Blue Capital fund down on collateral charge, Irma loss hike in December

Reflecting the fact that losses continue to develop for insurance-linked securities (ILS) funds and reinsurance-linked investment strategies, the stock exchange listed Blue Capital Alternative Income Fund has dropped in December, thanks to accounting for buffer loss collateral and an increase to hurricane Irma loss estimates.

The Blue Capital Alternative Income Fund (formerly known as the Blue Capital Global Reinsurance Fund), a stock exchange listed ILS fund strategy managed by Sompo International unit Blue Capital Management, has suffered heavy losses from the 2017 hurricanes and other catastrophe events.

In reporting its December results, the fund reveals a -1.79% decline for the month, taking its full-year 2017 return to -24.85% for its ordinary shares.

Driving the negativity in December were a number of factors, including what the manager termed a “modest increase in estimated losses from Hurricane Irma” as well as other attritional losses suffered and a reduction in estimated earned premiums.

But the main driver of the negative December return, in fact responsible for a -1.01% charge, is the impact of accounting recognition of “fair value of a risk margin applied against net assets that are required to be held as buffer loss collateral following the significant loss events in 2017.”

Because these buffer loss collateral balances would be unlikely to become available for deployment in their entirety, immediately after the underlying reinsurance contracts they are associated expire, fair value accounting principles mean that a risk margin charge should be taken. This is designed to reflect the uncertainty associated with the potential release of some or all of the buffer loss collateral in the future.

This charge should be reduced over time, as buffer loss collateral gets released or the uncertainty over its release declines and Blue Capital Management said that it “expects the risk margin charge to decline, with a corresponding accretion of net asset value over time as the buffer loss collateral balances decline.”

That should result in some recovery of NAV from this charge over the coming months. There is also the potential for some of the loss reserve NAV to be recovered as well, once the full extent of losses suffered becomes clear.

The experience of this Blue Capital Management fund, and also the Markel CATCo fund reserve strengthening we wrote about earlier today, show that a great deal of uncertainty remains in the final loss figures from 2017. As a result, it’s safe to assume other ILS funds have been adjusting reserves through December and possibly into January as well.