The analysts’ report said P/C insurers suffered from losses as high as 20 percent in their investment portfolios in 2008, but that on a price-to-book ratio many P/C insurers are trading at levels not seen since the 1970s.
Back then, interest rates were much higher, noted the analysis by Paul Newsome, a managing director, and Edward Shields, associate director, at Sandler O’Neill in Chicago.
In fact, many insurers with solid capital levels and high claims-paying ratings are trading below book value, they said. “The relationship between return-on-equity and price-to-book values is also as uncorrelated as we have ever seen it,” the two said in their report.
They also noted most investors believe the relationship between ROEs and price-to-book values has been a primary way in which insurance companies have been valued for many years.
The investment losses, the report said, stem from declines in the values of high-grade corporate bonds and in municipal bonds, in which P/C insurers are heavy investors.
Municipal bonds, the analysts said, had a very difficult fourth quarter, and that will weigh on the insurers' balance sheets. “When we last estimated the effect of investment returns on the insurers' book value, we estimated that the average bond portfolio would be down about 4.5 percent.”
Insurers with heavy equity investments would be most hard hit given what happened to equity investments during the quarter, they said, noting that equity investments have since rebounded somewhat.
The report said that many P/C insurers will not start to look at price increases until they have calculated their year-end 2008 statutory statements.
Based upon conversations they have had with a number of insurers Mr. Newsome and Mr. Shields wrote, “We think that many company managements will be surprised when they see their capital levels.”
Typically, they said, statutory annual statements are compiled by March. “We think that the rating agencies will then add additional pressure to raise prices when they criticize many insurers for having less capital than necessary to maintain current ratings,” they added.
“This should set the stage for a solidly hard market in the middle of the year,” the report said.
According to the analysis, while many insurers, particularly the large national insurers, are holding the line on insurance prices, many continue to lower prices. “We believe American International Group, many mutual insurers and many regional insurers lack pricing discipline,” the study said.