U.S. Insurance: Does management think like an owner? A homily regarding dilutive share buybacks

Research evidence excerpt

U.S. Insurance: Does management think like an owner? A homily regarding dilutive share buybacks

aid. It is understandable that a decision ACGL: Arch Capital

to do EPS-accretive/capital-destructive buybacks is chosen instead. WRB: Berkley

CB: Chubb Ltd

… making it hard to do the “right thing” EG: Everest Group Ltd

PGR: Progressive CorpCompanies should execute buybacks when 1) the company’s multi-year earnings per

RNR: RenaissanceReshare growth outlook is comfortably so much better than that of the market’s AND

HIG: The Hartfordpeers’ (i.e. “our stock is significantly more undervalued than giving investors the

TRV: Travelers Cosoptionality to choose for themselves”), 2) a return on invested capital from buybacks can

be framed as positive over a reasonable timespan and 3) that return on invested

(buyback) capital is greater than re-deployment into the business. In regards to the first

(and probably most important) requirement, only two underwriters in our coverage

universe consistently demonstrated the ability to compound earnings well in excess of

the market: Arch Capital and Progressive. Yet, despite a history of best-in-class

performance/capital allocation, both have implied in their capital return strategies over

the past couple years that buybacks were too expensive (though both have recently

pivoted to repurchase activity following devaluations in their respective share prices).

Some buybacks remain powerful; others arguably costly

Everest is currently repurchasing its shares at a discount to book, while AIG and RenRe

trade at thin premiums to book such that the time horizon to turn dilution to accretion is

a short one. Arch’s buyback at 1.4-1.5x can work in time, but with less efficacy than