Blue Capital London-listed ILS fund may be run-off

by Artemis on May 9, 2018

The Board of the London-listed insurance and reinsurance linked investment strategy, the Blue Capital Alternative Income Fund, is set to make a recommendation that the fund is put into an orderly run-off, after shareholders representing 39% of the ILS fund voted not to continue the company.

The exchange listed strategy is managed by insurance-linked securities (ILS) and collateralized reinsurance investment fund manager Blue Capital Management, a subsidiary of Sompo International Holdings Ltd.

The Blue Capital Alternative Income Fund had been hit hard by the catastrophe events of 2017, which reduced its available capital for deployment in 2018 as collateral was trapped on loss affected contracts.

This, has shrunk the size of the fund, to just under $130 million at the end of March, likely making it a less viable ongoing concern in the eyes of certain investors and at the annual general meeting shareholders representing 39% of the outstanding ordinary shares in the fund voted against the continuation of the company.

In response to this, the Board of the Blue Capital Alternative Income Fund said it intends to recommend an orderly run-off of the fund and would be voted on at a special general meeting to be held at the earliest practicable date.

The manager of the fund, Blue Capital Management, will take into consideration the run-off recommendation in how it conducts its business between now and the shareholder meeting.

The fund had suffered a -24.9% return in 2017, due to the impacts of hurricanes Harvey, Irma and Maria, as well as the California wildfires, Mexico earthquakes and other events.

The impact of losses from the hurricanes has continued to flow through in 2018, like so many ILS funds have experienced, with the fund suffering a negative return for March as loss estimates were increased, taking its return for the first-quarter to -2.2%.

This is not unlike the experience of many other ILS and collateralized reinsurance strategies, but the small size of this Blue Capital Alternative Income Fund due to the trapping of collateral has likely reduced the viability of it continuing as it is and the fact the shares have consistently traded at a discount to NAV for some time will also be a contributing factor.

The fund had been hoping to raise more capital this year and has constructed a portfolio that can deliver a higher return, if losses remained within expectation, but size does matter in the ILS fund world it seems.

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