Underlying loss ratio improves at Blue Capital Re despite higher Q4 cats

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Despite the heavy impact of losses during the fourth-quarter of 2018, Blue Capital Reinsurance Holdings Ltd., the stock exchange listed, collateralized reinsurer owned by Sompo International Holdings Ltd., came out of 2018 with a much improved accident year loss ratio.

blue-capital-logoThe team managing the collateralized but listed reinsurance vehicle have taken efforts to rebalance the portfolio and reduce volatility following the heavy catastrophe loss year of 2017.

2018 delivered further heavy losses to Blue Capital Reinsurance, but even though the Q4 combined ratio was particularly high at 308.8%, thanks to the impacts of the California wildfires, hurricane Michael and loss creep from typhoon Jebi and hurricane Irma, and 191.6% for the full-year, the management team feel the results are improved thanks to the work to adjust portfolio composition and retrocession.

Blue Capital Re reported a net loss of $24.9 million for Q4 2018 and $28.6 million for the full-year yesterday, driving a 21.5% decrease in book value for the quarter and 22.5% for the year.

Premiums written rose slightly in Q4 largely due to the effects of reinstatement premiums and for the full year premiums written reduced as the firm dealt with a a lower capital base after the aggregate effects of the last two year’s of catastrophe losses.

But the reinsurer remains positive about future prospects and has taken steps that appear to have assisted with how it managed its losses from the most recent catastrophes in 2018.

Michael J. McGuire, Chairman and CEO of Blue Capital Re, explained, “While good progress was made in 2018 to reduce volatility and improve the balance of our portfolio, adverse development from 2017 events and another active catastrophe year in 2018 masked underlying improvements. These improvements were evident in our current accident year loss ratio for the 2018 year which, while elevated at 94.3%, was significantly improved from the 169.1% achieved for the full year in 2017.  Our 2018 portfolio benefited from increased rates, better balance and improved retrocessional protection.”

Commenting on the recent January reinsurance renewals the company said that it has entered into contracts with expected premiums of $15.1 million, down from $27.8 million in January 2018.

The reinsurer said that it saw rates increase by approximately 1% on a risk adjusted basis across the renewed portfolio, while the  decline in premiums was driven by lower available collateral and also the non renewals of underperforming accounts.

As of January 1st 2019 the Blue Capital Re portfolio is made up of 27.7% first event reinsurance covers, 71.3% catastrophe quota shares and the remainder in support of second and subsequent event coverages.

Blue Capital Re may find further opportunities to increase the size of its portfolio over the first-half of 2019, with around $16 million of collateral expected to be released from expired contracts it had in-force at 1/1. Depending on the attractiveness of opportunities, the reinsurer said it could deploy this in underwriting or look to capital management activities instead.

“Looking forward, market conditions remain competitive,” McGuire said. “While loss exposed contracts saw some pricing increases, the January renewals were relatively flat overall.  As a result, we non-renewed several underperforming contracts and focused our capital deployment on quota share contracts which have historically generated better returns with lower volatility.

“We are closely monitoring market conditions for the upcoming April and June renewal periods where opportunities could emerge as more loss exposed contracts will be up for renewal during those periods.

” Lastly, we are cognizant of the current discount in the valuation of our stock and will be considering appropriate measures, including the potential commencement of a share repurchase program under the Company’s existing 500,000 share authorization.”

Given its catastrophe focus Blue Capital Re was hit particularly hard over the last two years, as many ILS strategies were, but the firm is taking efforts to better insulate itself against these kinds of aggregations of loss events and hopes this will lower the volatility in its results going forwards.

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