including purchases and sales of
investments, and income and expenses, are translated into United States dollar
amounts on the transaction date. Adjustments arising from foreign currency
transactions are reflected in the Statements of Operations.
The Company does not isolate the portion of the results of operations arising
from the effect of changes in foreign exchange rates on investments from
fluctuations arising from changes in market prices of investments held. Such
fluctuations are included in net gains or losses on securities in the
Statements of Operations.
Income Taxes
Under the laws of Bermuda, the Company is generally not subject to income
taxes. The Company has received an undertaking from the Minister of Finance of
Bermuda, under the Exempted Undertakings Tax Protection Act 1966 that in the
event that there is enacted in Bermuda any legislation imposing income or
capital gains tax, such tax shall not until 31 March 2035 be applicable to the
Company. However, certain United States dividend income and interest income
may be subject to a 30% withholding tax. Further, certain United States
dividend income may be subject to a tax at prevailing treaty or standard
withholding rates with the applicable country or local jurisdiction.
The Company is required to determine whether its tax positions are more likely
than not to be sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. The tax benefit recognised is measured
as the largest amount of benefit that has a greater than fifty per cent
likelihood of being realised upon ultimate settlement with the relevant taxing
authority. De-recognition of a tax benefit previously recognised results in
the Company recording a tax liability that reduces ending net assets. Based on
its analysis, the Company has determined that it has not incurred any
liability for unrecognised tax benefits as of 31 December 2021. 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 2021 and 2020.
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 2021 and 2020.
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. The
information contained in this section is a summary of publicly available
information and further detailed information regarding the PG&E chapter 11
case can be found on https://restructuring.primeclerk.com/pge/
(https://restructuring.primeclerk.com/pge/) .
As reported earlier, effective 1 July 2020, the California Bankruptcy Court
formally approved the PG&E reorganization plan. Part of that plan included
an $11 billion settlement with the Ad Hoc Subrogation Group (originally,
primary insurers only, now primary insurers and hedge funds that bought
subrogation rights from primary insurers).
It was estimated that the $11 billion plan represents a 55% recovery on an
aggregate basis to those primary insurers, such distributions are subject to a
confidential allocation formula based upon the applicable fire (defined as
claims relating to the 2017 North fires and 2018 Camp fire). Thus not all 2017
and 2018 California Wildfire losses are in scope for PG&E subrogation
proceeds.
There remains uncertainty with regards to the allocation of recoveries across
the insurance sector. Many primary insurers sold their claims during the
course of the chapter 11 proceeding at what may have been at discounted rates,
which would have ultimately decreased the amount available to reinsurers.
Contractually, any reduction due to subrogation in ground up loss (or
recovery) to the original Insurance companies flows through to the reinsurance
placements. Any potential recoveries are based on the reduction in loss to
treaty reinsurance and retrocessional reinsurance programs and are also based
on the level of each applicable layer - the order of recovery flows from the
top down. For companies that have sold their subrogation rights, any reduction
in cedant reported loss would have been computed already by the flow of any
sale price, and the likelihood of any additional recovery flowing through to
Markel CATCo as a result of the $11 billion payment is improbable.
As at 31 December 2021, the Manager believes that any subrogation benefitting
Markel CATCo has been substantially realised through reductions in updated
cedant loss reports, therefore 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
2021.
Preference Shares - Investments $ Fair Value Preference Shares - Investments $ Fair 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
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
2020.
Preference Shares - Investments $ Fair Value Preference Shares - Investments $ Fair Value
in Markel CATCo Re Ltd.
in Markel CATCo Re Ltd.
Class D 874,235 Class DP 885,163
Class P 3,021 Class DQ 64
Class S 3,615,936 Class DR 1,055,090
Class U 582,149 Class DS 39,464
Class Z 701,779 Class DT 1,349,569
Class BB 17,027 Class DY 645
Class BQ 1,549,134 Class DZ 1,662,082
Class BR 1,187,890 Class EA 2,438
Class BX 158,696 Class EB 890,698
Class BY 214,491 Class EC 183
Class BZ 6 Class ED 62,865
Class CA 382 Class EG 652,377
Class CB 7,864,225 Class EH 434,859
Class CC 1,958,820 Class EI 92,246
Class CD 1,024,262 Class EK 435,207
Class CE 1,921,558 Class EL 435,624
Class CF 330,869 Class EM 1,463,651
Class CI 1,898,899 Class EQ 522,647
Class CJ 2,052,077 Class ER 2,181,660
Class CK 209,579 Class ET 878,608
Class CL 2,770,841 Class EU 8,895,840
Class CM 580,856 Class EX 132
Class CQ 3,312,584 Class EY 339,857
Class CS 800,937 Class FA 3,075,054
Class CT 1,176,096 Class FB 2,050,036
Class CW 971,363 Class FC 930
Class CX 37,565 Class FD 1,384,229
Class DB 952 Class FE 3,951,449
Class DC 2,738,401 Class FG 1,828,845
Class DE 5,786,124 Class FH 517,507
Class DF 429,726 Class FI 199,767
Class DG 517 Class FJ 14,508
Class DH 31 Class FK 104
Class DI 20 Class FL 8,293,724
Class DK 581 Class FM 2,780,991
Class DL 356 Class FN 367,462
Class DM 694 Class FO 565,295
Class DN 59,339 Class FQ 1,293,084
Class DO 2,127,799 Expense Cell 156,026
Total Investments in Markel CATCo Re Ltd. Preference Shares $ 95,719,797
As at 31 December 2021, the Company's proportionate share of the Master Fund's
cash and cash equivalents was $1,169,848 (2020: $5,440,338).
As at 31 December 2021, 100.00 per cent of total investments held by the
Master Fund were classified as Side Pocket Investments (31 December 2020:
100.00 per cent).
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 2021 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 2021 and 2020, 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 Premium earned Straight line for uniform perils 12 months
Seasonality adjusted for 5 to 6 months
non-uniform perils
Loss reserves Loss reserves* 0 to contractual limit
Risk margin Risk margin 0% to 30%
* Based on underlying cedant loss notifications with management judgement
applied as deemed appropriate
Master Fund's Other Assets and Liabilities
As at 31 December 2021, the Company's proportionate share in the Master Fund's
other net assets amounted to approximately $61,840,690 (2020 net assets:
$61,209) and is included in 'Investments in Markel CATCo Reinsurance Fund -
Markel CATCo Diversified Fund' on the Statement of Assets and Liabilities.
This includes amounts due to other segregated accounts of the Master Fund SAC,
and other accrued expenses (net of other assets and due from the Reinsurer).
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. At
31 December 2021, cash and cash equivalents were held with HSBC Bank Bermuda
Ltd., which has a credit rating of A-/A-2, and with HSBC Global Asset
Management (USA) Inc., which has a credit rating of A/A-2 as issued by
Standard & Poor's.
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 2021, the Reinsurer's unsettled
contracts provided reinsurance property protection against natural catastrophe
perils for financial years 2016, 2017, 2018 and 2019. Geographically, these
contracts cover locations including, but not limited to, the US (49.00 per
cent; 2020:70.00 per cent), Japan (41.00 per cent; 2020: 25.00 per cent) and
the rest of the world (10.0 per cent; 2020: 5.00 per cent). Prior year
comparatives have been reclassified to conform with the current year
presentation.
5. COVID-19 CONSIDERATIONS
As at 31 December 2021, the Board and the Investment Manager have concluded
that the recent outbreak of the novel Coronavirus ("COVID-19") at the start of
January 2020 did not have a significant financial impact on the Company's
going concern assessment. There was minimal disruption in operational
activities. The fluidity of COVID-19 precludes any prediction to its ultimate
impact, which may have a continued adverse impact on economic and market
conditions and trigger a period of global economic slowdown.
The Investment Manager is monitoring developments relating to COVID-19 and is
coordinating its operational response based on existing business continuity
plans and on guidance from global health organisations, relevant governments,
and general pandemic response best practices.
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 $15,332,410 (2020: $25,435,700)
and gross realised loss on securities of $78,428,888 (2020: $195,158,117). Net
change in unrealised loss on securities includes gross change in unrealised
gain on securities of $104,247,330 (2020: $217,026,799) and gross change in
unrealised loss on securities of $12,651,262 (2020: $42,899,870).
31 Dec. 2021 31 Dec. 2020
Investment in Markel CATCo Reinsurance Fund Ltd. - $ 101,307,151 $ 97,370,089
Markel CATCo Diversified Fund, at fair value
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 judgement as deemed appropriate to
estimate the level of reserves required. The process of estimating loss
reserves is a complex exercise, involving many variables and a reliance on
actuarial modeled catastrophe loss analysis. However, there is no precise
method for evaluating the adequacy of loss reserves when industry loss
estimates are not final, and actual results could differ from original
estimates. In addition, the Reinsurer's reserves 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 2019 losses pertaining to Hurricane Dorian, Typhoon Faxai and
Typhoon Hagibis, the 2018 losses pertaining to Hurricane Michael, Typhoon
Jebi, Hurricane Florence, the 2018 California Wildfires and the 2017 losses
pertaining to Hurricanes Harvey, Irma, Maria and the 2017 California Wildfires
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 2019 and 2018 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 2021 and 2020, 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 2021, the Reinsurer paid claims of $395,922,603 (December 2020:
$627,919,002). Of this amount $9,035,459 related to the 2016 events,
$201,648,528 related to the 2017 events, $151,311,847 related to the 2018
loss events and $33,926,769 was in respect of 2019 events.
8. CAPITAL SHARE TRANSACTIONS
As of 31 December 2021, the Company has authorised share capital of
1,500,000,000 (31 December 2020: 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 2021, the Company had issued 149,305,187 (31 December 2020:
168,898,993) Class 1 Ordinary Shares (the "Ordinary Shares") and 83,230,467
(31 December 2020: 126,369,585) Class C Shares (the "C Shares").
Transactions in shares during the year, shares outstanding, NAV and NAV per
share are as follows:
31 December 2021
Beginning Shares Share Ending Ending Net Assets Ending NAV Per Share
Repurchase
Shares
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
31 December 2020
Beginning Shares Share Ending Shares Ending Net Assets Ending NAV Per Share
Repurchase
Class 1 Ordinary Shares 305,811,860 (136,912,867) 168,898,993 $ 47,764,929 $ 0.2828
Class C Shares 437,412,476 (311,042,891) 126,369,585 $ 64,081,442 $ 0.5071
$ 111,846,371
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 Shareholder 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.
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 that 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
The Investment Manager is entitled to a management fee, calculated and payable
monthly in arrears equal to 1/12 of 1.5 per cent of the net asset value, which
is not attributable to the Company's investment in the Master Fund's shares as
at the last calendar day of each calendar month. Management fees related to
the investment in the Master Fund shares are charged in the Master Fund and
allocated to the Company. Performance fees are charged in the Master Fund and
allocated to the Company. The fees payable under the Investment Management
Agreement are the same as those which had been payable under the Old
Investment Management Agreement.
On 28 January 2021, the Investment Manager agreed to maintain the partial
waiver of 50.00 per cent of the Management Fee on Side Pocket Investments for
the financial year 2021 (2020: 50.00 per cent) of the original fee of 1.50 per
cent. This is equal to an annual Management Fee of 0.75 per cent.
Markel Corporation, which holds the entire share capital of the Investment
Manager, holds 6.61 per cent (31 December 2020: 3.86 per cent) of the voting
rights of the Ordinary Shares and 0.00 per cent (31 December 2020: 0.00 per
cent) of the voting rights of the C Shares issued in the Company as of 31
December 2021.
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. LCML
receives a monthly service fee of 75.00 per cent of the net management fees
due to the Investment Manager.
In addition, as at 31 December 2021, two of the Directors are also
shareholders of the Company. The Directors' holdings are immaterial,
representing below 1.00 per cent of the Company NAV.
As at 31 December 2021, the Company had no receivable due from Markel CATCo
Diversified Fund (2020: $10,696,244, which was exclusively related to 1
December 2020 Side Pocket Releases).
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 2021 and 2020 are as
follows:
2021 2020
Class 1 Ordinary Shares Class C Shares Class 1 Ordinary Shares Class C Shares
Per share operating performance
Net asset value, beginning of year $ 0.2828 $ 0.5071 $ 0.2659 $ 0.5157
Loss from investment operations:
Net investment (loss) (0.0193) (0.0329) (0.0023) (0.0044)
Management fee (0.0022) (0.0038) (0.0019) (0.0033)
Net gain on investments 0.0763 0.2052 0.0210 0.0010
Total from investment operations $ 0.0548 $ 0.1685 $ 0.0168 $ (0.0067)
Discount on Share Buy-Back 0.0013 (0.0006) 0.0001 (0.0019)
Net asset value, end of year $ 0.3389 $ 0.6750 $ 0.2828 $ 0.5071
Total net asset value return
Total net asset value return before performance fee* 19.38 % 33.23 % $ 6.32 % (1.29) %
Performance fee - % - % - % - %
Total net asset value return after performance fee 19.38 % 33.23 % 6.32 % (1.29) %
Ratios to average net assets
Expenses other than performance fee** (6.94) % (6.15) % (1.67) % (1.32) %
Performance fee - % - % - % - %
Total expenses after performance fee (6.94) % (6.15) % (1.67) % (1.32) %
Net investment loss (7.60) % (7.24) % (1.58) % (1.49) %
Management fee waived (0.76) % (0.76) % (0.72) % (0.65) %
* 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 2021 and
2020. 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
As at 31 December 2021, the Master Fund recorded an amount of $27,232,774 for
legal fees and restructuring cost in relation to the Schemes of Arrangement,
of which $4,437,070 was allocated to the Company. Additionally, the Company
incurred direct expenses relating to the finalisation of the Schemes of
Arrangement in the amount of $229,415.
15. SUBSEQUENT EVENTS
Following the completion of the applicable conditions precedent, 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's
investors received an accelerated return of 100% of the NAV of the Company 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 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 the 6 April 2022, the Company redeemed 147,812,056 Ordinary Shares at a
rate of USD 0.349957 per Ordinary Share (approximately USD 0.3465 per Ordinary
Share held on the basis of 100% of each Shareholder's then outstanding Shares)
and 82,398,091 C Shares at a rate of USD 0.653616 per C Share (approximately
USD 0.6471 per C Share held on the basis of 100% of each Shareholder's then
outstanding Shares). Following this redemption, the Company now has 1,493,131
Ordinary Shares in issue and 832,376 C Shares in issue with the Company's
Ordinary Shares trading under the new ISIN number BMG1961Q4075 and the C
Shares will trade under the new ISIN number BMG1961Q5064.
The resulting proceeds from the redemption were paid to shareholders on 11
April 2022 amounting to $51.7m and $53.9m for Ordinary Shares and C Shares
respectively.
These Financial Statements were approved by the Board and available for
issuance on 27 April 2022. Subsequent events have been evaluated through this
date.
For further information:
Markel CATCo Investment Management Ltd.
Judith Wynne, General Counsel
Telephone: +1 441 493 9005
Email: judith.wynne@markelcatco.com
Mark Way, Chief of Investor Marketing
Telephone: +1 441 493 9001
Email: mark.way@markelcatco.com
Numis Securities Limited
David Benda / Hugh Jonathan
Telephone: +44 (0) 20 7260 1000
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