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Blue Capital Global - Annual Financial Report - 31 December 2016
RNS Number : 2640B
Blue Capital Global Reinsurance Fnd
31 March 2017
 

 

 

31 March 2017

 

Blue Capital Global Reinsurance Fund Limited (the "Company")

 

Annual Financial Report - 31 December 2016

 

Final results for period ended 31 December 2016

 

The Company has today, in accordance with DTR 6.3.5, released its Annual Report for the year ended 31 December 2016. The Annual Report will shortly be available from the Company's website www.bcgr.bm.

 

Highlights and Corporate Summary1

 

As at December 31, 2016

$171.6 million

$204.3 million

$1.1434

Market Capitalisation

Total Net Assets

Net Asset Value per

Ordinary Share

$1.1351

8.3%2

44.2%2

Net Asset Value per Redemption Share

Total Net Asset Value Return for the year

Total Net Asset Value Return since Inception

$0.96

$0.066

+ 1,5003

Mid-market

Ordinary Share price

Dividends per

Ordinary Share

declared for the year

Number of Positions

invested in

 

Company Highlights2

·      Historic portfolio outperformance versus other insurance linked securities ("ILS")4

·     Increase in net assets of $3.6 million to $226.9 million (2015: $223.3 million)

·     Increase in net asset value ("NAV") of 8.3 per cent. for the year and 44.2 per cent. since inception, representing an annualized return of 9.6 per cent. per annum

·      Positive NAV return in 94 per cent. of months since inception

·      Consistently in top quartile in non-life ILS funds

·      Achieved distribution target of $0.066 per ordinary share, representing a dividend yield of LIBOR plus 6 per cent. for the period ending 31 December 2016

·      Entered into a new $20 million revolving credit facility with Endurance Investment Holdings Ltd. a wholly-owned subsidiary of Endurance Specialty Holdings Ltd.

 

1 All currency references in this Annual Report are in US Dollars unless otherwise noted.

2 Past performance is not necessarily indicative of future results.

3 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 1,500 positions in catastrophe related reinsurance contracts.

4 As reported by Eurekahedge ILS Advisors Index “Eurekahedge.” Eurekahedge tracks the performance of participating Insurance Linked Investment funds. It is the first benchmark that allows a comparison between different insurance-linked securities fund managers in the insurance-linked securities, 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 Global Reinsurance Fund Limited (the “Company”) is an exempted closed-ended mutual fund company incorporated under the laws of Bermuda and listed on the London Stock Exchange’s Specialist Fund Segment (“SFS”) with a secondary listing on the Bermuda Stock Exchange (“BSX”). Trading in the Company’s shares commenced on 6 December 2012. The Company provides investors with access to the risk premia available from catastrophe reinsurance, largely uncorrelated to financial markets.

 

Target Return5

 

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 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.

 

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 carrying exposures to insured catastrophe event risks. The Master Fund predominantly invests in fully collateralised reinsurance-linked contracts through preference shares issued by Blue Water Re Ltd. (the "Reinsurer"), a Bermuda special purpose insurer which helps to support the Company's investment objective. 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

 

The Company has entered into an agreement with Blue Capital Management Ltd. (the "Manager") for the provision of

investment management services. The Manager also provides underwriting and administrative services to the "Reinsurer.

The Manager and the Reinsurer are wholly owned by Endurance Specialty Holdings Ltd. ("Endurance").

 

As of 31 December 2016, Endurance owned 28 per cent. of the Company's ordinary shares. On October 5, 2016, Endurance announced that it had entered into a definitive merger agreement pursuant to which it will be acquired by Sompo Holdings, Inc. ("Sompo"). On 28 March 2017, Sompo completed its acquisition of Endurance. Through its ownership of Endurance, Sompo indirectly holds 28 per cent. of the ordinary shares of the company.

 

The Manager attends each quarterly Board meeting and maintains open dialogue with the Directors on an ongoing basis. Fees payable by the Company to the Manager are disclosed in the Directors' Report.

5 These are targeted amounts and 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.

 

Capital Structure

 

At 31 December 2016, the Company had 178,698,523 issued and outstanding Ordinary Shares and 19,855,391 Redemption Shares. The Company's NAV per Ordinary Share and per Redemption 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 (the "Board" or the "Directors"), I am pleased to present the Company's annual report for the year ended 31 December 2016 (the "Annual Report"), which includes the Company's annual audited financial statements for the year ended 31 December 2016. As at 31 December 2016, the Company had net assets of $226.9 million compared to $223.3 million at the beginning of the year. During the year, the Company earned $17.2 million of which $13.1 million was distributed in dividends to Shareholders and $0.5 million in Ordinary Share repurchases during the year.

 

Performance

 

The Company's total NAV return for the year was 8.3 per cent. Since inception the Company has provided total NAV return per share of 44.2 per cent., representing an annualised return of 9.6 per cent. Returns by month for the first four years of operations are shown in the table below. Further details relating to the performance of the Company are set out in the Manager's Report.

 

Ordinary Share NAV Total Return

 

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Full Year

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%

 

Ordinary Share NAV Total Return for the Company and Select Indexes

 

 

2013

2014

2015

2016

Four Year Average

The Company

11.8%

8.8%

9.6%

8.3%

9.6%

Swiss Re Cat Bond Index

11.4%

6.3%

4.4%

6.9%

7.3%

Eurekahedge ILS Advisors Index

7.6%

5.4%

4.2%

5.2%

5.6%

 

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 July 2016, the Company declared dividends of $0.033 per Ordinary Share for the period from 1 January 2016 to 30 June 2016, and in January 2017 declared a further $0.033 per Ordinary Share for the second half of 2016.The combined dividends declared in respect of 2016 calendar year were at the Company's target.

 

The Company intends to move to quarterly dividends commencing with the first quarter of 2017.

 

Discount Management

 

On 23 June 2016, the Company announced that it has engaged Jefferies International Limited to effect share repurchases on its behalf. During the year ended 31 December 2016, 555,000 Ordinary Shares were repurchased and subsequently cancelled by the Company.

 

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 continue 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 will be 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).

 

Assuming that no additional loss events occur in respect of the portfolio attributable to the Redemption Shares, the Company anticipates (but can provide no assurances) that Redemption Shares will be redeemed and proceeds will be distributed to Shareholders in line with the following schedule:

 

Anticipated

Redemption Value Date

Anticipated % of Redemption Shares issued on the Tender Offer Completion Date being redeemed

Anticipated

Payment Date

31 March 2017

58%

30 April 2017

31 August 2017

30%

30 September 2017

31 December 2017

12%

31 January 2017

 

 

On 21 March 2017, the Company announced that on or before 30 April 2017, an amount equal to US$13.1 million was expected to be distributed to shareholders of the Company who participated in the Tender Offer in consideration for the first partial redemption of Redemption Shares. Such amount will be distributed to shareholders pro rata to their holdings of Redemption Shares, and their holdings of Redemption Shares will be reduced accordingly following such redemption.

 

Change of Name

 

Following consultation with the Manager, the Directors of the Company are proposing that the name of the Company is changed from Blue Capital Global Reinsurance Fund Limited to Blue Capital Alternative Income Fund Limited. The Directors and the Manager believe that the name of the Company should be changed to reflect (i) the uncorrelated nature of returns compared to other financial asset classes and (ii) emphasize what the Directors believe to be an attractive dividend yield offered by the Company.  A resolution regarding the proposed name change will be proposed at the Company's Annual General Meeting.

 

Outlook

 

The Company has now begun its 5th 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 superior portfolio returns. 

 

The January 2017 underwriting period saw promising signs in market pricing, although conditions remained competitive during this renewal period. The Reinsurer observed reductions in risk adjusted pricing beginning to moderate at approximately 3 per cent. compared with more significant reductions during previous renewal periods.   Despite such pricing pressure, the Manager successfully executed its renewal strategy.  We remain confident that we can deliver attractive returns for our Shareholders in spite of the current insurance market cycle and the pro forma modelled return expectations for the portfolio constructed are consistent with the Company's target return.

 

The Board continues to monitor the effects of the Tender Offer and proposed share repurchase programme on the Company's Ordinary Share trading price compared with the Company's NAV. The Board, in conjunction with the 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 has noted a number of proposed corporate changes. The Board has noted that commencing with the first quarter of 2017, the Company intends to move to quarterly dividends to provide more regular distributions to Shareholders. The Board has also noted that it proposes the name of the Company is changed from Blue Capital Global Reinsurance Fund Limited to Blue Capital Alternative Income Fund Limited. The Board also continues to consider ways to improve market valuation and to monitor fees and overall expenses in relation to the Company.

 

The Company remains pleased with the diversified portfolio that the 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, and I would like to thank our Shareholders for their support. If you have any questions regarding your Company, please do not hesitate to contact the Company or the Manager.

 

John R. Weale

Chairman

31 March 2017

 

Manager's Report

During the year ended 31 December 2016, the NAV of the Company’s Ordinary Shares increased by 8.3 per cent. net of fees and expenses, and inclusive of dividends to Shareholders. The Company declared dividends totaling $0.066 per Ordinary Share relating to the period, representing a dividend yield of 6 per cent. for the period ending 31 December 2016.

 

The Company opened 2016 with net assets of $223.3 million and finished it with net assets of $226.9 million. The increase in NAV of c. $3.6 million, represented profits generated by the Company’s investment in underlying reinsurance contracts net of dividend distributions and reflected the successful deployment of capital during the year. The 8.3 per cent. return during 2016 was above the longer-term target of LIBOR plus 8 per cent.

 

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 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

 

Loss activity during 2016 was higher than in previous years. The 2016 loss activity contributed to a 3.4 per cent. reduction in return related primarily to a series of earthquakes in Japan (0.1 per cent.), hailstorms throughout the Southeast and Plains regions in the United States (0.5 per cent.), Canadian wildfires (0.7 per cent.), Netherlands Hail (0.3 per cent.), Typhoon Meranti (0.2 per cent.) and Hurricane Matthew (1.6 per cent.).

 

2017 General Market Overview

 

The increase in 2016 regional insured market loss activity, the largest since 2012, is anticipated to provide moderate pricing support to loss affected layers across reinsurance programs in 2017.  The absence of a major catastrophe loss in 2016 (which typically stabilise reinsurance rates or drive rates higher) during the past several years, together with the continued influx of new capacity from capital markets, will contribute to continued pricing competition within the global property catastrophe reinsurance market. However, reinsurance rate decreases have not been uniform across the market, and rate pressures observed at January 2017 have shown to be less severe than the previous year with regional reinsurance programs facing price increases. In the Manager’s opinion the softening rate of risk adjusted pricing decline is directly attributable to the prevailing influence and acceptance of analytical pricing considerations fostering disciplined underwriting in the market over this period.

 

Typically, those segments which are easiest for providers of securitised instruments or commoditised capacity to penetrate, such as Cat Bonds, Retrocession or ILWs, have seen the largest reductions in risk adjusted pricing. However, the Company focuses on accessing risks from small to medium-sized insurance companies with regional or sub-regional exposures. These insurers are generally less willing or able to purchase their reinsurance protections via the securitized or commoditised market, which has high frictional costs for the insurer and requires a minimum transaction size to be viable. These traditional reinsurance markets have seen rates reduce by approximately 5 per cent. to 10 per cent., although there have been some areas of the market, such as reinsurance programs exposed to attritional catastrophe losses, that have experienced small pricing increases and improvements in terms and conditions.

 

These market dynamics have also created opportunities for the Company as a buyer of reinsurance protection. In response to rate softening in the retrocessional markets, the Company may purchase collateralised protection to optimise its portfolio while managing downside risk. The Company will continue to monitor these opportunities and to purchase protections for risk management and/or arbitrage purposes.

 

Portfolio Overview

Portfolio Overview as of December 31, 2016

 

Investment Type

%

 

Occurrence Type

%

 

Geography

%

Quota Share Retrocessional

39%

 

Property Cat - First Event

67%

 

Int'l Global/Pan Regional

45%

Indemnity Reinsurance

29%

 

ILW - Subsequent Event

13%

 

U.S. Single State

20%

Industry Loss Warranties

12%

 

ILW - First Event

4%

 

U.S. Nationwide

16%

Other Non-Property Catastrophe

5%

 

Property Cat - Subsequent Event

4%

 

U.S. Regional

8%

Indemnity Retrocession

3%

 

Property Cat - Aggregate

0%

 

Int'l Regional

0%

Retrocessional Hedging

0%

 

Cat Bond

1%

 

Cash

11%

Cat Bond

1%

 

ILW - Aggregate

0%

 

 

 

Cash

11%

 

Cash

11%

 

 

 

 

Remuneration Practices of the Manager

 

On 18 November 2014, the 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 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 Manager and the Company. This includes the requirement to make certain disclosures on the remuneration practices of the Manager.

 

As a Bermuda based investment manager, the 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 Manager's remuneration practices and appropriate information is available.

 

The Manager is a wholly owned subsidiary of Endurance, and is generally subject to Endurance’s compensation practices and policies. The Manager is supported through service agreements with Endurance, which has approximately 1,240 employees globally. The costs of such services to the Manager are allocated according to a services agreement among various Endurance subsidiaries (the “Shared Services Agreement”).

 

The 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 Manager’s remuneration expenses that are attributable to the services it performs for the Company. During 2016, the Manager recognised $6.8 million in total remuneration expenses as follows:

 

 

Remuneration Expense

(in $US)

Incurred directly by the Manager

3.2 million

Billed to the Manager by Endurance

3.6 million

Total

6.8 million

 

 

The performance fee payable by the Company to the Manager for 2016 was $1.2 million.

 

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 Manager to manage those risks.

 

The Company benefits substantially from the Manager’s relationship with Endurance by accessing and leveraging Endurance’s management talent, proprietary reinsurance modeling tools, underwriting expertise, proprietary risk management systems and longstanding broker/client relationships. The Manager’s affiliation with Endurance 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 Endurance’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 Endurance’s existing middle- and back-office support infrastructure.

 

Certain key risks are managed using a combination of Endurance’s proprietary risk modeling application, various third-party vendor models and underwriting judgment. The 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 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 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 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 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 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.bcgr.bm.

 

Board Members

The Company's directors (the "Directors") are as follows:

 

John R. Weale (58) (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 (70) (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 (64) 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 2016.

 

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 listed on the SFS and admitted to trading on the London Stock Exchange, 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 Endurance. 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 2016, the Company was in compliance with all of its respective covenants associated with the 2016 Credit Facility.  There were no borrowings from the 2016 Credit Facility as of 31 December 2016.

 

Investment Restrictions

 

The Master Fund has adopted the following investment restrictions which apply at the time of investment:

 

 

  • 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 earthquake, 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 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 Manager's Report (above), the 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 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 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.

 

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. 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 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. In July 2016, the 

Company declared dividends of $0.033 per share for the period from 1 January 2016 to 30 June 2016, and in January 2017 

declared a further $0.033 per share for the second half of 2016. The combined dividends declared during 2016 were consistent with the Company's target.

 

Significant Events

 

Except as described elsewhere in this Annual Report, there were no significant events during the period.

 

Management Arrangements and Fees

 

The Manager - (Blue Capital Management Ltd.)

 

The Manager is a specialist alternative asset manager in the Insurance-Linked Instrument asset class. The 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 Manager manages approximately $480 million in assets across a range of insurance-linked strategies. The Manager is wholly-owned by Endurance, a global specialty provider of property and casualty insurance and reinsurance.

 

The 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 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 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 Manager provides management, administrative, underwriting and other services as well as operational infrastructure to the Reinsurer. The 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 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 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 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 the Administrator 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 2016:

 

 

Number of Ordinary Shares Owned

John R. Weale

34,950

Gregory D. Haycock

5,000

George Cubbon

5,000

Total

44,950

 

 

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 February 2015, and it is publicly available on the AIC website. On 18 February 2015, the Financial Reporting Council provided the AIC with an endorsement letter to cover the February 2015 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 have 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 2016, 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 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. The names and biographies of each Director appear on page [9] of this Annual Report.

 

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 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. 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 Manager and the Company’s other service providers. During the year ended 31 December 2016, the Board held seven Board meetings and three Audit Committee meetings.

 

The table below sets out the attendance record of the Directors.

 

 

Board

Audit Committee

No. of Meetings:

7

3

 

 

 

Meetings Attended

 

 

John R. Weale (Chairman)

7

3

Gregory D. Haycock

7

3

George Cubbon

7

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 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 Manager provides management, administrative, underwriting and other services as well as operational infrastructure to the Reinsurer. The 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 Manager’s performance.  In evaluating the Manager, the Board considers the Company’s performance, Shareholder feedback, management reporting and communication, risk management, and the Manager’s interactions with the Board and the Shareholders.  Based on this assessment, the Board remains pleased with the Manager’s performance and it believes it is in the best interests of the Company and its Shareholders to retain the services of the 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 2016, 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.

Endurance'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 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 Annual meeting, together with the Summary of the Resolution], 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 2017 reinsurance renewals, which can be found at www.bcgr.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 2016.

 

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 2017.

A resolution to re-appoint Ernst & Young Ltd. as the Company's independent auditor for 2017 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; 

 

·      the Manager's performance and its relationship with Endurance; and

 

·      the acquisition of Endurance by Sompo Holdings, Inc.

 

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 

31 March 2017

 

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 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 

31 March 2017

 

 

Blue Capital Global Reinsurance Fund Limited

(Incorporated in Bermuda)

Audited Financial Statements

31 December 2016

(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, 2016 and 2015, 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, 2016 and 2015, 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.

 

Ernst & Young Ltd.

March 30, 2017

 

Blue Capital Global Reinsurance 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 2016

(expressed in thousands of U.S. dollars)

 

 

 

 

 

 

31 December

 

 

 

 

 

 

 

 

 

 

 

2016

2015

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Investment in the Master Fund at fair value

(cost - $155,467 ; 2015 cost - $174,340)

 

 

 

221,283

 

229,280

Cash and cash equivalents

 

 

 

5,482

 

16

Other assets

 

 

 

158

 

174

 

 

 

 

 

 

 

Total assets

 

 

 

226,923

 

229,470 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Accrued expenses and other liabilities

 

 

 

64

 

134

Amounts drawn from credit facility (Note 6)

 

 

 

-

 

6,000

 

 

 

 

 

 

 

Total liabilities

 

 

 

64

 

6,134

 

 

 

 

 

 

Net assets

 

 

 

226,859

 

223,336

 

 

 

 

 

 

 

 

 

Ordinary Shares in issue

 

 

 

178,698,523

 

199,105,326

 

 

 

 

 

 

 

Net asset value per Ordinary Share

 

 

 

1.1434

 

1.1217

 

 

 

 

 

 

 

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 Global Reinsurance Fund Limited

Statements of Operations

 

 

(expressed in thousands of U.S. dollars)

 

 

 

 

Year ended 31 December

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Net investment loss allocated from Master Fund

 

 

 

(4,267)

 

(5,847)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

Professional fees

 

 

 

(895)

 

(811)

Other fees

 

 

 

(93)

 

(184)

Administration fees

 

 

 

(69)

 

(67)

 

 

 

 

 

 

 

Total expenses

 

 

 

(1,057)

 

(1,062)

 

 

 

 

 

 

 

Net investment loss

 

 

 

(5,324)

 

(6,909)

 

 

 

 

 

 

 

Realised and unrealised gain on investments allocated from Master Fund:

 

 

 

 

 

 

Net realised gain on investments in securities

 

 

 

29,182

 

21,722

Net change in unrealised (depreciation) appreciation on

investments in securities

 

 

 


(6,662)

 

 

4,990

 

 

 

 

 

 

 

 

 

 

 

22,520

 

26,712

 

 

 

 

 

 

 

Net increase in net assets resulting from operations

 

 

 

17,196

 

19,803

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to Financial Statements and attached Financial Statements of Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance SA-I

 

Blue Capital Global Reinsurance Fund Limited

Statements of Changes in Net Assets

 

 

(expressed in thousands of U.S. dollars)

 

 

 

 

Year ended 31 December

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Increase in net assets

 

 

 

 

 

 

 

 

 

 

 

 

 

From operations

 

 

 

 

 

 

Net investment loss

 

 

      

(5,324)

 

(6,909)

Net realised gain on investments in securities

 

 

 

29,182

 

21,722

Net change in unrealised (depreciation) appreciation on

investments in securities

 

 

 

(6,662)

 

4,990

 

 

 

 

 

 

 

Net increase in net assets resulting from operations

 

 

 

17,196

 

19,803

 

 

 

 

 

 

 

From capital transactions

 

 

 

 

 

 

Share repurchases

 

 

 

(555)

 

-

Dividends declared

 

 

 

(13,118)

 

(13,141)

 

 

 

 

 

 

 

Net decrease in net assets resulting from capital transactions

 

 

 

(13,673)

 

(13,141)

 

 

 

 

 

 

 

Increase in net assets

 

 

 

3,523

 

6,662

 

 

 

 

 

 

 

Net assets - Beginning of year

 

 

 

223,336

 

216,674

 

 

 

 

 

 

 

Net assets  - End of year

 

 

 

226,859

 

223,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to Financial Statements and attached Financial Statements of Blue Water Master Fund Ltd. - Blue Capital Global Reinsurance SA-I

 

Blue Capital Global Reinsurance Fund Limited

Statements of Cash Flows

 

 

 (expressed in thousands of U.S. dollars)

 

 

 

 

 

Year ended 31 December

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

Cash flows from operating activities

 

 

 

 

 

 

Net increase in net assets resulting from operations

 

 

 

17,196

 

19,803

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

 

 

 

7,997

 

(29,919)

Net change in other assets and liabilities:

 

 

 

 

 

 

                Decrease / (increase) in other assets

 

 

 

16

 

(15)

Decrease in funds on deposit with the Master Fund

 

 

 

-

 

9,054

                (Decrease) / increase in accrued expenses and

                   other liabilities

 

 

 

(70)

 

21

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

 

 

25,139

 

(1,056)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

(Repayments to) / amounts drawn from credit facility

 

 

 

(6,000)

 

2,000 

Share repurchases

 

 

 

(555)

 

-

Dividends paid

 

 

 

(13,118)

 

(13,141)

 

 

 

 

 

 

 

Net cash used in financing activities

 

 

 

(19,673)

 

(11,141)

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

 

5,466

 

(12,197)

 

 

 

 

 

 

 

Cash and cash equivalents - Beginning of year

 

 

 

16

 

12,213

 

 

 

 

 

 

 

Cash and cash equivalents - End of year

 

 

 

5,482

 

16

               

 

 

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 Global Reinsurance Fund Limited

Notes to Financial Statements

31 December 2016

 

(expressed in thousands of U.S. dollars, except shares and per share amounts)

 

1.  Nature of operations

 

Blue Capital Global Reinsurance Fund Limited (the "Company") is a closed-ended exempted mutual fund company of unlimited duration incorporated under the laws of Bermuda on 8 October 2012, which commenced operations on 6 December 2012. The Company invests substantially all of its assets through a "master/feeder" structure in Blue Capital Global Reinsurance SA-I (the "Master Fund"). The Master Fund is a segregated account of Blue Water Master Fund Ltd., a mutual fund company incorporated under the laws of Bermuda on 12 December 2011, and registered as a segregated account company under the Segregated Accounts Company Act 2000. The investment objective of the Company is to generate attractive returns from a sustainable annual dividend yield and longer-term capital growth through its investment in the Master Fund. The Company is the only investor in the Master Fund. The 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 BCGR LN).  The Company's shares are listed on the Bermuda Stock Exchange (symbol BCGR BH).    

 

The investment objective of the Master Fund is to generate attractive returns by investing in a diversified portfolio of fully collateralized reinsurance-linked instruments ("RLI") and other investments carrying exposures to insured catastrophe event risks. The Master Fund invests predominantly in fully collateralized RLIs through non-voting redeemable preference shares issued by Blue Water Re Ltd. (the "Reinsurer") which in turn writes reinsurance contracts with 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 Endurance Specialty Holdings Ltd. ("Endurance"), a recognized global specialty provider of property and casualty insurance and reinsurance whose shares are listed on the New York Stock Exchange (symbol ENH).

 

The Reinsurer is an exempted limited liability company incorporated on 12 December 2011 under the laws of Bermuda and is licensed by the Bermuda Monetary Authority as a special purpose insurer with an underwriting plan focused on fully collateralized reinsurance protection of the property catastrophe insurance and reinsurance market. The Investment Manager also acts as the Reinsurer's insurance manager and insurance agent.

 

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 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 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. (formerly Prime Management Limited) (the "Administrator"), a division of SS&C GlobeOp, serves as the administrator for the Company and the Master Fund. The Administrator receives a monthly fee based on the NAV of the Company and the Master Fund, subject to a monthly minimum fee. Administration fees relating to the Master Fund are charged to the Master Fund and flow through to the Company as part of the expenses allocated from the Master Fund in the Statements of Operations.

 

4.  Related party transactions

 

As of 31 December 2016, Endurance Specialty Insurance Ltd. ("Endurance Bermuda") owned 28.0% (2015 - 25.1%) of the voting rights of the Ordinary Shares issued by the Company. Endurance Bermuda and the

Manager are 100% owned by Endurance Specialty Holdings Ltd. ("Endurance").

 

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 2016, the directors' fees amounted to $180 (2015 - $165), 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 2016 and 2015, 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 Endurance. The 2016 Credit Facility provides the Company with an unsecured $20,000 revolving credit facility for working capital and general corporate purposes and expires on 30 September 2018. The 2016 Credit Facility replaces the 364-day $20,000 revolving credit facility (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, 2016, the Company was in compliance with all of its respective covenants associated with the 2016 Credit Facility.  There were no borrowings from the 2016 Credit Facility as of 31 December 2016.

 

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 $42 (2015 - $100) including customary commitment fees, reflected in Other Fees in the Statement of Operations.  Under the 364-Day Credit Agreement, the Company also paid Endurance, 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 2016 and 2015, the Company is authorized to issue up to 990,000,000 Shares of par value $0.00001 per share.

 

On 15 January 2016, the Company declared a dividend covering the period 1 July 2015 to 31 December 2015 of $0.033 per Ordinary Share. The Company offered a scrip dividend alternative so that shareholders could elect to receive new Ordinary Shares instead of all or part of their cash dividend. On 15 March 2016, a cash dividend of $6,566 was paid and 3,588 Ordinary Shares were admitted to trading on the London Stock Exchange's Specialist Fund Segment (previously known as the Specialist Fund Market) and on the Bermuda Stock Exchange. The Company recorded a subscription of $4 in connection with the issuance of these Ordinary Shares. The 3,588 Ordinary Shares were issued in lieu of cash payments of dividends amounting to $4.

 

On 22 July 2016, the Company declared a dividend covering the period 1 January 2016 to 30 June 2016 of $0.033 per Ordinary Share. On 24 August 2016, a cash dividend of $6,552 was paid.

 

On 23 June 2016, the Company announced 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 2016, 555,000 Ordinary Shares were repurchased and subsequently cancelled 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 continue 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 will be redeemed for cash as and when these investments are realised. Conversion of tendered Ordinary Shares into Redemption Shares under the Tender Offer was completed on 30 December 2016.

 

Including Endurance Bermuda there are five shareholders who, in the aggregate, held approximately 63% of the share capital of the Company at 31 December 2016.

 

Transactions in Shares were as follows:

 

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

 

1 January 2015 to 31 December 2015

 

 

Beginning Shares

 

Shares Issued

 

Shares Redeemed

 

Ending Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary Shares

 

199,105,326

 

                                 -  

 

                                 -  

 

                199,105,326

 

 

 

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

 

 

 

 

2016

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

Per share operating performance

 

 

 

 

 

 

 

 

 

 

Net asset value, beginning of year

 

 

 

$         1.1217

 

 

 

 

$         1.0882

 

 

 

 

 

 

 

 

 

 

 

 

Income from investment operations

 

 

 

0.0877

 

 

 

 

0.0995

 

        Dividend payment per share

 

 

 

(0.0660)

 

 

 

 

(0.0660)

 

 

 

 

 

 

 

 

 

 

 

 

Net asset value, end of year

 

 

 

$         1.1434

 

 

 

 

$         1.1217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total return

 

 

 

 

 

 

 

 

 

 

Total return before performance fee

 

 

 

8.33

%

 

 

 

10.30

%

Dividend paid

 

 

 

(5.88)

 

 

 

 

(6.07)

 

Performance fee*

 

 

 

(0.52)

 

 

 

 

(1.15)

 

Total return after performance fee**

 

 

 

1.93

%

 

 

 

3.08

%

 

Ratio to average net assets

 

 

 

 

 

 

 

 

 

 

Expenses other than performance fee

 

 

 

(2.01)

%

 

 

 

(2.25)

%

Performance fee*

 

 

 

           (0.53)

 

 

 

 

             (1.17)

 

Total expenses after performance fee

 

 

 

                 (2.54)

%

 

 

 

                 (3.42)

%

Net investment loss before performance fee

 

 

 

                 (1.83)

%

 

 

 

                 (2.06)

%

 

 

* The performance fee and management fee are charged in the Master Fund.

** 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%. The total return for the year ended 31 December 2015 before the dividends declared on 29 January 2015 and 16 July 2015 is computed as 9.63%. 

 

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 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 28 March 2017, Endurance was acquired by Sompo Holdings Inc., a company incorporated in Japan.

 

These Financial Statements were approved by the Manager and the Directors and were made available for issuance on 30 March 2017.  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 2016

(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, 2016 and 2015, 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, 2016 and 2015, 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.

Ernst & Young Ltd.

March 30, 2017

 

 

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

 

 

2016

 

2015

 

 

 

 

Assets

 

 

 

Investments in securities, at fair value (cost  - $188,453;

     2015 cost  - $194,275)

209,802

 

220,025

Unrealised gain on derivatives (premiums paid - $2,335)

555

 

-

Cash and cash equivalents

13,749

 

17,657

Other receivables

264

 

-

Receivable from related party (Note 7)

118

 

-

Interest receivable

29

 

28

 

 

 

 

Total assets

224,517

 

237,710

 

 

 

 

Liabilities

 

 

 

Unrealised loss on derivatives (premiums received - $1,179;

     2015 premiums received - $1,703)

146

 

190

Performance fee payable

1,157

 

2,501

Management fee payable

1,108

 

3,520

Accrued expenses and other liabilities

823

 

440

Payable to related party (Note 7)

-

 

1,779

 

 

 

 

Total liabilities

3,234

 

8,430

 

 

 

 

Net assets

221,283

 

229,280

 

 

 

 

Offered Shares in issue

133,403

 

167,099

 

 

 

 

Net asset value per Offered Share

1,492.8732

 

1,372.1208

 

 

 

 

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,

 

 

 

2016

 

2015

 

Income

 

 

 

 

 

Interest

410

 

406

 

Other income

45

 

-

 

 

 

 

 

 

Total income

455

 

406

 

 

 

 

 

 

Expenses

 

 

 

 

 

Management fees

(3,293)

 

(3,270)

 

Performance fees

(1,157)

 

(2,501)

 

Administrative fees

(224)

 

(222)

 

Professional fees

(43)

 

(46)

 

Other fees

(5)

 

(214)

 

 

 

 

 

 

Total expenses

(4,722)

 

(6,253)

 

 

 

 

 

 

Net investment loss

(4,267)

 

(5,847)

 

 

 

 

 

 

Realised and unrealised gain on investments in securities
and derivative contracts

 

 

 

 

 

 

 

 

 

Net realised gain on investments in securities

and derivative contracts

29,182

 

21,722

 

Net change in unrealised (depreciation) appreciation on 

investments in securities and derivative contracts

(6,662)

 

4,990

 

 

 

 

 

 

Net gain on investments in securities and derivative contracts

22,520

 

26,712

 

 

 

 

 

 

Net increase in net assets resulting from operations

18,253

 

20,865

 

 

 

 

 

 

 

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,

 

 

2016

 

2015

 

 

 

 

(Decrease) / Increase in net assets

 

 

 

 

 

 

 

From operations

 

 

 

Net investment loss

(4,267)

 

(5,847)

Net realised gain on investments in securities

    and derivative contracts

29,182

 

21,722

Net change in unrealised (depreciation) appreciation on

    investments in securities and derivative contracts

(6,662)

 

4,990

 

 

 

 

Net increase in net assets resulting from operations

18,253

 

20,865

 

 

 

 

From capital share transactions

 

 

 

Issuance of shares

-

 

9,054

Redemption of shares

(26,250)

 

-

 

 

 

 

Net decrease in net assets resulting from capital transactions

(26,250)

 

9,054

 

 

 

 

(Decrease) / Increase in net assets

(7,997)

 

29,919

 

 

 

 

Net assets - Beginning of year

229,280

 

199,361

 

 

 

 

Net assets - End of year

221,283

 

229,280

 

 

 

 

 

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,

 

 

2016

 

2015

Cash flows from operating activities

 

 

 

Net increase in net assets resulting from operations

18,253

 

20,865

Adjustments to reconcile to net cash provided by operations:

 

 

 

 

Purchases of investments in securities

-

 

(6,654)

 

Premiums paid on ILW Swaps

(2,335)

 

(1,685)

 

Proceeds from sale of investments in securities

33,300

 

14,200

 

Premiums received on ILW Swaps

1,179

 

1,703

 

 

Net realised gain on investments in securities and

   derivative contracts

(29,182)

 

(21,722)

 

Net change in unrealised depreciation (appreciation)

   on investments in securities and derivative contracts

6,662

 

(4,990)

 

Change in other assets and liabilities:

 

 

 

 

     Increase in other receivable

(264)

 

-

 

     Increase in receivable from related party

(118)

 

-

 

     Increase in interest receivable

(1)

 

(1)

 

     Decrease in funds on deposit with Reinsurer

-

 

6,654

 

     (Decrease) / increase in performance fee payable

(1,344)

 

2,501

 

     (Decrease) / increase in management fee payable

(2,412)

 

3,271

 

     Increase in accrued expenses and other liabilities

383

 

365

 

     (Decrease) / increase in payable to related party

(1,779)

 

137

 

 

 

 

Net cash provided by operating activities

22,342

 

14,644

 

 

 

 

Cash flows from financing activities

 

 

 

Proceeds from issuance of shares

-

 

9,054

Decrease in subscription received in advance

-

 

(9,054)

Payments for redemption of shares

(26,250)

 

-

Net cash used in financing activities

(26,250)

 

-

 

 

 

 

 

 

 

 

Net (decrease) / increase in cash and cash equivalents

(3,908)

 

14,644

 

 

 

 

Cash and cash equivalents - Beginning of year

17,657

 

3,013

 

 

 

 

Cash and cash equivalents - End of year

13,749

 

17,657

         

 

Non-Cash transactions

During the year ended December 31, 2016, the Fund had non-cash purchases and sales of investment in securities amounting to $362,339

 

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)

 

31 December 2016

 

 Cost / Proceeds

Number of
Shares /
Principal /

 Fair Value

Percentage of
 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)

 

 

 Cost / Proceeds

Number of
Shares /
Principal /

 Fair Value

Percentage of
 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

Condensed Schedule of Investments

31 December 2016

 

(expressed in thousands of U.S. dollars, except share and per share amounts)

 

31 December 2015

 

 Cost / Proceeds

Number of
Shares /
Principal /

 Fair Value

Percentage of
 Net Assets

 

Type

 $

Notional

 $

%

 

 

 

 

 

 

 

Investments held in Risk Linked Instruments of Blue Water Re Ltd.

 

 

 

 

 

 

 

 

Blue Water Re Ltd Series A

                             65

                         64.5088

                                  139

                                0.06

 

Blue Water Re Ltd Series A 14

                           142

                        142.2241

                                 243

                                  0.11

 

Blue Water Re Ltd Series A 15

                    32,829

                32,829.3208

                           36,784

                               16.04

 

Blue Water Re Ltd Series AB 14

                               5

                           5.0783

                                       1

                                0.00

 

Blue Water Re Ltd Series  AB 15

                       6,525

                   6,524.9545

                              6,964

                                3.04

 

Blue Water Re Ltd Series ADJ

                           100

                       100.0000

                                 207

                                0.09

 

Blue Water Re Ltd Series AF 15

                     14,544

                  14,544.3010

                            15,896

                                6.93

 

Blue Water Re Ltd Series AG

                        1,579

                    1,579.0470

                                 987

                                0.43

 

Blue Water Re Ltd Series AH

                             23

                         22.5285

                                    32

                                 0.01

 

Blue Water Re Ltd Series AH 15

                    30,426

                 30,426.1992

                           37,749

                               16.46

 

Blue Water Re Ltd Series AN 1 15

                       5,933

                   5,932.8097

                               6,319

                                2.76

 

Blue Water Re Ltd Series AO 1 15

                        1,655

                    1,655.0537

                              2,028

                                0.88

 

Blue Water Re Ltd Series AP 1 15

                          922

                       921.5537

                                1,129

                                0.49

 

Blue Water Re Ltd Series AV 15

                       4,278

                   4,277.7953

                               4,281

                                 1.87

 

Blue Water Re Ltd Series AW

                        4,156

                    4,155.5780

                              4,754

                                2.07

 

Blue Water Re Ltd Series AX

                         1,918

                      1,918.1630

                               2,401

                                 1.05

 

Blue Water Re Ltd Series BD 1 15

                        1,604

                    1,603.6575

                               1,962

                                0.86

 

Blue Water Re Ltd Series  BF

                        2,551

                     2,551.1224

                              2,995

                                  1.31

 

Blue Water Re Ltd Series BG

                       3,707

                   3,706.8864

                              3,865

                                 1.69

 

Blue Water Re Ltd Series C14

                        2,371

                     2,371.1322

                              2,335

                                 1.02

 

Blue Water Re Ltd Series E15

                         1,133

                     1,133.3850

                               1,430

                                0.62

 

Blue Water Re Ltd Series  H 1 15

                     33,781

                33,780.8764

                           38,553

                                16.81

 

Blue Water Re Ltd Series I 1 15

                       5,892

                    5,892.1099

                               6,761

                                2.95

 

Blue Water Re Ltd Series J 1 14

                         1,616

                     1,641.4770

                                 460

                                0.20

 

Blue Water Re Ltd Series J 1 15

                          436

                      436.2058

                                 503

                                0.22

 

Blue Water Re Ltd Series K 1 15

                       5,643

                   5,643.0262

                               7,143

                                 3.12

 

Blue Water Re Ltd Series L 1 15

                           871

                      870.7522

                                  1,111

                                0.48

 

Blue Water Re Ltd Series M 1 15

                       7,603

                   7,603.3442

                              9,750

                                4.25

 

Blue Water Re Ltd Series Q 1 15

                        2,016

                    2,015.5200

                              2,395

                                 1.04

 

Blue Water Re Ltd Series S 1 15

                           581

                       581.0055

                                 773

                                0.34

 

Blue Water Re Ltd Series T 1 15

                          542

                      542.2973

                                 728

                                0.32

 

Blue Water Re Ltd Series U 1 15

                          550

                       549.9317

                                  741

                                0.32

 

Blue Water Re Ltd Series V 1 15

                          330

                       329.5610

                                 442

                                 0.19

 

Blue Water Re Ltd Series W 1 15

                          468

                      468.2064

                                 622

                                0.27

 

Blue Water Re Ltd Series Z SAI

                              17

                          17.3073

                                     17

                                 0.01

 

Blue Water Re Ltd Series ZZ

                     15,463

                 15,463.8707

                            15,466

                                6.74

 

 

                   192,275

               192,300.7907

                          217,966

                              95.06

 

Catastrophe Bonds

 

 

 

 

 

 

 

 

 

 

 

Residential Re 2013-II

                       2,000

          2,000,000.0000

                              2,059

0.90

 

 

                       2,000

          2,000,000.0000

                              2,059

0.90

 

 

 

 

 

 

 

Total investments in securities, at fair value

194,275

 

220,025

95.96

 

 

 

 

 

 

 

ILW Swaps

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on derivatives

                      (1,703)

         14,305,048.0000

                                (190)

                              (0.08)

 

 

 

 

 

 

 

Total unrealized loss on derivatives

            (1,703)

 

                   (190)

                  (0.08)

 

                   

 

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 2016

 

(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 Endurance Specialty Holdings Ltd. ("Endurance"), a holding company headquartered in Bermuda whose common shares are listed on the New York Stock Exchange under the symbol "ENH". 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 Global Reinsurance Fund Limited (the "Company"), 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 to the Master Fund is also the Manager.

 

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.