Back in the Black with Blue Capital

04/12/2018 5:00 am EST

Focus: FINANCIALS

Stephen Mauzy

Income-Investing Specialist, Wyatt Investment Research

After suffering losses due to hurricanes Harvey, Irma, and Maria, and to earthquakes in Mexico, Blue Capital Reinsurance Holdings (BCRH) resumed paying its quarterly dividend after skipping the first-quarter payment, explains Steve Mauzy, editor of High Yield Wealth.

Blue Capital declared a $0.30-per-share second-quarter dividend last week. The dividend will be paid on April 13. The ex-dividend date is March 28. Investors were surprised, and pleasantly so. Blue Capital’s share price popped $1.25 when the dividend was declared on Friday. 

The future looks encouraging. Blue Capital management said that it expects pricing to improve for underwriting catastrophe insurance. Insurers should reap more premiums for assuming the same level of risk.

So far, so good on expectations: Management reports that affected business benefited from renewing rate increases of 15%-to-20%, while non-loss affected agreements benefited from rate increases of 3%-to-5% compared with 2017.

Better pricing, in turn, should lead to a recovery in book value, which was clobbered in the fourth quarter. Blue Capital reported fully converted book share of $14.48 at December. Book value for year-end 2017 was 30% lower compared with year-end 2016.

But that’s the past. In the absence of another year of multiple major natural disasters, Blue Capital shares are poised to rebound toward the $20. That’s 60% higher than the market price. 

We think 60% is achievable. We view Blue Capital as a solid value at its depressed price. Blue Capital shares trade near an all-time low.

We like the business. Blue Capital is more conservative than most reinsurers. It writes coverage only to the level of cash it has on hand. It holds the premiums in short-term U.S. Treasury securities, which eliminates market risk.

Blue Capital also has deep-pocket backers. It’s a subsidiary of Endurance Specialty Holdings Ltd. (ENH). Overall, the reward is worth risk, so the risk is worth taking. We view Blue Capital Reinsurance Holdings as one of our more enticing “buy” recommendations. 

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