Blue Capital listed ILS fund dented by loss creep in Q3

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Loss creep from prior year events has struck the in run-off listed insurance-linked securities (ILS) investment fund strategy, managed by ILS and collateralized reinsurance specialist fund manager Blue Capital Management.

blue-capital-logoThe stock exchange listed Blue Capital Alternative Income Fund which had delivered a positive 2.9% return in the second-quarter of 2019, fell to a negative return of -9.7% in the third-quarter as loss creep from catastrophes over recent years continued to bite.

The fund had to set aside further reserves as increased estimated claim losses from 2017 and 2018 catastrophe events dented its return for the quarter.

This has driven the year-to-date return from its positive 3.6% at the end of Q2, down to a negative -6.4% at the end of September.

The Blue Capital listed ILS fund, which is largely focused on collateralised reinsurance investments, is of course set for liquidation.

Similar to a number of other stock exchange listed ILS fund strategies, it had struggled to achieve the size required and traded at a discount to net asset value, leading the manager to put the fund into run-off, a process that is ongoing and expected to complete in 2021.

But the remaining unimpaired investments in the ILS portfolio had been accumulating positive premiums up until the end of Q2, however loss creep has come back to dent the funds performance significantly in recent months.

Loss estimates have increased for events including some of the 2017 hurricanes, in particular hurricane Irma, the Japanese typhoon Jebi from 2018 and some of the California wildfire events as well, some or all of which will have caused the impact to the Blue Capital managed fund.

The liquidation and running off of the ILS fund is progressing though, with the manager set to distribute $13 million to shareholders in the fund at the end of October.

This distribution will be delivered to shareholders pro-rate based on their holdings in the ILS fund and is just the first of an expected series of distributions on a quarterly basis as assets come off risk and can be fully liquidated and their collateral retrieved from the master reinsurance fund trust to be returned to investors.

This fund had been benefiting from a slow down in loss creep associated with prior year events, but Q3’s negative impact shows that the industry continues to face its challenges with this as reinsurance loss estimates continue to be adjusted and in some cases rise.

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