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Blue Capital cites renewal stability, reserves for catastrophe events


The combination of technical pricing discipline and a continued trend of increasing demand for reinsurance capacity, helped moderate price declines and stabilise the market at renewals, according to insurance and reinsurance linked asset manager Blue Capital.

In an update on the mid-year and Florida reinsurance renewals for one of its funds, Blue Capital Management said that it was pleased to see pricing declines slowdown and a more stabilised marketplace, resulting in an average decline in renewal pricing of just 2%, compared to the prior year.

Blue Capital Management is a subsidiary of Bermudian reinsurance firm Endurance, specialising in insurance and reinsurance linked investment management, with a range of funds, sidecars and private mandate vehicles.

The manager also revealed that it has reserved for estimated potential losses from recent catastrophe events around the globe, the negative effect of which has now been factored into its funds NAV.

Being largely focused on property catastrophe reinsurance risks, you might expect Blue Capital to have been exposed to the steepest of price declines. However at the mid-year 2016 renewals it has been widely seen that many programs have neared a pricing floor, as appetite to continue deploying capital into catastrophe risks at any costs abated.

Blue Capital clearly experienced this moderation of the market’s risk appetite, benefiting by being able to construct a portfolio with minimal pricing declines, as reported in an update on the dual London and Bermuda Stock Exchange listed fund, the Blue Capital Global Reinsurance Fund.

Adam Szakmary, CEO & Portfolio Manager of Blue Capital Management Ltd., explained; “We are pleased to report strong portfolio execution and promising market dynamics following the June renewal period.  Overall price reductions have begun to moderate and we have witnessed a market showing continued signs of nearing a bottom with risk adjusted pricing down only 2 per cent. when compared to last year.”

“We believe the stabilizing pricing environment was influenced in part by technical pricing discipline, and a continuing trend of increasing demand for open market reinsurance limit replacing the Florida Hurricane Catastrophe Fund,” Szakmary went on to explain.

Discipline has certainly been evident, with a number of ILS players pulling back on Florida deployment while the majority remained static. At the same time the increased demand has helped to satiate excess demand, to a degree, enabling ILS managers to deploy the capital they wanted at the renewals.

Szakmary added; “Blue Capital was well positioned to take advantage of these market dynamics, constructing an attractive portfolio.”

For the Blue Capital Global Reinsurance Fund in particular, the June 2016 renewal enabled the manager to deploy total investments of $191.1 million into the Blue Capital Global Reinsurance SA‐1 (the “Master Fund”), which is up US$4.9 million year-on-year.

The majority of the assets are invested by the Master Fund into the preferred shares of Blue Water Re Ltd. (a collateralized reinsurance underwriting vehicle used by Blue Capital), industry loss warranty (ILW) derivative contracts, and one catastrophe bond transaction.

The portfolio constructed represents the deployment of $183.2 million of capital across 92 different positions and 39 different clients, which the manager notes generates $40.4 million of net insurance premium written and fixed ILW payments. This is up $6.13 million from the previous year, a sizable increase in percentage terms.

The fund also made investments in portfolio retrocessional hedging amounting to $4.6 million, which is  up $2.9 million from the previous year.

Blue Capital Management explained that the increase in premium is “directly attributable to the investment policy changes and portfolio construction adjustments made to the portfolio in response to changes in market conditions since the Company’s initial public offering.”

In the update today the Blue Capital Global Reinsurance Fund also reveals the impact of exposure to the variety of severe catastrophe loss events that have struck in the first-half of 2016.

The manager said that the fund’s net asset value (NAV) as at the 31st May 2016 now includes estimated losses related to recent catastrophe events in Japan, the United States, and Canada. As a result of the impact of these events, the fund reported May performance of -1.84% and year to 31st May as -0.66%.

With these loss estimates factored in the projected return range for the 2016 portfolio has been reduced to 5-9%, from the original 14% no loss return estimation. It should be stressed that these are initial estimates and the range is likely conservative at this time, while losses continue to develop.

It’s also important to note that the 14% no loss return projection for the 2016 portfolio was significantly above the Libor plus 8% net return the Blue Capital Global Reinsurance Fund targets for investors.

 The manager said that it “continues its normal post-event procedures to estimate any loss to the Company, and continues to monitor these events for potential material impact to the Fund.”

Blue Capital explained that its estimates of any losses, which it would then naturally reserve or side-pocket for, are based largely on proprietary catastrophe modeling, standard industry models, an in-depth review of in-force contracts and indications received from clients and brokers.

As a result the actual loss that the manager and fund suffers from a catastrophe event such as those experienced in 2016 can be materially different to estimates, which can mean higher or lower numbers when the final tally is made.

However, it is often seen, in the ILS world, that these estimates are made on a highly conservative basis, meaning that they can be overstated in many cases. Of course, the complexity of catastrophe losses and their development means that this is necessary as ILS managers do not want to surprise their investors with unexpected losses, hence conservative estimates are essential as we see with Blue Capital.

The discipline and stability seen in reinsurance pricing at the mid-year renewals, particularly in Florida, will help Blue Capital and the Blue Capital Global Reinsurance Fund through the rest of this year, as its portfolio will now be largely set through the the end of the year.

The transparent  manner in which the estimated impact of these events has been reported to investors is again testament to the ILS fund market’s desire to ensure their investors are informed and protected from worsening of estimates. Hence the tendency to side-pocket at maximum estimates in order to reduce the chance of any negative development.

Also read:

Blue Capital ILS fund “sidesteps” most competitive market segments.

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

Blue Capital Reinsurance Holdings returns 11.4% in 2015.

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