Blue Capital Re beats analyst estimates in Q1 2016

Blue Capital Reinsurance Holdings Ltd. (BCRH), the New York exchange listed collateralized reinsurance company operated by Endurance subsidiary Blue Capital Management, has beaten analysts estimates despite suffering from adverse development on losses related to last winter’s UK storms.

Blue Capital Re, which offers fully collateralised reinsurance products and invests in insurance-linked securities (ILS), reported net income of $5m or $0.57 per share for the first-quarter of 2016, beating the average of five analyst firm earnings per share estimates of $0.52.

However the firm’s results are slightly down on a year earlier, with the main reasons being adverse development related to losses suffered due to last winter’s storms and floods in the UK in December 2015, costing the reinsurance firm $0.7m, as well as changes to the way premiums are flowing through after increased investment in reinsurance quota shares.

Book value per share rose to $20.44 at the end of Q1 2016, an increase of 2.7% for the quarter and 11.5% for the last twelve months, inclusive of dividends.

Adam Szakmary, President and CEO of the company, said; “Blue Capital’s strong results in a quarter marked by significant financial market volatility highlights the value of our strategy of providing investors with diversified access to the preferred traditional property catastrophe market.

“Blue Capital’s partnership with Endurance, our underwriting expertise and our enhanced market position enabled us to successfully navigate the competitive marketplace and construct an attractive portfolio for 2016.”

Reinsurance premiums written declined to $17.4m, which was down $2.7m or 13.4% compared to Q1 2015. The firm explained that this is due to a change in the composition of its book, with more business coming from quota shares than before.

It’s likely that since the ownership changed to Endurance, when the Bermudian re/insurer acquired Montpelier Re and inherited the third-party capital and ILS investment management unit Blue Capital Management, Blue Capital Re has been entering into larger quota shares with the company, providing greater access to a broader book of business.

The shift to more quota shares means that more of the underwritten premiums in 2016 will be recognised over the term of the reinsurance contracts, rather than at inception of the transaction and investment.

Blue Capital Re saw slightly higher current period losses, at $1m compared to $0.9m in Q1 2015, which along with the adverse loss development on UK storm exposures resulted in a combined ratio of 52.2% in Q1 2016, compared to 44.6% in the first quarter of 2015.

The adverse development cost the company $0.7m and is interesting as it suggests the potential for other reinsurance and perhaps ILS related funds or collateralised reinsurers to also see some worsening of any positions exposed to last year’s flooding and storms in the UK.

Blue Capital Re’s general and administrative expenses were $1.5 million, or $0.2 million higher than ! 2015, which the company explained was largely due to modestly higher performance fees. At the same time acquisition costs declined 4.4% to $2.2m during the quarter from a year earlier, which is largely due to the shift to greater use of quota shares which meant the company paid lower fronting expenses.

The returns generated by Blue Capital Re provide an attractive entry point to reinsurance linked investing, particularly as the company is stock exchange listed and thus provides investors with a liquid way to access the returns of the catastrophe reinsurance market.

Currently the company’s shares trade well below book value, making Blue Capital Re an increasingly tipped opportunity by analysts. Analysts at KBW noted that the ownership by Endurance suggests greater access to premiums and the shift to more quota share reflects this.

As Blue Capital Re has the capital available to underwrite it should have no problem accessing diverse business through Endurance and the relationship should also enable the firm’s to underwrite in partnership as well, also broadening the range of counterparties for the reinsurer.