Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Blue Capital Management sees higher 2018 returns for listed strategies


The two stock exchange listed ILS and collateralized reinsurance investment strategies run by Blue Capital Management, a subsidiary of Sompo International Holdings Ltd., are targeting improved returns for 2018 after experiencing substantial rate increases at the renewals.

Both of the listed ILS strategies, the London-listed Blue Capital Alternative Income Fund and the New York-listed Blue Capital Reinsurance Holdings Ltd., were hit hard by the catastrophe events of 2017, especially hurricanes Harvey, Irma and Maria.

But the investment manager, Blue Capital Management, says that the 2018 underwriting portfolios for both vehicles will lead to higher returns, as long as losses remain within normal expectations.

Mike McGuire, CEO of Blue Capital Management, explained, “Following the significant industry losses experienced in 2017, we are pleased to report improved market conditions during the January renewal period. On average, loss affected business benefited from renewing premium rate increases of 15%-20% while non-loss affected agreements benefited from rate increases of 3-5% (in each case compared to 2017 and net of expenses).”

As a result of the better reinsurance renewal conditions, the Blue Capital Alternative Income Fund has an increased expected return range of 8% to 13%, up from 6% to 10% in 2017.

The Blue Capital Reinsurance Holdings vehicle now has a target of an 8% increase in fully converted book value per common share on a mean loss basis and 13% on a median loss basis.

Both vehicles invest their third-party capital assets into the master vehicles managed by Blue Capital Management, meaning the portfolios are largely aligned in terms of return potential.

In creating their portfolios for 2018, Blue Capital Management had less capital to deploy on both counts, given the heavy losses suffered from catastrophes in 2017.

The Blue Capital Alternative Income Fund deployed $139.3 million into the master fund vehicle, but this was down $62.2 million year-on-year primarily due to the losses.

Blue Capital Re, meanwhile, bound indemnity reinsurance with expected total annual premiums of $27.8 million, which is expected to produce a net rate on line for the portfolio of 23.7%, up 190 basis points over the prior year.

Blue Capital cited an average risk adjusted price increase of 12% during the January reinsurance renewals.

For the Blue Capital Alternative Income Fund the same price increase of 12% was seen, but the portfolio is expected to generate a net rate on line for the portfolio of 24%, which is up 150 basis points.

There is also collateral release to consider and Blue Capital Re noted that its forecast for 2018, “Reflects the collateral expected to be available for redeployment during 2018 taking into account loss events in 2017 and associated buffer loss provisions.”

These strategies, like so many other ILS funds and collateralized reinsurance vehicles, will be hoping to release a portion of the collateral held due to 2017 events at points throughout the year ahead.

By reserving prudently for catastrophe losses suffered, many ILS fund managers find they can release reserves to the benefit of their investors in the following months. All the while ensuring they have sufficient collateral held back in case losses deteriorated.

Blue Capital Management will be hoping for a quieter year through 2018, so that it’s underwritten portfolios can deliver the higher returns that are achievable thanks to rate increases experienced at 1/1.

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