Item 5: Fees and Compensation
Compensation received by MSC is generally comprised of fees based on a percentage of assets
under management (“Management Fee”) and performance allocations (“Performance Allocation”).
Current and prospective Clients should carefully review all fees charged by MSC.
The precise amount of, and the manner and calculation of, the Management Fee and Performance
Allocation for each Fund are established by MSC and are set forth in such Fund’s Governing
Documents received by each investor prior to investment in such Fund. The Management Fees,
Performance Allocation and other fees and distributions described herein are generally subject to
modification, waiver or reduction by MSC in its sole discretion, both voluntarily and on a negotiated
basis with selected investors via side letters and other arrangements, which may not be disclosed to
other investors in the same Fund. The fee structures may be modified from time to time. Fees may
differ from one Fund to another, as well as among investors in the same Fund.
Expenses
Each Fund will bear, or reimburse MSC for all payments of, all expenses incurred in connection
with the organization of the Fund, including legal and accounting fees, government charges, “blue
sky” and other filing fees and expenses and professional fees and expenses in connection with the
preparation of the organizational documents of the Funds and their agreement with an investment
manager (“Organizational Expenses”). Organizational Expenses in excess of certain prescribed
amounts will be a fee offset against the Management Fee.
Except as otherwise specified in the applicable Fund’s offering and organizational materials, each
Fund will bear or reimburse MSC for all expenses of its operation, including, without limitation,
costs and expenses relating to fees of any investment intermediary, custodian and escrow agent;
valuation expenses; due diligence and other investment expenses, including related research
expenses and related origination travel and lodging expenses, consultation and licensing fees
specific to applications used in evaluating Insurance Securities investments, brokerage
commissions, clearing and settlement charges, hedging expenses, interest expenses, and expenses
relating to unconsummated investments; reinsurance and insurance brokerage fees; all premiums,
insurance, indemnification of counterparties, sourcing/origination fees, escrow fees, servicing costs;
collateral security structuring and ongoing servicing costs, such as trustee fees, letter of credit and
facility fees, bank charges, the establishment of a Bermuda-based special purpose insurer and the
associated operating costs and other costs relating to the Fund providing collateral; claims and loss
adjusting expenses incurred in connection with processing, reviewing or disputing any reinsurance
or insurance losses and claims, including external legal fees and expenses, professional advisers
and claims administration fees and expenses, claims audit and verification fees and expenses and
other costs; ceding and trading commissions; premium taxes, fronting fees, other investment
expenses, such as commissions, interest on margin accounts and other indebtedness and other
expenses related to the purchase, sale or transmittal of the Fund’s assets and all other operating
expenses and other expenses associated with the acquisition, holding, management, financing,
servicing and disposition of its proposed or actual investments in Insurance Securities or other
assets; legal fees and expenses; actuarial expenses; auditing and tax preparation expenses; printing
and mailing reports and notices expenses; directors fees; costs associated with directors or
shareholders meetings; indemnification amounts and expenses relating to indemnification of
directors and service providers and of the general partner of the Fund (the “General Partner”), MSC
and other parties as set forth in the Fund’s Governing Documents; fees relating to financial services,
governmental registration, license and membership fees (including those payable to regulatory as
well as self-regulatory organizations); Management Fees; fees of the administrator; corporate
licensing fees; bank service fees; systems, research and other information used for portfolio
management purposes (including costs of statistics and pricing services), service contracts for
quotation equipment, hardware and software (including fees of third-party software developers),
valuation, withholding and transfer taxes; entity-level taxes; consultant, professional adviser, legal
or any other third-party service provider fees and expenses relating to: the preparation, review and
filing of any matters required by the Fund or its investors by a taxing authority, regulator or any
other governmental agency; regulatory and compliance expenses of the Fund, including reporting
obligations of MSC with respect to the Fund; annual reviews or self-assessments required by the
Fund to demonstrate compliance with tax or regulatory requirements; expenses incurred in
connection with any claim or any threatened or anticipated claim or any examination or audit by
any taxing authority, regulator or any other governmental agency, and other extraordinary expenses
and other similar expenses related to the operation of the Fund. The Fund will also bear expenses
relating to the offer and sale of the shares and the interests in the Fund, including the cost of
producing and distributing offering memoranda and other marketing materials, the negotiation of
Fund and side letter terms with investors, custody fees, bank charges, travel expenses, lodging,
meals and entertainment and marketing expenses, of MSC and the General Partner in connection
with the offering of the shares. Certain costs and expenses may be incurred by MSC or its affiliates
for the benefit of the Fund and one or more other Clients or affiliates. In such cases, the Fund may
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