IERM Comment: The buyback dilemma

Published in: Risk, Risk management, Capital, Corporate strategy, Capital management, UK, US - Canada - Bermuda

Companies: Lancashire, Travelers, Ace

Dear friend,

It's a lovely dilemma to have as a company. You're sitting on a pile of money and you're not quite sure what to do with it. Should you raise dividends, use cash to fund those acquisitions you've had your eye on for a while or invest monies in the business instead?

Actually, for most insurers of late it seems the answer is fairly clear: engage in share buybacks.

Interim results have only just started to trickle in, but already a pattern has been emerging. Leading the charge has been US insurer Travelers, which returned some $1bn in capital to shareholders in the second quarter. This included $876m of share repurchases, despite posting a reduced pre-tax profit for the period of $683. Indeed year-to-date total capital returned to shareholders at the insurer has been some $1.95bn.

Ace bought back $237mn of its shares in the quarter, taking the total repurchased under its November 2013 authorisation to $699mn, while Lancashire Holdings remains committed to returning excess capital to shareholders despite posting reduced pre-tax profits for the first six months of the year of $98.9m

Great news for shareholders, of course, and reward is the other side of the risk coin. But I'm a little nervous about the timing of these buybacks, coming as they do just as the industry is about to enter a crucial period, with the peak of the US Atlantic hurricane season still to come. The market hasn't had to contend with a major US landfall in the Gulf of Mexico region for some time, but if it does it can only blame itself if it needs to go on a potentially expensive capital-raising exercise come the autumn.

Marcus Alcock,

Editor, InsuranceERM