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Blue Capital Re shows importance of a diversified ILS portfolio


New York  stock exchange listed fully-collateralized reinsurance company Blue Capital Reinsurance Holdings Ltd., a subsidiary of Endurance, continued to demonstrate the importance of having a globally diversified portfolios of risks reporting a profit despite higher losses.

In 2016 catastrophe and weather loss experience has ticked up for the reinsurance industry, resulting in more frequent and attritional losses at catastrophe reinsurance focused firms.

Blue Capital Re is operated like a stock exchange listed insurance-linked securities (ILS) fund, offering investors a way to access the returns of the ILS market via a listed vehicle with liquidity in the shares. As such it’s an interesting firm to watch, with a portfolio that is constructed in a similar manner to so many ILS funds focused on collateralized reinsurance transactions and much greater disclosure due to its requirement to file results.

In the third-quarter Blue Capital Re reported $3.3 million (or $0.38 per share) of income for Q3 2016 and $10.3 million ($1.17 per share) for the first nine months of the year. That compares to $4.4 million for Q3 2015 and $15.3 million for the first nine months of that year.

The difference is due to an increase in the combined ratio due to higher catastrophe loss experience around the globe, with it rising to 63.5% in Q3, compared to 50.8% in the prior year quarter.

Higher loss and loss adjustment expenses as well as reinsurance acquisition costs raised the combined ratio, while lower general and administrative expenses offset this a little.

Blue Capital Re reports loss and loss adjustment expenses for Q3 2016 of $2.6 million compared to $1.4 million a year earlier, which the firm said is down to “a higher frequency of losses from smaller events.”

For 2016 to-date, the combined ratio is reported as 66.4%, up from 46.1% in the prior period, which the company explained is “driven by a significantly higher level of industry global catastrophe losses compared to a year ago.”

In the second quarter Blue Capital Re experienced losses from larger events including the Fort McMurray wildfires, the Kumamoto, Japan earthquake, and convective storms in Texas and Europe. But in Q3 the loss experience was still higher than in 2015, but due to smaller catastrophe and weather loss events.

These smaller catastrophe loss events are attritional and take their toll on profitability, but also highlight the importance of an ILS fund strategy having a diversification element to it. Some investors want concentrated risk, focused on generating the highest returns, but the majority in the ILS space want a source of stable returns, hence diversification is key.

It’s also important to note that the aggregation of smaller catastrophe losses in 2016 could mean an interesting last couple of months for some aggregate reinsurance or retrocession contracts, as we’d imagine some will be nearing attachment.

And for diversification to be achieved the ILS vehicle needs the reach and access to a diverse book of business, to enable returns to be delivered even when catastrophe loss activity has risen. Here the relationship between Blue Capital and parent Endurance is key, as it enables the Blue Capital ILS vehicles to source a much broader range of risks than they could on their own.

Adam Szakmary, President and CEO of Blue Capital Re, explained; “Our third quarter and year to date results reflect our effective underwriting and risk management capabilities as we generated strong profitability despite a greater frequency of global loss events in 2016. Our strategy of exclusively focusing on catastrophe exposures to create a portfolio of risks diversified across global geographies, products and insurers continues to generate attractive shareholder returns.”

With Blue Capital Management, the ILS manager behind the various Blue Capital vehicles, now part of a much larger insurance and reinsurance group thanks to Sompo’s recent acquisition of Endurance, the all important access to a diverse range of catastrophe underwriting business is only going to be enhanced.

Blue Capital Re’s results reflect what we’ve seen throughout the third-quarter from ILS funds, that those investing in private ILS deals and collateralized reinsurance have seen more frequent attritional losses in 2016. It will be interesting to see how Q4 ends the year, given the fact that hurricane Matthew losses will flow through during the period.

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