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Blue Capital suspends buyback as it rides out Irma

12 September 2017

Listed reinsurance fund Blue Capital Alternative Income suspends share buybacks and its broker downgrades its shares to ‘neutral’ in response to hurricane Irma.

Blue Capital Alternative Income (BCAI) has suspended its share buyback until it knows the impact that hurricane Irma will have on its portfolio.

The fund, which provides reinsurance capital to the insurance industry, said the share repurchase programme announced in May has been suspended due to the ‘potential impact to its investments from a US landfall of hurricane Irma’.

In a stock exchange announcement the trust said ‘it will not know what, if any, material impact there may be until it has completed its normal post-event procedures’.

Shares in the fund have fallen nearly 5% since the beginning of the month, leaving them trading 10.7% below net asset value. This is slighly wider than its 12-month discount of 9.7%, according to Morningstar data.

Anthony Stern, analyst at house broker Stifel, downgraded his recommendation to ‘neutral’ on the trust and warned he was ‘anticipating some sizeable claims impact’.

Although he said it is too early to assess the impact, the fund noted earlier in the year that ‘a US Florida hurricane could result in a 34% loss to net asset value (NAV)’.

‘It is important to note that this is based on a one-in-100 year modelled event,’ said Stern. ‘While this hurricane does not appear to have been as severe as such an exceptional event, it was clearly a major wind storm with meaningful claims likely and therefore some material – more than 3% - NAV impact is expected.’

Stern added that the loss could ‘also be negative for dividend paying ability’. The investment company yields 6.7%. 

The total damage to homes, businesses and crops in Florida from hurricane Irma could be as much as $300 billion (£227 billion), according to Panmure Gordon analyst Barrie Cornes.

Insurance companies could see their bill top $150 billion in repairs, rebuilds and clean-up following Irma and its predecessor hurricane Harvey that caused severe flooding in Texas last month. An 8.1 magnitude earthquake in Mexico, which has killed 90, could see claims rise further.

The caution over the suspension echoes a warning from CatCo Reinsurance Opportunities (CAT) that it could face large losses.

In a statement, CatCo said the losses due to the hurricane would be in the ‘low single digit billions’ of dollars, and less than $10 billion total when flood losses were factored in.

While the company said the impact of the spate of natural disasters ‘is not expected to be significant, the shares in the company have tumbled 17% since the start of the month. The uncertainty of the impact has wiped out the company’s premium and now trades at a discount of 17.3% from a 0.1% premium averaged over the past 12 months.

Numis Securities analyst Charles Cade said the impact of Irma from an insurance perspective may not be as bad as first feared due to a shift in the path of the hurricane – which has been downgraded to a tropical storm – away from Miami.

‘In recent days, there have been widespread forecasts that this would lead to a one-in-100 year losses, equivalent to insurance losses of $150 billion or more,’ he said.

‘However, commentators are now suggesting that insured losses could be in the region of $50-75 billion. By comparison, Katrina cost the insurance industry $45 billion.’

Cade added that it would take weeks before CatCo could put a figure on the losses but he estimated that it could face losses of 5-10% for Harvey and ‘perhaps 10-15% for Irma’.

‘It needs to be recognised the CatCo’s contracts are individually negotiated and most are based on the actual losses suffered by the client (insurer/reinsurer), rather than an estimate of overall industry losses,’ he said.

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