Blue Capital Re forecasts 14.9% median return, up to 25% rate rises

by Artemis on December 1, 2017

New York stock exchange listed fully collateralized reinsurer Blue Capital Reinsurance Holdings Ltd. has increased its median return target for 2018 to as much as 14.9%, on the back of an expectation of prices rises across the reinsurance sector, with some loss affected contracts expected to see rate increases of as much as 25%.

Blue Capital Re and its manager, the ILS fund and collateralized reinsurance vehicle specialist unit of Sompo International – Blue Capital Management, expects that the roughly $100 billion of catastrophe losses suffered in 2017 will result in rate increases across the sector, resulting in higher returns for its funds and the Blue Capital Re reinsurer.

As a result, the reinsurer forecasts a mean loss scenario return of 9.1% and a median loss scenario return of 14.9% for the 2018 underwriting year, based on growth in fully converted book value per common share, which is an increase on the 2017 figures.

Blue Capital Re suffered a 28.6% hit to its fully converted book value per common share after third-quarter 2017 catastrophes and hurricanes, but the manager is positioning the vehicle to capitalise on higher rate opportunities for 2018.

The company says that the projected return is based on the planned portfolio of reinsurance contracts it aims to underwrite for 2018, believing it will see loss affected ceded and quota share reinsurance agreements with rate increases estimated at 15% to as much as 25%, while other agreements could see estimated rate increases of 2.5%, compared to 2017.

Blue Capital Re’s forecasts for book value growth in 2018 also take into account the amount of collateral it will have available for deployment at the key January reinsurance renewals, bearing in mind the loss events of 2017 and associated buffer loss provisions the company has made.

The figures are also inclusive of dividends, but the firm says it is not a profit forecast, rather is indicative of where it believes the portfolio could end up if rate increases are as high as currently anticipated.

Achieving higher return, in terms of book value growth, when a portion of its collateral will be trapped for the key January renewals is indicative of the desire of alternative capital managers to ensure they benefit from higher rates while capacity is restricted due to the 2017 losses.

Key to delivering higher results in 2018 will be the reaction of the market at the mid-year renewals, at which point in the year at least some of the trapped ILS collateral issue will have been resolved and there will likely be more capital in the sector once again.

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