Blue Capital: Low Risk, High Yield

03/20/2015 7:00 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Our research has unearthed a quality insurer with a 9% yield. Most investors have no idea this insurer exists. Few brokerages follow it. Its market cap—$150 million—ensures it flies under the radar, notes Ian Wyatt, editor of High Yield Wealth

If you are a serious income investor, Bermuda-based Blue Capital Reinsurance Holdings Ltd. (BCRH) belongs on your radar. 

This isn't your typical insurer. It doesn't underwrite or sell insurance for the general public. Blue Capital is a reinsurer.  Reinsurance is insurance purchased by insurers from other insurers to limit the total loss an insurer would experience should a disaster occur.

Blue Capital focuses on reinsuring natural catastrophic events, namely windstorms, hurricanes, and earthquakes. Its exposure is well diversified across geography, catastrophic events, and insurers.

Blue Capital Management is a wholly-owned subsidiary of Montpelier Re Holdings Ltd. (MRH), which provides insurance expertise. Montpelier has developed accurate historical data and risk models spanning over a decade. Montpelier's expertise ensures Blue Capital maintains high underwriting standards.  

Nearly all insurers and reinsurers invest their premiums in a portfolio of fixed income and equity investments. Such portfolios entail a number of risks, such as interest rate, credit, and market.

Blue Capital, in contrast, backs its policies with cash and short-term US Treasury securities in the equivalent amount of its maximum liability. This approach insulates the company from the market risk that virtually all other insurers are exposed to.
Blue Capital exists to pay 90% of cash earnings as dividends, which it does. Currently, three of the four quarterly dividends are set at $0.30 per share.

The fourth quarterly dividend is variable; the most recent was set at $0.66 per share. In total, Blue Capital paid $1.56 per share in dividends; hence, the 9% yield.

Reinsurance yields correlate positively with Treasury yields. If short-term interest rates finally move higher this year, there is potential for an even larger payout with the next variable quarterly payout.  At a minimum, we expect another $1.56 annual dividend this year. 

At the end of the 2014, Blue Capital's book value per share was $19.77. This means that investors are able to acquire the stock. The 13% discount is significant, and even irrational, given that the majority of Blue Capital's book value is held in cash. 

Blue Capital's risk lies solely with nature. Its shares could move lower on a major storm, but not on a major market selloff.  This means Blue Capital is uncorrelated with the investments in most investors' portfolios.

Blue Capital not only provides high-yield income, it serves as portfolio ballast should the stock market turn volatile. 

One caveat is liquidity. There are only 8.8 million shares outstanding. Trading volume is low; average daily volume is only 15,000 shares, so you'll need to pay attention to bid-ask spreads.

When liquidity is low, consider using a limit order. Liquidity might be an inconvenience, but in our opinion it's a small price to pay for such a conservatively managed high-yield income investment.

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