Montpelier Re’s planned reinsurance and retrocessional linked investment fund, Blue Capital Global Reinsurance Fund Limited, is getting closer to launch with the publication today of a listing announcement and prospectus for its first public share offering. As we wrote three weeks ago, the Bermudian reinsurer has been planning to launch a fund based collateralized reinsurance and retro play in the market through its Blue Capital Management investment management subsidiary.
Blue Capital Management has been providing investors with ways to access reinsurance and catastrophe risk for some time with many being privately arranged structures. The newly created Blue Capital Global Reinsurance Fund will seek a stock exchange listing on both the London Stock Exchange’s Specialist Fund Market (SFM) and on the Bermuda Stock Exchange (BSX) which will greatly widen the reach of the fund to a much broader audience of investors.
According to the announcement Blue Capital Global Reinsurance Fund Limited is a closed ended mutual fund and will seek to list on both the SFM and BSX on the 6th of December. That suggests this will have been marketed to investors for some time and this is just the official placement of marketing prospectus on the exchange. At this time we don’t know how well subscribed this offering of shares is nor what the target size of the fund is.
The fund is set up as a feeder fund and will invest in a diversified portfolio of fully collateralised reinsurance-linked contracts and other investments carrying exposures to insured catastrophe event risks via a segregated account of Blue Water Master Fund Ltd., identified as Blue Capital Global Reinsurance SA-I (the “Master Fund”).
By providing its investors with an opportunity to access the returns of global reinsurance markets and catastrophe risks it aims to offer a return uncorrelated with other asset classes such as equities. The fund seeks to target an annualised dividend yield return of Libor +6% on the issue price of the shares and longer term a net return to shareholders of Libor +10%.
Blue Capital Global Reinsurance Fund intends to invest in predominantly in fully collateralised reinsurance-linked contracts through investing in preference shares issued by Blue Water Re Ltd. a reinsurer which in turn writes the reinsurance contracts with the ceding companies. It may also invest in other reinsurance-linked investments carrying exposure to insured catastrophe event risks such as Industry Loss Warranties (ILWs), Catastrophe Bonds and other Insurance-Linked Securities.
They intend to follow a similar diversification strategy to other funds, diversifying across a number of geographies, perils, occurrence structures. The portfolio will be diversified across 21 geographic regions, according to the announcement, focused within North America (primarily the USA), Europe and Asia (primarily Japan). To enhance the diversification offered the fund puts in place certain investment restrictions such as maximum aggregate exposure by specific zone. Each zone will be defined by a combination of geography, peril and occurrence.
The maximum aggregate exposure the fund will have in any one zone will be 35% of the funds NAV. Examples of zones would be USA Florida Windstorm 1st event; USA Florida Windstorm 2nd Event; UK and Ireland Windstorm 1st event; UK and Ireland Windstorm 2nd Event; USA California Earthquake 1st event; Japan Earthquake 1st event; and USA Midwest Aggregate. They intend to keep the probable maximum loss from any one event at a 1-in-100 year return period will be 25% of NAV. For earthquake events that rises to 1-in-250 year events for a 25% NAV impact. The fund will not invest in any contract or security with a premium of less than 5% of the limit exposed to a single event and no more than 20% of the funds NAV may be invested in a single contract or security.
By putting these restrictions in place up front Blue Capital will have multiple risk zones that they can diversify across. With 21 geographic regions plus the added diversifiers of aggregate or occurrence and 1st or 2nd event, it’s clear that Blue Capital will be diversifying broadly.
That’s a very similar strategy to the one successfully followed by a number of other reinsurance-investment linked funds and we assume that a lot of the reinsurance business Blue Capital Re will underwrite will be retrocessional enabling them to take on high-risk, high premium business while strictly following a diversification strategy that means even the most major catastrophe events can only do moderate damage to the portfolio and returns.
Blue Capital Management Ltd. serves as the investment manager for both the Blue Capital Global Reinsurance Fund and the Blue Water Master Fund Ltd. It is wholly owned by Montpelier Re Holdings Ltd. and therefore benefits from Montpelier’s industry leading proprietary reinsurance modelling tools, underwriting expertise and broker/client relationships. The same goes for Blue Water Re who will benefit from all of the Montpellier Re resources as well.
William Pollett, President of Blue Capital and also Chief Corporate Development and Strategy Officer, Treasurer and SVP for Montpelier Group, said; “We are delighted to announce the proposed listing of the Company on the SFM and BSX. The Company will provide targeted exposure to the reinsurance market via a partnership with Montpelier’s global property catastrophe franchise. We believe Montpelier’s reach and expertise will allow Blue Capital to construct a diversified portfolio with attractive risk-adjusted return characteristics.”
The timeline for the launch of Blue Capital Global Reinsurance Fund is as follows. The latest date for applications and placements is on the 3rd of December, then on the 4th the results of the listing will be announced (including the size we’d imagine) followed by the official listing on the 6th December.
This is a very good time to launch such a vehicle and we suspect that the capital raised from this share issuance will be deployed at the January renewals most likely on retro and high-value reinsurance contracts. Blue Capital’s investment strategy is to be as diversified as possible. In fact the announcement says it would like to invest in a more diversified range of reinsurance instruments than is typical of most reinsurance funds and it believes that the access to the reinsurance market that its relationship with Montpelier Re gives will allow it to achieve that aim.
This launch from Montpelier Re is just the latest sign that reinsurers are finding value in the asset management side of the convergence market and looking to participate in what is currently a very profitable sector if well executed. With the backing of Montpelier Re and the track-record of its team and board, we expect Blue Capital Global Reinsurance Fund will be well received and the listing successful. We’ll update you when we hear that it has launched and we know the amount of capital the share issuance raised which may be by the end of next week.