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P&C stocks outperform in Q2 as M&A fever fuels Bermudians

The average share price for the Insider 30 universe of P&C (re)insurers climbed 0.74 percent in the second quarter, outperforming the S&P 500, FTSE 100 and Stoxx Euro 600 indices.

But the performance was lacklustre compared to the first quarter of 2015, when the Insider 30 surged by 6.93 percent.

And within the composite there was a wide range of movement as Bermudians and short-tail specialists rode a wave of M&A euphoria while Lloyd's carriers and global reinsurers lagged behind.

By sub-sector, there was a reversal of fortunes compared to the first quarter of the year.

In the three months ended 31 March 2015, shares in the six companies that make up the global reinsurer segment of the Insider 30 soared by almost 15 percent on average, buoyed by strong full-year results.

In the second quarter though the same group's average share price dropped 2.7 percent - although the movement was skewed by the impact of companies going ex-dividend.

Indeed, the biggest faller across the entire the Insider 30 was Munich Re, which turned a 21.1 percent first quarter climb into a 20.7 percent decline.

The drop was partly driven by the giant German reinsurer going ex-dividend on 23 April, as it paid out a significantly increased 2014 dividend of EUR7.75 a share.

But the stock continued to fall away from a 52-week high reached just before the payout through the rest of Q2. This probably reflects broader Eurozone and "Grexit" concerns that contributed to a 4.02 percent decline in the Stoxx Euro 600 index during the quarter.

Hannover Re was the other major faller among global reinsurance stocks, with its shares down 9.22 percent in the quarter. This compared to a more modest fall of 4.75 percent at Swiss Re.

Among the sub-group the biggest riser was PartnerRe, whose stock price increased by 12.39 percent.

The surge was stoked by the ongoing battle between Italian investment vehicle Exor and Axis to win support from the Bermuda-based reinsurer's shareholders.

The stock jumped at the end of the first quarter when Exor's cash bid emerged to challenge the initial $11bn "merger of equals" agreed by the Axis and PartnerRe boards.

And it ended Q2 higher still at $128.50, despite falling back slightly from a mid-May high of $134.56.

M&A fever

M&A fever would appear to be an obvious driver of the strong performance of the Insider 30's Bermuda sub-group.

The group of six performed best across the index with an increase of 4.85 percent - roughly in line with the first quarter, when conversely the group was the worst performer.

Arch led the group as its stock climbed 8.7 percent. The company has been linked in speculation with a potential move for Axis if the Bermudian fails to secure its agreed transaction to merge with PartnerRe.

Shares in Endurance and Allied World also climbed strongly, by 7.5 percent and 7.0 percent respectively, as the markets bid up the price of stocks in mid-sized (re)insurers seen as potential predators or prey in the M&A feeding frenzy.

Shares in XL - which closed its acquisition of Catlin in the period - and Aspen traded up more modestly at 1.1 percent and 1.42 percent respectively.

The quartet of short-tail carriers in the Insider 30 composite also traded up on average in another relatively benign period for underwriters.

Montpelier ended its last quarter as an independent reinsurer before its sale to Endurance up 4.53 percent and was the best performer of the four.

Validus was close behind at up 4.49 percent, with its shares trading around 6 percent ahead for the year-to-date.

RenaissanceRe, which closed its own acquisition of compatriot Platinum Underwriters in the first quarter, ended Q2 up 1.78 percent.

But Lancashire, whose founding former CEO Richard Brindle unveiled start-up Fidelis in the second quarter, saw its stock drop in the period, closing down 1.36 percent.

The shrinking sub-sector may have been boosted towards the end of the quarter by a moderately improved position in its core property cat market.

Although rates continued to fall at the key mid-year renewals, there were key signs of slower downwards momentum that suggest an incrementally better outlook for underwriters into 2016, all other factors remaining the same.

The bloodbath in the energy sector may have been an offsetting factor for those with a specialty insurance underwriting presence, however.

The group traded up 2.36 percent, but that represented an inferior performance to Q1 when the companies returned 5.7 percent of share price appreciation on average.

Lloyd's stocks fall

The Lloyd's sub-sector - now down to four with Fairfax's takeout of Brit - saw its average share price dip by 0.81 percent in Q2, albeit the performance was ahead of the FTSE 100, which dropped by closer to 4 percent.

Prior to its de-listing in late June, Brit was actually the second-strongest performer, with a modest 0.88 percent increase in its share price.

Beazley outperformed, with its shares up 2.82 percent, but Novae and Hiscox both traded down in the period, by 0.56 percent and 1.41 percent respectively. The real laggard was Amlin, whose shares traded off 5.76 percent.

Other notable movers outside of the core Insider 30 sub-segments included Ace and Chubb, whose shares traded down 8.8 percent and 5.9 percent in the quarter respectively, likely as a result of growing pressure on US commercial insurance rates.

The stock movement for Chubb surged in the opposite direction at the start of July, however, as Ace agreed a $28.3bn deal to buy its rival carrier.

AIG resurgent

At the other end of the scale, American International Group (AIG) was the strongest performer among all the stocks, as its rehabilitation continued during an active quarter, including a significant boost from the sale of its stake in AerCap Holdings.

There was also probably an impact from the no-damages judgment in the suit bought by former CEO Hank Greenberg against the US government, which brought a factor overhanging the stock closer to an end.

Elsewhere, Argo was also a strong performer, with its stock trading up 11.1 percent in the period. The company has long been viewed as a potential M&A takeout target.

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