Blue Capital ILS fund on target in first-half, monitoring Harvey

Reinsurance and insurance-linked securities (ILS) investment manager Blue Capital Management reported on target returns for its listed ILS fund strategy in the first-half of 2017, but noted that it is now monitoring the impacts of hurricane Harvey closely to identify any threat to the fund’s investment positions.

The Sompo (previously Endurance) owned ILS fund manager reported that its stock exchange listed Blue Capital Alternative Income Fund (formerly known as the Blue Capital Global Reinsurance Fund) saw a net asset value return of 1.8% for the first-half of the year.

That’s up on the first-half of 2016, a year which saw the full-year NAV return hit 8.3% and the Blue Capital fund will expect to derive the majority of its annual return over the second-half of the year, depending on global catastrophe event activity.

The Blue Capital Alternative Income Fund has just over $207 million in total net assets and a portfolio of reinsurance and private ILS contracts made up of over 1,500 catastrophe reinsurance contract positions, offering its investors well-diversified access to insurance-linked returns.

The fund has returned nearly 50% to investors that joined it from its launch, generating a positive return in 94.4% of months and has an annualised return through 30th June 2017 reached 8.9%.

Chairman John R. Weale commented on the first-half of 2017; “The January to June 2017 underwriting period saw promising signs in market pricing, although conditions remained competitive during this renewal period. The Reinsurer observed reductions in risk adjusted pricing beginning to moderate at approximately 3 per cent. compared with more significant reductions during previous renewal periods.

“Despite such pricing pressure, Blue Capital Management Ltd. successfully executed its renewal strategy. We remain confident that we can deliver attractive returns for our Shareholders in spite of the current insurance market cycle and the pro forma modelled return expectations for the portfolio constructed are consistent with the Company’s target return.”

The fund’s shares continue to trade at a discount to NAV and Weale said that, “The Board is considering various options and will put to Shareholders a proposed course of action in due course. The Board continues to consider ways to improve the Company’s profitability, market valuation and to monitor fees and overall expenses in relation to the Company.”

Blue Capital explained first-half global catastrophe activity, saying; “The first half of 2017 was characterized by a relatively low level of insured losses from large natural catastrophes. The most significant event was Cyclone Debbie which struck the Queensland coast as a Category 4 storm in late March 2017. It has also been an active first half within the United States due to a high frequency of tornado and hail events. The Company employed its normal post-event procedures to estimate the losses from Cyclone Debbie and other events and determined the losses did not have a material impact on the Company.”

On hurricane Harvey, which could threaten to dent second-half returns a little for many ILS funds, Blue Capital explained that it is closely assessing the impacts. The ILS manager will likely be in touch with its ceding companies and working to identify whether any contracts are at risk of impairment.

“On 25 August 2017, Hurricane Harvey made landfall near Corpus Christi, Texas as a Category 4 hurricane with winds of 130 miles per hour followed by substantial rainfall and flooding. The Investment Manager has now commenced its normal post-event procedures to estimate any loss to the Company from Hurricane Harvey, and continues to monitor this event for potential material impact to the Company,” Blue Capital explained.

So the first-half of 2017 has been relatively benign for the Blue Capital listed ILS fund strategy. The second-half may not be quite so benign, given the impacts of hurricane Harvey that are unfolding still and the forecasts for higher hurricane activity, but the diversification within the ILS portfolio should help to ensure that even a major industry loss event is only contained within a portion of the managers underwritten book.