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


The London and Bermuda stock exchange listed reinsurance and insurance linked securities (ILS) investment fund, the Blue Capital Global Reinsurance Fund, has reported a total Net Asset Value (NAV) return, inclusive of dividends, of 9.6% for 2015, up on its prior-year performance.

Announcing its portfolio deployment for the 2016 underwriting year the Blue Capital Global Reinsurance Fund revealed another positive year of performance, with its return to investors beating 2014 by 80 basis points and above its own targets.

Under the challenging and competitive reinsurance market conditions this is a solid result for the Blue Capital ILS fund, demonstrating just how attractive a reinsurance linked investment, with the added benefit of the liquidity that a listing on a stock exchange provides, can be.

Adam Szakmary, President and CEO of the investment manager Blue Capital Management Ltd., commented on the 2015 performance; “We are pleased to report that in BCGR’s third full year of operations, the Company has continued to deliver very attractive returns to investors consistent with the preferred access Blue Capital provides to the traditional reinsurance market. The Company posted a total Net Asset Value (“NAV”) return (inclusive of dividends) of 9.6 per cent. in 2015, an increase of approximately 80 basis points from the previous year.”

Additionally, Blue Capital gave an update on the reinsurance and ILS market renewal conditions at January 1st 2016, when this fund deploys substantially the bulk of its assets. Blue Capital continued to expand its portfolio and increase the diversity of its invested positions, which all bode well for the year ahead for investors.

“The Company is also pleased to confirm its successful underwriting execution during the key January renewal period. Although pricing pressures persisted during this renewal period, we successfully grew our deployed capacity, improved the diversification of our portfolio and maintained expected profitability in line with our targeted returns. We remain confident that we can continue to deliver attractive un-correlated returns to shareholders,” explained Szakmary.

At the January 2016 renewals the fund increased its total investments by $9.8m, compared to a year earlier, resulting in a total allocation of $208.5m into reinsurance and private ILS positions via allocating capital to the master fund, Blue Capital Global Reinsurance SA-1.

The master fund invests the majority of the capital in transactions executed by the reinsurance vehicle Blue Water Re Ltd., as well as into industry loss warranties (ILW’s) and one catastrophe bond position.

The 2016 portfolio for the Blue Capital Global Reinsurance Fund represents a deployment of $193.8m across 102 positions, covering 47 clients and generating $44.6m of net reinsurance premiums written and fixed ILW payments, which is up $8.4m from January 2014.

The company explained that the “Growth 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.”

The fund’s shareholders approved an adjustment to its investment policy in December, which gave the manager greater scope for allocating capital at the recent renewals. The adjustment was intended to help the fund better navigate current reinsurance market conditions, avoid the worst priced business, access more of the better priced risks and also to better utilise its relationship with parent reinsurer Endurance.

The 2016 portfolio investments made by the Blue Capital Global Reinsurance Fund could provide for a no-loss return as high as 15%, but a more reasonable forecast is the expected return range of 7% to 12%, based on a net aggregate return distribution between a mean and median catastrophe year. The probability of achieving that mean or greater return in 2016 is cited by the manager as 68%.

As at January 1st 2016 the majority of the fund’s portfolio is exposed to property catastrophe first-event excess of loss contracts, with a small amount invested in second or subsequent event deals and aggregate covers. In total 78% is allocated to property catastrophe reinsurance deals.

21% is allocated to industry loss warranties (ILW’s), with more than half in second and subsequent event covers. A small 1% of the overall portfolio is invested in a single $2m position in one catastrophe bond.

39% of the portfolio is exposed to indemnity reinsurance contracts, 34% to quota share retrocession deals, 5% to indemnity retrocession, 14% to industry loss warranties, 7% to non-property catastrophe risks and 1% to the single catastrophe bond.

Within the quota share retrocessional agreements that the fund invests in the underlying number of positions that it gains exposure to add up to a huge 1,565, which greatly expands the diversification of the exposures the fund can access and benefit from.

In terms of probable maximum loss exposure for 2016 (on a first-event basis), the fund is 33% exposed to Florida hurricanes, 11% to Japan earthquake, 10% to Gulf of Mexico hurricanes, 10% to UK and Ireland windstorm, 10% to U.S. mid-Atlantic hurricanes, 8% to U.S. northeast hurricanes, 7% to Japan typhoons, 6% to California earthquakes and the remaining less than 5% to other territories, regions and perils.

So after a successful total return including dividends in 2015, the Blue Capital Global Reinsurance Fund has again built what appears a diverse and solid portfolio for 2016.

As Blue Capital settles into its ownership by insurance and reinsurance firm Endurance, the opportunities to access business through the re/insurer will increase and that could extend the reach the manager has when constructing portfolios for its funds and vehicles, which should ultimately benefit the end-investors.

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