Blue Capital among ILS funds hit by hurricane loss creep in March

by Artemis on April 23, 2018

Stock exchange listed ILS and collateralized reinsurance investment strategy the Blue Capital Alternative Income Fund, suffered a -2.62% loss in March 2018, as hurricane Irma loss estimates were increased by counterparties, a factor that has negatively affected a number of ILS funds for the month.

Ever since the major hurricanes of 2017, in particular Harvey and Irma, some ILS funds have been finding that losses are creeping upwards as counterparties gain increasingly clarity over their exposures, or as industry loss estimates move around.

It can be notoriously difficult to accurately estimate the cost of major catastrophes close to the time of the event and with both Harvey and Irma the complexity of the loss event and also the issues surrounding claims in Florida (in particular with Irma) have resulted in some unwelcome loss increases through the beginning of this year.

In January 2018 it was catastrophe bond price recovery that drive ILS fund performance, while a number of funds with exposure to collateralized reinsurance treaties reported negative returns due to ongoing booking of losses and increases of estimates, from 2017 exposures.

Then in February ILS fund performance was split down the middle, as the impacts of prior losses from 2017 continued to reverberate around the ILS market and numerous ILS funds reported negative returns.

The reverberations continue, and it was the insurance-linked securities (ILS) and collateralized reinsurance investment fund manager Blue Capital Management, a subsidiary of Sompo International Holdings, which revealed the continued adjustment of losses from 2017 events late on Friday as it reported its March 2018 net asset value for the listed fund.

The Blue Capital Alternative Income Fund fell to a -2.62% net asset return for March, driving it to a -2.2% net asset return for the first three months of the year.

The cause for the major adjustment in March is hurricane Irma, as the fund manager saw increased reported ultimate net losses for certain reinsurance treaties exposed to hurricane Irma.

The manager said that these increases were aligned with increases seen to industry loss estimates recently. The estimates of Irma losses had declined before, but those declines were largely reversed in March as the industry gained a greater clarity of its expected loss from the hurricane event.

Other ILS funds are also likely to report similar increases to losses under UNL contracts for March and so far, the ILS Advisers Index shows a March return of just 0.08% based on the reporting of more than half of the ILS funds it tracks.

That suggests it will be another mixed month, with a number of ILS funds experiencing negative performance again as the impacts of the 2017 hurricanes continue to flow through.

It’s not just increases to UNL contract losses either. There have been additional industry-loss warranty (ILW) positions put into the red in March as well, due to the increase in hurricane Harvey and Irma industry loss estimates.

The overall exposure to 2017 catastrophe events for aggregate ILW’s has been rising steadily as a result of these two estimate updates, putting some into the frame for losses again and resulting in markdowns for some ILS fund positions, we understand.

With the estimate for Irma still looking to have the potential for further increases, there is always a chance that this situation continues for a few more weeks as well.

ILS funds may not be able to put the 2017 catastrophes to bed for some time yet, but the way they have been communicating loss creep to investors has been impressive in the main and a good education for investors on how long it can take for complex loss situations to fully develop.

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