Diverse portfolio helps Blue Capital Re profit despite catastrophes in Q2

Strong risk management and a diverse portfolio of property catastrophe risks helped New York exchange listed fully-collateralized reinsurance firm Blue Capital Reinsurance Holdings Ltd., a subsidiary of Endurance, to a profit in Q2 2016 despite the impact of global catastrophe loss activity.

Blue Capital Reinsurance Holdings (BCRH) suffered perhaps its highest level of catastrophe losses in a single quarter to-date, which is unsurprising given the companies focus on property catastrophe risk returns for its investors.

Loss and loss adjustment expenses came in at $6m for the second-quarter, a little higher than the firms initial $5.1m estimate of Q2 catastrophe exposure, compared to the much quieter quarter a year earlier when the figure was just $0.1m.

However, BCRH remained profitable in Q2, reflecting the fact that it seeks to minimise its exposure to single large losses by maintaining a well-diversified, global book of property catastrophe risks.

Adam Szakmary, President and CEO of Blue Capital Reinsurance Holdings, explained; “The second quarter included a greater frequency of global catastrophe events and Blue Capital’s ability to generate a profit reflects our strong risk management and the benefits of maintaining a portfolio of diverse catastrophe risks.”

Events that hit Blue Capital Re in the quarter included the Fort McMurray wildfires, the Kumamoto, Japan earthquake, and convective storms in Texas and Europe. But despite the impacts of these events BCRH managed a combined ratio for the current quarter of 82% and 67.8% for 2016 to date, compared to 43.1% and 43.8% in the same periods of 2015.

As a result the company, which offers collateralized reinsurance to the property catastrophe market and also invests in various insurance-linked securities (ILS), reported net income and operating income of $2m ($0.22 per share) for Q2 2016 and $6.9m ($0.79 per share) for the first six months of 2016. Fully converted book value per share hit $20.35 at June 30th 2016, a 1% increase for the quarter and up 3.6% year-to-date inclusive of dividends declared.

As a result of the catastrophe losses suffered in Q2 BCRH reported lower expenses of $1.2m, which is $0.7m below the prior year quarter, as reduced performance fees were earned due to lower profitability after the losses. Acquisition costs also declined slightly to $2.1m, due to lower profit commissions partially offset by higher commissions driven by a larger earned premium base.

The key mid-year renewals saw BCRH underwriting additional premiums, with reinsurance premiums underwritten during Q2 and year to date coming in at $9.3m and $26.7m, up $1.7m in Q2 but declining $1m for the first-half. Q2 2016’s premiums written benefited from $0.7m of reinstatement premiums compared to zero received in Q2 of 2015.

“During mid-year renewals, our portfolio’s average price decline of approximately 3% moderated compared to the 5% decline experienced a year ago. Through our advantageous partnership with Endurance and the leveraging of our experienced underwriters, we were able to assemble an attractive portfolio during the mid-year renewals,” Szakmary commented.

Access to global property catastrophe reinsurance markets is key for a vehicle such as Blue Capital Reinsurance Holdings, as developing a robust and diverse portfolio of risks is the only way to avoid outsized losses from larger catastrophe events.

By profiting in Q2 2016, a quarter when losses have ticked above expectations and budgets, Blue Capital Re could profit by demonstrating to investors the benefit of investing in the largely uncorrelated reinsurance asset class, even at times of catastrophe loss stress.