Blue Capital Global Reinsurance Fnd Half-year Report (3048I)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Blue Capital	LSE:BCGR	London	Ordinary Share	BMG1189R1043	ORD USD0.00001 (DI)

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
	0	0		N/A	0

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TIDMBCGR

RNS Number : 3048I

Blue Capital Global Reinsurance Fnd

26 August 2016

Blue Capital Global Reinsurance Fund Limited

(the "Company")

(Incorporated in Bermuda)

Half Yearly Report

For the six months ended 30 June 2016

The Company has today, in accordance with DTR 6.3.5, released its Half Yearly Report for the six month period ended 30 June 2016.

CHAIRMAN'S STATEMENT

On behalf of the Board of Directors (the "Directors") of Blue Capital Global Reinsurance Fund Limited (the "Company"), I am pleased to present the Company's interim report for the six month period ended 30 June 2016. During the period, the Company recorded a decline in net assets from operations of $0.3 million, repurchased shares totaling $0.3m and distributed $6.6 million in dividends to Shareholders, resulting in a decrease in the Company's net assets to $216.1 million from $223.3 million at the beginning of the year.

Capital Deployment

The Company's investment in Blue Capital Global Reinsurance SA-I (the "Master Fund") at 30 June 2016 was US$216.2 million, representing all of the Company's capital excluding that retained for working capital purposes.

As at 30 June 2016, The Master Fund has invested substantially all of its assets in: (i) preferred shares of the Blue Water Re Ltd. (the "Reinsurer") (ii) Industry loss warranty ("ILW") derivatives and (iii) one catastrophe bond. The combined investments represent the deployment of US$187.5 million across 93 different positions and 40 different clients generating US$40.7 million of net insurance premium written and fixed ILW payments which is an increase of US$6.7 million from the previous year. Current investments in portfolio retrocessional hedging total US$4.6 million which is an increase of US$2.9 million from the previous year. Growth in premium is directly attributable to the investment policy changes and portfolio construction adjustments made to the portfolio in response to changes in market conditions since the Company's initial public offering.

A further breakdown of the exposure of the portfolio is set out in the Investment Manager's Report, below.

Financial Performance

During the first half of 2016, the net asset value ("NAV") of the Company's Ordinary Shares decreased by approximately 0.2 per cent. excluding the impact of dividends declared. The NAV per Ordinary Share moved from US$1.1217 at 31 December 2015 to US$1.0871 per share, with a US$0.033 per share dividend declared in January 2016 and paid in March 2016. As described in the Investment Manager's Report below, most of the portfolio has been allocated to U.S. wind-related risks, for which the premiums are earned between July and October.

During the first half of 2016, loss events, including adjustments to losses incurred in previous years, reduced the Company's NAV by approximately US$0.037 per Ordinary Share. Further details in relation to these events are set out in the Investment Manager's Report below.

Dividend

The Company continues to target an annualised dividend of LIBOR plus 6 per cent. on the original issue price of its Ordinary Shares in December 2012. In January 2016, the Company declared a further dividend of $0.033 per Ordinary Share for the second half of 2015. The Company offered a scrip dividend alternative in respect of this second half dividend so that Shareholders could elect to receive new Ordinary Shares instead of all or part of their cash dividend. On 22 July 2016, the Company declared a dividend of US$0.033 per Ordinary Share. The Directors' current intention is that, save for unforeseen circumstances, the second distribution in respect of the six months ended 31 December 2016 (expected to be paid in March 2017), will be for approximately the same amount.[1]

Credit Facility

On 16 May 2016, the Company entered into a credit facility (the "2016 Credit Facility") with Endurance Investment Holdings Ltd. (the "Lender"), a wholly-owned subsidiary of Endurance Specialty Holdings Ltd. (together with its subsidiaries "Endurance"), which holds indirectly 25.2 per cent. of the Company's issued ordinary shares and is the ultimate parent company of the Company's Investment Manager. The 2016 Credit Facility provides the Company with an unsecured US$20.0 million revolving credit facility for working capital and general corporate purposes and expires on 30 September 2018. The 2016 Credit Facility replaces the 364-day US$20.0 million revolving credit facility which expired on 13 May 2016. Borrowings under the 2016 Credit Facility bear interest, set at the time of the borrowing, at a rate equal to the applicable LIBOR rate plus 150 basis points. As at 30 June 2016, the 2016 Credit Facility was undrawn.

Outlook

The Company remains pleased with the diversified portfolio that the Investment Manager has created, which has attractive risk adjusted return characteristics, consistent with the Company's investment objectives. I am pleased with the performance achieved by this portfolio in our first three years of operations, and I would like to thank our Shareholders for their support.

Looking ahead to the second half of the year, while little direct reinsurance will be bound prior to the January renewals, the Investment Manager will continue to look for opportunities to improve our portfolio and position us for the upcoming renewal season.

The Ordinary Shares traded at an average discount to their Net Asset Value of 9.6 per cent. over the period. The Company's discount management policy, adopted at the time the Company was launched, includes a requirement for the Directors to consider a tender offer if the shares trade at an average discount of more than 5 per cent. to the net asset value per ordinary share over the three month period ending on 31 August each year. In the event this proves to be the case in 2016, the Directors intend to offer Shareholders the opportunity to tender up to 25 per cent of Ordinary Shares in accordance with this policy.

On 16 May 2016, Shareholders approved all the resolutions at the Annual General Meeting. Of the 199,108,914 Ordinary Shares outstanding, 78 per cent. were voted in favour of each of the proposals. No Ordinary Shares were voted against any of the proposals.

/s/ John R. Weale

John R. Weale

Chairman

DIRECTORS' REPORT

30 June 2016

Principal Risks and Uncertainties

The Board regularly reviews the principal risks facing the Company and, for the purposes of this report, has carried out an assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. As further set out in the Investment Manager's report (below), the Investment Manager maintains risk management systems to manage risks the Company faces. Key risks relating to the Company's portfolio and borrowing are managed by the Investment Manager applying Endurance's proprietary risk modeling approaches, various third-party vendor models and underwriting judgment, and by application of the Company's investment policy and restrictions.

The Board considers the following to be the principal risks facing the Company:

Institutional Credit Risk

In the event of the insolvency of the institutions, including brokerage firms, banks and custodians, with which the Master Fund and the Reinsurer may do business, or to which assets have been entrusted, the Master Fund and the Reinsurer may be temporarily or permanently deprived of the assets held by or entrusted to that institution, which will affect the performance of the Master Fund and the Reinsurer and, in turn, the performance of the Company.

For example, the Reinsurer may pay amounts owed on claims under fully collateralised reinsurance- linked contracts entered into in respect of the Master Fund to reinsurance brokers, and these brokers, in turn, may pay these amounts over to the ceding companies that have reinsured a portion of their liabilities with the Reinsurer. In some jurisdictions, if a broker fails to make such a payment, the Reinsurer might remain liable to the ceding company for the deficiency. Conversely, in certain jurisdictions when the ceding company pays premiums in respect of reinsurance contracts to reinsurance brokers for payment over to the Reinsurer, these premiums are considered to have been paid and the ceding company will no longer be liable to the Reinsurer for those amounts, whether or not the Reinsurer has actually received the premiums. Consequently, consistent with industry practice, the Reinsurer assumes a degree of credit risk associated with brokers.

Furthermore, while the Master Fund invests predominantly in fully-collateralised reinsurance-linked contracts by subscribing for preference shares issued by the Reinsurer, it may, in accordance with its investment policy and when the Investment Manager identifies suitable investment opportunities, also invest in other reinsurance-linked investments and such investments may form a material part of its investment portfolio from time to time. Where the Master Fund invests in certain insurance-based instruments, including participation in traditional reinsurance, insurance-linked swaps and industry loss warranties, insurance-linked securities as well as other financial instruments (together, "Insurance-Linked Instruments"), a broker may trade with an exchange as a principal on behalf of the Master Fund, in a "debtor/creditor" relationship, unlike other clearing broker relationships where the broker is merely a facilitator of the transaction. That broker could, therefore, have title to all of the assets of the Master Fund (for example, the transactions which the broker has entered as principal as well as the margin payments that the Master Fund provides). In the event of the broker's insolvency, the transactions which the broker has entered into as principal could default and the Master Fund's assets could become part of the insolvent broker's estate, resulting in the Master Fund's rights being limited to that of an unsecured creditor.

Illiquidity of Insurance-Linked Instruments

Insurance-Linked Instruments have a limited or, in some cases, no secondary market. Fully collateralised reinsurance-linked contracts of the type that the Reinsurer enters into in respect of the Master Fund typically cover annual periods. Cat Bonds and investments in sidecars may have market quotes, but the trading volume may be low and pricing correspondingly ineffective. ILWs have even less liquidity and pricing transparency, and bilateral insurance contracts currently have no secondary market.

The liquidity of Insurance-Linked Instruments may also be affected by a number of other factors, such as whether a covered event has occurred or whether a catastrophe season has passed. It is anticipated that the Master Fund and/or the Reinsurer will retain their respective exposures for the duration of the Insurance-Linked Instruments, gradually recognising income as the likelihood of a covered event occurring in respect of one or more Insurance-Linked Instruments, and therefore the Master Fund and/or the Reinsurer incurring a loss, diminishes.

While these Insurance-Linked Instruments generally can be sold at a price, they are largely "buy and hold" instruments, and it may require substantial time to enter into or exit a position and the amount that could be recognised upon liquidation may be materially less than its theoretical fair value. Consequently, the Master Fund may need to realise assets at below fair value and the Master Fund may need to borrow to meet its financing needs, each of which will have an impact on the returns to Shareholders. Further, the illiquidity of Insurance-Linked Instruments means that the Master Fund's portfolio is more likely to be mis-valued as the valuation ascribed to an Insurance-Linked Instrument may differ significantly from the price at which it may ultimately be realised. In turn, any mis-valuation is likely to have an impact on the trading price of the Ordinary Shares, which may be adverse to Shareholders, as well as on the fees based on such valuations.

Portfolio invested in Insurance-Linked Instruments

The Master Fund predominantly invests in a diversified portfolio of fully collateralised reinsurance- linked contracts, through preference shares issued by the Reinsurer, but also invests in other investments carrying exposures to insured catastrophe event risks, such as ILWs and Cat Bonds. The Master Fund's portfolio is therefore concentrated in Insurance-Linked Instruments. Insurance-Linked Instruments are particularly exposed to sudden substantial or total loss due to, among other things, natural catastrophes or other covered risks, which together with other factors, can cause sudden and significant price movements in Insurance-Linked Instruments. The Master Fund's, and hence the Company's, portfolio is more exposed to such risks, than it would be if it were diversified across other asset classes in addition to Insurance-Linked Instruments.

Currency risk

The Master Fund's and the Reinsurer's functional currency is the US dollar, but a portion of their respective businesses will receive premiums and hold collateral in currencies other than US dollars. The Master Fund and the Reinsurer may use currency hedges for balances held in non-US currencies. Therefore, they can choose (but are not obliged) to manage currency fluctuation exposure. The Master Fund and the Reinsurer may experience foreign exchange losses to the extent their respective foreign currency exposure is not hedged, which in turn would adversely affect their respective financial condition and that of the Company.

Counterparty risk; counterparty credit risk

Where the Master Fund invests other than in fully collateralised reinsurance-linked contracts, a number of the investment techniques that may be utilised by the Master Fund, and a number of markets in which the Master Fund may invest, will expose it to counterparty risk, which is the risk that arises due to uncertainty in a counterparty's ability to meet its obligations. Non-performance by counterparties for financial or other reasons could expose the Master Fund, and therefore Shareholders, to losses.

GOING CONCERN STATUS

In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk issued in October 2009, the Board of Directors has reviewed the Company's ability to continue as a going concern.

The Company's assets consist of cash and a diverse portfolio of fully collateralised reinsurance-linked contracts (held indirectly through investments in preference shares of the Reinsurer) and other Insurance-Linked Instruments. The Board has considered the Company's assets and reviewed forecasts and has determined that the Company has sufficient financial resources to continue as a going concern. Accordingly, the Directors have adopted the going concern basis in preparing the financial statements for the six month period ended 30 June 2016.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the Half-Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that, to the best of their knowledge:

1. The condensed set of financial statements contained within the Half-Yearly Financial Report has been prepared in accordance with the applicable accounting standards and gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company.

2. The Chairman's Statement, the Investment Manager's Report, the Directors' Report and the notes to the unaudited financial statements provides a fair review of the information required by rule 4.2.7R of the Disclosure and Transparency Rules (being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year) and rule 4.2.8R (being related party transactions that have taken place since commencement of operations and that have materially affected the financial position of the Company during that period; and any changes in the related party transaction described in the last annual report that could do so).

The unaudited financial statements were approved by the Investment Manager and the Directors and available for issuance on 26 August 2016. Subsequent events have been evaluated through this date.

Signed by John R. Weale for and on behalf of the Board of Directors this 26(th) day of August 2016:

/s/ John R. Weale

Chairman

John R. Weale

INVESTMENT MANAGER'S REPORT

30 June 2016

Outlook

The continuing convergence of traditional reinsurance and capacity from capital markets provides insurance companies with additional flexibility in their risk transfer solutions and establishes the capital markets as a sustainable complement to traditional reinsurance. However, this convergence has also created challenges. The January 2016 underwriting period was another competitive one, characterised by pressure to reduce prices and offer more generous contractual terms and conditions. The Reinsurer's January trades that the Company invests in were executed with an average risk adjusted rate decrease of approximately 4 per cent. compared to January last year. The Reinsurer's January 2016 portfolio incorporated an increase in the quota-share participation of a traditional property catastrophe book of business, which further increased the Company's access to a broader client base.

Following the June 2016 renewals, it appeared that price reductions had begun to moderate and the market showed continued signs of nearing a bottom with risk adjusted pricing down only 2 per cent. when compared to last year. We believe the stabilizing pricing environment was influenced in part by technical pricing discipline, and a continuing trend of increasing demand for open market reinsurance limit replacing the Florida Hurricane Catastrophe Fund. The Reinsurer was well positioned to take advantage of these market dynamics, constructing an attractive portfolio.

Reinsurance Portfolio - Geographic and Peril Diversification

The following unaudited table, which has been provided by the Investment Manager, provides a breakdown of the Company's portfolio's exposure by contract type, zone and peril as at 30 June 2016.

 
                                     Exposure 
 Zones                              Percentage 
-----------------------------  ------------------- 
 US Windstorm 1(st) Event 
 US - Florida WS                      45.2% 
 US - MidAtlantic WS                  43.3% 
 US - Gulf WS                         39.2% 
 US - NorthEast WS                    36.0% 
 US - Hawaii WS                       21.6% 
 US - Northwest WS                    18.0% 
 US - New Madrid WS                   18.0% 
 US - Midwest WS                      16.9% 
 US - California WS                   15.4% 
 US Earthquake 1(st) Event 
 US - New Madrid EQ                   27.1% 
 US - Northwest EQ                    19.2% 
 US - California EQ                   18.0% 
 US - MidAtlantic EQ                  17.3% 
 US - Midwest EQ                      12.8% 
 US - NorthEast EQ                    12.6% 
 US - Hawaii EQ                       11.2% 
 Japan Windstorm 1(st) Event 
 Japan WS                             12.8% 
 Japan Earthquake 1(st) 
  Event 
 Japan EQ                                    18.1% 
 Europe Windstorm 2(nd) 
  + Event 
 Europe WS                             4.8% 
 US Windstorm 2(nd) + Event 
 US - Florida WS 2(nd) + 
  Event                                9.3% 
 US Earthquake 2(nd) + Event           7.4% 
 Japan Windstorm 2(nd) + 
  Event                                4.8% 
 Japan Earthquake 2(nd) 
  + Event                              4.8%

Notes:

-- For the purposes of this table, the exposures, which are shown as percentages of the Master Fund's net assets, represent the associated contract limits, less net deposit premium, less amounts potentially collectible from purchased retrocessional and derivative covers. This basis is consistent with that of the underwriting guidelines followed by the Investment Manager.

-- For contracts that overlap zones, the full contract limit exposed, calculated after the deduction of any inuring reinsurance purchase, is counted in each of the exposed zones. Key: WS = Windstorm/Hurricane, EQ = Earthquake

2016 Catastrophic Activity to Date

Japan experienced a series of earthquakes and aftershocks beginning on 14 April 2016, in wide parts of the Kumamoto and Oita prefectures. During these events the U.S. Geological Survey estimated a magnitude of M7.0 earthquake which occurred on 16 April 2016. Reports indicate damage occurred to more than 3,900 residences and 120 non-residential structures across prefectures on Kyushu Island. Fires, landslides and liquefaction caused additional damage; while shaking caused significant damage to the transportation infrastructure. The General Insurance Association of Japan has reported the loss attributable to claims payouts for damage to dwellings from the earthquakes has now surpassed $3.4 billion.

The United States experienced severe hailstorms throughout the Southeast and the Plains, with the most significant reported damage in the San Antonio and Dallas areas of Texas between 10 - 12 April 2016. Hail stones were reported to be as large as 3-4 inches in diameter. The ISO Property Claims Services report that this event has caused $3.1 billion of damage in Texas.

Wildfires began in the province of Alberta Canada on 1 May 2016 in and around the city of Fort McMurray. The fires spread rapidly through forest to neighborhoods and areas surrounding the city causing the evacuation of 88,000 residents. In total, the fire has covered nearly 600,000 acres and destroyed an estimated 2,400 structures. PCS Canada Service has reported that losses as a result of the wildfires is now in excess of $3.6 billion, making this the largest loss in Canadian history.

The Investment Manager continues its normal post-event procedures to estimate any loss to the Company, and continues to monitor these events for potential material impact to the Company.

The Investment Manager's loss estimates are largely derived from the utilization of proprietary catastrophe modeling, standard industry models, an in-depth review of in-force contracts and initial indications from clients and brokers. The actual losses from these events may ultimately differ materially from our estimated losses due to the nature of the risks assumed, the complexity of the assessment of damages and the limited number of reported claims received to date.