Blue Capital to maintain scale of listed fund, sees 15% return potential

Given the recent catastrophe losses and the expectation that better reinsurance and retrocession market conditions are on the way, Blue Capital Management is looking to maintain the scale of its listed ILS fund and says that the median loss return target for 2018 could be as high as 15%.

The stock exchange listed Blue Capital Alternative Income Fund (formerly known as the Blue Capital Global Reinsurance Fund) has a discount management policy that could allow it to make tender offers to its shareholders, if the shares of the fund trade at a significant discount.

Despite the shares having traded at an average discount of more than 5% to the net asset value, the board of the Blue Capital fund has decided that maintaining the scale of the fund is better for taking advantage of future opportunities, as well as for the liquidity of the fund.

The company said that, “Having received views from certain major shareholders and in light of the expected improvement in market conditions, does not believe it is the right time to reduce the capital base of the Company.”

It went on to say that it also, “Believes that a reduction in the scale of the Company will further reduce the liquidity of the Ordinary Shares and result in the Company’s fixed costs being borne by a smaller net asset base.”

As a result no discount tender offer will be made at this time, the board said.

The Chairman of the board John Weale said, “The negative financial impact to the insurance industry from the third quarter catastrophe events is estimated to collectively be above $100 billion. Looking forward, we think it is prudent to retain our full capacity as we expect market pricing to improve during upcoming renewals and we will position the Company appropriately in recognition of changing market conditions.”

The fund also provided a projection for its 2018 returns, forecasting a 10% return in a mean loss scenario year and as high as a 15% return in a median loss scenario.

In making these forecasts, the board of the Blue Capital ILS fund assume that loss affected reinsurance contracts will see price rises of 15% to 25% in 2018, while other reinsurance contracts are expected to benefit from an estimated rate increase of 2.5%.

The projections also factor in the availability of collateral for redeployment, taking into account buffer loss provisions made for the recent catastrophe losses.

This isn’t a profit forecast though, it’s simply a target or projection made based on the latest available data and information that Blue Capital Management and the board of the fund has at their disposal.

But these do give an indication of the potential higher returns available to reinsurance and ILS investors through 2018, particularly the price increases expected for loss affected accounts.

This fund returned 8.26% in 2016 and while it will suffer a loss this year, due to the heavy impact of hurricanes, earthquakes and wildfires, should losses revert to a more expected level it is clear to see that it could be a profitable strategy for its investors.

Join us in New York in February 2018 for our next ILS conference