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Bermudians search for capital deployment in Q1…

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.

According to analysis conducted by The Insurance Insider's Data Room, the total capital repatriated by our six-strong Bermuda composite (Arch, Allied World, Aspen, Axis, Endurance, XL) slid by 21.2 percent to $571mn in Q1 2014 from the same period a year earlier.

The decline was predominantly driven by a reduction in share repurchases during the period, as group-wide buybacks fell by around a third year-on-year to $454mn despite an unusually modest quarter for loss events.

While this may seem like a large shift in activity, it should be noted that the $652mn total reported in Q1 2013 was somewhat higher than usual. This was primarily due to a pile-up of repurchases from Q4 2012 that spilt over into the quarter, as a result of restrictions put into place following loss uncertainty for Superstorm Sandy in October 2012.

However, this doesn't fully explain the reduction. For example, at Arch and Endurance buybacks were completely halted during the first quarter this year, despite moderate repurchases of $41mn and $10mn respectively in the same period of 2013.

Coupled with the lack of common dividends, Arch was the only member of its peer group to return zero capital to shareholders in Q1 2014.

Explaining this trend, CEO Dinos Iordanou said that the carrier was more interested in deploying capital into the business, "rather than how to return capital to investors".

This bullish stance follows the company's recent move into the mortgage insurance market.

"And let's just say [investors] are paying us to find the opportunities, and I am spending a lot of time and all of our people are looking at new opportunities and there are quite a few out there in the market," he added.

Although Endurance paid the equivalent of 16.1 percent of its Q1 operating income in regular dividends last quarter, CEO John Charman has made it clear that his preferred method of capital management and creating shareholder value would be M&A.

At The Insurance Insider's InsiderScope New York earlier this month, Charman suggested that at the current point in the underwriting cycle, shareholders' interests are best served by capital returns or by looking to strategically reposition businesses for changing market conditions.

But attempts in this direction have so far been unfruitful. In April, Aspen rejected a hostile takeover bid from Endurance that valued the firm at $3.2bn or $47.50 a share, claiming that the proposal was "derisory" and "ill-conceived".

Nevertheless, Aspen CEO Chris O'Kane said he would keep an "open mind" if new or revised offers materialised. In the meantime, CFO John Worth said the carrier would continue to drive shareholder value through new business prospects, seeking higher investment returns or by capital repatriation.

Aspen bought back just $31mn of ordinary shares in Q1 2014, down a considerable 85.3 percent from the prior-year quarter, when the company executed an accelerated $150mn buyback programme.

Compelling valuations

Other carriers, however, have been more active. For example, Axis was the most aggressive repurchaser in the composite with $179mn of buybacks completed during Q1 - a 36.6 percent increase on the prior-year quarter.

The Bermudian (re)insurer has recently been trading at a discount to book of 0.93x, making share repurchases a very attractive form of capital management.

Including $30mn of common dividends, this meant the firm returned a considerable 1.52x its reported Q1 operating income to investors, thus shrinking its balance sheet.

Axis CFO Joseph Henry said that although the company expects to continue actively repurchasing shares throughout the second quarter, "strategic expansion opportunities continue to progress and we remain optimistic about our prospects".

Allied World also took advantage of the weakness in its stock last quarter by significantly increasing its appetite for buybacks.

Its share repurchases climbed by 89.4 percent to $69mn in Q1 2014 - the highest amount of stock repurchased in a single quarter since Q1 2012 - equating to just over half of the firm's Q1 operating income.

The carrier also reinforced its commitment to returning capital to shareholders by approving a new $500mn share buyback authorisation, which it expects to complete over the next two years.

Despite possessing the lowest price-to-book multiple in the composite at 0.87x, XL Group curbed its Q1 buyback activity by 21.6 percent year-on-year to $175mn.

Nevertheless, CEO Mike McGavick said that share repurchases were still expected to reach $575mn-$600mn by the end of 2014.

McGavick also said there would be an additional $300mn of repurchases over the course of the year connected to the recent sale of XL's life business, adding that it had made the firm "less risky".

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