Blue Capital to raise new cash for London-listed ILS & reinsurance fund

by Artemis on November 6, 2014

London and Bermuda listed, Montpelier Re operated, reinsurance and ILS linked Blue Capital Global Reinsurance Fund, is planning to raise new capital from investors with a new placing of shares that is anticipated to close in the fourth-quarter.

It is the first time the fund has raised new capital for a while and sees it looking to grow its capital-base in order to increase the reinsurance and insurance-linked securities (ILS) business it collateralises at the upcoming January renewals.

The net proceeds raised from this new share placement will be invested in fully collateralised reinsurance-linked contracts and other investments, such as cat bonds, ILW’s etc, with exposure to insured catastrophe event risks. The majority of the capital raised is expected to be deployed at the January 2015 reinsurance renewals, according to the firm.

The fund, which is managed by Blue Capital Management, the third-party capital and reinsurance-linked investment management arm of Bermuda based reinsurer Montpelier Re, reported that at 30th September 2014 it had a market capitalisation of $191.8 million, up from $187 million at the end of June, and unaudited total net assets of $191.9 million.

Year-to-date the Blue Capital Global Reinsurance Fund has suffered a few attritional losses but still reports a 12 month NAV per share return of 8.55%, including dividends. Since those losses impacted the fund the performance has been impressive, with its three-month share price performance reaching 4.76% and its three-month NAV performance reaching 5.63%, as seasonal effects boosted the returns through the summer months.

The fund is not immune to market effects and pricing pressure is a factor. The company explained; “Pricing pressure continued to increase during the important mid-year renewal period, resulting in risk-adjusted pricing decreases of approximately 15% compared to 2013.”

However the fund can, like reinsurers, target more attractively priced business where possible and attempt to navigate the difficult market as companies do, to protect the return to investors as much as is possible in the current environment.

“The largest price decreases were observed in the catastrophe bond and retrocessional markets, where the Company is underweight, and in the layers of reinsurance programs with the greatest risk and highest premium rates,” the funds statement explains.

Blue Capital has actively taken steps to pull-back from some under-priced areas of the market and now holds less risk than it used to. So while returns will likely suffer a little due to pricing and competition, which is unavoidable in such a market, exposure is down as well.

The statement continues; “In response to these competitive pressures, the Company elected not to renew several programs that were inadequately priced, replacing these exposures with layers that incorporated better pricing on a risk-adjusted basis. As a result, the Company’s portfolio is now earning less income but has a lower risk profile compared to 2013.”

The details of the placing of new shares will be released by Blue Capital soon. It will be interesting to see how much capital the fund could raise at this time of high competition in the market. The return achieved by the fund in the last three months is a great advert for the potential of ILS and collateralised reinsurance investments even in a difficult and much softer market environment.

The fund’s share price has annualised performance since inception of 9.31% while the NAV per share performance annualised is 11.03%, including dividends. In the current financial market environment that is an extremely attractive offering to investors and with its dual London and Bermuda Stock Exchange listing the Blue Capital Global Reinsurance Fund can access a significant pool of global capital.

However the capital raise will likely not be too large as Blue Capital needs to be conscious that any capital the fund raises will need to be put to work. With attractively priced opportunities in property catastrophe reinsurance and retrocession more limited it is likely that the investment manager will take a steady approach to building the funds capital base. We will update you as and when details of the placement emerge.

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