TIDMBCAI
RNS Number : 4164J
Blue Capital Alternative Income Fd
29 March 2018
29 March 2018
Blue Capital Alternative Income Fund Limited (the "Company")
Final results for the period ended 31 December 2017.
The Company has today, in accordance with DTR 6.3.5, released
its Annual Report for the year ended 31 December 2017. The Annual
Report will be available shortly from the Company's website at
www.bcai.bm.
Key Statistics and Corporate Summary(1)
As at 31 December 2017
$122.8 Million $139.3 Million $0.7939
====================== ======================= ========================
Market Capitalisation Total Net Assets Net Asset Value
Per Ordinary Share
$1.1229(2) -24.9%(3) 8.1%(3)
Net Asset Value Total Net Asset Value Total Net Asset Value
Per Redemption Share Return Return Since Inception
For The Year
$0.70 $0.0714 1400(4)
Mid-Market Dividends Per Ordinary Number Of Positions
Ordinary Share Price Share Declared For Invested In
The Year
====================== ======================= ========================
Company Highlights(3)
-- Industry losses of approximately $135 billion during 2017(5)
-- Historic portfolio outperformance versus other insurance
linked securities ("ILS") for the first four years of
operations(6)
-- Increase in net asset value ("NAV") of 8.1 per cent. since
inception, representing an annualised return of 1.6 per cent. per
annum
-- Positive NAV return in 90 per cent. of months since inception
-- Achieved distribution target of $0.0714 per Ordinary Share,
representing a dividend yield of LIBOR plus 6 per cent. for the
period ending 31 December 2017 despite significant losses
-- 2017 losses were within modeled expectations given the events that occurred
1 All currency references in this Annual Report are in U.S.
Dollars unless otherwise noted.
2 Redemption Shares were redeemed effective 31 December 2017
with a settlement date of 31 January 2018.
3 Past Performance is not necessarily indicative of future
results.
4 Shareholders who invest in a single Ordinary Share enjoy the
benefit of investing in a share that is diversified by underlying
instruments of greater than 1,400 positions in catastrophe related
reinsurance contracts.
5 Source: Munich Re and Aon.
6 As reported by Eurekahedge ILS Advisors Index ("Eurekahedge")
for 2013-2016. Eurekahedge tracks the performance of participating
insurance linked investment funds. It is the first benchmark that
allows a comparison between different ILS fund managers in the ILS,
reinsurance and catastrophe bond investment space. The index is
calculated and maintained by Eurekahedge. The index includes funds
that allocate at least 70 per cent. of their assets in non-life
risk.
The Company
Blue Capital Alternative Income Fund Limited (the "Company",
formerly Blue Capital Global Reinsurance Fund Limited) is a
closed-ended exempted mutual fund company of unlimited duration
that was incorporated under the laws of Bermuda on 8 October 2012
and commenced operations on 6 December 2012. The Company provides
investors with access to the risk premia available from catastrophe
reinsurance, largely uncorrelated to financial markets. The
Company's shares are admitted to trading on the Specialist Fund
Segment of the London Stock Exchange (the "SFS") with a secondary
listing on the Bermuda Stock Exchange (the "BSX"). (SFS: BCAI LN,
BSX: BCAI BH)
Target Return(7)
The Company targets an annualised dividend yield of LIBOR plus 6
per cent. per annum on the original issue price of the Ordinary
Shares issued in December 2012. The Company's target net total
return (comprised of dividends and other distributions to
Shareholders together with increases in the Company's net asset
value ("NAV")) is LIBOR plus 8 per cent. per annum, to be achieved
over the longer term.
7 These are targeted amounts not profit forecasts. There can be
no assurance that these targets can or will be met or that the
Company will make any distributions at all and these should not be
viewed as an indication of the Company's expected or actual results
or returns.
Summary of Investment Objective and Investment Policy
The investment objective of the Company is to generate
attractive returns from a sustainable annual dividend yield and
longer-term capital growth by investing substantially all of its
assets in shares linked to the segregated account identified as
Blue Capital Global Reinsurance SA-1 (the "Master Fund") within
Blue Water Master Fund Ltd., an exempted Bermuda mutual fund
segregated accounts company.
The Master Fund invests in a diversified portfolio of fully
collateralised reinsurance-linked contracts and other investments
whose value is based on insured catastrophe event risks, which are
largely uncorrelated to traditional asset classes. The Master Fund
predominantly invests in fully collateralised reinsurance-linked
contracts through preference shares issued by Blue Water Re Ltd.
(the "Reinsurer"), an exempted limited liability company
incorporated on 12 December 2011 under the laws of Bermuda and
licensed by the Bermuda Monetary Authority as a special purpose
insurer with an underwriting plan focused on fully collateralised
reinsurance protection of the property catastrophe insurance and
reinsurance market. The Master Fund's investment in other
reinsurance-linked investments carrying exposure to insured
catastrophe event risks such as industry loss warranties ("ILWs"),
144A rated catastrophe bonds ("Cat Bonds") and other
insurance-linked instruments ("Insurance-Linked Instruments") may
be made directly by the Master Fund or indirectly via the
Reinsurer.
An overview of the Company's investment policy, including
investment restrictions, is set out in the Directors' Report.
Management Arrangements
Blue Capital Management Ltd. (the "Investment Manager") has been
retained by the Company and by the Master Fund to manage their
respective assets, subject to the investment guidelines, the terms
of the investment management agreement and the oversight of the
Company's Board of Directors (the "Board" or the "Directors"). The
Investment Manager also acts as the Reinsurer's insurance manager
and insurance agent providing underwriting, management and
administrative services to the Reinsurer. 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 of 1978, as amended.
The Investment Manager attends each quarterly Board meeting and
maintains open dialogue with the Directors on an ongoing basis.
Fees payable by the Company to the Investment Manager are disclosed
in the Directors' Report.
The Investment Manager, the Reinsurer and Blue Water Master Fund
Ltd. are wholly-owned subsidiaries of Sompo International Holdings
Ltd. ("Sompo International"), a recognised global specialty
provider of property and casualty insurance and reinsurance
incorporated in Bermuda. As of 31 December 2017, Endurance
Specialty Insurance Ltd. ("Endurance Bermuda"), a wholly owned
subsidiary of Sompo International, owned 28.5 per cent. of the
Company's Ordinary Shares.
Capital Structure
At 31 December 2017, the Company had issued and outstanding
175,448,523 Ordinary Shares. The Company's NAV per Ordinary Share
is calculated by the Company's administrator, SS&C Fund
Services (Bermuda) Ltd. (the "Administrator") (or such other person
as the Directors may appoint for such purpose from time to time)
and published on a monthly basis, within 15 business days after the
end of each calendar month through a regulatory information service
("RIS") authorised by the Financial Conduct Authority (the "FCA")
and on the list of RISs maintained by the FCA.
Chairman's Statement
On behalf of the Company's Board of Directors, I present the
Company's annual report for the year ended 31 December 2017 (the
"Annual Report"), which includes the Company's annual audited
financial statements for the year ended 31 December 2017.
Performance
The Company's performance for the year was heavily impacted by
natural catastrophes with insurance industry claims of
approximately $135 billion for the year.(8) Hurricanes Harvey, Irma
and Maria ("HIM"), the California wildfires, the Mexico earthquakes
and other events accounted for $330 billion in overall economic
losses, the second highest figure since 2011.(8)
As at 31 December 2017, the Company had net assets of $139.3
million compared to $226.9 million at the beginning of the year.
The Company's total NAV return for the year was -24.9 per cent.
Since inception, the Company has provided total NAV return per
share of 8.1 per cent., representing an annualised return of 1.6
per cent. While the Company did experience a significant loss
during 2017, the actual losses were within the modeled expectations
for the magnitude and range of the events occurring during the
year.
The Company has achieved positive NAV return in 90 per cent. of
months since inception. Returns by month for the first five years
of operations are shown in the table below. Further details
relating to the performance of the Company are set out in the
Investment Manager's Report.
8 Source: Munich Re and Aon.
Ordinary Share NAV Total Return(9)
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Full
Year
2017 0.7% 0.2% 0.1% 0.2% 0.2% 0.5% 0.9% 0.5% -26.0% -0.4% 0.7% -1.8% -24.9%
2016 0.4% 0.3% 0.3% 0.2% -1.8% 0.5% 1.1% 2.5% 2.8% -0.2% 1.0% 0.9% 8.3%
2015 0.3% 0.3% 0.3% 0.2% 0.2% 0.7% 0.7% 2.0% 2.0% 1.6% 0.5% 0.6% 9.6%
2014 0.2% 0.3% 0.0% -0.1% 0.3% 0.4% 1.3% 1.9% 2.4% 1.1% 0.3% 0.5% 8.8%
2013 0.3% 0.4% 0.5% 0.7% 0.1% 0.8% 1.0% 2.4% 3.2% 1.9% 0.1% 0.0% 11.8%
====== ===== ===== ===== ====== ====== ===== ===== ===== ======= ====== ===== ====== =======
9 Past Performance is not necessarily indicative of future
results.
Ordinary Share NAV Total Return for the Company and Selected
Indices
2013 2014 2015 2016 2017 Five Year Average
-------------------------------- ------ ----- ----- ----- ------- ------------------
The Company 11.8% 8.8% 9.6% 8.3% -24.9% 1.6%
-------------------------------- ------ ----- ----- ----- ------- ------------------
Swiss Re Cat Bond Index 11.4% 6.3% 4.4% 6.9% 0.5% 5.9%
-------------------------------- ------ ----- ----- ----- ------- ------------------
Eurekahedge ILS Advisors Index 7.6% 5.4% 4.2% 5.2% -5.1% 3.5%
-------------------------------- ------ ----- ----- ----- ------- ------------------
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. During 2017, the Company declared quarterly
dividend payments of $0.0165 per Ordinary Share for each of the
first three quarters of 2017 and declared a $0.0219 per Ordinary
Share relating to the fourth quarter on 18 January 2018. The
combined dividends declared in respect of the 2017 calendar year
were at the Company's target.
Discount Management
Since 2016, in accordance with the Discount Management Programme
described in the Company's initial prospectus dated 20 November
2012, the Board has implemented two share repurchase programmes and
a tender offer in an attempt to narrow the trading discount.
During 2017, the Company sought to improve the marketing of the
Company's Ordinary Shares. A new broking agent was engaged and the
Company commissioned a market research firm to communicate with
existing and potential new investors. To support these efforts, the
Investment Manager met with many current Shareholders and potential
Shareholders on numerous occasions via face-to face meetings,
webcasts, and conference calls.
Despite these efforts, during 2017, the Company's share price
continued to trade at a discount to NAV. As a result, the Board
believes the current form of the Company's Discount Management
Programme is ineffective. The Directors continue to evaluate
alternatives to the current Discount Management Programme.
Ordinary Share Repurchases
On 25 May 2017, the Company announced a share repurchase
engagement with Stifel Nicolaus Europe Limited (the "Engagement").
Share buy-backs under the Engagement were conducted in accordance
with the authority granted to the Company at its 2017 annual
general meeting. During the year ended 31 December 2017, 3,250,000
Ordinary Shares were repurchased.
Tender Offer
On 2 September 2016, the Company announced that its Ordinary
Shares had traded at an average discount of more than 5 per cent.
to the NAV per Ordinary Share calculated over the three month
period ended 31 August 2016 which triggered the Board of Directors
to offer Shareholders the opportunity to tender Ordinary Shares in
accordance with the Company's discount management policy (the
"Tender Offer"). Under the Tender Offer, the Company offered to
repurchase up to 10 per cent. of the Ordinary Shares in issue. Each
Ordinary Share tendered was converted into one Redemption Share, a
new unlisted class of shares in the capital of the Company.
Redemption Shares participated in an indirect pro rata share of
each underlying reinsurance-linked investment in the Company's
portfolio as at the date of their issue, and were redeemed for cash
as and when these investments are realised. Conversion of
19,855,391 tendered Ordinary Shares into Redemption Shares under
the Tender Offer was completed on 30 December 2016 (representing 10
per cent. of the Ordinary Shares in issue at that time).
The Company redeemed the Redemption Shares and proceeds were
distributed to Shareholders under the following schedule:
Redemption Value Date % of Redemption Shares Payment Date
issued on the Tender
Offer Completion Date
being redeemed
--------------------- ---------------------- -----------------
31 March 2017 59% 30 April 2017
--------------------- ---------------------- -----------------
31 August 2017 37% 29 September 2017
--------------------- ---------------------- -----------------
31 December 2017 4% 31 January 2018
--------------------- ---------------------- -----------------
During 2017, the Company's Ordinary Shares traded at an average
discount of more than 5 per cent. to the NAV per Ordinary Share
over the three month period ended on 31 August 2017. As a result,
in accordance with the discount management policy of the Company
implemented at the inception of the Company, the Directors
considered various options available to it, including offering the
Shareholders the opportunity to tender shares (the "Discount Tender
Offer"). The Board, having received views from certain major
Shareholders, considering the impact of a tender offer on the
liquidity and expense ratios, and in light of the expected
improvement in market conditions as a result of the significant
natural catastrophes during 2017, announced that it would not
implement a Discount Tender Offer on 21 November 2017.
Continuation of the Company
The Board is proposing to ask Shareholders to approve the
continuation of the Company as presently constituted by ordinary
resolution at the Company's 2018 annual general meeting of
Shareholders.
The Board is unanimous in its recommendation that Shareholders
vote in favour of this resolution. In reaching its recommendation,
the Board considered a number of factors, the most important of
which are described below:
Market Conditions
Following the severe catastrophe events of 2017, the insurance
market has seen price increases in 2018, which are the largest
since the Company's inception. The Board believes insurance risk
remains an attractive alternative to other investment options in
the traditional equity and fixed income markets. The Board and the
Investment Manager are confident that the Company's portfolio is
well-positioned to continue to deliver attractive returns over the
long-term. As a result of the rate increases and portfolio
management, the Company anticipates generating an 8.0 per cent.
return on a mean loss basis and a 13.0 per cent. return on a median
loss basis for 2018, each inclusive of dividends.(10)
10 There can be no assurance that these returns can or will be
met. Instead, these are the Investment Manager's projected
returns.
Historic Performance
Despite a declining pricing environment in 2017 and prior, the
Company consistently outperformed its benchmark during its first
four years of operation. Prior to 2017, the Company had provided
its investors with a total NAV return per Ordinary Share of 44.2
per cent. representing an annualised return of 9.6 per cent. During
2017, when faced with the highest industry losses since the
Company's inception and the second highest in history, the
Company's performance was as modelled given the events that
occurred. The Company was able to take advantage of price
improvements during January 2018 renewals which averaged 12%. The
combined investments in preferred shares of the Reinsurer issued in
January 2018 represent collateral deployment across 76 different
positions and 33 different clients generating an estimated US$41.1
million of net reinsurance premium written. The Board believes that
the Investment Manager is in a unique position to provide the
support and resources necessary to provide the Company with
positive returns.
Shareholder Support
The Company retains the support and commitment of its largest
shareholder, Sompo International. Sompo International, through its
ownership of Endurance Bermuda, owns 28.5 per cent. of the
Company's Ordinary Shares and is a wholly-owned subsidiary of Sompo
Holdings, Inc. Sompo International is a recognised global specialty
provider of property and casualty insurance and reinsurance and a
leading property catastrophe and short tail reinsurer since 2001.
The Investment Manager is managed by Sompo International executives
and leverages the underwriting expertise and infrastructure of
Sompo International and its various subsidiaries to conduct its
business. Due to its relationship with Sompo International, the
Company has access to attractive catastrophe reinsurance
opportunities that may not otherwise be available to it.
Illiquid Portfolio
The nature of the Company's portfolio includes illiquid
investments. A vote against continuation would not result in an
immediate liquidation of assets. Instead, the investments would be
liquidated over time and Shareholders may not receive a full
redemption of their holdings for several years due to the
contractual terms of the underlying investments which require
collateral to be held in trust for a defined period of time
following a loss. This redemption might take longer than it might
have done at other times in the Company's history as a result of
longer collateral lock-up periods following the severe catastrophe
events of 2017. During the time between the decision not to
continue and the complete redemption of the Ordinary Shares, the
Company would also continue to incur expenses which will reduce the
ultimate value of the Ordinary Shares received by Shareholders.
Growth of the Company
The Board currently intends to grow the Company to improve the
liquidity and scale of the Company, and is considering various
options, including raising additional capital as described under
the section headed "Capital Raise" below.
For the reasons set forth above, the Board encourages
Shareholders to vote for the Company to continue as presently
constituted.
Capital Raise
Subject to Shareholder approval, at the 2018 annual general
meeting, of the continuation vote (as described above) and the
required disapplication of pre-emption rights, and to the Board's
assessment that market conditions are favourable, the Board will
consider raising additional capital by way of a share issuance
programme, to commence with an initial issue of C Shares. The Board
believes that growth of the Company will improve liquidity, reduce
the fixed expense ratios, and make the Company more attractive to
larger investors, and combined with improved targeted returns, will
eventually lead to a narrowing of the share price discount to
NAV.
Outlook
The Company is now in its sixth year of operation with a
consistent strategy of providing investors access to attractive,
largely uncorrelated, investment returns of the traditional
reinsurance and insurance linked securities market. The Company's
preferred access to risk, proprietary methodology of portfolio
construction, and its conservative approach to reserving allow the
Company to continue to deliver uncorrelated portfolio returns.
Following the significant industry losses experienced in 2017,
the Investment Manager reported improved market conditions during
the January 2018 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). With the June
2018 renewal period approaching, the Investment Manager expects
continued rate improvement with the majority of contracts renewing
being loss affected.
The Board, in conjunction with the Investment Manager
continuously reviews matters relating to the Company, with a view
to ensuring the Company is best placed to meet its investment
objectives and generate returns for Shareholders. To that end, the
Board recognises it must also continue to consider ways to improve
market valuation and to monitor fees and overall expenses in
relation to the Company.
I would like to thank our Shareholders for their continued
support. If you have any questions regarding your Company, please
do not hesitate to contact the Company or the Investment
Manager.
John R. Weale
Chairman
29 March 2018
Manager's Report
During the year ended 31 December 2017, the NAV of the Company's
Ordinary Shares decreased by 24.9 per cent. (net of fees and
expenses, and inclusive of dividends to Shareholders). The Company
declared dividends totaling $0.0714 per Ordinary Share relating to
that period, representing a dividend yield of LIBOR plus 6 per
cent. for the period ending 31 December 2017.
Despite the significant losses during 2017, the Company
continues to benefit from a strong reception from insurance brokers
and clients. The Company has successfully targeted heavily
regulated regional insurance companies who purchase traditional
reinsurance programmes, which, in the Investment Manager's opinion,
tend to be more persistent buyers of reinsurance and generally have
a superior risk adjusted expected return. The Company views each of
these relationships as the basis for a longer-term relationship
which we hope to grow over time, subject to satisfactory terms and
conditions.
The Company focuses on traditional reinsurance, which provides
customised protection to insurance clients in bespoke indemnity
programmes. Traditional reinsurance, which is most commonly
provided in the rated (as opposed to collateralised) reinsurance
market, represents the bulk of the more than $375 billion of limits
purchased annually. The advantage of establishing relationships
with longer-term reinsurance buyers is that consistency of
counterparties, service quality and claims-paying history are
important considerations for these buyers of reinsurance.
Loss Events Impacting the Company
Global economic losses for natural catastrophe events for 2017
were approximately $330 billion with insured losses estimated at
$135 billion.(10) The main drivers for the losses included multiple
Category 4 Atlantic Hurricanes, California wildfires, earthquakes
in Mexico and convective storms.
The Company experienced its largest losses from the three
Atlantic Hurricanes: Hurricanes Harvey, Irma and Maria.
In late August, Hurricane Harvey made landfall in Texas as a
Category 4 storm. Hurricane Harvey was the strongest Hurricane to
make landfall in the United States since 2004. The Hurricane made
landfall with winds of 130 miles per hour. Total economic losses
related to Hurricane Harvey are estimated at $85 billion.(10)
On 10 September 2017, Hurricane Irma, the fourth costliest
Hurricane of all time, made initial U.S. landfall near the Florida
Keys, Florida. Total economic losses related to Hurricane Irma are
estimated at $62 billion with insured losses at $32
billion.(10)
On 20 September 2017, Hurricane Maria made landfall in Puerto
Rico, causing significant damage to Puerto Rico and the Caribbean
islands. Total economic losses related to Hurricane Maria are
estimated at $63 billion with insured losses at $30
billion.(10)
The Company's losses related to the Atlantic Hurricanes were as
follows:
-- Hurricane Harvey: $6.2 million in estimated losses
-- Hurricane Irma: $45.4 million in estimated losses
-- Hurricane Maria: $4.5 million in estimated losses
Other losses incurred during the year include:
-- 2(nd) event/Aggregate losses triggered by multiple events:
estimated losses of $12.3 million
-- California wildfires: $2.5 million in estimated losses
-- $8.7 million in estimated losses from smaller events and
attritional losses plus $1.4 million risk margin charge applied to
buffer loss collateral balances.
Overall, the portfolio performed as expected given the magnitude
of the catastrophic events during 2017. In aggregate, the full year
NAV decline was 24.9%, implying a return period of between 1 in
14.3 and 1 in 33.3 years, which is within the expected range for
the industry wide losses that occurred in 2017.
In addition to the estimated losses that reduced the Company's
total NAV, estimated contractual buffer loss provisions locked up
approximately 11.8 per cent. of the Company's NAV ahead of the 1
January 2018 renewals. These lockups are projected to be released
systematically through the course of 2018 and 2019.(11)
10 Source: Munich Re and Aon.
11 The Company's actual contractual buffer loss provisions may
ultimately differ materially from estimated contractual buffer loss
provisions due to the underlying nature of the risks assumed, the
complexity of the assessment of damages and the limited number of
reported claims received to date.
Remuneration Practices of the Investment Manager
On 18 November 2014, the Investment Manager gave written notice
to the FCA that it intended to market Ordinary Shares (and/or C
Shares) in the United Kingdom (the "UK") in accordance with section
59(1) of the UK Alternative Investment Fund Managers Regulations
(2013/1773). As a result, the Investment Manager is required to
comply, inter alia, with Article 22 of the Alternative Investment
Fund Managers Directive (2011/61/EU) (the "Directive") regarding
the contents of this Annual Report insofar as it is relevant to the
Investment Manager and the Company. This includes the requirement
to make certain disclosures on the remuneration practices of the
Investment Manager.
As a Bermuda based investment manager, the Investment Manager is
not required to implement a remuneration policy consistent with
Annex II to the Directive, and the disclosures below address the
Article 22 requirements to the extent they are relevant to the
Investment Manager's remuneration practices and appropriate
information is available.
The Investment Manager is a wholly owned subsidiary of Sompo
International, and is generally subject to Sompo International's
compensation practices and policies. The Investment Manager is
supported through service agreements with Sompo International,
which has approximately 1,337 employees globally. The costs of such
services to the Investment Manager are allocated according to a
services agreement among various Sompo International subsidiaries
(the "Shared Services Agreement").
The Investment Manager provides services to several client funds
and does not track its remuneration expenses by client. It is
therefore impossible to determine the proportion of the Investment
Manager's remuneration expenses that are attributable to the
services it performs for the Company. During 2017, the Investment
Manager recognised $7.7 million in total remuneration expenses as
follows:
Remuneration Expense
(in $U.S.)
Incurred directly by the Investment 2.3 Million
Manager
Billed to the Investment Manager
by Sompo International 5.4 Million
---------------------
Total 7.7 Million
There were no performance fees paid by the Company to the
Investment Manager for 2017. The Company does not expect to pay the
Company a performance fee for the years ending 31 December 2018 or
31 December 2019 due to the significant losses during 2017.
Risk Management
Article 23(4) of the Directive requires the Company to disclose
its current risk profile and the risk management systems employed
by the Investment Manager to manage those risks.
The Company benefits substantially from the Investment Manager's
relationship with Sompo International by accessing and leveraging
Sompo International's management talent, proprietary reinsurance
modeling tools, underwriting expertise, proprietary risk management
systems and longstanding broker/client relationships. The
Investment Manager's affiliation with Sompo International enables
the Company to deploy capital to build a diversified portfolio of
reinsurance risks with an attractive risk-adjusted return potential
for Shareholders. The Company also benefits from Sompo
International's scale, experience and reputation in pricing
reinsurance contracts and achieving key policy terms and
conditions, which is a competitive advantage for the Company
relative to other independent or small reinsurance platforms. The
Company further benefits from Sompo International's existing
middle- and back-office support infrastructure.
Certain key risks are managed using a combination of Sompo
International's proprietary risk modeling application, various
third-party vendor models and underwriting judgment. The Investment
Manager's approach focuses on tracking exposed contract limits,
estimating the potential impact of a single natural catastrophe
event, and simulating the yearly net operating result to reflect
aggregate underwriting and investment risk. The Investment Manager
seeks to refine and improve each of these approaches based on
operational feedback. Underwriting judgment involves important
assumptions about matters that are inherently unpredictable and
beyond the Investment Manager's control and for which historical
experience and probability analysis may not provide sufficient
guidance.
An important component of any underwriting decision is the
selection of ceding companies who have an effective and robust
claims mitigation capability following loss. The Investment
Manager's experience indicates that there can be a significant
variation in the performance of ceding companies following a large
event if claims are handled judiciously and effectively by a
dedicated in-house team or other committed resource. The Investment
Manager targets ceding companies who are expected to outperform in
this regard to ensure that losses are minimised by leveraging the
qualitative and quantitative underwriting reviews and historical
analyses of the potential ceding company clients.
Material Changes
The Company has been required to make certain information
available to investors under Article 23 of the Directive from 18
November 2014 following the Investment Manager giving notice to the
FCA of its intention to market the Company's shares in the UK.
This information can be found in the Directive Investor
Disclosure Document available at www.bcai.bm.
Key Information Document
The Investment Manager has issued, in respect of the Company,
the key information document for retail investors so as to ensure
that the Investment Manager complies with the EU Regulation on key
information documents for packaged retail and insurance-based
investment products (PRIIPs) (Regulation 1286/2014/EU). This
document has been completed in compliance with EU Regulation and
the included performance disclosures are calculated as prescribed
by the EU Regulation. The key information document is available on
the Company's website at www.bcai.bm.
The Company presents its own performance results with the
Monthly Fact Sheets and Presentations contained within the
Company's website. The Company's forecasted results are based on
modeled outcomes for its existing portfolio and expected future
market conditions whereas the performance scenarios contained in
the key information document required by PRIIPS are based on a
range of historic outcomes calculated on returns achieved in recent
years. Investors should consider all available information when
making investment decisions.
Board Members
The Company's directors (the "Directors") are as follows:
John R. Weale (59) (Chairman) has been a director since 5
November 2012. He is currently a non-executive director of Blue
Capital Reinsurance Holdings Ltd., a Bermuda-based holding company
listed on the NYSE that offers collateralised reinsurance in the
property catastrophe market and invests in various insurance-linked
securities, where he serves as a member chairman of the
compensation and nominating committee. He has over 30 years of
professional financial management and accounting experience in the
insurance/reinsurance industry and has been resident in Bermuda
since March 1983. Until November 2011, Mr. Weale was Chief
Financial Officer of Catalina Holdings (Bermuda) Ltd., which
acquires and manages non-life insurance and reinsurance companies
and portfolios in run-off. Prior to this role, Mr. Weale spent over
13 years at IPCRe Limited and IPC Holdings, Ltd., a Bermuda
publicly listed reinsurance company that specialised in property
catastrophe business, which merged with Validus Holdings Ltd in
2009. At IPC, he was Executive Vice President from July 2008 and
Chief Financial Officer from June 1996, and Interim President and
Chief Executive Officer during 2009. Previously, he held various
positions at American International Company, Limited, including
Vice President - Insurance Management Services. Mr. Weale has also
served as chairman and audit committee member of Butterfield Money
Market Fund Limited and Butterfield Liquid Reserve Fund Limited,
and as a director of Butterfield Select Fund Limited. Mr. Weale
holds a Bachelor's degree in Accounting & Finance. He is a
fellow of the Chartered Institute of Management Accountants and is
a Chartered Global Management Accountant (a designation issued
jointly by the Chartered Institute of Management Accountants and
the American Institute of Certified Public Accountants).
Gregory D. Haycock (71) (Audit Committee Chairman) has been a
director since 5 November 2012. He is currently chairman of several
international exempt companies, including two life insurance
companies and two investment companies. He is based in Bermuda and
is also on the boards of various local companies, including
BF&M Ltd., a general and life insurance company, and its Cayman
subsidiary Island Heritage Limited. Mr. Haycock joined KPMG as a
partner in 1985 and at his retirement in September 2006 was the
Senior Partner of KPMG in Bermuda. In the year before his
retirement, Mr. Haycock was Chairman of KPMG TOG Ltd with
responsibility for ten offshore island jurisdictions and a member
of KPMG's European Board and International Council. Before joining
KPMG, Mr. Haycock held positions on a number of charities as well
as government and local boards, including the Bermuda Monetary
Authority, the Bank of Butterfield, The Bermuda Press Holdings Ltd
and the Bermuda Electric Light Company Limited. He retired as
Chairman of the Board of the Bermuda International Business
Association in 2007. In 1993, Mr. Haycock was elected a Fellow of,
and is a past President and Council member of, the Institute of
Chartered Accountants of Bermuda. During his tenure he was also a
member of the Canadian Institute of Chartered Accountants Board of
Governors. He was appointed a Justice of the Peace by the Governor
of Bermuda in 1987.
George Cubbon (65) was appointed as a director on 9 July 2015 to
fill a vacancy. Mr. Cubbon retired from American International
Group ("AIG") in 2012 after more than 30 years of service. From
2005, he served as President and Chief Executive Officer of
American International Company Limited. During his career with AIG,
Mr. Cubbon held various financial and management roles of
increasing seniority and was the senior executive and a director of
multiple AIG-controlled insurance, reinsurance and financial
services companies. Mr. Cubbon holds an Honours degree in
Engineering from the University of Liverpool and is an Associate
Member of the Chartered Institute of Management Accountants.
Directors' Report
The Directors present their report and the annual audited
financial statements of the Company for the year ended 31 December
2017.
Principal Activity
The Company was incorporated with limited liability in Bermuda
as a closed-ended mutual fund company on 8 October 2012. The
Ordinary Shares were admitted to trading on the SFS, with a
secondary listing on the BSX, on 6 December 2012.
Company Law
The financial statements provided in this Annual Report have
been prepared in accordance with Bermuda law.
Investment Objective and Policy
The Company seeks to achieve its investment objective by
investing all of its assets (other than cash or near cash pending
distribution to Shareholders or investment in the Master Fund and
any funds required for short-term working capital purposes) in the
Master Fund. The Master Fund invests in a diversified portfolio of
fully collateralised reinsurance-linked contracts and other
investments carrying exposures to insured catastrophe event
risks.
The Company's published investment policy is consistent with
that of the Master Fund set out below. Blue Water Master Fund Ltd.
has agreed pursuant to the control agreement that it will not amend
the Master Fund's investment policy without the consent of the
Company. Any material change to the investment policy of the
Company will be made only with the approval of Shareholders.
The Company may not borrow for investment purposes, however,
borrowings may be used for the purposes of funding repurchases of
Ordinary Shares or managing other working capital requirements. In
each of these circumstances, the Company is limited to borrowing an
amount equivalent to a maximum of 20 per cent. of its NAV at the
time of draw down.
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 Sompo International.
The 2016 Credit Facility provides the Company with an unsecured
$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 $20.0 million 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 of these covenants, the Lender
could revoke the facility and exercise remedies against the
Company. As of 31 December 2017, 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 31 December 2017.
Investment Restrictions
The Master Fund has adopted the following investment
restrictions which apply at the time of investment:
-- the portfolio will be diversified geographically with an
emphasis on 20 regions set out in the investment policy;
-- the maximum net aggregate exposure (i.e. the sum of all
collateral invested less reinsurance recoverable) in any one zone
(each zone being defined by a combination of geography, peril and
occurrence) will not exceed 50 per cent. of the company's NAV;
-- the net probable maximum loss (i.e. net of (a) reinsurance
recoverable, (b) net unearned premiums on loss impacted contracts
and (c) any reinstatement premiums receivable) from any one
catastrophe loss event, excluding earthquakes, at the one in one
hundred year return period will not exceed 35 per cent. of the
Company's NAV;
-- the net probable maximum loss (i.e. net of (a) reinsurance
recoverable, (b) net unearned premiums on loss impacted contracts
and (c) any reinstatement premiums receivable) from any one
earthquake loss event at the one in two hundred and fifty year
return period will not exceed 35 per cent. of the Company's NAV;
and
-- no more than 20 per cent. of the Company's NAV will be
invested in any one catastrophe-linked contract or security (in the
case of quota share or stop loss agreements, the analysis looks
through to the underlying reinsurance contracts).
The following limits shall apply (at the time of investment) to
the Master Fund's investments in the following classes of
reinsurance (each limit being expressed as a percentage of the
Company's NAV):
-- up to 100 per cent. in indemnity reinsurance;
-- up to 50 per cent. in indemnity retrocession;
-- up to 50 per cent. in quota share retrocessional agreements;
-- up to 50 per cent. in Industry Loss Warranties;
-- up to 10 per cent. in Cat Bonds; and
-- up to 10 per cent. in other non-property catastrophe risks.
Based on the information available to the Investment Manager at
the time, if a new investment being considered would cause an
investment restriction to be breached, or if an investment
restriction relevant to that new investment opportunity is already
in breach, then that new investment shall not be made. The
existence of investment restriction breaches does not preclude the
Master Fund from making any new investments but only restricts it
from making new investments that would result in a new breach or
exacerbate existing breaches of investment restrictions.
Principal Risks and Uncertainties
The Board regularly reviews the principal risks facing the
Company and, for the purposes of this Annual 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 (above), 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 Sompo
International'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-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 decreases.
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.
Shareholder Information
The Administrator calculates the NAV of the Company and the NAV
per Ordinary Share and per Redemption Share as of the last day of
each calendar month. The monthly NAV of the Ordinary and Redemption
Shares are announced through an RIS provider within 15 business
days after the end of each calendar month.
Results
The results for the period covered by this Annual Report are set
out in the Statement of Operations.
Significant Events
Except as described elsewhere in this Annual Report, there were
no significant events during the period.
Management Arrangements and Fees
The Investment Manager - (Blue Capital Management Ltd.)
The Investment Manager is a specialist alternative asset manager
in the Insurance-Linked Instrument asset class. The Investment
Manager is licensed to conduct investment business by the Bermuda
Monetary Authority and is run by a market-leading team of
professionals with a deep bench of experience in both reinsurance
and capital markets. Currently, the Investment Manager manages
approximately $390 million in assets across a range of
insurance-linked strategies. The Investment Manager is wholly-owned
by Sompo International, a global specialty provider of property and
casualty insurance and reinsurance.
The Investment Manager has been retained by the Master Fund to
manage its assets on a discretionary basis pursuant to an
investment management agreement dated 27 November 2012. The
Investment Manager is entitled to a monthly management fee of: (a)
0.125 per cent. (1.5 per cent. per annum) of the month-end NAV
(prior to accrual of the performance fee) of the Master Fund, up to
a NAV of $300 million; and (b) 0.104 per cent. (1.25 per cent. per
annum) of such month-end NAV above $300 million.
The Investment Manager is also licensed with the Bermuda
Monetary Authority as an insurance manager and insurance agent and
is authorised to provide services to the Reinsurer under an
Underwriting and Insurance Management Agreement.
The Investment Manager provides management, administrative,
underwriting and other services as well as operational
infrastructure to the Reinsurer. The Investment Manager also
provides stand-alone and portfolio risk modelling and assists the
Reinsurer to originate business by entering into reinsurance
agreements with ceding companies.
The Investment Manager is entitled to an annual performance fee
equal to 15 per cent. of: (a) the aggregate appreciation in the NAV
of the Master Fund shares held by the Company (excluding special
memorandum account shares) over the previous high water mark; less
(b) the performance hurdle of LIBOR plus 5 per cent. on the
starting NAV of the Master Fund shares held by the Company,
provided that the performance fee shall not be less than zero and
provided further that no performance fee will be payable in a
performance period unless the performance trigger of LIBOR plus 8
per cent. on the starting NAV of the Master Fund shares held by the
Company during the performance period has been reached.
The Company does not expect to pay the Investment Manager a
performance fee during the 2018 and 2019 fiscal years due to the
significant losses during 2017.
The Reinsurer - (Blue Water Re Ltd.)
The Reinsurer is an exempted company incorporated on 18 November
2011 with limited liability under the laws of Bermuda that is
licensed by the Bermuda Monetary Authority as a special purpose
insurer with an underwriting plan focused on fully collateralised
reinsurance protection of the property catastrophe insurance and
reinsurance markets.
The Master Fund invests in the Reinsurer by way of subscription
for a separate series of non-voting redeemable preference shares of
the Reinsurer linked to each reinsurance contract entered into by
the Reinsurer per loss occurrence period or exposure period, as
applicable. For each fully collateralised reinsurance-linked
contract identified by the Investment Manager in accordance with
the investment policy, the Master Fund invests the necessary
collateral in redeemable preference shares of the Reinsurer. The
Reinsurer then pledges this collateral to secure its obligations
under the relevant contract to the ceding company. Net premiums
received from ceding companies may be used to make further
investments or to pay distributions to the Master Fund, as
appropriate.
The Administrator - (SS&C Fund Services (Bermuda) Ltd.)
The Company and the Master Fund have each appointed SS&C
Fund Services (Bermuda) Ltd. as its administrator. The
Administrator has been retained by the Company and the Master Fund
to calculate their respective NAVs and to provide certain other
administrative services.
Directors' Interests
The Directors all served during the period under review.
Beginning in June 2016, each of the Directors is required to
purchase at least $5,000 worth of the Company's Ordinary Shares in
the secondary market per year. The table below sets forth the
Directors' Ordinary Share ownership as of 31 December 2017:
Number of Ordinary Shares
Owned
John R. Weale 39,850
Gregory D. Haycock 10,000
George Cubbon 10,000
--------------------------
Total 59,850
Substantial Interests
As the Ordinary Shares have been admitted to trading on the SFS,
the Company is required to comply with the Disclosure and
Transparency Rules ("DTRs"), which are now contained in the FCA's
handbook. Pursuant to the DTRs, Shareholders are required to notify
the Company and the FCA when their holdings exceed, reach or fall
below certain prescribed thresholds. The Company must then
disseminate this information to the wider market.
Corporate Governance
Introduction
The Board strives to create a transparent corporate governance
culture that meets the relevant listing requirements and provides
fair and informative disclosures for investors.
Bermuda Regulatory Environment
Bermuda has no specific corporate governance regime applicable
to the Company; but, in recognition of the importance of sound
corporate governance, the Company has joined the Association of
Investment Companies (the "AIC"). Furthermore, the Board endorses
and has adopted the AIC Code of Corporate Governance (the "AIC
Code"). The Company has carefully considered the principles and
recommendations of the AIC Code and has elected to follow the AIC's
Corporate Governance Guide for Investment Companies (the "AIC
Guide").
The AIC Code of Corporate Governance "A framework of best
practice for member companies" was issued in July 2016, and it is
publicly available on the AIC website. On 14 July 2016, the
Financial Reporting Council provided the AIC with an endorsement
letter to cover the July 2016 edition of the AIC Code. The
endorsement confirms that by following the AIC Code investment
company boards should fully meet their obligations in relation to
the UK Corporate Governance Code.
AIC and UK Corporate Governance Code Compliance
Management has undertaken a review of the corporate governance
principles of the Board of the Company. The Directors confirm that
during the period for the accounting year ended 31 December 2017,
the Company has complied with the recommendations of the AIC Code
and the relevant provisions of the UK Corporate Governance Code,
except as follows: (a) there was no chief executive position within
the Company which is not in accordance with A.2.1 of the UK
Corporate Governance Code but is not relevant to the Company as the
Company does not have and does not intend to have employees or
executive directors; (b) the Company did not establish a separate
remuneration or nomination committee which is not in accordance
with D.2.1 and B.2.1, respectively, of the UK Corporate Governance
Code but is not relevant to the Company as the Company does not
have and does not intend to have employees or executive directors;
and (c) the Company did not have a senior independent director
which is not in accordance with A.4.1 of the UK Corporate
Governance Code, but it is not relevant to the Company or its Board
because the Board is composed of only three directors, each of whom
are independent.
The Board
The Board consists of three non-executive Directors, each of
whom is independent of the Investment Manager in accordance with
Principle 2 of the AIC Code. The Board has determined that each
non-executive Director met the independence criteria set forth in
Principle 1 of the AIC Code upon appointment and has continued to
meet this condition throughout his term of service. Moreover, no
Director has a service contract with the Company.
Messrs. Weale and Haycock have served as non-executive Directors
since the Company's launch. Mr. Cubbon was appointed as a
non-executive Director in July 2015 to fill a vacancy caused by the
resignation of Neil W. McConachie who resigned to pursue other
interests. When considering director nominees, the Board considers
whether an individual has significant accomplishments in his or her
chosen field, whether he or she has experience with a high degree
of responsibility and whether he or she is able and willing to
commit the appropriate time for preparing and participating in
matters relating to his or her role as a director of the
Company.
The Company's Bye-laws provide that one third of the Directors
retire by rotation each year. This year, however, as in each prior
year, each Director has retired and offered himself for re-election
at the annual general meeting.
The Directors stay fully informed of the business affairs and
internal investment and financial controls of the Company. All
matters relevant to the Company's business are brought to the
attention of the Board, which also has access to independent
professional advice at the expense of the Company. The Directors'
terms of appointment are available at the Investment Manager's
office for review by Shareholders.
Each year, the Board performs a formal performance appraisal of
itself and its individual Directors. In view of the Company's
non-executive, independent nature and size, the Board considers it
inappropriate for there to be a separate committee to perform this
appraisal, as envisaged by the AIC Code.
In addition to reviewing the performance, independence and
tenure of its individual Directors, the Board also considers its
overall composition, diversity and balance as well as the adequacy
and continuity of itself and its committees.
Presently, the Board is satisfied that all Directors continue to
discharge their duties effectively and contribute to the work of
the Board and its committees.
In considering its composition, the Board strives to achieve a
balance of skills, experience, length of service and knowledge of
the Company with the ultimate goal of creating value for investors
while meeting a high standard of corporate governance. Given the
Company's limited operating history and the considerable experience
and expertise brought to bear by each Director, the Board has
determined it to be in the best interest of the Shareholders to
maintain the continuity of the Directors.
Accordingly, the Board recommends the election of each of the
Directors whose supporting biographies appear elsewhere in this
Annual Report. A full list of other public company directorships
for each Director is disclosed in the Annual Report.
The Board holds regular meetings four times a year, at a
minimum, and maintains ongoing communications with the Investment
Manager and the Company's other service providers. During the year
ended 31 December 2017, the Board held six formal Board meetings
and three Audit Committee meetings.
The table below sets out the attendance record of the
Directors.
Board Audit
Number of Meetings: 6 3
Meetings Attended:
John R. Weale 6 3
Gregory D. Haycock 6 3
George Cubbon 6 3
Notices and agendas, and any other materials that are deemed
necessary or useful, are circulated to the Board prior to each
meeting so that the Directors have sufficient time to review the
items to be addressed at the meeting. Directors may also request
the addition to the agenda of any items they deem appropriate for
Board consideration. Regular Board meetings primarily focus on the
Company's investment performance, risk management, asset
allocation, compliance, investor relations and any other matters
the Board considers appropriate for review. If a Director has any
potential or actual conflicts of interest, he must disclose such
conflict prior to each Board meeting.
Directors' Authorities
The Directors have adopted a set of authorities reserved to the
Board in accordance with Principle 16 of the AIC Code, which
provide a non-exclusive list of the principal areas in which the
Board reserves approval over activities or transactions by the
Company. The principal authorities reserved to the Board include
the following:
-- design and maintenance of investment objectives, restrictions and policies;
-- appointment, oversight and delegation of authorities to Committees of the Board;
-- establishment of limits of authority of management relating
to monetary expenditures and approval all expenditures exceeding
such limits;
-- declaration of all Shareholder dividends;
-- review and approval of all borrowing by the Company;
-- recommendation and approval of the compensation of Directors;
-- oversight over all aspects of Company's risk management
function, including the definition of the Company's risk appetite
and design of the Company's risk management process; and
-- any other matters having a material effect on the Company.
Manager's Authorities
The Investment Manager has been retained by the Master Fund to
manage its assets on a discretionary basis pursuant to an
investment management agreement dated 27 November 2012.
The Investment Manager provides management, administrative,
underwriting and other services as well as operational
infrastructure to the Reinsurer. The Investment Manager also
provides stand-alone and portfolio risk modelling and assists the
Reinsurer to originate business by entering into reinsurance
agreements with ceding companies.
Management, Remuneration and Audit Committees
The Company generally complies with the recommendations of the
AIC Code and the relevant provisions of the UK Corporate Governance
Code.
In view of the Company's non-executive and independent
composition, the Board considers it unnecessary for there to be a
Management or Remuneration Committee as anticipated by the AIC
Code. Further, the Company does not, and does not intend to, have
employees or executive directors. Accordingly, the Board as a whole
fulfils the functions of the Management and Remuneration
Committees.
Each year, the Board undertakes an assessment of the Investment
Manager's performance. In evaluating the Investment Manager, the
Board considers the Company's performance, Shareholder feedback,
management reporting and communication, risk management, and the
Investment Manager's interactions with the Board and the
Shareholders. Based on this assessment, the Board remains pleased
with the Investment Manager's performance and it believes it is in
the best interests of the Company and its Shareholders to retain
the services of the Investment Manager. The Board reviews each of
its service providers on an ongoing basis.
Audit Committee
In accordance with the AIC Code, the Company has established an
Audit Committee, which comprises all three of the Company's
Directors. Mr. Haycock serves as Chairman of the Audit Committee.
As discussed above, all of the Company's Directors are independent,
and the Board considers it appropriate for all three Directors to
serve on the Audit Committee given the Board's small size.
The terms of reference of the Audit Committee, which are
available from the Company Secretary upon request, provide that it
will meet at least two times per year at appropriate times in the
reporting and audit cycle and otherwise as required. The Audit
Committee's principal duties are to consider among other things:
(a) annual and interim financial statements; (b) auditor reports;
and (c) terms of appointment and remuneration for the auditors
(including overseeing the independence of the external auditors
particularly as it relates to the provision of non-audit
services).
The Audit Committee pays particular attention to the
qualifications, expertise and resources of the external auditor, as
well as the effectiveness of the audit process.
Where the external auditor is to provide non-audit services to
the Company, the Audit Committee fully considers the implications
of the provision of those services on the independence of the
external auditor prior to undertaking any such engagement. If such
non-audit services are provided, the Audit Committee reviews the
services to ensure the preservation of the external auditor's
independence.
In accordance with its terms of reference, the Audit Committee
has reviewed the Annual Report, including the audited financial
statements for the year ended 31 December 2017, in detail and
considered all matters brought to the attention of the Board during
the accounting period. The Audit Committee has subsequently
determined that the Annual Report and the financial statements
fairly represent the status of the Company's affairs.
Internal Controls
The Board bears ultimate responsibility for the Company's system
of internal control. While the Company does not have its own
employees to undertake an internal audit function, the Company has
utilised Sompo International's internal audit department to perform
reviews of certain components of its internal control framework.
Further, the terms of reference of the Audit Committee provide that
the Board will perform the following functions relating to internal
audit in addition to its functions associated with management and
remuneration:
-- rigorous selection process for key service providers;
-- regular physical board meetings and ad hoc board meetings as required;
-- receipt and consideration of quarterly (or more frequent if
necessary) reporting from each of the Company's key service
providers;
-- receipt and consideration of quarterly reports from the Company's Administrator;
-- establishment of committees of the Board (if any);
-- ensure existence of dual signatories in respect of the Company's bank accounts;
-- annual reviews of all key service providers;
-- annual review of the Company's and the Administrator's systems of internal controls;
-- quarterly review of management accounts; and
-- quarterly review of reporting against budget.
The Board has reviewed the effectiveness of the Company's risk
management and internal control systems and is satisfied at this
time that these systems are appropriate to safeguard Shareholders'
investments and the Company's assets.
Corporate Responsibility
In accordance with Principle 20 of the AIC Code, the Board takes
responsibility for, and is kept aware of, all relevant
communications with Shareholders. The Company relies upon its
service providers to perform its operations, and it maintains an
open line of communication with those providers to address the
ongoing concerns of Shareholders. In addition, the Company may also
address the concerns of its investors through direct discussions
with Shareholders.
Relations with Shareholders
The Company maintains regular communications with institutional
Shareholders through its Investment Manager, and the Board is kept
aware of the feedback received from such investors. Board members
are also available to respond to Shareholder questions at the
annual general meeting, and Shareholders may request meetings with
Directors or communicate with the Board directly by contacting the
Company Secretary.
Furthermore, in accordance with Principle 19 of the AIC Code,
the Board monitors the Shareholder profile of the Company on a
regular basis.
The Board encourages all Shareholders to attend and participate
in the annual general meeting, at which the key issues affecting
the Company will be addressed. The notice of the Company's 2018
annual general meeting, together with a summary of the resolutions
to be proposed at the meeting, contained in this Annual Report,
sets out the business of the upcoming annual general meeting
including the resolutions to be voted upon. The Company announces
meeting results as soon as practicable after they are
determined.
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 Company provided a market
update on its portfolio following its January 2018 reinsurance
renewals, which can be found at www.bcai.bm. 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 year ended 31 December 2017.
Disclosure of Information to Auditors
The Directors have determined that, to their knowledge, there is
no relevant audit information unknown to the Company's external
auditor. Furthermore, each Director has taken adequate and
appropriate steps to make himself aware of any relevant information
and to convey such information to the Company's external
auditor.
Auditors
The Company's Audit Committee appoints and annually evaluates
the performance of the Company's independent auditor and provides
assistance to the members of the Board in fulfilling their
oversight functions of the financial reporting practices. The
Company's current independent registered public accounting firm is
Ernst & Young Ltd. Ernst & Young Ltd. has been the
Company's independent registered public accounting firm since July
2015 and the Audit Committee has selected Ernst & Young Ltd. to
be the Company's independent registered public accounting firm for
2018.
A resolution to re-appoint Ernst & Young Ltd. as the
Company's independent auditor for 2018 and to authorise the Board,
acting by the Company's Audit Committee, to set their remuneration
will be proposed at the forthcoming annual general meeting.
Viability Statement
As detailed above, the Directors have conducted an assessment of
the principal risks facing the Company and believe that the Company
is well placed to manage these risks. Therefore, in accordance with
Principle 21 of the AIC Code, the Directors confirm that they have
a reasonable expectation that the Company will continue in
operation and meet its liabilities as they fall due for the next
four years.
The following factors were considered in determining the four
year viability period:
-- the Company operates within the property catastrophe
reinsurance market which has matured steadily over the past several
years, with greater participation by a wider and more knowledgeable
investor base and increasing acceptance of third party capital by
cedants;
-- the Company's investment policy which imposes restrictions on
the types of investments and the amount of risk that may be
taken;
-- the Company's projected financial performance over the four year viability period; and
-- the Investment Manager's performance and its relationship with Sompo International.
After considering the above, the Directors believe that a four
year viability period is the most appropriate to ensure that its
projections are reasonable and that the Company can conduct a
reasonable identification and assessment of its principal
risks.
By order of the Board,
John R. Weale Gregory D. Haycock George Cubbon
Chairman Director Director
29 March 2018
Statement of Directors' Responsibilities in Respect of the
Financial Statements
The Directors are responsible for preparing the Directors'
Report and the financial statements in accordance with the
applicable law and regulations.
The Directors consider that this Annual Report and the financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for the Shareholders to
assess the Company's position and performance, business model and
strategy.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Board has
elected to prepare the financial statements in accordance with
accounting principles generally accepted in the US ("US GAAP").
The financial statements are required by law to give a true and
fair view of the state of affairs of the Company and of the profit
or loss of the Company for that period.
In preparing these financial statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgments and estimates that are reasonable and prudent; and
-- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and to enable them to ensure that
the financial statements comply with the Bermuda Companies Act
1981, as amended. The Board is also responsible for safeguarding
the assets of the Company and taking all reasonably available steps
to prevent and detect fraud and other irregularities.
Directors' Responsibility Statement
In accordance with Chapter 4 of the Disclosure and Transparency
Rules, the Directors confirm that, to the best of their knowledge
and belief, they have complied with the above requirements in
preparing the financial statements and that:
-- the Chairman's Statement, the Investment Manager's Report and
the Directors' Report include a fair review of the development and
performance of the business and the position of the Company
together with a description of the principal risks and
uncertainties that the Company faces; and
-- the financial statements, prepared in accordance with US
GAAP, give a true and fair view of the assets, liabilities,
financial position and profit of the Company.
Signed on behalf of the Board by:
John R. Weale Gregory D. Haycock George Cubbon
Chairman Director Director
29 March 2018
Blue Capital Alternative Income Fund Limited
(Incorporated in Bermuda)
Audited Financial Statements
31 December 2017
(expressed in thousands of U.S. dollars)
Report of Independent Auditors
The Board of Directors
Blue Capital Alternative Income Fund Limited
We have audited the accompanying financial statements of Blue
Capital Alternative Income Fund Limited (the "Company", formerly
Blue Capital Global Reinsurance Fund Limited), which comprise the
statements of assets and liabilities as of December 31, 2017 and
2016, and the related statements of operations, changes in net
assets and cash flows for the years then ended, and the related
notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair
presentation of these financial statements in conformity with U.S.
generally accepted accounting principles; this includes the design,
implementation and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are
free of material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control.
Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the
financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Blue Capital Alternative Income Fund Limited at December 31, 2017
and 2016, and the results of its operations, changes in its net
assets and its cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young Ltd.
Hamilton, Bermuda
March 28, 2018
Blue Capital Alternative Income Fund Limited
Statements of Assets and Liabilities
(expressed in thousands of U.S. dollars, except shares and per
share amounts)
Audited Financial Statements
31 December 2017
(expressed in thousands of U.S. dollars)
31 December
2017 2016
----------- -----------
Assets
Investment in the Master Fund at
fair value
(cost - $129,371 ; 2016 cost - $155,467) 136,994 221,283
Cash and cash equivalents 2,339 5,482
Amounts due from Master Fund 920 -
Other assets 187 158
----------- -----------
Total assets 140,440 226,923
----------- -----------
Liabilities
Redemptions payable 985 -
Accrued expenses and other liabilities 158 64
Total liabilities 1,143 64
----------- -----------
Net assets 139,297 226,859
Ordinary Shares in issue 175,448,523 178,698,523
----------- -----------
Net asset value per Ordinary Share 0.7939 1.1434
----------- -----------
Redemption Shares in issue - 19,855,391
----------- -----------
Net asset value per Redemption Share - 1.1351
----------- -----------
See accompanying notes to Financial Statements and attached
Financial Statements of Blue Water Master Fund Ltd. - Blue Capital
Global Reinsurance SA-I
Blue Capital Alternative Income Fund Limited
Statements of Operations
(expressed in thousands of U.S. dollars)
Year ended 31 December
2017 2016
------------ ----------
Net investment loss allocated
from Master Fund (3,039) (4,267)
Expenses
Professional fees (746) (895)
Other fees (84) (93)
Administration fees (70) (69)
------------ ----------
Total expenses (900) (1,057)
Net investment loss (3,939) (5,324)
------------ ----------
Realised and unrealised gain/(loss)
on investments allocated from
Master Fund:
Net realised gain on investments
in securities 22,567 29,182
Net change in unrealised depreciation
on
investments in securities (65,897) (6,662)
(43,330) 22,520
------------ ----------
Net (decrease) increase in net
assets resulting from operations (47,269) 17,196
------------ ----------
See accompanying notes to Financial Statements and attached
Financial Statements of Blue Water Master Fund Ltd. - Blue Capital
Global Reinsurance SA-I
Blue Capital Alternative Income Fund Limited
Statements of Changes in Net Assets
(expressed in thousands of U.S. dollars)
Year ended 31 December
2017 2016
----------- -----------
Increase in net assets
From operations
Net investment loss (3,939) (5,324)
Net realised gain on investments
in securities 22,567 29,182
Net change in unrealised depreciation
on
investments in securities (65,897) (6,662)
----------- -----------
Net (decrease) increase in net
assets resulting from operations (47,269) 17,196
----------- -----------
From capital transactions
Ordinary share repurchases (3,387) (555)
Redemption share repurchases (22,246) -
Dividends declared (14,660) (13,118)
Net decrease in net assets resulting
from capital transactions (40,293) (13,673)
----------- -----------
(Decrease) increase in net assets (87,562) 3,523
----------- -----------
Net assets - Beginning of year 226,859 223,336
----------- -----------
Net assets - End of year 139,297 226,859
----------- -----------
See accompanying notes to Financial Statements and attached
Financial Statements of Blue Water Master Fund Ltd. - Blue Capital
Global Reinsurance SA-I
Blue Capital Alternative Income Fund Limited
Statements of Cash Flows
(expressed in thousands of U.S. dollars)
Year ended 31 December
2017 2016
----------- -----------
Cash flows from operating activities
Net (decrease) increase in net
assets resulting from operations (47,269) 17,196
Adjustments to reconcile to net
cash provided by (used in) operations:
Sales / (purchases) of investments
in Master Fund and net investment
loss, net realised gain and net
change in unrealised appreciation/depreciation
on investments in securities allocated
from Master Fund 83,369 7,997
Net change in other assets and
liabilities:
(Increase) / decrease in other
assets (29) 16
Increase / (decrease) in accrued
expenses and
other liabilities 94 (70)
----------- -----------
Net cash provided by (used in)
operating activities 36,165 25,139
----------- -----------
Cash flows from financing activities
Repayments to credit facility - (6,000)
Share repurchases (24,648) (555)
Dividends paid (14,660) (13,118)
Net cash used in financing activities (39,308) (19,673)
----------- -----------
Net (decrease) increase in cash
and cash equivalents (3,143) 5,466
Cash and cash equivalents - Beginning
of year 5,482 16
----------- -----------
Cash and cash equivalents - End
of year 2,339 5,482
----------- -----------
Non-Cash transactions
3,588 Ordinary Shares issued in
lieu of cash payments of dividends
(Note 7) -4
See accompanying notes to Financial Statements and attached
Financial Statements of Blue Water Master Fund Ltd. - Blue Capital
Global Reinsurance SA-I
Blue Capital Alternative Income Fund Limited
Notes to Financial Statements
31 December 2017
(expressed in thousands of U.S. dollars, except shares and per
share amounts)
1. Nature of operations
Blue Capital Alternative Income Fund Limited (the "Company",
formerly Blue Capital Global Reinsurance Fund Limited which was
renamed on 23 May 2017) 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
financial statements of the Master Fund, including the condensed
schedule of investments, are attached to this report and should be
read in conjunction with these financial statements.
The Company's shares are admitted to trading on the Specialist
Fund Segment, a market operated by the London Stock Exchange
(symbol BCAI LN). The Company's shares are listed on the Bermuda
Stock Exchange (symbol BCAI 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 the 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 of
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 Insurance Act. The
Investment Manager is a wholly-owned subsidiary of Sompo
International Holdings Ltd. ("Sompo International"), a recognized
global specialty provider of property and casualty insurance and
reinsurance incorporated in Bermuda.
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.
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. 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. Valuation of investments held by the Master Fund is discussed
in the notes to the Master Fund financial statements attached to
this report.
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 Statement 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
occurred. 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 other changes
in the fair value of investments held. Such fluctuations are
included in net change in unrealized gains from investments 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. Administration fees
SS&C Fund Services (Bermuda) Ltd. (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.
4. Related party transactions
As of 31 December 2017, Endurance Specialty Insurance Ltd.
("Endurance Bermuda") owned 28.5% (2016 - 28.0%) of the voting
rights of the Ordinary Shares issued by the Company. Endurance
Bermuda and the
Manager are 100% owned by Sompo International.
Director's Fees
The Company's Board of Directors has overall management
responsibility for the Company. The Company will reimburse all
directors for their out-of-pocket expenses and will pay a customary
fee, in accordance with reasonable and customary directors' fees.
For the year ended 31 December 2017, the directors' fees amounted
to $180 (2016 - $180), none of which remained payable at year
end.
Management fees and performance fees
Management and performance fees are charged to the Master Fund
and flow through to the Company as part of the net investment loss
allocated from the Master Fund in the Statements of Operations. For
details, investors should refer to Note 7 in the Master Fund
financial statements attached to this report.
Issue costs
Issue costs are those fees, expenses and costs necessary for the
establishment of the Company and for the issuance of its shares.
Issuance costs include but are not limited to placing agreements
fees, legal, accounting, registration, printing, advertising and
distribution costs, and costs associated with the creation of
depository interests. Each placing agreement sets limits for
issuance costs to be borne by the Company. Issuance costs exceeding
the limits are paid by the Investment Manager. At 31 December 2017
and 2016, no amount was owed from the Investment Manager in respect
to issue costs.
5. 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. For a summary of risks, investors should refer to the
financial statements of the Master Fund attached to this
report.
6. 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 Sompo International.
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 (the "364-Day Credit Agreement") 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 December 31, 2017, 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 31 December 2017.
In February 2016, the Company repaid the $6,000 outstanding
under the 364-Day Credit Agreement. During the year, the Company
incurred interest expense of nil (2016 - $42) including customary
commitment fees, reflected in Other Fees in the Statement of
Operations. Under the 364-Day Credit Agreement, the Company also
paid Endurance Specialty Holdings Ltd., in its capacity as the
Guarantor, an annual fee of 0.125% of the Commitment Amount for
guaranteeing its obligations.
7. Capital share transactions
As at 31 December 2017 and 2016, the Company is authorized to
issue up to 990,000,000 Shares of par value $0.00001 per share.
On 19 January 2017, the Company declared a dividend covering the
period 1 July 2016 to 31 December 2016 of $0.033 per Ordinary
Share. On 24 February 2017, a cash dividend of $5,897 was paid.
On 30 March 2017, the Company declared a dividend covering the
period 1 January 2017 to 31 March 2017 of $0.0165 per Ordinary
Share. On 8 May 2017, a cash dividend of $2,949 was paid.
On 19 July 2017, the Company declared a dividend covering the
period 1 April 2017 to 30 June 2017 of $0.0165 per Ordinary Share.
On 24 August 2017, a cash dividend of $2,919 was paid.
On 18 October 2017, the Company declared a dividend covering the
period 1 July 2017 to 30 September 2017 of $0.0165 per Ordinary
Share. On 24 November 2017, a cash dividend of $2,895 was paid.
On 25 May 2017, the Company announced a share repurchases
engagement (the "Engagement"). Share buy-backs under the Engagement
were conducted in accordance with the authority granted to the
Company at its annual general meeting. During the year ended 31
December 2017, 3,250,000 Ordinary Shares were repurchased and
subsequently added to Treasury Shares by the Company.
On 2 September 2016, the Company announced that its Ordinary
Shares had traded at an average discount of more than 5% to the Net
Asset Value per Ordinary Share calculated over the three month
period ended 31 August 2016 which triggered the Board of Directors
to offer Shareholders the opportunity to tender Ordinary Shares in
accordance with the Company's discount management policy (the
"Tender Offer"). Under the Tender Offer, the Company offered to
repurchase up to 10% of the Ordinary Shares in issue. Each Ordinary
Share repurchased was converted into one Redemption Share, a new
unlisted class of share. Redemption Shares have continued to
participate in an indirect pro rata share of each underlying
reinsurance-linked investment in the Company's portfolio as at the
date of their issue, and have been redeemed for cash as and when
these investments have been realised. Conversion of tendered
Ordinary Shares into Redemption Shares under the Tender Offer was
completed on 30 December 2016.
On 11 December 2017, the Company announced that it would make
the final redemption payment to Redemption Shareholders on or
before 31 January 2018. As of 31 December 2017, the redemption
payable on the Statement of Assets and Liabilities of $985
represented the final redemption payment to Redemption Shareholders
based on a net asset value of $1.1229 per share.
Including Endurance Bermuda there are five shareholders who, in
the aggregate, held approximately 75% of the share capital of the
Company at 31 December 2017.
Transactions in Shares were as follows:
1 January 2017 to 31 December 2017
Beginning Shares Shares Issued Shares Repurchased Shares Converted Ending Shares
Ordinary
Shares 178,698,523 - (3,250,000) - 175,448,523
------------------ ------------------------ --------------------- ------------------------ ------------------------
Redemption
Shares 19,855,391 - (19,855,391) - -
------------------ ------------------------ --------------------- ------------------------ ------------------------
1 January 2016 to 31 December 2016
Beginning Shares Shares Issued Shares Repurchased Shares Converted Ending Shares
Ordinary
Shares 199,105,326 3,588 (555,000) (19,855,391) 178,698,523
---------------------------------- ------------------------ ------------------------- ----------------------- ------------------
Redemption
Shares - - - 19,855,391 19,855,391
---------------------------------- ------------------------ ------------------------- ----------------------- ------------------
The Company has been established as a closed-ended mutual fund
and, as such, Ordinary Shares may not be redeemed from the
Company.
8. 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.
9. Financial highlights
Financial highlights for Ordinary Shares are as follows:
Year ended December 31
2017 2016
-------------- -------------
Per share operating performance
Net asset value, beginning
of year $ 1.1434 $ 1.1217
Income from investment operations (0.2670) 0.0877
Dividend payment per share (0.0825) (0.0660)
---------- ---------
Net asset value, end of year $ 0.7939 $ 1.1434
---------- ---------
Total return
Total return before performance
fee (23.35) % 8.33 %
Dividend paid (7.22) (5.88)
Performance fee* - (0.52)
---------- ---------
Total return after performance
fee** (30.57) % 1.93 %
---------- ---------
Ratio to average net assets
Expenses other than performance
fee (2.05) % (2.01) %
Performance fee* - (0.53)
----------------------- -----------------------
Total expenses after performance
fee (2.05) % (2.54) %
----------------------- -----------------------
Net investment loss before
performance fee (2.00) % (1.83) %
----------------------- -----------------------
* The performance fee and management fee are charged in the
Master Fund.
** The total return for the year ended 31 December 2017 before
the dividends declared on 19 January 2017, 30 March 2017, 19 July
2017 and 18 October 2017 is computed as (24.85)%. The total return
for the year ended 31 December 2016 before the dividends declared
on 15 January 2016 and 22 July 2016 is computed as 8.26%.
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 year.
Total return is calculated based on the percentage movement in
net asset value per share. The expense ratio is calculated based on
the expenses of the Company and the proportionate share of expenses
allocated from the Master Fund over the average net asset value 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 net asset value per share in the year.
10. 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.
11. Subsequent events
On 18 January 2018, the Company declared a dividend covering the
period 1 October 2017 to 31 December 2017 of $0.0219 per Ordinary
Share. On 23 February 2018, a cash dividend of $3,842 was paid.
On 11 December 2017, the Company announced that it would make
the final redemption payment to Redemption Shareholders on or
before 31 January 2018. On 31 January 2018, the final redemption of
$985 was paid.
These Financial Statements were approved by the Manager and the
Directors and were made available for issuance on 28 March 2018.
Subsequent events have been evaluated through this date.
Blue Water Master Fund Ltd. -
Blue Capital Global Reinsurance SA-I
(Incorporated in Bermuda)
Audited Financial Statements
31 December 2017
(expressed in thousands of U.S. dollars)
Report of Independent Auditors
The Board of Directors
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
We have audited the accompanying financial statements of Blue
Water Master Fund Ltd. - Blue Capital Global Reinsurance SA-I (the
"Master Fund"), which comprise the statements of assets and
liabilities, including the condensed schedule of investments, as of
December 31, 2017 and 2016, and the related statements of
operations, changes in net assets and cash flows for the years then
ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair
presentation of these financial statements in conformity with U.S.
generally accepted accounting principles; this includes the design,
implementation and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are
free of material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the
entity's preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control.
Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the
financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance SA-I
at December 31, 2017 and 2016, and the results of its operations,
changes in its net assets and its cash flows for the years then
ended in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young Ltd.
Hamilton, Bermuda
March 28, 2018
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Statements of Assets and Liabilities
(expressed in thousands of U.S. dollars, except share and per
share amounts)
December 31
2017 2016
---------- ----------
Assets
Investments in securities, at fair value (cost
- $179,043;
2016 cost - $188,453) 133,747 209,802
Unrealised gain on derivatives (2016 premiums
paid - $2,335) - 555
Cash and cash equivalents 4,737 13,749
Other receivables - 264
Receivable from related party (Note 7) 14 118
Interest receivable - 29
Total assets 138,498 224,517
---------- ----------
Liabilities
Unrealised loss on derivatives (2016 premiums
received - $1,179) - 146
Performance fee payable - 1,157
Management fee payable 523 1,108
Redemption payable 920 -
Accrued expenses and other liabilities 61 823
Total liabilities 1,504 3,234
---------- ----------
Net assets 136,994 221,283
---------- ----------
Offered Shares in issue 122,854 133,403
---------- ----------
Net asset value per Offered Share 1,115.0886 1,492.8732
---------- ----------
Redemption Shares in issue - 14,823
---------- ----------
Net asset value per Redemption Share - 1,492.8732
---------- ----------
See accompanying notes to the Financial Statements
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Statements of Operations
(expressed in thousands of U.S. dollars)
Year ended December 31,
2017 2016
------------- ----------
Income
Interest 105 410
Other income - 45
------------- ----------
Total income 105 455
------------- ----------
Expenses
Management fees (2,789) (3,293)
Performance fees - (1,157)
Administrative fees (196) (224)
Professional fees (49) (43)
Other fees (110) (5)
Total expenses (3,144) (4,722)
------------- ----------
Net investment loss (3,039) (4,267)
------------- ----------
Realised gain and unrealised gain on investments
in securities
and derivative contracts
Net realised gain on investments in securities
and derivative contracts 22,567 29,182
Net change in unrealised depreciation on investments
in securities and derivative contracts (65,897) (6,662)
------------- ----------
Net (loss) gain on investments in securities and
derivative contracts (43,330) 22,520
------------- ----------
Net (decrease) increase in net assets resulting
from operations (46,369) 18,253
------------- ----------
See accompanying notes to the Financial Statements
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Statements of Changes in Net Assets
(expressed in thousands of U.S. dollars)
Year ended December 31,
2017 2016
------------ -----------
(Decrease) / Increase in net assets
From operations
Net investment loss (3,039) (4,267)
Net realised gain on investments in securities
and derivative contracts 22,567 29,182
Net change in unrealised depreciation on investments
in securities and derivative contracts (65,897) (6,662)
------------ -----------
Net (decrease) increase in net assets resulting
from operations (46,369) 18,253
------------ -----------
From capital share transactions
Redemption of shares (37,920) (26,250)
Net decrease in net assets resulting from capital
transactions (37,920) (26,250)
------------ -----------
Decrease in net assets (84,289) (7,997)
------------ -----------
Net assets - Beginning of year 221,283 229,280
------------ -----------
Net assets - End of year 136,994 221,283
------------ -----------
See accompanying notes to the Financial Statements
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Statements of Cash Flows
(expressed in thousands of U.S. dollars
Year ended December 31,
2017 2016
------------ -----------
Cash flows from operating activities
Net (decrease) increase in net assets resulting
from operations (46,369) 18,253
Adjustments to reconcile to net cash (used in)
provided by operations:
Purchases of investments in securities (12,221) -
Premiums paid on ILW Swaps (2,240) (2,335)
Proceeds from sale of investments in securities 42,295 33,300
Premiums received on ILW Swaps 5,300 1,179
Net realised gain on investments in securities
and
derivative contracts (22,567) (29,182)
Net change in unrealised depreciation on investments
in securities and derivative contracts 65,897 6,662
Change in other assets and liabilities:
Decrease / (increase) in other receivable 264 (264)
Decrease / (increase) in receivable from related
party 104 (118)
Decrease / (increase) in interest receivable 29 (1)
Decrease in performance fee payable (1,157) (1,344)
Decrease in management fee payable (585) (2,412)
(Decrease) / increase in accrued expenses and
other liabilities (762) 383
Decrease in payable to related party - (1,779)
Net cash provided by operating activities 27,988 22,342
------------ -----------
Cash flows from financing activities
Payments for redemption of shares (37,000) (26,250)
------------ -----------
Net cash used in financing activities (37,000) (26,250)
Net decrease in cash and cash equivalents (9,012) (3,908)
Cash and cash equivalents - Beginning of year 13,749 17,657
------------ -----------
Cash and cash equivalents - End of year 4,737 13,749
------------ -----------
Non-Cash transactions
During the year ended December 31, 2017, the Fund had non-cash
purchases and sales of investment in securities amounting to
$377,116.
See accompanying notes to the Financial Statements
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Condensed Schedule of Investments
31 December 2017
Percentage
Number of of
Cost Shares Fair Value Net Assets
Type $ $ %
Investments held in Risk Linked Instruments of
Blue Water Re Ltd.
Blue Water Re
Ltd Series
A 15 14.8481 63 0.05
Blue Water Re
Ltd Series
A 14 24 23.9181 76 0.06
Blue Water Re
Ltd Series
A15 852 851.7577 822 0.60
Blue Water Re
Ltd Series
A16 482 481.5181 474 0.35
Blue Water Re
Ltd Series
A17 31,311 31,311.0350 17,090 12.48
Blue Water Re
Ltd Series
AB 14 5 5.0783 5 0.00
Blue Water Re
Ltd Series
ADJ 100 100.0000 170 0.12
Blue Water Re
Ltd Series
AF 17 2,280 2,279.6320 0 0.00
Blue Water Re
Ltd Series
AH 4 3.9249 25 0.02
Blue Water Re
Ltd Series
AH 15 12 11.5431 141 0.10
Blue Water Re
Ltd Series
AH 16 277 277.2440 693 0.51
Blue Water Re
Ltd Series
AH 17 57,685 57,684.9280 50,509 36.87
Blue Water Re
Ltd Series
AX 17 4,340 4,340.3730 1,886 1.38
Blue Water Re
Ltd Series
AX 3 17 2,216 2,216.1220 0 0.00
Blue Water Re
Ltd Series
AY 17 192 192.0300 214 0.16
Blue Water Re
Ltd Series
BD 1 17 1,812 1,811.9920 1,064 0.78
Blue Water Re
Ltd Series
BH 16 222 221.6600 236 0.17
Blue Water Re
Ltd Series
BH 17 2,706 2,705.5180 2,374 1.73
Blue Water Re
Ltd Series
BI 1 17 3,534 3,534.4820 3,495 2.55
Blue Water Re
Ltd Series
BK 1 17 988 987.5000 5,000 3.65
Blue Water Re
Ltd Series
BM 1 17 3,587 3,587.4930 3,310 2.42
Blue Water Re
Ltd Series
C14 104 104.3946 158 0.12
Blue Water Re
Ltd Series
E17 557 557.2350 662 0.48
Blue Water Re
Ltd Series
H 1 16 879 819.2001 513 0.37
Blue Water Re
Ltd Series
H 1 17 39,054 39,054.1220 24,613 17.97
Blue Water Re
Ltd Series
HB 1 17 4,286 4,285.7660 4,370 3.19
Blue Water Re
Ltd Series
K 1 17 3,295 3,294.6480 579 0.42
Blue Water Re
Ltd Series
L 1 17 1,328 1,327.9040 489 0.36
Blue Water Re
Ltd Series
M 1 16 101 101.4932 112 0.08
Blue Water Re
Ltd Series
M 1 17 5,118 5,118.3560 2,927 2.14
Blue Water Re
Ltd Series
Z SAI 17 17.3073 17 0.01
Blue Water Re
Ltd Series
ZZ 11,660 11,660.1812 11,660 8.51
179,043 178,983.2047 133,747 97.63
Total
investments in
securities,
at fair value 179,043 133,747 97.63
---------------- -------------------------------- --------------------------------- ------------------------------------------ -----------------------------------------
See accompanying notes to the Financial Statements
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Condensed Schedule of Investments
31 December 2016
(expressed in thousands of U.S. dollars, except share and per
share amounts)
Number of
Shares
/ Percentage
Cost / Principal of
Proceeds / Fair Value Net Assets
Type $ Notional $ %
Investments held in Risk Linked Instruments of
Blue Water Re Ltd.
Blue Water Re
Ltd Series
A 64 64.5088 272 0.12
Blue Water Re
Ltd Series
A 14 142 142.2241 238 0.11
Blue Water Re
Ltd Series
A15 858 858.0400 802 0.36
Blue Water Re
Ltd Series
A16 16,016 16,015.5819 17,833 8.06
Blue Water Re
Ltd Series
AB 14 5 5.0783 5 -
Blue Water Re
Ltd Series
AB 1 16 2,613 2,612.8003 2,805 1.27
Blue Water Re
Ltd Series
ADJ 100 100.0000 238 0.11
Blue Water Re
Ltd Series
AF 16 11,492 11,492.0364 12,454 5.63
Blue Water Re
Ltd Series
AG 1,579 1,579.0470 960 0.43
Blue Water Re
Ltd Series
AH 22 22.5285 30 0.01
Blue Water Re
Ltd Series
AH 15 442 441.8060 909 0.41
Blue Water Re
Ltd Series
AH 16 68,581 68,581.0000 79,647 35.98
Blue Water Re
Ltd Series
AN 1 16 4,484 4,484.0870 4,775 2.16
Blue Water Re
Ltd Series
AP 1 16 699 698.6779 897 0.41
Blue Water Re
Ltd Series
AV 15 4,278 4,277.7953 4,594 2.08
Blue Water Re
Ltd Series
AX 16 2,377 2,377.2311 2,923 1.32
Blue Water Re
Ltd Series
BD 1 16 2,031 2,031.4152 2,474 1.12
Blue Water Re
Ltd Series
BH 16 2,360 2,360.0189 2,604 1.18
Blue Water Re
Ltd Series
BI 1 16 8,919 8,919.0000 10,000 4.52
Blue Water Re
Ltd Series
BK 1 16 667 666.8750 196 0.09
Blue Water Re
Ltd Series
BL 4,253 4,252.5714 4,548 2.06
Blue Water Re
Ltd Series
BM 1 2016 3,475 3,475.2401 3,777 1.71
Blue Water Re
Ltd Series
BN 1 2016 1,511 1,510.7540 1,738 0.79
Blue Water Re
Ltd Series
C 92 52.7208 153 0.07
Blue Water Re
Ltd Series
C14 2,371 2,371.1322 2,400 1.08
Blue Water Re
Ltd Series
E16 1,204 1,203.9994 1,469 0.66
Blue Water Re
Ltd Series
H 1 16 25,130 25,052.8197 28,348 12.80
Blue Water Re
Ltd Series
J 1 14 1,616 1,641.4770 444 0.20
Blue Water Re
Ltd Series
J 1 15 580 446.2389 - -
Blue Water Re
Ltd Series
K 1 16 2,497 2,497.4497 3,198 1.45
Blue Water Re
Ltd Series
L 1 16 1,132 1,132.3373 1,363 0.62
Blue Water Re
Ltd Series
M 1 16 6,792 6,792.1599 7,573 3.42
Blue Water Re
Ltd Series
Z SAI 17 17.3073 17 0.01
Blue Water Re
Ltd Series
ZZ 8,054 8,054.0894 8,054 3.64
186,453 186,230.0488 207,738 93.88
Catastrophe
Bonds
Residential Re
2013-II 2,000 2,000,000.0000 2,064 0.93
---------------- -------------------------------- --------------------------------- --------------------------------------- --------------------------------------
2,000 2,000,000.0000 2,064 0.93
Total
investments in
securities,
at fair value 188,453 209,802 94.81
---------------- -------------------------------- --------------------------------- --------------------------------------- --------------------------------------
See accompanying notes to the Financial Statements
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Condensed Schedule of Investments
31 December 2016
(expressed in thousands of U.S. dollars, except share and per
share amounts)
Number of
Shares
/ Percentage
Cost / Principal of
Proceeds / Fair Value Net Assets
Type $ Notional $ %
------------- ------------------------------ -------------------------- ------------------------------------- ------------------------------------
Inward ILW
Swaps
Unrealised
gain
on
derivatives 2,335 11,000,000.0000 555 0.25
Total
unrealised
gain on
derivatives 2,335 555 0.25
------------- ------------------------------ -------------------------- ------------------------------------- ------------------------------------
Outward ILW
Swaps
Unrealised
loss
on
derivatives (1,179) 11,509,138.0000 (146) (0.07)
Total
unrealised
loss on
derivatives (1,179) (146) (0.07)
------------- ------------------------------ -------------------------- ------------------------------------- ------------------------------------
See accompanying notes to the Financial Statements
Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance
SA-I
Notes to the Financial Statements
31 December 2017
(expressed in thousands of U.S. dollars, except share and per
share amounts)
1. Nature of operations
Blue Water Master Fund Ltd. (the "Master Fund SAC") is an
open-ended mutual fund company of unlimited duration incorporated
with limited liability under the laws of Bermuda on 12 December
2011 that commenced operations on 1 June 2012. The Master Fund SAC
is registered as a segregated account company under the Segregated
Accounts Companies Act 2000, as amended (the "SAC Act"). The Master
Fund SAC establishes a separate account for each class of shares
comprised in each segregated account (each, a "Segregated
Account"). Each Segregated Account is a separate individually
managed pool of assets constituting, in effect, a separate fund
with its own investment objective and policies and overseen by Blue
Capital Management Ltd. (the "Manager"), a wholly owned subsidiary
of Sompo International Holdings Ltd. ("Sompo International"), a
recognized global specialty provider of property and casualty
insurance and reinsurance headquartered in Bermuda. The 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 Insurance Act.
The Master Fund SAC currently has four Segregated Accounts that
have commenced operations, being Blue Capital Global Reinsurance
SA-I (the "Master Fund"), BCAP Mid Vol Fund, Blue Capital Low
Volatility Strategy and Blue Capital Global Reinsurance SA-II. The
Master Fund operates under a "master/feeder" structure. Blue
Capital Alternative Income Fund Limited (the "Company", formerly
Blue Capital Global Reinsurance Fund Limited), a closed-ended
exempted mutual fund company of unlimited duration with limited
liability incorporated under the laws of Bermuda on 8 October 2012
that commenced operations on 6 December 2012, invests substantially
all of its assets by way of subscription for non-voting redeemable
preference shares of the Master Fund ("Offered Shares"). Outside of
the activities of the Segregated Accounts, the Master Fund SAC has
no substantial operations of its own. The Master Fund commenced
operations on 1 January 2013. These financial statements relate to
the Master Fund only.
The investment objective of the Master Fund is to generate
attractive returns by investing in a diversified portfolio of fully
collateralised reinsurance-linked instruments ("RLI") and other
investments carrying exposures to insured catastrophe event risks.
The Master Fund predominantly invests in fully collateralised 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 insurance-linked
instruments, are made directly by the Master Fund. The Manager is
also manager to the Master Fund.
The Manager provides underwriting, investment management,
insurance management and other administrative services to the
Reinsurer. The Manager's fees are obligations of the Master
Fund.
The capital of the Master Fund is represented by the net assets
attributable to holders of Offered Shares and Redemption Shares
(see Note 6). It is the Manager's responsibility when managing
capital to safeguard the Master Fund's ability to continue as a
going concern in order to provide returns for shareholders and
benefits for other stakeholders and to maintain a strong capital
base to support the development of the investment activities of the
Master Fund. In order to maintain or adjust the capital structure,
the Manager's policy is to monitor any subscriptions and
redemptions relative to the liquid assets and adjust the amount of
distributions the Master Fund may pay to the Company.
The Reinsurer is an exempted limited liability company
incorporated on 18 November 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 collateralised
reinsurance protection of the property catastrophe insurance and
reinsurance market.
2. Summary of significant accounting policies
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America ("US GAAP"). The Master Fund is an investment company and
is therefore applying the specialised accounting and reporting
requirements of ASC Topic 946, Financial Services - Investment
Companies.
Use of Estimates
The preparation of financial statements in conformity with US
GAAP requires management 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. Actual results could differ from those
estimates.
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.
The Reinsurer does not operate with a financial strength rating
and, instead, fully collateralizes its reinsurance obligations
through cash and cash equivalents held in trust funds established
for the benefit of policyholders. The reinsurance treaties entered
into by the Reinsurer may contain buffer loss provisions which
specify that following a covered loss event, collateral should be
held at pre-determined levels in excess of established loss and LAE
reserves ("buffer loss collateral"). Where buffer loss collateral
is not available for deployment immediately following the expiry of
the underlying reinsurance treaties, the Master Fund applies a risk
margin charge against the fair value of RLI's to reflect the risk
associated with the uncertainty of the buffer loss collateral being
released in the future.
Reinsurance premiums written and purchased
Premiums written by the Reinsurer are earned, net of any
applicable brokerage fees, taxes and commissions, over the term of
the related policy or contract, based on earnings patterns
appropriate to the types of cover provided and the exposure period
thereon.
The Reinsurer purchases reinsurance from third parties in order
to manage its exposures. Such ceded reinsurance premiums are
accounted for on bases consistent with those used in accounting for
the underlying premiums assumed, and are reported as reductions in
net premiums written and earned.
Loss and Loss Adjustment Expenses Reserves
Loss and Loss Adjustment Expense ("LAE") reserves recorded by
the Reinsurer on reinsurance contracts are comprised of case
reserves and incurred but not reported ("IBNR") reserves. Case
reserve estimates are initially set on the basis of loss reports
received from third parties if it is expected that these losses
would result in a loss for the Reinsurer based on the underlying
exposures. IBNR reserves consist of a provision for additional
losses and LAE in excess of the case reserves reported by ceding
companies as well as a provision for claims which have occurred but
which have not yet been reported by ceding companies. IBNR reserves
are estimated by management using various actuarial methods as well
as a combination of historical insurance industry loss experience
and management's professional judgment.
The uncertainties inherent in the reserving process, potential
delays by cedants in the reporting of loss information, together
with the potential for unforeseen adverse developments, may result
in loss and LAE reserves ultimately being significantly greater or
less than the reserve provided at the end of any given reporting
period. The degree of uncertainty is further increased when a
significant loss event takes place near the end of a reporting
period. Loss and LAE reserve estimates are regularly reviewed and
updated as new information becomes known. Any resulting adjustments
are reflected in the Reinsurer's income in the period in which they
become known.
During the year ended 31 December 2017, the Reinsurer incurred
$87,566 (2016 - $14,587) of losses and LAE in connection with
reinsurance contracts written on behalf of the Master Fund. For the
year ended 31 December 2017, the Reinsurer had paid claims of
$56,414 (2016 - $7,097).
Investment Transactions and Related Investment Income
Investment transactions are accounted for on a trade-date basis.
Realised gains or losses on the sale of investments are calculated
using the specific identification method of accounting. Interest is
recognised on the accrual basis.
The Master Fund enters into ILW Swap Contracts ("ILW Swaps") as
an additional means of managing its underwriting risk. ILW Swaps
provide reinsurance-like protection for specific loss events.
However, unlike traditional reinsurance, ILW Swap loss payments are
determined purely on the basis of losses incurred by the insurance
industry as a whole, with no reference to losses incurred by the
ILW Swap counterparty. The ILW Swaps are not accounted for as
hedging instruments under ASC 815-10-50, Disclosures about
Derivative Instruments and Hedging Activities.
Translation of Foreign Currency
The accounting records of the Master Fund are maintained in
United States dollars. Assets and liabilities denominated in
foreign currencies are translated into United States dollar amounts
at the year-end exchange rates. Transactions denominated in foreign
currencies, including purchases and sales of investments, and
income and expenses, are translated into United States dollar
amounts on the transaction date. Adjustments arising from foreign
currency transactions are reflected in the statement of
operations.
The Master Fund 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 unrealised gains from investments in the
statements of operations.
Income 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 Master Fund. The
Master Fund has received an undertaking from the Minister of
Finance of Bermuda, under the Exempted Undertakings Tax Protection
Act 1966 exempting the Master Fund from income, profit, capital
transfer or capital gains taxes, should such taxes be enacted,
until 31 March 2035.
The Manager assesses uncertain tax positions by determining
whether a tax position of the Master Fund 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 recognised in the financial
statements is reduced by the largest benefit that has a greater
than fifty per cent likelihood of being realised upon ultimate
settlement with the relevant taxing authority. The Manager has not
identified any uncertain tax positions in the Master Fund arising
in this or any preceding period. However, the 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 Manager
has determined that there are no reserves for uncertain tax
positions necessary for any of the Master Fund's open tax years.
The Manager does not expect the total amount of unrecognised tax
benefits will materially change over the next twelve months.
3. Fair value measurements
The Master Fund records its investments at fair value. Fair
value is the amount for which an asset could be exchanged, or a
liability transferred, between knowledgeable, willing parties in an
arm's length transaction. Determining the fair value for these
instruments requires the use of the Manager's judgment. The fair
values of the Master Fund's investments in ILW Swaps and contracts
written by the Reinsurer are ultimately dependent on the nature of
the underlying fully-collateralised property catastrophe
reinsurance protection risk assumed or purchased.
Under US GAAP, the Master Fund must determine the appropriate
level in the fair value hierarchy for each fair value measurement.
The fair value hierarchy prioritises inputs, which refer broadly to
assumptions market participants would use in pricing an asset or
liability, into three-levels. It gives the highest priority to
quoted prices (unadjusted) in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs. The
level in the fair value hierarchy within which a fair value
measurement in its entirety falls is determined based on the lowest
level input that is significant to the fair value measurement. 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 Master Fund
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.
Level 3 includes financial instruments that are valued using the
income approach valuation technique. These methods incorporate both
observable and unobservable inputs. The Master Fund's financial
instruments in this category consist of collateralised property
catastrophe risks from traditional reinsurance markets.
For positions that are not traded in active markets or are
subject to transfer restrictions, valuations are adjusted to
reflect illiquidity and/or non-transferability, and such
adjustments are generally based on available market evidence. The
Manager's determination of fair value is then based on the best
information available in the circumstances, and may incorporate the
Manager's own assumptions and may involve some degree of
judgment.
The fair values assigned to Level 2 and 3 securities are based
upon available information and do not necessarily represent amounts
which might ultimately be realised. Because of the inherent
uncertainty of valuation, the estimated fair value may differ
significantly from the values that would have been used had a ready
market for such securities existed and these differences could be
material.
Fully Collateralised Reinsurance-Linked Instruments
The fair value of each RLI held by the Master Fund will
generally equal:
(i) the amount of capital invested in such RLI; plus
(ii) the amount of net premium earned to date for such RLI; plus
(iii) the amount of the investment earnings earned to date on
both the capital invested in the RLI and the associated reinsurance
premiums; minus
(iv) the amount of any losses paid and Loss and Loss Adjustment Expense reserves.; minus
(v) the amount of any risk margin charge applied against buffer loss encumbered collateral
Valuations are performed on a monthly basis, whereby each
redeemable preference share of the Reinsurer will be valued on the
basis of the remaining risk inherent in the agreement, adjusted for
any potential covered events.
ILW Swaps
The fair value of an ILW Swap at each reporting date is
determined through the use of an internal valuation model. Inputs
to the internal valuation model are based on proprietary data as
observable market inputs are not available. The most significant
unobservable input is the potential payment that would become due
to the counterparty following the occurrence of a triggering event
as reported by an external agency. The initial investment
represents a short position on the statements of assets and
liabilities. Generally, an increase (decrease) in the potential
payment would result in an increase (decrease) to the fair value of
the ILW liability.
Catastrophe Bonds
The fair value of catastrophe bonds held directly by the Master
Fund is based on broker or underwriter bid indications for the same
or similar catastrophe bond, as of the valuation date.
The following tables present information about the Master Fund's
assets and liabilities measured at fair value:
31 December 2017
Level 1 Level 2 Level 3 Total
----------------------------- ----------------------------- ------------------------- ------------------------
Assets (at fair
value)
Investments in
Blue
Water Re Ltd.
Redeemable
preference
shares $ - $ - $ 133,747 $ 133,747
Total
investments $ - $ - $ 133,747 $ 133,747
--- ------------------------- --- ------------------------- -------------------- --------------------
31 December 2016
Level 1 Level 2 Level 3 Total
----------------------------- ---------------------------- --------------------------- ---------------------------
Assets (at fair
value)
Investments in
Blue
Water Re Ltd.
Redeemable
preference
shares $ - $ - $ 207,738 $ 207,738
Investments in
Catastrophe
Bonds - 2,064 - 2,064
Investments in ILW
Swaps - - 555 555
Total
investments $ - $ 2,064 $ 208,293 $ 210,357
--- ------------------------- ----------------------- ----------------------- -----------------------
Liabilities (at
fair
value)
Investments in
ILW Swaps $ - $ - $ (146) $ (146)
--- ------------------------- ----------------------- ----------------------- -----------------------
Total
investments
sold
short $ - $ - $ (146) $ (146)
--- ------------------------- ----------------------- ----------------------- -----------------------
There were no transfers between levels during the years
presented.
The following tables present additional information about Level
3 assets measured at fair value. Both observable and unobservable
inputs may be used to determine the fair value of positions that
the Master Fund has classified within the Level 3 category. As a
result, the change in unrealised gains from investments within the
Level 3 category may include changes in fair value that were
attributable to both observable and unobservable inputs.
Changes in Level 3 assets and liabilities measured at fair value
for the year were as follows:
31 December 2017
Change
in
Unrealized
Appreciation
Change in on
Beginning Unrealized Realized Ending Investments
still
Balance Depreciation Gain on Balance held at
1 January on Investments Investments 31 December 31 December
2017 in Securities Purchases Sales in Securities 2017 2017 (a)
--------------------------- ---------------------------- -------------- ------------------------- ---------------------- ------------------- -------------------------
Assets (at fair
value)
Investments in Blue
Water Re Ltd.
Redeemable
preference
shares $ 207,738 $ (66,580) $ 389,337 $ (417,416) $ 20,668 $ 133,747 $ (63,309)
-------- ----------------- ------------------------ -------------- --------------------- ------------------ --------------- -------------------------
Investments
in
ILW swaps $ 555 $ 1,779 $ 2,241 $ (5,300) $ 725 $ - $ -
-------- ----------------- ------------------------ -------------- --------------------- ------------------ --------------- -------------------------
Liabilities
(at fair value)
Investments
in
ILW swaps $ (146) $ (1,033) $ - $ - $ 1,179 $ - $ -
-------- ----------------- ------------------------ -------------- --------------------- ------------------ --------------- -------------------------
31 December 2016
Change
in
Unrealized
Appreciation
Change in on
Beginning Unrealized Realized Ending Investments
still
Balance Depreciation Gain on Balance held at
1 January on Investments Investments 31 December 31 December
2016 in Securities Purchases Sales in Securities 2016 2016 (a)
-------------------------- -------------------------- -------------- ------------------- -------------------- ---------------------- ------------------------
Assets (at fair
value)
Investments in Blue
Water Re Ltd.
Redeemable
preference
shares $ 217,966 $ (4,407) $ 362,339 $ (395,639) $ 27,479 $ 207,738 $ 11,431
-------- ---------------- ---------------------- -------------- --------------- ---------------- ------------------ ------------------------
Investments
in
ILW swaps $ - $ (1,780) $ 2,335 $ - $ - $ 555 $ (1,780)
-------- ---------------- ---------------------- -------------- --------------- ---------------- ------------------ ------------------------
Liabilities
(at fair value)
Investments
in
ILW swaps $ (190) $ (480) $ - $ (1,179) $ 1,703 $ (146) $ 1,032
-------- ---------------- ---------------------- -------------- --------------- ---------------- ------------------ ------------------------
(a) The change in unrealised appreciation on investments for the
year ended 31 December 2017 and 31 December 2016 for securities
still held at 31 December 2017 and 31 December 2016 are reflected
in the net change in unrealised depreciation on investments in
securities in the statements of operations.
The table below summarises information about the significant
unobservable inputs used in determining the fair value of the
Master Fund's Level 3 assets:
Range / Weighted
Asset/Liability Valuation Technique Unobservable Inputs average
Investments
in
Blue Water Re Premiums earned - straight
Ltd. Premium earned line 12 months
Redeemable Premiums earned - seasonally
adjusted 5 to 6 months
--------------------- ----------------------------- ------------------
preference shares - loss incurred 0 to contractual
and loss reserves Loss Reserves limit
--------------------- ----------------------------- ------------------
Buffer loss collateral
- risk margin charge release pattern 18 months
--------------------- ----------------------------- ------------------
Premiums earned - seasonally
ILW Swaps Premium earned adjusted 12 months
--------------------- ----------------------------- ------------------
4. Derivative Contracts
During the year ended 31 December 2017, the Master Fund entered
into 5 (2016 - 9) ILW Swaps with notional values ranging from $500
to $4,900 (2016 - $500 to $7,401). The notional exposure of ILW
Swaps still held at 31 December 2017 amounts to $nil (2016 -
$27,009). The Master Fund's derivative positions are not subject to
a master netting agreement and are shown gross on the statements of
assets and liabilities.
The following tables present the realised and unrealised
appreciation and depreciation on ILW Swaps reflected in the
statements of operations:
The Effect of Derivative Instruments on
the Statement of Operations for the year
ended 31 December 2017
---------------------- -----------------------------------------------------------
Net Change in
Net Realised Unrealised Appreciation
Gain on Investments on Investments
in Securities in Securities
and Derivative and Derivative
Derivative Contracts Contracts Contracts Total
---------------------- --------------------- ------------------------- ---------
ILW Swaps $ 1,904 $ 746 $ 2,650
===================== ========================= =========
The Effect of Derivative Instruments on
the Statement of Operations for the year
ended 31 December 2016
---------------------- -----------------------------------------------------------
Net Change in
Net Realised Unrealised Depreciation
Gain on Investments on Investments
in Securities in Securities
and Derivative and Derivative
Derivative Contracts Contracts Contracts Total
---------------------- --------------------- ------------------------- ---------
ILW Swaps $ 1,703 $ (2,260) $ (557)
===================== ========================= =========
5. Financial Instruments: Risks
Liquidity Risk
Liquidity risk represents the potential loss due to the
difficulty in liquidating holdings quickly. RLIs 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.
Catastrophe bonds and investments in sidecars may have market
quotes, but the trading volume may be low. ILWs have even less
liquidity and pricing transparency, and bilateral insurance
contracts currently have no secondary market.
The liquidity of RLIs 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 RLIs, gradually recognising income as the
likelihood of a covered event occurring in respect of one or more
RLIs, and therefore the Master Fund and/or the Reinsurer incurring
a loss, diminishes.
While these RLIs 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
RLIs means that the Master Fund's portfolio is more likely to be
mis-valued as the valuation ascribed to an RLI 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 Company's shares, which may be adverse to
shareholders, as well as on the fees based on such valuations.
Portfolio Concentration Risk
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 catastrophe bonds. The Master Fund's
portfolio is therefore concentrated in RLIs. RLIs 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 RLIs. 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
RLIs.
Valuation Risk
Valuation risk is the risk that a financial asset is overvalued
and will realise less than expected when it matures or is sold by
the entity that holds it. The valuation of the Master Fund's RLI is
driven by the Reinsurer's internal model which involves estimating
the risk and impact of severe but infrequent natural catastrophe
events and, consequently, a dimension of uncertainty to which most
investment funds are not subject.
Market Risk
Market risk represents the potential loss that can be caused by
a change in the market value of the insurance contract. Exposure to
market risk is determined by a number of factors, including foreign
currency exchange rates and market volatility caused by the supply
and demand of similar property catastrophe capacity in the broader
reinsurance markets. Additionally, as the occurrence of a covered
property catastrophe event could lead to an immediate and total
loss of the value of the affected RLI the risks of sudden major
losses in RLI value are qualitatively different than those
applicable to most conventional financial market investments such
as equities and bonds. The Master Fund's RLIs in the Reinsurer may
sometimes assume relatively large risks in a single geographic
region or in similar perils. The Master Fund may from time to time
hold substantial amounts of capital which has not been invested in
RLIs due to the unpredictable nature of the Master Fund's cash
flows or the inability to deploy capital into the reinsurance
market at a risk-adjusted rate of return that the Manager considers
adequate. Such uninvested cash cannot earn a return consistent with
the Master Fund's objectives.
The following tables illustrate the risk profile of the
Reinsurer's portfolio by geography and peril:
31 December 2017
Key Single Event Exposure % of NAV Value Key Single Event Exposure % of NAV
Zone Zone Value
-------------------------- -------------- ------------------------------ --------
US Hurricane (a) European Wind (c)
-------------------------- -------------- ------------------------------ --------
US - Gulf 13% UK and Ireland 11%
US - Florida 35% Northern Europe 4%
US - MidAtlantic 9% Western Europe 10%
US - NorthEast 13%
US - Hawaii 1%
Earthquake (b) Other
-------------------------- -------------- ------------------------------ --------
US - Midwest Severe Convection
US - New Madrid 1% (d) 3%
US - Northwest 3%
US - California 14%
Japan 20%
31 December 2016
Key Single Event Exposure % of NAV Value Key Single Event Exposure % of NAV
Zone Zone Value
-------------------------- -------------- ------------------------------ --------
US Hurricane (a) European Wind (c)
-------------------------- -------------- ------------------------------ --------
US - Gulf 14% UK and Ireland 10%
US - Florida 31% Western Central Europe 6%
US - MidAtlantic 10% Southern Europe 1%
US - NorthEast 9%
US - Hawaii 1%
Earthquake (b) Other
-------------------------- -------------- ------------------------------ --------
US - Midwest Severe Convection
US - Northwest 3% (d) 2%
US - California 7%
Japan 11%
The tables above detail the projected net impact to NAV from
single event losses as of 31 December for selected zones at
specified return periods using industry-recognised third-party
vendor models. For hurricane and wind events a 1 in 100 year return
period is reflected and for earthquake events a 1 in 250 year
return period is reflected. A "100-year" return period can also be
referred to as the 1.0% occurrence exceedance probability ("OEP"),
meaning there is a 1.0% chance in any given year that this level
will be exceeded. A "250-year" return period can also be referred
to as the 0.4% OEP, meaning there is a 0.4% chance in any given
year that this level will be exceeded. The tables group contracts
by the key underlying peril. These contracts may include other
perils as follows:
(a) US Hurricane contracts often cover secondary perils,
including earthquake, terrorism, and other perils;
(b) Earthquake contracts often cover secondary perils, including
windstorm, terrorism and other perils;
(c) European Wind contracts often cover secondary perils,
including terrorism and other perils;
(d) US Midwest Severe Convection contracts often cover secondary
perils, including earthquake, terrorism, and other perils;
The exposures above are net of any coverage purchased by the
Reinsurer.
None of the reinsurance contracts bound on behalf of the Master
Fund carry exposure to nuclear, biological, chemical or radioactive
perils. Therefore, the Manager considers the risk of incurring
losses equal to the aggregate limits associated with terrorism or
other secondary perils to be remote.
Counterparty 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. Counterparty risk represents the potential loss that the
Master Fund would incur if counterparties failed to perform
pursuant to the terms of their obligations to the Master Fund. The
Master Fund is subject to counterparty risk to the extent any
financial institution with which it conducts business is unable to
fulfill contractual obligations on its behalf. The Master Fund has
counterparty risk in relation to cash and investments held with
HSBC Bank Bermuda, Ltd. and The Bank of New York Mellon, which have
credit ratings of A- and A+ respectively. The Manager monitors the
financial condition of such financial institutions and does not
anticipate any losses from these counterparties at either the
Master Fund or the Reinsurer.
The Reinsurer underwrites its business through certain
established brokers and, in other cases, directly from Endurance
Specialty Insurance Ltd. ("Endurance Bermuda"), a Bermuda domiciled
company registered as a Class 4 insurer under the Insurance Act
1978. Business underwritten directly from Endurance Bermuda
consists of reinsurance contracts assumed via (i) fronting
agreements for specific cedents and (ii) quota-share participation
of a portfolio of business originally underwritten by Endurance
Bermuda. Amounts due to the Reinsurer from brokers and Endurance
Bermuda in connection with business written on behalf of the Master
Fund totaled $13,565 and $10,441 as of 31 December 2017 and 31
December 2016, respectively. Endurance Bermuda is a wholly owned
subsidiary of Sompo International.
Although the Reinsurer purchases reinsurance from, and enters
into ILW swaps with, third parties in order to manage its
exposures, it is not relieved of its obligations to ceding
companies entering into such transactions and it is subject to
counterparty risk to the extent that a counterparty is unable to
pay amounts owed to it.
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 Manager
identifies suitable investment opportunities, also invest in other
RLIs and such investments may form a material part of its
investment portfolio from time to time. Where the Master Fund
invests in certain RLIs, 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, any transactions which the broker has entered
into 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.
Foreign Currency Risk
Foreign currency risk represents the potential loss caused by
fluctuations in the prevailing levels of market exchange rates. The
Master Fund's and the Reinsurer's functional currency is the US
dollar, but a portion of their respective businesses may 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 (but are
not obliged) to manage currency fluctuation exposure. The Master
Fund and the Reinsurer 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.
6. Capital share transactions
The Master Fund SAC has an authorised share capital of 100
ordinary, voting, non-redeemable shares (the "Management Shares")
of $0.01 par value each and 10,000,000 non-voting, redeemable
preference shares of par value $0.001 (the "Shares"). The Shares
are divided upon issue into a designated class of shares, each
class referencing a segregated account. As of 31 December 2017, the
Master Fund SAC has issued 100 Management Shares with a total par
value of $1 to the Manager, which has been fully paid. Holders of
Management Shares are to attend and vote at general meetings of the
Master Fund SAC, are not entitled to any dividend or other
distribution and will, in the event of a winding-up or dissolution
of the Master Fund SAC, whether voluntary or involuntary, be
entitled to receive the amount of capital paid up on their
Management Shares after payment in full of the capital paid up on
the participating shares to the holders thereof, but will not be
entitled to participate further in the surplus assets of the Master
Fund SAC.
The Master Fund issued Offered Shares to the Company at an
initial price of $1,000 per Share. The Company's additional
investments in the Master Fund will be issued shares at the current
Net Asset Value ("NAV"). Annual distributions will not be made in
respect of the Offered Shares.
From time to time, investments held by the Reinsurer which are
attributable to the Master Fund may be subject to a loss occurrence
but the amount of such loss occurrence may be uncertain. At such
time and at the discretion of the Master Fund SAC's Board of
Directors, if a Special Memorandum Account ("SMA") is established,
a portion of each investor's Offered Shares will be converted into
a new series of SMA shares at a price of $1,000 per share to
reflect the investor's pro rata interest in such SMA (each, an "SMA
Investment"). SMA shares may not be redeemed by an investor at any
Redemption Date.
SMA Investments will be segregated for accounting purposes and
increases or decreases in the value of a particular SMA Investment
will be separately accounted for in the series of SMA shares
established for the SMA Investment. Upon the disposition of the SMA
Investment or reclassification of the investment as a non-SMA
Investment, the Master Fund will convert the corresponding series
of SMA shares held by investors into additional Offered Shares.
Shareholders have redemption rights which contain certain
restrictions with respect to rights of redemption of Offered
Shares. Subject to the Master Fund's ability to liquidate assets
efficiently and other substantial limitations including those
relating to SMA shares as discussed above, a holder of Offered
Shares may redeem its Offered Shares monthly on the last day of
each calendar month (each, a "Redemption Date") by giving ten
calendar days' prior written notice to the Master Fund. Any such
redemption of Offered Shares will be affected at the NAV of such
shares as of the applicable Redemption Date, with cash settlement
within forty-five days after such Redemption Date; provided,
however, the Master Fund reserves the right to withhold amounts for
its contingent liabilities.
The Master Fund had no SMA investments at 31 December 2017 and
31 December 2016.
In 2016, the Master Fund's share capital was reorganised to
establish a new class of shares ("Redemption Shares") in connection
with the redemption of Offered Shares to facilitate a tender offer
by the Company. Redemption Shares are issued at $1,000 per Share,
are not redeemable at the option of the holder and are not entitled
to receive or participate in any dividends. Redemption Shares
continue to participate in an indirect pro rata share of each
underlying RLI in the Master Fund's portfolio held at the time of
their issue. The RLI's primarily comprise preference shares issued
by Blue Water Re Ltd. and the Redemption Shares are redeemed for
cash as and when the RLI's are realised. As of 31 December 2017,
all Redemption Shares were redeemed.
Transactions in shares are as follows:
1 January 2017 to 31 December 2017
Beginning
Shares Shares Redeemed Shares Converted Ending Shares
Offered
Shares 133,403 (10,549) - 122,854
------------------------------------------ -------------------------------------------- ------------------------------ ----------------------------------
Redemption
Shares 14,823 (14,823) - -
------------------------------------------ -------------------------------------------- ------------------------------ ----------------------------------
1 January 2016 to 31 December 2016
Beginning
Shares Shares Redeemed Shares Converted Ending Shares
Offered
Shares 167,099 (18,873) (14,823) 133,403
------------------------------------- ------------------------------------- ----------------------------------- -----------------------------------
Redemption
Shares - - 14,823 14,823
------------------------------------- ------------------------------------- ----------------------------------- -----------------------------------
As at 31 December 2017, 100% (2016 - 100%) of the Offered are
owned by the Company.
7. Related party transactions
As of 31 December 2017, the Master Fund had a $14 (2016 - $118)
receivable balance due from the Master Fund SAC for expenses
incurred in the Master Fund SAC that are allocated to the Master
Fund.
Directors' Fees
The Master Fund SAC's Board of Directors has overall management
responsibility for the Master Fund. The Manager has two directors
in common with the Master Fund SAC. The Master Fund SAC will
reimburse all directors for their out-of-pocket expenses and will
pay a customary fee, in accordance with reasonable and customary
directors' fees.
Fronting Agreements with Endurance Bermuda
The Master Fund (via the Reinsurer) has entered into fronting
agreements with Endurance Bermuda, under which Endurance Bermuda
agreed to enter into certain reinsurance contracts that were
underwritten by the Reinsurer and transferred all risks and
premiums to the Reinsurer via a collateralised retrocessional
reinsurance contract in exchange for a fronting fee. Fronting fees
for the year ended 2017 recorded by the Reinsurer were $472 (2016 -
$224). Where it is proposed that Endurance Bermuda acts as fronting
reinsurer, the Manager has established procedures to deal with any
potential conflicts of interest that may arise. Any such fronting
services would only be supplied with the approval of the Directors
of the Company, all of whom are independent of Endurance
Bermuda.
Quota Shares with Endurance Bermuda
The Master Fund (via the Reinsurer) has entered into quota share
agreements with Endurance Bermuda, under which Endurance Bermuda
ceded an agreed percentage of every risk it insures falling within
certain agreed classes of business, subject to a reinsurance
treaty. The Manager has established procedures to deal with any
potential conflicts of interest that may arise. The terms of the
quota share agreements are on an arms' length basis and are
approved in advance by the Directors of the Company, all of whom
are independent of Endurance Bermuda.
Management Fee
Pursuant to the Investment Management Agreement dated 27
November 2012, the 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 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 Shares
held by investors, 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 Shares held by investors, above a NAV of
$300,000.
Performance Fee
The Manager is entitled to a performance fee, payable by the
Master Fund on an annual basis, or earlier upon the redemption or
transfer of Offered Shares and Redemption Shares, 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 SMA shares) held by investors,
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 an investor's Offered Shares at the end of such
Performance Period exceeds 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 one-month U.S. Dollar LIBOR
("LIBOR") on the last Business Day of each month during such
Performance Period and (ii) 8% of the NAV of such investor'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 an
investor'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.
The performance fee attributable to the SMA shares upon the
disposition of the SMA Investment or the recharacterization or
reclassification of the investment as a non-SMA Investment (e.g.,
when the amount of loss has become sufficiently certain with
respect to the loss occurrence, as determined by the Manager in its
sole discretion), if any, will be allocated to any series of
Offered Shares held by the holder of the SMA shares. Any excess
owing thereafter will be allocated and paid from any subsequent
redemption proceeds payable to the investor.
The redemption of Offered Shares in consideration for the issue
of Redemption Shares shall not be treated as a redemption or a
subscription, with the effect that the Performance Period will not
end on the redemption date and the Performance Hurdle will not be
adjusted at such time. For purposes of calculating the performance
fee for the Performance Period ended 31 December 2016, the Offered
Shares and the Redemption Shares were treated as being of the same
series.
Performance fees for Redemption Shares shall be calculated in
the same manner as Offered Shares. Performance fees shall be
determined separately for Offered Shares and Redemption Shares so
that the performance of one class does not impact the performance
fee paid in respect of the other. Performance fees will only be
payable in respect of the Redemption Shares at the end of each
fiscal year and/or the date on which the last Redemption Share is
redeemed.
Expenses
The Master Fund SAC pays on behalf of the Reinsurer the portion
of the Reinsurer's operating costs relating to the four Segregated
Accounts, including legal fees, government licensing fees and fees
in connection with the establishment of the Reinsurer. For the year
ended 31 December 2017, the Master Fund SAC incurred expenses of
$76 (2016 - $87 recovered) on behalf of the Reinsurer. As of 31
December 2017, the Master Fund has $14 receivable (2016 - $118
receivable) from the Master Fund SAC. The expenses of the Master
Fund SAC and the Reinsurer are allocated between the Master Fund,
BCAP Mid Vol Fund, Blue Capital Low Volatility Strategy and Blue
Capital Global Reinsurance SA-II on a monthly basis based on their
gross asset value. For the year ended 31 December 2017, the Master
Fund was allocated expenses totaling $105 (2016 - $45
recoveries).
8. Administrative fee
SS&C Fund Services (Bermuda) Ltd. (the "Administrator"), a
division of SS&C GlobeOp, serves as the administrator,
secretary, and registrar for the Master Fund SAC. For its
administration and registrar services, the Administrator receives a
monthly fee based on the NAV of the Master Fund, subject to a
monthly minimum fee. For its secretarial services, the
Administrator receives a fixed annual fee.
9. Financial highlights
Financial highlights for Offered Shares are as follows:
Year ended December 31
2017 2016
------------------------- --------------------------
Per share operating performance
Net asset value, beginning
of year $ 1,492.8732 $ 1,372.1208
--------------------- ----------------------
Income from investment
operations:
Net investment gain (loss) (1.9507) 1.2437
Performance fees - (7.8027)
Management fees (20.8498) (21.2879)
Net gain from investments (354.9841) 148.5993
--------------------- ----------------------
Total income from investment
operations (377.7846) 120.7524
--------------------- ----------------------
Net asset value, end of
year $ 1,115.0886 $ 1,492.8732
--------------------- ----------------------
Total return
Total return before performance
fee (25.31) % 9.37 %
Performance fee - % (0.57) %
--------------------- ----------------------
Total return after performance
fee (25.31) % 8.80 %
--------------------- ----------------------
Ratio to average net assets
Expenses other than performance
fee (1.63) % (1.62) %
Performance fee - % (0.53) %
---------------------- --------------------------
Total expenses after performance
fee (1.63) % (2.15) %
---------------------- --------------------------
Net investment loss before performance
fee (1.58) % (1.43) %
Performance fee - % (0.53) %
---------------------- --------------------------
Net investment loss after performance
fee (1.58) % (1.96) %
---------------------- --------------------------
Financial highlights are calculated for each permanent,
non-managing class or series of preference shares. 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.
Per share operating performance is computed on the basis of
average shares outstanding during the year.
Total return is calculated based on the percentage movement in
net asset value per share. The expense ratio is calculated based on
the expenses of the Master Fund over the average net asset value
per share in the year. The net investment loss ratio is based on
the net loss per share from investment operations of the Master
Fund over the average net asset value per share in the year.
10. Commitments and contingencies
In the normal course of business, the Master Fund may enter into
contracts or agreements that contain indemnifications or
warranties. The Master Fund's exposure under these arrangements is
unknown, as this would involve future claims that may be made
against the Master Fund that have not yet occurred. However, based
on experience, the Manager expects the risk of loss to be
remote.
As of 31 December 2017, the Master Fund had pledged cash and
cash equivalents of $nil (2016 - $11,946) as collateral held in
trust under the terms of its ILW Swaps.
The Reinsurer has provided for a reinsurance recovery in which
the Master Fund has an interest totaling $5.0 million. The
reinsurance recovery relates to an Industry Loss Warranty
protection purchased by the Reinsurer. The counterparty to the
Industry Loss Warranty contract has disputed the claim for the
recovery which is based upon the result of an insured industry loss
calculated based on third party data. The Reinsurer is vigorously
pursuing recovery in this action. In the course of litigation and
arbitration, the Reinsurer may engage in discussions with opposing
counsel for possible resolution. Should developments cause a change
in the Master Fund's determination as to an unfavorable outcome, or
result in a final adverse judgment or a settlement for
significantly less than the contested amount, there could be a
material adverse effect on the Master Fund's results of operations,
cash flows and financial position in the period in which such
change in determination, judgment or settlement occurs.
11. Subsequent events
On 31 January 2018, the Company redeemed $2,080 from the Master
Fund which was equivalent to 1,855.9778 Offered Shares.
These financial statements were approved by the Manager and the
Master Fund SAC's Board of Directors, and made available for
issuance on 28 March 2018. Subsequent events have been evaluated
through this date.
For further information please contact:
Blue Capital Management Ltd.
Michael J. McGuire +1 441 278 0400
Email: investorrelations@Sompo-Intl.com
Stifel Nicolaus Europe Limited +44 (0)20 7710 7600
Neil Winward
Mark Bloomfield
Tunga Chigovanyika
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR LLFFIVRIAFIT
(END) Dow Jones Newswires
March 29, 2018 06:40 ET (10:40 GMT)
Blue Capital (LSE:BCAI)
Historical Stock Chart
From Dec 2024 to Jan 2025
Blue Capital (LSE:BCAI)
Historical Stock Chart
From Jan 2024 to Jan 2025
