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P&C rally in Q3 generates record year-to-date share price growth

The Insider 50 recorded solid growth of 4.1 percent during the third quarter of 2019 as over three-quarters of the index’s stocks rose during the period.

Indeed, the I50 – The Insurance Insider’s index of 50 P&C (re)insurance companies – rallied by 18.6 percent during the first nine months of the year. Looking at the index’s performance in the years since the I50’s inception in 2016, growth has never been so high.

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During the first nine months of 2017, the index grew by 9.5 percent. For the same period in 2018 the I50 remained unchanged compared to the start of the year as any gains made in Q3 2018 were offset by losses made during the first two quarters of the year.

Meanwhile, valuation multiples for P&C (re)insurers across our coverage universe were mixed in Q3 2019. At a composite level, the price-to-book value multiple for the I50 increased by just 0.6 percent to 1.46x during the quarter. However, it is over 22 percent higher than the 10-year average.

As of 30 September, the I50 reached 1,185.8 index points.

Over the third quarter of this year, the I50 outperformed other major stock markets including the S&P 500 which rose by a modest 1.2 percent during the period. US stock-market returns were somewhat dampened by the ongoing fallout from the US-China trade war which has started to take its toll on the US economy.

Despite this though, the S&P 500 went up by 18.7 percent for the first nine months of the year, beating the I50 by just 0.1 percentage points.

Meanwhile, stock market performance in Europe was mixed during Q3. The Stoxx Europe 600 gained 2.2 percent while the FTSE 100 produced a dull decline of 0.2 percent over the same period.

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The risers

Within the I50, 38 companies recorded positive share-price movements and all sub-groups grew during Q3.

The cluster of insurers based in Bermuda were the best-performing sub-group as they rose by 13.2 percent on a weighted average basis.

All three of the Bermudians in the I50 featured as top-20 risers. Arch was the leader of this sub-group as its shares grew by 13.2 percent over the quarter. For the year through to the end of September, Arch’s stock price has soared by over 59 percent.

Arch has indeed been active in the M&A landscape during Q3 as it confirmed at the end of July that it would acquire Barbican from US private-equity firm Carlson Capital.

This publication previously reported that the deal had been struck at around about £140mn-£150mn ($173mn-$185mn).

Additionally, Arch Insurance North America announced in August that it had entered into a definitive agreement to purchase managing general underwriter Ventus Risk Management for an undisclosed sum.

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Elsewhere in Bermuda, shares in Axis Capital grew by 11.9 percent during the quarter. For the same period, RenaissanceRe’s stock price advanced by 8.7 percent.

However, the best performing I50 stock of the quarter was Greenlight Capital Re. Shares in the total-return reinsurer jumped by 23.7 percent during the period, albeit only offsetting the 21.9 percent loss it returned in Q2.

Caymans Islands-based Greenlight Re has come under significant pressure over the past year as a result of capital erosion. Heavy losses on the investment side of the business caused its capital levels to fall substantially last year.

However, the company announced in August that it was conducting a strategic review of its business, with Credit Suisse retained to advise. There has been some market speculation that the business is looking for a sale.

Nevertheless, according to Bloomberg, the rally in the US stock market also helped lift Greenlight Re’s main fund up by 15.2 percent in August.

The total-return sub-group in the I50 – which includes Greenlight Re, Third Point Re Watford Re – grew by 7.1 percent over the quarter solely thanks to Greenlight Re as shares in Watford Re and Third Point Re actually deteriorated over the quarter.

The next-best-performing stock in our index during Q3 was Alleghany as its shares pushed up 17.1 percent.

The fallers

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The third quarter was a relatively positive period for I50 stocks as only 11 stocks declined.

Fairfax Financial logged the largest loss of the quarter with its shares losing 9.1 percent. However, the Canadian conglomerate’s performance during the first two quarters of the year meant than it has lost just 1.1 percent during the first nine months of the year.

Elsewhere, shares in Argo suffered in Q3 as a result of unfavourable development in its international book during Q2 2019. Its shares closed down more than 3 percent in July when the company issued a profit warning noting that losses from its London, European and Bermuda operations would eat into its second-quarter results.

By the end of the third quarter, Argo’s shares were down 5.1 percent. Nevertheless, for the first nine months of the year, shares in Argo have gained 5.5 percent.

On average, all sub-groups within the I50 grew during the quarter but the cluster of brokers in the index only grew by 0.3 percent on a weighted average basis.

By the end of September, shares in the big three brokers – Willis Towers Watson, Aon and Marsh and McLennan Companies (MMC) – remained almost unchanged compared to the start of the third quarter.

Shares in Willis Towers Watson grew only 0.7 percent while shares in Aon and MMC inched up just 0.3 percent each.

Conversely, shares in fellow brokers Arthur J Gallagher were up by 2.3 percent for Q3 while shares in Brown & Brown jumped 7.7 percent.

Brown & Brown’s shares have rallied 32.7 percent during the first nine months of the year.

In fact, all five brokers in the I50 have generated strong stock growth in the range of between 23 percent and 35 percent.

Brown & Brown has delivered strong earnings this year so far, reaching organic growth of 5.2 percent in the first quarter and 3.9 percent in the second.

The intermediary has also been active in the M&A space – it acquired US agriculture agency CKP Insurance in August.

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