Blue Capital Re still feeling Irma, but portfolio has higher return potential

Blue Capital Reinsurance Holdings Ltd., a unit of Sompo International Holdings Ltd., continued to feel the effects of hurricane Irma losses in Q2, but anticipates its underwritten portfolio producing a 100 basis point higher rate-on-line thanks to price improvements.

New York stock exchange listed fully collateralized reinsurer Blue Capital Re reported net income of $2.5 million for the second quarter of 2018 and $3 million for the first six months of the year. That compares to $4.6 million for Q2 2017 and $8.7 million for the first-half of last year, as this year’s result has been dented thanks to the losses of 2017.

Also as a result of the impacts of last year’s hurricanes and catastrophe losses, Blue Capital Re reported that it underwrote a smaller portfolio in Q2 of $7.4 million of premiums and $19.9 million during the first-half. This is down by $4.7 million and $9.2 million respectively over the prior year periods. 

The smaller portfolio underwritten in 2018 is due to the reinsurer having a smaller capital base, due to last year’s losses, and as it made greater cessions to third-party reinsurers, although this was all partially offset by price increases achieved at January and June renewal seasons.

Hurricane Irma’s impact is most evident and Blue Capital Re reported an elevated combined ratio, due to higher loss and loss adjustment expense ratios.

“The increase in the current quarter’s loss and loss adjustment expenses were driven by an increase in estimated losses related to Hurricane Irma which made landfall in Florida in September 2017,” the company said.

Michael J. McGuire, Chairman and CEO of the company, commented on the second-quarter results, “While the second quarter and year to date results have been impacted by an increase in estimated losses related to Hurricane Irma, the Company generated an attractive combined ratio of 73.5% in the quarter and successfully deployed capital during the mid year renewal period. During the June 1st renewals this year, Blue Capital was able to achieve an overall rate increase of 4.5% on its renewed portfolio. The mid-year renewal period was characterized by an abundance of capital and strong appetite for Florida business. Early renewals achieved higher rate increases than those completed later in the period as there was an increasing urgency from a number of markets to deploy capital as the renewals progressed.

“The market improvements experienced so far during 2018 coupled with our strategic alignment with Sompo International Holdings Ltd., have enabled us to construct an improved portfolio year over year with increased expected returns and a lower risk profile.”

Blue Capital Re has underwritten a portfolio of risk with significantly higher profit potential in 2018 so far.

The company said that while its reduced capital base, due to the losses of 2017, meant it underwrote indemnity reinsurance contracts with expected total annual premiums of $25.6 million, down by $11.2 million from a year ago, the resulting portfolio is expected to produce a net rate-on-line of 21.1%, which is up by 100 basis points compared to the prior year.

That’s a significant uplift and if the market remains relatively free of major losses the investors backing Blue Capital Re should benefit from earnings growth over the period.

Price increases achieved at the renewals are driving the higher return potential of the portfolio, with average risk adjusted prices having risen by 12% during the January renewals and 4.5% during the June renewals, Blue Capital Re said.

As of June 1st, the portfolio was made up of roughly 93.7% of first event excess of loss reinsurance contracts, with the rest being subsequent event excess of loss reinsurance contracts. 

Blue Capital Re has also spent time tailoring its portfolio during the period to reduce its exposure, resulting in the non-renewal of aggregate excess of loss and Industry Loss Warranty contracts because the firm said, “The risk reward metrics were not as attractive for these types of contracts.”

Given the relationship with Sompo International, Blue Capital Management, the ILS manager that looks after Blue Capital Re and the other Blue Capital vehicles, has access to many transactions from which it can take small shares.

This gives it the benefit of greater diversification that some ILS strategies can manage and Blue Capital Re’s current portfolio is now made up of more than 1,400 underlying positions.

So greater return potential, a broadly diverse portfolio and a listed strategy that provides for more chances of liquidity for investors.

As the impacts of 2017 losses tail off for strategies like Blue Capital Re, it’s going to be interesting to see how the higher pricing achieved flows through into enhanced returns.