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Q2 wrap: investments and returns

Investment returns across the companies in our coverage universe were slightly up year-on-year in the three months to 30 June 2017, but remained at anaemic single-digit levels.

Investment returns

The strongest investment yield - calculated as Q2 net investment income relative to total cash and invested assets on an annualised basis - was at Swiss Re's P&C reinsurance division. The portfolio generated a 4.6 percent return in the second quarter. In the same period of 2016, the investment return was 2.9 percent.

The improvement was mostly driven by fixed income returns and equity investments, which nearly doubled year-on-year to $338mn and $157mn, respectively.

Elsewhere, Beazley's investment yield was 60 basis points (bps) higher than Q2 2016 at 3.8 percent for the quarter.

The London carrier noted that its result was aided by the shift from sovereign to corporate bonds, as political uncertainty in the US generated volatile markets - with narrowing credit spreads and strong rises in equity markets - while US sovereign yields remained relatively flat.

US specialty insurers American Financial Group and Argo saw their investment portfolios yield 3.8 percent in the quarter, after also benefiting from flatter bond yield curves and a strong quarter in equities and credit.

At the other end of the spectrum, Lancashire posted the lowest yield in our coverage universe - 1.5 percent - which was relatively flat year-on-year.

Bermudian (re)insurers also generated some of the lowest investment yields, with Validus, XL Catlin and Arch all below 2.0 percent and RenaissanceRe at 2.3 percent.

Axis had the strongest result among its Bermudian peers with a 2.9 percent investment return, 40 bps above the prior-year period's result, owing to a better performance in its alternative investments portfolio.

Q2 operating returns increase

Second quarter annualised operating returns on equity (RoEs) expanded year-on-year as benign catastrophe losses allowed underwriting margins to widen, while investment returns increased slightly.

In Bermuda, the aggregate second quarter operating RoE stood at 8.7 percent, 3.5 percentage points above the corresponding result last year and in line with the five-year average.

However, despite being an improvement compared to Q2 2016, operating returns this quarter were lower than any other year since 2011, when the group generated a 7.0 percent return.

One feature that stood out in the Q2 result was the unprofitability of Bermudians' insurance operations, with management bemoaning claims inflation that ran ahead of pricing.

For example, Arch's insurance book reported a loss of $4.5mn due to a deteriorating underlying claims ratio that took the segment's combined ratio to 100.9 percent.

 Operating returns
And Aspen's insurance division fell to a loss for the second consecutive quarter, of $12.8mn, due to charges for business placed into run-off, while profit in its reinsurance segment was down 8.8 percent at $26.0mn.

Over in London, Novae's first half results were in the red as it reported a net loss of £11.8mn ($15.4mn). This translated into a 7.6 percent loss on net tangible assets, as the carrier posted an underwriting loss following reserve strengthening in lines placed into run-off.

This compared unfavourably to its result from a year before, when the carrier produced a 33.9 percent return on net tangible assets (Ronta).

And Hiscox's Ronta contracted by 16.0 percentage points year-on-year to 11.4 percent as foreign exchange headwinds negatively impacted first-half profits by £30.9mn, in contrast with the prior-year period, when currency movements added £87.3mn to overall profits.

Meanwhile, RLI continued to outperform its US specialty rivals with a 12.6 percent operating RoE for the second quarter, 30 bps more year-on-year.

Markel and American Financial Group both posted operating RoEs of 11.0 percent for the second quarter. For Markel, this represented an increase of 1.7 points on the same period of 2016 and its best Q2 operating RoE since 2013.

Overall, the US specialty cohort's weighted average result rose by 40 bps to 9.6 percent and marked the fourth consecutive yearly increase for the group.


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