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..But short-tail writers give back amid headwinds

Bermuda's cat specialists responded to market conditions by returning more capital to shareholders in Q1

In contrast to their Bermuda neighbours with larger insurance/specialty operations, the island's short-tail specialists were less circumspect about returning excess capital to their shareholders in the first quarter.

Across the four members of our short-tail peer group (Lancashire, Montpelier Re, RenaissanceRe, Validus) total share repurchases leapt by 150 percent to $545mn in Q1 2014 compared to the prior-year quarter.

Short-tail buybacks

This follows a build-up of surplus capital from the strong earnings generated in 2013, aided by a historically "normal" year for natural catastrophe losses.

However, as property cat reinsurance books begin to shrink in response to the deteriorating rating environment, and with competitive pressures spreading to other lines of business, opportunities to deploy capital are becoming limited.

As a result, short-tail carriers have increased efforts to return capital to shareholders in order to deflate their balance sheets and create value.

Return, return, return

"Our strategy has always been to deploy our capital holding where we believe we are appropriately paid for the risk," said Validus CEO Ed Noonan.

"As the pool of attractively priced risks contracts, we have reduced our writings," he continued.

In addition, he said that the company's willingness to carry risk on its balance sheet had diminished due to the decline in catastrophe rates.

Combined with the opportunistic purchase of reinsurance and retrocession cover, this has led to a significant decrease in the carrier's probable maximum losses (PMLs).

As a result, Noonan said that the company "right-sized its capital to the opportunity at hand" with a 183.2 percent year-on-year boost in its Q1 share buybacks to $197mn, equating to 1.35x Validus' Q1 operating income.

The firm said it was focused on completing the $500mn share repurchase authorisation it announced in February, of which around 60 percent remains.

RenaissanceRe also bolstered its repurchasing appetite in Q1 2014 as share buybacks climbed to $277mn, a 148.9 percent increase from the prior-year quarter. This meant that the reinsurer returned more than double its Q1 operating income to investors through repurchases alone.

"During the quarter, we took advantage of what we believed were attractive valuations for our stock to address some of the excess capital through share repurchases," said CFO Jeff Kelly, adding that company expected to remain active in this respect if the upcoming wind season is tame.

Although the reinsurer currently trades at the highest price-to-book multiple among its peers at 1.25x, Kelly said there were a few instances when over 1 million shares were trading a day, which made the firm's share price particularly compelling.

At its rival Montpelier Re, share repurchases reached $70mn in Q1 2014 - nearly double Q1 2013 and approximately equal to the reinsurer's reported first quarter operating income.

Although the firm's share price is quickly approaching book value - highlighted by a price-to-book multiple of 0.98x - president and CEO Chris Harris cited a couple of headwinds that could lead the company to consider further share repurchases.

Short tail capital return

For example, Harris highlighted the reinsurer's risk position, stating that the "PML to equity ratio is certainly lower than it was last summer and lower than what it was at the beginning of last year".

Furthermore, he warned that while there were "some good opportunities" embedded in the current pricing environment, these were going to be "hard to find".

"We still feel at current valuations we're comfortable with the capital management plans we have in place," Harris concluded.

Dividends dwindle

Meanwhile, London-listed short-tail specialist Lancashire continued its tradition of using dividends as its preferred mechanism of returning capital shareholders, with zero share buybacks for the fourth year in a row.

However, first quarter dividend payments declined by a substantial 71.4 percent year-on-year to $63mn.

This comes as Lancashire slashed its 2013 special dividend by two thirds to $0.65 per common share, compared to the $1.95 per share declared for 2012.

Nevertheless, the (re)insurer still managed to return the equivalent of its Q1 operating income to shareholders.

Looking forward, group CFO Elaine Whelan said the company would concentrate on capital repatriation rather than writing more business at a time when intense competition is weighing on rates and profit margins.

"With no indication of any change in trading conditions, it is likely that we will return a substantial portion of our earnings later in the year," she said, adding the firm would "continue to monitor market developments".

"Should conditions change we will clearly put any excess capital to work. While we do not currently anticipate any need to raise additional capital, we are ready to do so if the circumstances merit," Whelan added.

Despite the surfeit of capital, paucity of cat losses and increasing pressure on pricing, Bermudian (re)insurers were cautious in returning capital to shareholders during the first quarter of 2014 while cat specialists responded to market conditions by returning more capital to shareholders in Q1.

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