Blue Capital ILS fund “sidesteps” most competitive market segments

The London and Bermuda stock exchange listed reinsurance and insurance linked securities (ILS) investment fund, the Blue Capital Global Reinsurance Fund, described the challenging state of reinsurance renewals in its annual report yesterday, citing risk adjusted rate declines of around 4%.

The Blue Capital Global Reinsurance Fund underwrites fully collateralised reinsurance, largely for smaller, regional insurance cedents, which Chairman John R. Weale described as a “differentiated” approach, helping the company to “sidestep the most competitive market segments.”

Weale explained the competitive state of the reinsurance market saying that the continued convergence of traditional reinsurance and capital markets has also created challenges for the Blue Capital ILS fund.

The January 2016 reinsurance renewal period was a “competitive one, characterised by pressure to reduce prices and offer more generous contractual terms and conditions,” Weale explained.

But the differentiated approach of targeting these small to mid-sized regional U.S. insurers as clients does appear to have paid off, with the fund only experiencing prices declines of approximately -4% on a risk adjusted basis, compared to the prior January.

That’s a fairly low price decline, considering the fund’s focus on largely U.S. property catastrophe risks. As price declines were cited as higher by some of the brokers, it seems that the focus on these regional players risks is perhaps serving to insulate the ILS fund from some of the steepest price declines.

The reinsurer which acts on behalf of the Blue Capital ILS fund’s, Blue Water Re, also increased the size of a quota-share participation in a traditional property catastrophe book of business, in January. This serves to increase the fund’s access to a broader range of clients, Weale wrote.

This quota-share arrangement is likely with Endurance Bermuda, the parent reinsurer to Blue Capital Management. By participating in a percentage of Endurance’s risks, the Blue Capital fund can not only follow in the fortunes of a highly respected reinsurance business, but also gain additional counterparty diversity through the large Endurance portfolio it takes a share of.

The Blue Capital Global Reinsurance Fund began 2015 with $216.7 million of net assets and closed the year with $223.3 million. The 3% or $6.6 million increase represented profits generated from the investments in reinsurance contracts, net of dividend distributions and reflects the low catastrophe loss environment as well.

That’s not to say the fund was completely loss free, but 2015 saw lower losses than 2014, resulting in a net asset value positive impact year-on-year of 80 basis points. The events which caused minor losses in 2015 were largely wind and hail events in the U.S. Midwest and Southeast, along with a small losses in Europe and Australia.

The investment manager Blue Capital Management Ltd. noted that rate declines in January 2016 were smaller than those seen a year earlier. The slowing rate of decline is “directly attributable to the prevailing influence and acceptance of analytical pricing considerations that disciplined the market over this period,” the manager explained.

Rate dynamics, such as the potential for a disconnect between traditionally priced reinsurance that it underwrites and the cost of protection from instruments such as industry loss warranties (ILW’s) can enable Blue Capital to arbitrage the market, or take advantage of pricing disconnects, the manager explained.

For investors looking for an entry point into the ILS market and insurance linked investments, these stock exchange listed funds (like Blue Capital) are an ideal starting place. Providing all the benefits of ILS, in terms of return, diversification and low correlation, they also come with liquidity thanks to the exchange listing.

Also read:

– Blue Capital ILS fund returns 9.6% in 2015, reports 2016 portfolio.

– Blue Capital Reinsurance Holdings returns 11.4% in 2015.