CATCo Reinsurance Opportunities Fund Ltd. – Annual Report

Hamilton, Bermuda – 22 February, 2016 – CATCo Reinsurance Opportunities Fund Ltd. (the "Company”; Ticker: CAT.BH), released its Annual Report.  The filing stated:

To: Specialist Fund Market, London Stock Exchange and Bermuda Stock Exchange          

CATCo Reinsurance Opportunities Fund Ltd. provides its shareholders the opportunity to participate in the returns from investments linked to catastrophe reinsurance risks, principally by investing in fully collateralised reinsurance contracts and also via a variety of insurance-based investments.

2015 Highlights

·   Net Asset Value Return of 11.58%

·   Share price total return of 18.1%

·   2015 annual dividend of $0.06619 per share paid to Shareholders

·   C Share capital raise of $91mn

CHAIRMAN’S STATEMENT 2015

Welcome to the 2015 CATCo Reinsurance Opportunities Fund Ltd. (the “Company”) Annual Report. The Company has delivered another strong performance for the year ended 31 December 2015, achieving a net return for Shareholders of 11.58 percent and exceeding the Company’s stated target annual net return of LIBOR plus 9 to 12 percent per annum. The Company outperformed the industry benchmark, the Eurekahedge ILS Advisors Index, by 7.31 percent.

The 2015 net return was on track to equal last year’s NAV return of approximately 14 percent. However, in view of the UK flooding event that occurred in late December, and increased levels of uncertainty amongst the Company’s reinsurance clients, the Board decided it prudent to apply a conservative reserving approach for the event at year-end. The Investment Manager expects that a proportion of this reserve will be released during 2016.

2015 represented the fifth full year of operations of continued solid performance with a share price total return of 18.1 percent, which includes the annual dividend (at a rate of LIBOR plus 5 percent of the Company’s NAV). The Company, the largest UK listed collateralised retrocessional fund, forms part of the CATCo Group which now has a combined private and public fund capital base of approximately $3.2bn.

In 2014, Side Pocket Investments were created as a result of U.S. severe convective storm events, amounting to around 3.5 percent of NAV. These loss reserves reduced during 2015 and as at 31 December 2015 amounted to 1 percent of NAV.

Over the course of 2015 the Investment Manager also released loss reserves connected with the 2012 Superstorm Sandy Side Pocket Investment, resulting in an additional NAV appreciation of 1 percent. The majority of the capital released from these Side Pocket Investments has been redeployed into new contracts.

On 8 December 2015, Markel Corporation completed the purchase of the majority of the assets of CATCo Investment Management Ltd., the Company’s investment manager. The strength of the combined brands is reflected in the name of the Company’s new investment manager, Markel CATCo Investment Management Ltd. The Company enters 2016 with strong optimism thanks to continuing strong investor support and an expanding and dedicated client base.

Capital Raising

Following strong demand from potential new investors and after consulting with existing Shareholders, the Board took the decision to raise additional capital in 2015. The exercise exceeded expectations and the Company successfully raised $88.44mn in October and a further $3.4mn in December from both new and existing investors, issuing 91,835,018 new C Shares at a price of $1 per share.

The additional capital was fully invested as of the 1 January reinsurance renewals, which has enabled the Investment Manager to meet the increased demand from reinsurance clients during this key renewal date.

The separate share classification will remain until all Side Pocket Investments have either been released or deemed immaterial, limiting the new capital’s exposure to legacy losses. The Company has the flexibility to raise additional capital during 2016 should significant events occur or if new and attractive investment opportunities present themselves. Any further share placings under the Placing Programme, which expires on 28 September 2016, will be issued at a premium to the latest published Net Asset Value per Ordinary Share to cover the associated costs and expenses.

Dividend and Tender Offer

In order to make an investment in the Company more attractive to a wider range of investors, the Board has introduced a policy under which is has the capability to implement a Return of Value Tender Offer at the end of each fiscal year. This is in addition to the annual dividend, which has a target annual distribution equal to LIBOR plus 5 percent of NAV.

The Tender Offer will be offered at the Board’s discretion and only if the Company’s shares have been trading at a discount to the Net Asset Value per share as at 31 October in a particular year. No Return of Value Tender Offer was made in 2015.

An annual dividend of $0.06619 in respect of Ordinary Shares will be paid to Shareholders on 26 February 2016 as announced on 29 January 2016.

Shareholders

I would like to thank Shareholders for their continued support throughout 2015 and increased support for 2016. In addition the Board greatly appreciates the hard work demonstrated by the Investment Management team during 2015 resulting in another successful year for the Company. I would also like to welcome Markel Corporation as the new owners of the Investment Manager.

Nigel Barton

Chairman,

CATCo Reinsurance Opportunities Fund Ltd.

19 February 2016

Manager’s Review

In September 2015 CATCo Investment Management Ltd. agreed to sell substantially all of its assets to Markel Corporation (“Markel”), a U.S.-based financial holding company with a strong presence in specialty insurance and reinsurance products. The deal completed as planned on 8 December 2015 with the establishment of Markel CATCo Investment Management Ltd. (“the Investment Manager” or “Markel CATCo IM”). Markel CATCo IM was subsequently appointed by the Company as the new investment manager entity and serves as the investment manager for Markel CATCo Reinsurance Fund Ltd. and insurance manager for Markel CATCo Re Ltd. (collectively “Markel CATCo”). We believe Markel CATCo offers investors and clients extra financial support, scale and the opportunity to develop new products.

Founded in 1930 and headquartered in Virginia, U.S., Markel is listed on the New York Stock Exchange (MKL). As at the date of this report Markel has a market capitalisation of over $12bn and 2015 operating revenues of more that $5bn. Over the past two decades it has significantly expanded both globally and by class of business. In May 2013, Markel increased the scope of its business by purchasing Bermuda based reinsurer Alterra Capital Holdings Limited for $3.3bn.

In addition to sharing a similar culture and goals, we believe Markel offers the ability to access additional resource if it is needed. We are excited by the opportunities this union offers Markel CATCo’s clients and investors with the combination of Markel CATCo’s ILS investment management and differentiated product innovation capabilities complementing Markel’s brand and global reach.

2015 Significant Loss Events Update

2015 saw the lowest level of catastrophe losses since 2009 with total economic losses amounting to approximately $90bn, of which approximately $27bn were insured, according to Munich Re.

The largest insured loss from a natural catastrophe came from a series of winter storms which struck North-Eastern U.S. and Canada in February 2015, causing cumulative claims of $2.1bn. This could yet be surpassed by flooding in Northern England and Scotland during December 2015, with early estimates suggesting claims could be between $2.3bn and $3.3bn. As these estimates are significantly lower than the loss levels used to set the reserves at the end of December 2015, the Investment Manager is confident that a proportion of these reserves will be released during 2016.

A series of large explosions at the Chinese port city of Tianjin on August 12^th was the most costly manmade disaster of 2015. Industry claims of at least $2bn are expected.

As a result of the relatively uneventful catastrophe year, portfolio losses from the 2015 events were approximately 4.25 percent due principally to the winter storm in the U.S. and Canada, the Tianjin explosion and the UK floods. The small Tianjin exposure was fully settled at 31 December 2015 and the conservative loss reserve put in place for the UK floods is expected to be partly released during 2016 as the losses materialise.

Outlook

The Investment Manager has continued to build a robust and diversified investment portfolio for 2016, with a broad geographic spread and balanced exposure to differing risk perils. While the soft market presents challenges, it has also enabled the purchase of broader balance sheet protections for 2016, mainly in the form of ILWs, at a similar price year-on-year.

It is expected that excess capacity in the reinsurance sector and the three-year absence of significant natural catastrophe losses will continue to exert downward pressure on traditional reinsurance pricing as we move into 2016. Property catastrophe rates on line were down 7 to 10 percent at 1 January 2016, although it is the opinion of Guy Carpenter that the rate of decline has moderated, particularly for U.S. property catastrophe risks.

The Investment Manager will continue to practice underwriting discipline and prudent capital management and will look to take advantage of the challenging operating environment. The ability to further de-risk the portfolio will also be taken on an opportunistic basis.

Anthony Belisle

Chief Executive Officer

Markel CATCo Investment Management Ltd.

19 February 2016

REVIEW OF BUSINESS

A review of the Company's activities is given in the Chairman's Statement and in the Manager’s Review. This includes a review of the business of the Company and its principal activities, and likely future developments of the business.

Investment Objective

The investment objective of the Company, CATCo Reinsurance Fund (the “Master Fund”) and Markel CATCo Reinsurance Fund Ltd. (the “Markel CATCo Master Fund”) is 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, CATCo-Re Ltd. (for the year ended 31 December 2015, and, for future years, in preference shares of Markel CATCo Re Ltd. (the “Markel CATCo Reinsurer”). The Company’s investment policy appears below, and the Manager’s Review explains how the Company and the Master Fund have invested their assets with a view to spreading investment risk in accordance with the Company’s investment policy.

Benchmark

Eurekahedge Insurance Linked Securities index. This index is not a benchmark used for investment performance measurement.

Investment Policy and Investment Strategy

The Master Fund and the Markel CATCo Master Fund intend to spread investment risk by seeking exposure to multiple non-correlated risk categories so as to endeavour to limit the amount of capital at risk with respect to a single catastrophic event.

The Master Fund and the Markel CATCo Master Fund intend that:

• no more than 20 percent of their respective capital will be exposed to a single catastrophic event;

• their respective capital will only be exposed to catastrophic events at loss levels that have not occurred more than twice in the past 40 years on a trended loss estimate basis, unless otherwise approved by the Board of Directors of the Master Fund or the Markel CATCo Master Fund, as appropriate;

• their respective capital will be exposed to aviation and marine (including offshore energy) losses caused by catastrophes; and

• at least 50 percent of their respective capital will be exposed to residential and commercial property losses.

At 31 December 2015, the Portfolio of Investments reflects the stated guidelines as each of the reinsurance arrangements entered into by the Reinsurer contain several non-correlated pillars of risk and provides a portfolio exposure to 50 diversified risk pillars.

When investing, the Company’s policy is to move freely between different risk perils as opportunities arise. There are no limits to geographical or sector exposures, except as stated above, but these are reported to, and monitored by, the Board of Directors in order to ensure that adequate diversification is achieved.

While there is a comparative index for the purpose of measuring performance, no attention is paid to the composition of this index when constructing the portfolio and the composition of the portfolio is likely to vary substantially from that of the index. A short term view is taken and there may be periods when the Net Asset Value per Share declines both in absolute terms and relative to the comparative index.

Capital Structure and Voting Rights

273,224,673 Ordinary Shares of $0.0001 par value each entitled to one vote as at 1 January 2016. On 2 November 2015, the Company issued 88,435,018 C Shares, and a further 3,400,000 C Shares on 7 December 2015, resulting in a total of 91,835,018 C Shares as at 1 January 2016.

Total Assets and Net Asset Value

At 31 December 2015, the Company had Total Assets of $437.1mn and a Net Asset Value per Ordinary Share of $1.2705.

Borrowing

The Company will not borrow for investment purposes, although it may borrow for temporary cash flow purposes such as for satisfying working capital requirements. The Master Fund and the Markel CATCo Master Fund will not borrow for investment or other purposes but may invest in Insurance-Linked Instruments which are themselves leveraged.

Duration

The Company does not have a fixed life. A continuation vote will be put to Shareholders every five years.

Risk

The investment funds portfolio managed by Markel CATCo Investment Management Limited consist of fully collateralised reinsurance contracts and are largely uncorrelated to traditional asset classes. Risk is spread across multiple non-correlated risk pillars which aims to limit the amount of capital exposed with respect to a single catastrophic event.

Monitoring Performance

At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives.

The key performance indicators used to measure the progress and performance of the Company over time are established industry measures and are as follows:

.    the movement in Net Asset Value per Ordinary Share on a gross, net and total return basis;

.    the movement in the Share price on a Share price and total return basis;

.    the discount; and

.    the total expense ratio.

In addition to the above, the Board of Directors also considers peer group comparative performance.  

Management of Risk

The Manager’s risk objectives are closely linked to their performance goals. They seek to optimise trade-offs to ensure that they meet their return objectives, control the volatility of these returns, track underlying liquidity and identify and manage macro-factor risk.

The Board of Directors regularly review the major strategic 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 in addition to the reinsurance risks as discussed above relate to the Company’s investment activities and include market price, interest rate, liquidity and credit risk. Such key risks relating to investment and strategy including, for example, inappropriate asset allocation or borrowing are managed through investment policy guidelines and restrictions, and by the process of oversight at each Board meeting as previously outlined.

Operational disruption, accounting and legal risks are also covered annually, and regulatory compliance is reviewed at each Board meeting. 

An explanation of other risks relating to the Company's investment activities, specifically concentration of credit risk and concentration of reinsurance risk, are contained in notes 3 and 4 to the Financial Statements.

Results and Dividends

The total return attributable to Ordinary Shareholders for the year amounted to 11.58% (2014 – 14.08%).

At the launch of the Company, the Board of Directors indicated the intention to pay an annual dividend in respect of any Fiscal Year of an amount equal to LIBOR plus 5 percent of the Net Asset Value as at the end of the relevant Fiscal Year.

An annual dividend of USD0.06619 in respect of the Ordinary Shares for the year to 31 December 2015 was declared on 29 January 2016.

The record date for this dividend was 12 February 2016 and the Ordinary Shares went ex-dividend on 11 February 2016. The dividend will be paid to Shareholders on 26 February 2016.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Board of Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Board of Directors have 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 of Directors are 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 Directors are 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. They are 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 Directors consider 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 Markel CATCo Investment Management Ltd. is, so far as it relates to the Company, the responsibility of Markel CATCo Investment Management Ltd.

The Board of Directors are 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 and Transparency Rules, and to the best of their knowledge, each Director of CATCo Reinsurance Opportunities Fund Ltd. confirms that the financial statements have been prepared in accordance with the applicable set of accounting standards and 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 report of the Directors includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

Nigel Barton

Chairman, CATCo Reinsurance Opportunities Fund Ltd.

19 February 2016

The full report can be found using the following link:

www.bsx.com/company_details.php?CompanyID=1099937744