TIDMBCGR
RNS Number : 3048I
Blue Capital Global Reinsurance Fnd
26 August 2016
Blue Capital Global Reinsurance Fund Limited
(the "Company")
(Incorporated in Bermuda)
Half Yearly Report
For the six months ended 30 June 2016
The Company has today, in accordance with DTR 6.3.5, released
its Half Yearly Report for the six month period ended 30 June
2016.
CHAIRMAN'S STATEMENT
On behalf of the Board of Directors (the "Directors") of Blue
Capital Global Reinsurance Fund Limited (the "Company"), I am
pleased to present the Company's interim report for the six month
period ended 30 June 2016. During the period, the Company recorded
a decline in net assets from operations of $0.3 million,
repurchased shares totaling $0.3m and distributed $6.6 million in
dividends to Shareholders, resulting in a decrease in the Company's
net assets to $216.1 million from $223.3 million at the beginning
of the year.
Capital Deployment
The Company's investment in Blue Capital Global Reinsurance SA-I
(the "Master Fund") at 30 June 2016 was US$216.2 million,
representing all of the Company's capital excluding that retained
for working capital purposes.
As at 30 June 2016, The Master Fund has invested substantially
all of its assets in: (i) preferred shares of the Blue Water Re
Ltd. (the "Reinsurer") (ii) Industry loss warranty ("ILW")
derivatives and (iii) one catastrophe bond. The combined
investments represent the deployment of US$187.5 million across 93
different positions and 40 different clients generating US$40.7
million of net insurance premium written and fixed ILW payments
which is an increase of US$6.7 million from the previous year.
Current investments in portfolio retrocessional hedging total
US$4.6 million which is an increase of US$2.9 million from the
previous year. 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
since the Company's initial public offering.
A further breakdown of the exposure of the portfolio is set out
in the Investment Manager's Report, below.
Financial Performance
During the first half of 2016, the net asset value ("NAV") of
the Company's Ordinary Shares decreased by approximately 0.2 per
cent. excluding the impact of dividends declared. The NAV per
Ordinary Share moved from US$1.1217 at 31 December 2015 to
US$1.0871 per share, with a US$0.033 per share dividend declared in
January 2016 and paid in March 2016. As described in the Investment
Manager's Report below, most of the portfolio has been allocated to
U.S. wind-related risks, for which the premiums are earned between
July and October.
During the first half of 2016, loss events, including
adjustments to losses incurred in previous years, reduced the
Company's NAV by approximately US$0.037 per Ordinary Share. Further
details in relation to these events are set out in the Investment
Manager's Report below.
Dividend
The Company continues to target an annualised dividend of LIBOR
plus 6 per cent. on the original issue price of its Ordinary Shares
in December 2012. In January 2016, the Company declared a further
dividend of $0.033 per Ordinary Share for the second half of 2015.
The Company offered a scrip dividend alternative in respect of this
second half dividend so that Shareholders could elect to receive
new Ordinary Shares instead of all or part of their cash dividend.
On 22 July 2016, the Company declared a dividend of US$0.033 per
Ordinary Share. The Directors' current intention is that, save for
unforeseen circumstances, the second distribution in respect of the
six months ended 31 December 2016 (expected to be paid in March
2017), will be for approximately the same amount.[1]
Credit Facility
On 16 May 2016, the Company entered into a credit facility (the
"2016 Credit Facility") with Endurance Investment Holdings Ltd.
(the "Lender"), a wholly-owned subsidiary of Endurance Specialty
Holdings Ltd. (together with its subsidiaries "Endurance"), which
holds indirectly 25.2 per cent. of the Company's issued ordinary
shares and is the ultimate parent company of the Company's
Investment Manager. The 2016 Credit Facility provides the Company
with an unsecured US$20.0 million revolving credit facility for
working capital and general corporate purposes and expires on 30
September 2018. The 2016 Credit Facility replaces the 364-day
US$20.0 million revolving credit facility which expired on 13 May
2016. Borrowings under the 2016 Credit Facility bear interest, set
at the time of the borrowing, at a rate equal to the applicable
LIBOR rate plus 150 basis points. As at 30 June 2016, the 2016
Credit Facility was undrawn.
Outlook
The Company remains pleased with the diversified portfolio that
the Investment Manager has created, which has attractive risk
adjusted return characteristics, consistent with the Company's
investment objectives. I am pleased with the performance achieved
by this portfolio in our first three years of operations, and I
would like to thank our Shareholders for their support.
Looking ahead to the second half of the year, while little
direct reinsurance will be bound prior to the January renewals, the
Investment Manager will continue to look for opportunities to
improve our portfolio and position us for the upcoming renewal
season.
The Ordinary Shares traded at an average discount to their Net
Asset Value of 9.6 per cent. over the period. The Company's
discount management policy, adopted at the time the Company was
launched, includes a requirement for the Directors to consider a
tender offer if the shares trade at an average discount of more
than 5 per cent. to the net asset value per ordinary share over the
three month period ending on 31 August each year. In the event this
proves to be the case in 2016, the Directors intend to offer
Shareholders the opportunity to tender up to 25 per cent of
Ordinary Shares in accordance with this policy.
On 16 May 2016, Shareholders approved all the resolutions at the
Annual General Meeting. Of the 199,108,914 Ordinary Shares
outstanding, 78 per cent. were voted in favour of each of the
proposals. No Ordinary Shares were voted against any of the
proposals.
/s/ John R. Weale
John R. Weale
Chairman
DIRECTORS' REPORT
30 June 2016
Principal Risks and Uncertainties
The Board regularly reviews the principal risks facing the
Company and, for the purposes of this report, has carried out an
assessment of the principal risks facing the Company, including
those that would threaten its business model, future performance,
solvency or liquidity. As further set out in the Investment
Manager's report (below), the Investment Manager maintains risk
management systems to manage risks the Company faces. Key risks
relating to the Company's portfolio and borrowing are managed by
the Investment Manager applying Endurance's proprietary risk
modeling approaches, various third-party vendor models and
underwriting judgment, and by application of the Company's
investment policy and restrictions.
The Board considers the following to be the principal risks
facing the Company:
Institutional Credit Risk
In the event of the insolvency of the institutions, including
brokerage firms, banks and custodians, with which the Master Fund
and the Reinsurer may do business, or to which assets have been
entrusted, the Master Fund and the Reinsurer may be temporarily or
permanently deprived of the assets held by or entrusted to that
institution, which will affect the performance of the Master Fund
and the Reinsurer and, in turn, the performance of the Company.
For example, the Reinsurer may pay amounts owed on claims under
fully collateralised reinsurance- linked contracts entered into in
respect of the Master Fund to reinsurance brokers, and these
brokers, in turn, may pay these amounts over to the ceding
companies that have reinsured a portion of their liabilities with
the Reinsurer. In some jurisdictions, if a broker fails to make
such a payment, the Reinsurer might remain liable to the ceding
company for the deficiency. Conversely, in certain jurisdictions
when the ceding company pays premiums in respect of reinsurance
contracts to reinsurance brokers for payment over to the Reinsurer,
these premiums are considered to have been paid and the ceding
company will no longer be liable to the Reinsurer for those
amounts, whether or not the Reinsurer has actually received the
premiums. Consequently, consistent with industry practice, the
Reinsurer assumes a degree of credit risk associated with
brokers.
Furthermore, while the Master Fund invests predominantly in
fully-collateralised reinsurance-linked contracts by subscribing
for preference shares issued by the Reinsurer, it may, in
accordance with its investment policy and when the Investment
Manager identifies suitable investment opportunities, also invest
in other reinsurance-linked investments and such investments may
form a material part of its investment portfolio from time to time.
Where the Master Fund invests in certain insurance-based
instruments, including participation in traditional reinsurance,
insurance-linked swaps and industry loss warranties,
insurance-linked securities as well as other financial instruments
(together, "Insurance-Linked Instruments"), a broker may trade with
an exchange as a principal on behalf of the Master Fund, in a
"debtor/creditor" relationship, unlike other clearing broker
relationships where the broker is merely a facilitator of the
transaction. That broker could, therefore, have title to all of the
assets of the Master Fund (for example, the transactions which the
broker has entered as principal as well as the margin payments that
the Master Fund provides). In the event of the broker's insolvency,
the transactions which the broker has entered into as principal
could default and the Master Fund's assets could become part of the
insolvent broker's estate, resulting in the Master Fund's rights
being limited to that of an unsecured creditor.
Illiquidity of Insurance-Linked Instruments
Insurance-Linked Instruments have a limited or, in some cases,
no secondary market. Fully collateralised reinsurance-linked
contracts of the type that the Reinsurer enters into in respect of
the Master Fund typically cover annual periods. Cat Bonds and
investments in sidecars may have market quotes, but the trading
volume may be low and pricing correspondingly ineffective. ILWs
have even less liquidity and pricing transparency, and bilateral
insurance contracts currently have no secondary market.
The liquidity of Insurance-Linked Instruments may also be
affected by a number of other factors, such as whether a covered
event has occurred or whether a catastrophe season has passed. It
is anticipated that the Master Fund and/or the Reinsurer will
retain their respective exposures for the duration of the
Insurance-Linked Instruments, gradually recognising income as the
likelihood of a covered event occurring in respect of one or more
Insurance-Linked Instruments, and therefore the Master Fund and/or
the Reinsurer incurring a loss, diminishes.
While these Insurance-Linked Instruments generally can be sold
at a price, they are largely "buy and hold" instruments, and it may
require substantial time to enter into or exit a position and the
amount that could be recognised upon liquidation may be materially
less than its theoretical fair value. Consequently, the Master Fund
may need to realise assets at below fair value and the Master Fund
may need to borrow to meet its financing needs, each of which will
have an impact on the returns to Shareholders. Further, the
illiquidity of Insurance-Linked Instruments means that the Master
Fund's portfolio is more likely to be mis-valued as the valuation
ascribed to an Insurance-Linked Instrument may differ significantly
from the price at which it may ultimately be realised. In turn, any
mis-valuation is likely to have an impact on the trading price of
the Ordinary Shares, which may be adverse to Shareholders, as well
as on the fees based on such valuations.
Portfolio invested in Insurance-Linked Instruments
The Master Fund predominantly invests in a diversified portfolio
of fully collateralised reinsurance- linked contracts, through
preference shares issued by the Reinsurer, but also invests in
other investments carrying exposures to insured catastrophe event
risks, such as ILWs and Cat Bonds. The Master Fund's portfolio is
therefore concentrated in Insurance-Linked Instruments.
Insurance-Linked Instruments are particularly exposed to sudden
substantial or total loss due to, among other things, natural
catastrophes or other covered risks, which together with other
factors, can cause sudden and significant price movements in
Insurance-Linked Instruments. The Master Fund's, and hence the
Company's, portfolio is more exposed to such risks, than it would
be if it were diversified across other asset classes in addition to
Insurance-Linked Instruments.
Currency risk
The Master Fund's and the Reinsurer's functional currency is the
US dollar, but a portion of their respective businesses will
receive premiums and hold collateral in currencies other than US
dollars. The Master Fund and the Reinsurer may use currency hedges
for balances held in non-US currencies. Therefore, they can choose
(but are not obliged) to manage currency fluctuation exposure. The
Master Fund and the Reinsurer may experience foreign exchange
losses to the extent their respective foreign currency exposure is
not hedged, which in turn would adversely affect their respective
financial condition and that of the Company.
Counterparty risk; counterparty credit risk
Where the Master Fund invests other than in fully collateralised
reinsurance-linked contracts, a number of the investment techniques
that may be utilised by the Master Fund, and a number of markets in
which the Master Fund may invest, will expose it to counterparty
risk, which is the risk that arises due to uncertainty in a
counterparty's ability to meet its obligations. Non-performance by
counterparties for financial or other reasons could expose the
Master Fund, and therefore Shareholders, to losses.
GOING CONCERN STATUS
In accordance with the Financial Reporting Council's guidance on
going concern and liquidity risk issued in October 2009, the Board
of Directors has reviewed the Company's ability to continue as a
going concern.
The Company's assets consist of cash and a diverse portfolio of
fully collateralised reinsurance-linked contracts (held indirectly
through investments in preference shares of the Reinsurer) and
other Insurance-Linked Instruments. The Board has considered the
Company's assets and reviewed forecasts and has determined that the
Company has sufficient financial resources to continue as a going
concern. Accordingly, the Directors have adopted the going concern
basis in preparing the financial statements for the six month
period ended 30 June 2016.
DIRECTORS' RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the Half-Yearly
Financial Report in accordance with applicable law and regulations.
The Directors confirm that, to the best of their knowledge:
1. The condensed set of financial statements contained within
the Half-Yearly Financial Report has been prepared in accordance
with the applicable accounting standards and gives a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company.
2. The Chairman's Statement, the Investment Manager's Report,
the Directors' Report and the notes to the unaudited financial
statements provides a fair review of the information required by
rule 4.2.7R of the Disclosure and Transparency Rules (being an
indication of important events that have occurred during the first
six months of the financial year and their impact on the condensed
set of financial statements and a description of the principal
risks and uncertainties for the remaining six months of the
financial year) and rule 4.2.8R (being related party transactions
that have taken place since commencement of operations and that
have materially affected the financial position of the Company
during that period; and any changes in the related party
transaction described in the last annual report that could do
so).
The unaudited financial statements were approved by the
Investment Manager and the Directors and available for issuance on
26 August 2016. Subsequent events have been evaluated through this
date.
Signed by John R. Weale for and on behalf of the Board of
Directors this 26(th) day of August 2016:
/s/ John R. Weale
Chairman
John R. Weale
INVESTMENT MANAGER'S REPORT
30 June 2016
Outlook
The continuing convergence of traditional reinsurance and
capacity from capital markets provides insurance companies with
additional flexibility in their risk transfer solutions and
establishes the capital markets as a sustainable complement to
traditional reinsurance. However, this convergence has also created
challenges. The January 2016 underwriting period was another
competitive one, characterised by pressure to reduce prices and
offer more generous contractual terms and conditions. The
Reinsurer's January trades that the Company invests in were
executed with an average risk adjusted rate decrease of
approximately 4 per cent. compared to January last year. The
Reinsurer's January 2016 portfolio incorporated an increase in the
quota-share participation of a traditional property catastrophe
book of business, which further increased the Company's access to a
broader client base.
Following the June 2016 renewals, it appeared that price
reductions had begun to moderate and the market showed 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. The Reinsurer was well positioned to take
advantage of these market dynamics, constructing an attractive
portfolio.
Reinsurance Portfolio - Geographic and Peril Diversification
The following unaudited table, which has been provided by the
Investment Manager, provides a breakdown of the Company's
portfolio's exposure by contract type, zone and peril as at 30 June
2016.
Exposure
Zones Percentage
----------------------------- -------------------
US Windstorm 1(st) Event
US - Florida WS 45.2%
US - MidAtlantic WS 43.3%
US - Gulf WS 39.2%
US - NorthEast WS 36.0%
US - Hawaii WS 21.6%
US - Northwest WS 18.0%
US - New Madrid WS 18.0%
US - Midwest WS 16.9%
US - California WS 15.4%
US Earthquake 1(st) Event
US - New Madrid EQ 27.1%
US - Northwest EQ 19.2%
US - California EQ 18.0%
US - MidAtlantic EQ 17.3%
US - Midwest EQ 12.8%
US - NorthEast EQ 12.6%
US - Hawaii EQ 11.2%
Japan Windstorm 1(st) Event
Japan WS 12.8%
Japan Earthquake 1(st)
Event
Japan EQ 18.1%
Europe Windstorm 2(nd)
+ Event
Europe WS 4.8%
US Windstorm 2(nd) + Event
US - Florida WS 2(nd) +
Event 9.3%
US Earthquake 2(nd) + Event 7.4%
Japan Windstorm 2(nd) +
Event 4.8%
Japan Earthquake 2(nd)
+ Event 4.8%
Notes:
-- For the purposes of this table, the exposures, which are
shown as percentages of the Master Fund's net assets, represent the
associated contract limits, less net deposit premium, less amounts
potentially collectible from purchased retrocessional and
derivative covers. This basis is consistent with that of the
underwriting guidelines followed by the Investment Manager.
-- For contracts that overlap zones, the full contract limit
exposed, calculated after the deduction of any inuring reinsurance
purchase, is counted in each of the exposed zones. Key: WS =
Windstorm/Hurricane, EQ = Earthquake
2016 Catastrophic Activity to Date
Japan experienced a series of earthquakes and aftershocks
beginning on 14 April 2016, in wide parts of the Kumamoto and Oita
prefectures. During these events the U.S. Geological Survey
estimated a magnitude of M7.0 earthquake which occurred on 16 April
2016. Reports indicate damage occurred to more than 3,900
residences and 120 non-residential structures across prefectures on
Kyushu Island. Fires, landslides and liquefaction caused additional
damage; while shaking caused significant damage to the
transportation infrastructure. The General Insurance Association of
Japan has reported the loss attributable to claims payouts for
damage to dwellings from the earthquakes has now surpassed $3.4
billion.
The United States experienced severe hailstorms throughout the
Southeast and the Plains, with the most significant reported damage
in the San Antonio and Dallas areas of Texas between 10 - 12 April
2016. Hail stones were reported to be as large as 3-4 inches in
diameter. The ISO Property Claims Services report that this event
has caused $3.1 billion of damage in Texas.
Wildfires began in the province of Alberta Canada on 1 May 2016
in and around the city of Fort McMurray. The fires spread rapidly
through forest to neighborhoods and areas surrounding the city
causing the evacuation of 88,000 residents. In total, the fire has
covered nearly 600,000 acres and destroyed an estimated 2,400
structures. PCS Canada Service has reported that losses as a result
of the wildfires is now in excess of $3.6 billion, making this the
largest loss in Canadian history.
The Investment Manager 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
Company.
The Investment Manager's loss estimates are largely derived from
the utilization of proprietary catastrophe modeling, standard
industry models, an in-depth review of in-force contracts and
initial indications from clients and brokers. The actual losses
from these events may ultimately differ materially from our
estimated losses due to the nature of the risks assumed, the
complexity of the assessment of damages and the limited number of
reported claims received to date.
BLUE CAPITAL GLOBAL REINSURANCE FUND LIMITED
Unaudited Statements of Assets and Liabilities
(expressed in thousands of U.S. dollars, except shares and per
share amounts)
Unaudited Unaudited Audited
30 June 30 June 31 December
2016 2015 2015
----------- ----------- ------------
Assets
Investments in Master Fund
at fair value (cost 30 June
2016 - $164,730; 30 June
2015 - $174,340; 31 December
2015 - $174,340) $ 216,207 $ 212,903 $ 229,280
Cash and cash equivalents 4,706 4,190 16
Amounts due from related
parties (Note 6) 1,202 - -
Other assets 115 67 174
----------- ----------- ------------
Total assets 222,230 217,160 229,470
----------- ----------- ------------
Liabilities
Proceeds from the redemption
of investments received
in advance 6,000 - -
Amounts drawn from credit
facility (Note 8) - 3,000 6,000
Accrued expenses and other
liabilities 125 101 134
----------- -----------
Total liabilities 6,125 3,101 6,134
----------- ----------- ------------
Net assets $ 216,105 $ 214,059 $ 223,336
----------- ----------- ------------
Ordinary Shares in issue 198,783,914 199,105,326 199,105,326
----------- ----------- ------------
Net asset value per Ordinary
Share $ 1.0871 $ 1.0751 $ 1.1217
----------- ----------- ------------
See accompanying notes to the Unaudited Financial Statements
BLUE CAPITAL GLOBAL REINSURANCE FUND LIMITED
Unaudited Statements of Operations
(expressed in thousands of U.S. dollars)
Unaudited Unaudited
For the For the
six month six month Audited
period period For the
ended ended year ended
30 June 30 June 31 December
2016 2015 2015
---------- ---------- ------------
Net investment loss allocated
from
Master Fund $ (1,692) $ (1,614) $ (5,847)
---------- ---------- ------------
Expenses
Professional fees (376) (436) (811)
Other fees (105) (68) (184)
Administration fees (34) (28) (67)
---------- ---------- ------------
Total expenses (515) (532) (1,062)
----------
Net investment loss (2,207) (2,146) (6,909)
---------- ---------- ------------
Realized and unrealized
gain on investments allocated
from Master Fund:
Net realized gain on investments
in securities 28,203 22,745 21,722
Net change in unrealized
appreciation on
investments in securities (26,334) (16,644) 4,990
----------
Net gain on investments 1,869 6,101 26,712
---------- ---------- ------------
Net (decrease) increase
in net assets resulting
from operations $ (338) $ 3,955 $ 19,803
---------- ---------- ------------
See accompanying notes to the Unaudited Financial Statements
BLUE CAPITAL GLOBAL REINSURANCE FUND LIMITED
Unaudited Statements of Changes in Net Assets
(expressed in thousands of U.S. dollars)
Unaudited Unaudited
For the For the Audited
six month six month For the
period period year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
---------- ---------- -------------
(Decrease) Increase in
net assets
From operations
Net investment loss $ (2,207) $ (2,146) $ (6,909)
Net realized gain on investments
in securities 28,203 22,745 21,722
Net change in unrealized
appreciation on
investments in securities (26,334) (16,644) 4,990
---------- ---------- -------------
Net (decrease) increase
in net assets resulting
from operations (338) 3,955 19,803
---------- ---------- -------------
From capital share transactions
Issuance of shares 4 - -
Share repurchases (326) - -
Dividends declared (6,571) (6,570) (13,141)
----------
Net decrease in net assets
resulting from capital
transactions (6,893) (6,570) (13,141)
---------- ---------- -------------
(Decrease) Increase in
net assets (7,231) (2,615) 6,662
---------- ---------- -------------
Net assets - Beginning
of period 223,336 216,674 216,674
---------- ---------- -------------
Net assets - End of period $ 216,105 $ 214,059 $ 223,336
---------- ---------- -------------
See accompanying notes to the Unaudited Financial Statements
BLUE CAPITAL GLOBAL REINSURANCE FUND LIMITED
Unaudited Statements of Cash Flows
(expressed in thousands of U.S. dollars)
Unaudited Unaudited
For the For the Audited
six month six month For the
period period year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
---------- ---------- -----------------------
Cash flows from operating
activities
Net (decrease) increase
in net assets resulting
from
operations $ (338) $ 3,955 $ 19,803
Adjustments to reconcile
to net cash and cash equivalents
provided by (used in)
operations:
Proceeds from sales (purchases)
of investments in Master
Fund and net investment
loss, net realized gain
on investments in securities
and net change in unrealized
appreciation on investments
in securities allocated
from Master Fund 19,073 (13,542) (29,919)
Net change in other assets
and liabilities:
(Increase) decrease in
amounts due from related
parties (1,202) 9,054 -
Decrease (increase) in
other assets 59 92 (15)
Decrease in funds on deposit
with Master Fund - - 9,054
(Decrease) increase in
accrued expenses and other
liabilities (9) (12) 21
---------- ---------- -----------------------
Net cash provided by (used
in) operating activities 17,583 (453) (1,056)
---------- ---------- -----------------------
Cash flows from financing
activities
Amounts (repaid on) drawn
from credit facility (6,000) (1,000) 2,000
Share repurchases (326) - -
Dividends paid (6,567) (6,570) (13,141)
Net cash used in financing
activities (12,893) (7,570) (11,141)
---------- ---------- -----------------------
Net increase (decrease)
in cash and cash equivalents 4,690 (8,023) (12,197)
Cash and cash equivalents
- Beginning of period 16 12,213 12,213
---------- ---------- -----------------------
Cash and cash equivalents
- End of period $ 4,706 $ 4,190 $ 16
---------- ---------- -----------------------
See accompanying notes to the Unaudited Financial Statements
BLUE CAPITAL GLOBAL REINSURANCE FUND LIMITED
Unaudited Notes to the Financial Statements
30 June 2016
(expressed in thousands of U.S. dollars, except shares and per
share amounts)
1. Nature of operations
Blue Capital Global Reinsurance Fund Limited (the "Company") is
a closed-ended exempted mutual fund company of unlimited duration
incorporated under the laws of Bermuda on 8 October 2012 which
commenced operations on 6 December 2012. The Company invests
substantially all of its assets through a "master/feeder" structure
in Blue Capital Global Reinsurance SA-I (the "Master Fund"). The
Master Fund is a segregated account of Blue Water Master Fund Ltd.,
a mutual fund company incorporated under the laws of Bermuda on 12
December 2011, and registered as a segregated account company under
the Segregated Accounts Company Act 2000. The investment objective
of the Company is to generate attractive returns from a sustainable
annual dividend yield and longer-term capital growth through its
investment in the Master Fund. The Company is the only investor in
the Master Fund.
The Company's shares are admitted to trading on the Specialist
Fund Market, a market operated by the London Stock Exchange (symbol
BCGR LN). The Company's shares are listed on the Bermuda Stock
Exchange (symbol BCGR BH).
The investment objective of the Master Fund is to generate
attractive returns by investing in a diversified portfolio of fully
collateralized reinsurance-linked instruments ("RLI") and other
investments carrying exposures to insured catastrophe event risks.
The Master Fund invests predominantly in fully collateralized RLIs
through non-voting redeemable preference shares issued by Blue
Water Re Ltd. (the "Reinsurer") which in turn writes reinsurance
contracts with ceding companies. Each non-voting redeemable
preference share of the Reinsurer corresponds to a specific
reinsurance contract entered into by the Reinsurer. The Master
Fund's investments in other reinsurance-linked investments which
carry exposure to insured catastrophe event risks such as industry
loss warranties, catastrophe bonds and other reinsurance-linked
instruments are made directly by the Master Fund. The manager to
the Master Fund is Blue Capital Management Ltd. (the "Investment
Manager"). The Investment Manager is licensed in Bermuda to carry
on investment business under the Investment Business Act 2003, as
amended, and as an agent and manager under the Bermuda Insurance
Act 1978. The Investment Manager is a wholly-owned subsidiary of
Endurance Specialty Holdings Ltd. ("Endurance"), a recognized
global specialty provider of property and casualty insurance and
reinsurance whose shares are listed on the New York Stock Exchange
(symbol ENH).
The Reinsurer is an exempted limited liability company
incorporated on 12 December 2011 under the laws of Bermuda and is
licensed by the Bermuda Monetary Authority as a special purpose
insurer with an underwriting plan focused on fully collateralized
reinsurance protection of the property catastrophe insurance and
reinsurance market. The Investment Manager also acts as the
Reinsurer's insurance manager and insurance agent.
On 31 March 2015, Endurance announced the signing of a
definitive agreement and plan of merger with Montpelier Re Holdings
Ltd. ("Montpelier") and Millhill Holdings Ltd., a direct,
wholly-owned subsidiary of Endurance ("Merger Sub"), under which
Endurance, through Merger Sub, acquired all of the outstanding
common shares of Montpelier (the "Merger"). The Merger was
completed on 31 July 2015 (the "Closing Date") and on the Closing
Date, Merger Sub merged into Endurance. Effective on the Closing
Date: (i) the Investment Manager and the Reinsurer became
wholly-owned subsidiaries of Endurance; and (ii) Endurance and its
subsidiaries began providing each of the services that had formerly
been provided by Montpelier and its subsidiaries. On 29 December
2015, Montpelier Reinsurance Ltd. ("Montpelier Re") was merged into
Endurance Specialty Insurance Ltd. ("Endurance Bermuda"), a
wholly-owned subsidiary of Endurance, with Endurance Bermuda as the
surviving company.
2. Summary of significant accounting policies
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("US GAAP"). The Company is an investment company and is
therefore applying the specialized accounting and reporting
requirements of ASC Topic 946, Financial Services - Investment
Companies.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the year/period.
Actual results could differ from those estimates.
Investment in Master Fund
The Company records its investment in the Master Fund at fair
value, determined as the value of the net assets of the Master
Fund.
Investment transactions
The Company records its participation in the Master Fund's
income, expenses, and realized and change in unrealized gains and
losses within the Statements of Operations. The Company records its
investment transactions on a trade date basis. Realized gains and
losses on disposals of investments are calculated using the
first-in, first-out (FIFO) method. In addition, the Company records
its own income and expenses on the accrual basis of accounting.
Cash and cash equivalents
Cash and cash equivalents include short-term, highly liquid
investments, such as money market funds, that are readily
convertible to known amounts of cash and have original maturities
of three months or less.
Foreign currency
Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars using rates of exchange prevailing at
the date of the Statements of Assets and Liabilities. Foreign
currency revenue and expense items are translated into U.S. dollars
at the rates of exchange in effect at the date when transactions
occur. The resulting exchange gains and losses are reflected in the
Statements of Operations.
The Company does not isolate that portion of the results of
operations arising from the effect of changes in foreign exchange
rates on investments from fluctuations arising from changes in
market prices of investments held. Such fluctuations are included
in net change in unrealized appreciation on investments in
securities in the Statements of Operations.
Offering costs
Offering costs are costs directly incurred in connection with
the registration and distribution of the Company's shares at each
capital raise and are recorded as a reduction in proceeds from the
issuance of shares.
3. Fair value measurements
In accordance with the authoritative guidance on fair value
measurements and disclosures under US GAAP, the Company discloses
the fair value of its investments in a hierarchy that prioritizes
the inputs to valuation techniques used to measure the fair value.
The hierarchy gives the highest priority to valuations based upon
unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to
valuations based upon unobservable inputs that are significant to
the valuation (Level 3 measurements). The guidance establishes
three levels of the fair value hierarchy as follows:
Level 1 - Inputs that reflect unadjusted quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access at the measurement date;
Level 2 - Inputs other than quoted prices that are observable
for the asset or liability either directly or indirectly, including
inputs in markets that are not considered to be active; and
Level 3 - Inputs that are unobservable.
The investment in the Master Fund is carried at fair value and
has been estimated using the Net Asset Value ("NAV"). FASB guidance
provides for the use of NAV as a "Practical Expedient" for
estimating fair value of alternative investments. The Company uses
the "market approach" valuation technique to value its investment
in the Master Fund. As the Directors' valuation of the Company's
investment in the Master Fund has been based upon observable inputs
such as ongoing redemption and subscription activity, the Company's
investment in the Master Fund has been classified as Level 2. The
determination of what constitutes "observable" requires significant
judgment by the Directors. The categorization within the hierarchy
does not necessarily correspond to the Directors' perceived risk of
an investment in the Master Fund, nor the level of the investments
held within the Master Fund.
4. Losses and reserves
The reserve for unpaid losses and loss adjustment expenses
recorded by the Reinsurer includes estimates for losses incurred
but not reported as well as losses pending settlement.
The Reinsurer makes a provision for losses on contracts only
when an event that is covered by the contract has occurred. When a
potential loss event has occurred, the Reinsurer obtains and uses
assessments from counterparties as a baseline, incorporating its
own models and historical data regarding loss development, to
determine the level of reserves required.
Future adjustments to the amounts recorded as of period-end,
resulting from the continual review process, as well as differences
between estimates and ultimate settlements, will be reflected in
the Reinsurer's statement of operations in future periods when such
adjustments become known. Future developments may result in losses
and loss expenses materially greater or less than the reserve
provided.
During the six-month period ended 30 June 2016, the Reinsurer
incurred $7,437 of losses and loss adjustment expenses. The impact
of wildfires in Alberta, Canada occurring in May 2016 represented
the largest driver of this loss activity. For the six-month period
to 30 June 2016, the Reinsurer had paid claims of $2,364.
5. Administration fees
Prime Management Limited (the "Administrator"), a division of
SS&C GlobeOp, serves as the administrator for the Company and
the Master Fund. The Administrator receives a monthly fee based on
the NAV of the Company and the Master Fund, subject to a monthly
minimum fee. Administration fees relating to the Master Fund are
charged to the Master Fund and flow through to the Company as part
of the expenses allocated from the Master Fund in the Statements of
Operations.
6. Related party transactions
On 29 December 2015, Montpelier Re was merged into Endurance
Bermuda and by operation of law Endurance Bermuda became the direct
owner of the Company's ordinary shares (the "Ordinary Shares")
previously held by Montpelier Re. As of 30 June 2016, Endurance
Bermuda owned 25.15% of the voting rights of the ordinary shares
(the "Ordinary Shares") issued by the Company.
As of 30 June 2016, the Company had $1,202 due from related
parties for payments on behalf of the Master Fund.
Management and performance fees are charged to the Master Fund
and flow through to the Company as part of the expenses allocated
from the Master Fund in the Statements of Operations.
Management fees
Pursuant to the Investment Management Agreement dated 27
November 2012, the Investment Manager is empowered to formulate the
overall investment strategy to be carried out by the Master Fund
and to exercise full discretion in the management of the trading,
investment transactions and related borrowing activities of the
Master Fund in order to implement such strategy. The Investment
Manager is entitled to a management fee, calculated and payable
monthly in arrears equal to (a) 1/12 of 1.5% of the month-end NAV
(prior to accrual of the performance fee, as defined below) of all
redeemable preference shares of the Master Fund ("Offered Shares")
held by the Company, up to a NAV of $300,000 and (b) 1/12 of 1.25%
of the month-end NAV (prior to accrual of the performance fee, as
defined below) of all Offered Shares held by the Company, above a
NAV of $300,000.
Performance fees
The Investment Manager is entitled to a performance fee, payable
by the Master Fund on an annual basis, which will generally be
equal to 15% of the aggregate increase in NAV of the Master Fund
over the previous High Water Mark (as defined below) of all series
of shares (except for Special Memorandum Account shares) held by
the Company, minus the performance hurdle. The "High Water Mark"
for a holder of Offered Shares at the end of any period is equal to
(i) where there is New Net Profit (as defined below) in such
period, the then current NAV of such Offered Shares, or (ii) where
there is no New Net Profit in such period, the previous High Water
Mark. The initial High Water Mark for any holder of Offered Shares
is equal to the initial subscription amount of such Offered Shares.
Appropriate adjustments will be made to account for subscriptions,
redemptions and distributions, if any. "New Net Profit" for any
series of Offered Shares for any period is the appreciation of the
NAV of such series for such period ("Profit") after deducting any
depreciation in NAV of such series in any prior period that has not
been previously eliminated by Profit in prior periods.
The performance trigger in respect of a Performance Period
("Performance Trigger") is reached when New Net Profit, if any, in
respect of the Company's Offered Shares at the end of such
Performance Period exceeds the sum of: (i) the NAV of the Company's
Offered Shares as of the beginning of the Performance Period
multiplied by the average of the one-month U.S. Dollar LIBOR on the
last Business Day of each month during such Performance Period and
(ii) 8% of the NAV of the Company's Offered Shares as at the
beginning of the Performance Period. The Performance Trigger is
calculated on an annual basis. If a Performance Period is a partial
calendar year, the Performance Trigger will be adjusted
proportionately. The Performance Trigger is not cumulative and
resets at the beginning of each Fiscal Year. Shortfalls or
outperformance of the Performance Trigger in a given year has no
effect on the Performance Fee calculated with respect to any other
year. The Performance Trigger may be further equitably adjusted to
reflect subscriptions which are made during a Performance Period or
partial redemptions or distributions of the Company's Offered
Shares.
The performance hurdle in respect of a Performance Period
("Performance Hurdle") is the amount of New Net Profit, if any, in
respect of an investor's Offered Shares at the end of such
Performance Period which equals the sum of: (i) the NAV of such
investor's Offered Shares as of the beginning of the Performance
Period multiplied by the average of the LIBOR on the last Business
Day of each month during such Performance Period and (ii) 5% of the
NAV of such investor's Offered Shares as at the beginning of the
Performance Period. The Performance Hurdle is calculated on an
annual basis. If a Performance Period is a partial calendar year,
the Performance Hurdle will be adjusted proportionately. The
Performance Hurdle is not cumulative and resets at the beginning of
each Fiscal Year. Shortfalls or outperformance of the Performance
Hurdle in a given year has no effect on the Performance Fee
calculated with respect to any other year. The Performance Hurdle
may be further equitably adjusted to reflect subscriptions which
are made during a Performance Period or partial redemptions or
distributions of an investor's Offered Shares.
7. Financial instruments
The Company's investment activities expose it to various types
of risk, which are associated with the securities and markets in
which it invests. As the majority of the Company's assets are
invested in the Master Fund, they are primarily exposed to the
risks faced by the Master Fund. Due to the nature of the
"master/feeder" structure, the Company could be materially affected
by subscriptions or redemptions in the Master Fund by other feeder
funds. However, as the Master Fund was established solely for the
Company to invest in, the Company is the only feeder fund of the
Master Fund.
8. Credit agreement
On 16 May 2016, the Company entered into a credit facility (the
"2016 Credit Facility") with Endurance Investment Holdings Ltd.
(the "Lender"), a wholly-owned subsidiary of Endurance. The 2016
Credit Facility provides the Company with an unsecured $20,000
revolving credit facility for working capital and general corporate
purposes and expires on 30 September 2018. The 2016 Credit Facility
replaces the 364-day $20,000 revolving credit facility which
expired on 12 May 2016. Borrowings under the 2016 Credit Facility
bear interest, set at the time of the borrowing, at a rate equal to
the applicable LIBOR rate plus 150 basis points. The 2016 Credit
Facility contains covenants that limit the Company's ability, among
other things, to grant liens on its assets, sell assets, merge or
consolidate, or incur debt. If the Company fails to comply with any
these covenants, the Lender could revoke the facility and exercise
remedies against the Company. As of June 30, 2016, the Company was
in compliance with all of its respective covenants associated with
the 2016 Credit Facility. There were no borrowings from the 2016
Credit Facility as of 30 June 2016.
9. Capital share transactions
As at 30 June 2016, the Company is authorized to issue up to
990,000,000 Ordinary Shares of par value $0.00001 per share.
As of 30 June 2016, the Company has issued 198,783,914 Ordinary
Shares.
Transactions in Ordinary Shares during the six-month period
ended 30 June 2016 and the Ordinary Shares outstanding and the NAV
per share as of 30 June are as follows:
Beginning Shares Shares Ending
Shares Issued Repurchased Shares
1-Jan-16 30-Jun-16
------------ -------- ------------- ------------
Ordinary shares 199,105,326 3,588 (325,000) 198,783,914
On 15 January 2016, the Company declared a dividend with scrip
alternative covering the period from 1 July 2015 to 31 December
2015 of $0.033 per Ordinary Share. On 15 March 2016, a cash
dividend of $6,567 was paid and 3,588 Ordinary Shares were admitted
to trading on the London Stock Exchange's Specialist Fund Market
and on the Bermuda Stock Exchange.
On 23 June 2016, the Company announced that it has engaged
Jefferies International Limited to effect share buy backs on its
behalf. As of 30 June 2016, 325,000 Ordinary Shares have been
repurchased and subsequently cancelled by the Company.
The Company has been established as a closed-ended mutual fund
and, as such, shareholders do not have the right to redeem their
shares.
10. Taxes
At the present time, no income, profit, capital transfer or
capital gains taxes are levied in Bermuda and accordingly, no
provision for such taxes has been recorded by the Company. The
Company has received an undertaking from the Minister of Finance of
Bermuda, under the Exempted Undertakings Tax Protection Act 1966
exempting the Company from income, profit, capital transfer or
capital taxes, should such taxes be enacted, until 31 March
2035.
The Investment Manager assesses uncertain tax positions by
determining whether a tax position of the Company is more likely
than not to be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the tax amount recognized in the financial
information is reduced by the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate
settlement with the relevant taxing authority.
The Investment Manager has not identified any uncertain tax
positions in the Company arising in this or any preceding period.
However, the Investment Manager's conclusions may be subject to
review and adjustment at a later date based on factors including,
but not limited to, on-going analysis of changes to tax laws,
regulations and interpretations thereof. The Investment Manager has
determined that there are no reserves for uncertain tax positions
necessary for any of the Company's open tax years.
11. Financial highlights
Financial highlights for the six month period ended 30 June 2016
are as follows:
Ordinary
Shares
---------
Per share operating performance
Net asset value, beginning of period $1.1217
Loss from investment operations (0.0016)
Dividend payment per share (0.0330)
---------
Net asset value, end of period $1.0871
---------
Total return
Total return before performance fee (0.14%)
Dividend paid (2.94%)
Performance fee* -
---------
Total return after performance fee** (3.08%)
---------
Ratios to average net assets
Expenses other than performance fee (1.10%)
Performance fee* -
---------
Total expenses after performance fee (1.10%)
---------
Net investment loss before performance
fee (1.01%)
---------
* The performance fee and management fee are charged in the
Master Fund.
** The total return for the period ended 30 June 2016 before the
dividends declared on 15 January 2016 is computed as (0.16%).
Financial highlights are calculated for each permanent,
non-managing class or series of Ordinary Share. An individual
shareholder's return and ratios may vary based on different
performance fee and/or management fee arrangements, and the timing
of capital share transactions. The ratios include effects of
allocations of net investment income from the Master Fund.
Per share operating performance is computed on the basis of
average shares outstanding during the period.
Total return is calculated based on the percentage movement in
NAV per share. The expense ratio is calculated based on the
expenses of the Company and the proportionate share of net expenses
allocated from the Master Fund over the average NAV per share in
the year. The net investment loss ratio is based on the net loss
per share from investment operations of the Company and the
proportionate share of net loss allocated from the Master Fund over
the average NAV per share in the year.
12. Commitments and contingencies
In the normal course of business, the Company may enter into
contracts or agreements that contain indemnifications or
warranties. The Company's exposure under these arrangements is
unknown, as this would involve future claims that may be made
against the Company that have not yet occurred. However, based on
experience, management expects the risk of loss to be remote.
13. Subsequent events
On 4 July 2016, an additional 230,000 Ordinary Shares were
repurchased by the Company.
The Company declared an interim dividend in respect of the six
months ended 30 June 2016 of $0.033 per Ordinary Share to
shareholders on the register on 5 August 2016 which was paid on 24
August 2016.
These Financial Statements were approved by the Investment
Manager and the Directors and were made available for issuance on
26 August 2016. Subsequent events have been evaluated through this
date.
For further information please contact:
Adam Szakmary
Chief Executive Officer, Blue Capital Management Ltd.
+1 441-278-0400
adam.szakmary@bluecapital.bm
(1) This amount is a target only and not a profit forecast.
There can be no assurance that this target will be met or the
Company will make any distributions at all
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR EQLFLQVFEBBD
(END) Dow Jones Newswires
August 26, 2016 12:05 ET (16:05 GMT)
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