How Does the Property-CasualtyIndustry Compare?

Gary K. RansomFox-Pitt, Kelton

May 19, 2003May 19, 2003

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Comparing Returns on Equity & Variation in ROEs

Data Source: Standard & Poor’s Operating ROEs

63 industry classes (including property-casualty insurance)

Reflects publicly traded companies

ROE captures some, but not all, the characteristics important to investors (e.g. growth)

Data has some survivor bias

ROE is a measure that can be compared across industries.

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Standard Deviation of ROEs

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PC Insurance 9.1%

Personal Products

Tobacco

63 Industries: ROE vs. Standard Deviation of ROE (1990-2002)

Property-casualty is at weaker end of the spectrum.

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Average Industry ROE 1990-2002

AverageROE

1 Personal Products 40.8%2 Tobacco 37.8%3 Pharmaceuticals 28.9%

48 Property-Casualty Insurance 9.1%

61 Wireless Telecom -18.0%62 Internet Software Services -36.8%63 Transportation Infrastructure -205.4%

Property-casualty is at the bottom of the third quartile.

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Standard Deviation of ROE 1990-2002

StandardAverage Dev. of

ROE ROE

1 Commercial Services/Supplies 13.8% 1.1%2 Electric Utilities 11.8% 1.3%3 Water Utilities 9.7% 1.3%

23 Property-Casualty Insurance 9.1% 2.7%

61 Internet Software & Services -36.8% 29.3%62 Airlines -12.6% 51.7%63 Transportation Infrastructure -205.4% 653.0%

PC has less variation than most—some smoothing of earnings?

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Industry Coefficient of Variation 1990-2002

CoefficientAverage of

ROE Variation*

1 Pharmaceuticals 28.9% 7.3%2 Commercial Services/Supplies 13.8% 7.7%3 Insurance Brokers 18.0% 7.3%

39 Property-Casualty Insurance 9.1% 29.4%

55 Metals & Mining 5.1% 121.3%56 Media 2.6% 171.1%57 Communications Equipment 6.2% 235.5%

* Negative coefficients excluded

On this measure, property-casualty is still in the third quartile.

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50 Industries: ROE vs. Standard Deviation of ROE (1973-1990)

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Standard Deviation of ROEs

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PC Insurance 11.2%

Cosmetics

Tobacco

Property-casualty was similarly weak in prior decades.

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Average Return on Equity 1973-1990

AverageROE

1 Cosmetics 23.5%2 Beverages 22.5%3 Drugs 22.2%

34 Property-Casualty Insurance 11.2%

48 Machine Tools 5.1%49 Airlines 4.4%50 Steel 1.5%

PC in roughly the same position. Top industries are mostly the same ones.

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Standard Deviation of ROE 1973-1990

Average StandardROE Deviation

1 Telephone 12.2% 1.6%2 Life Insurance 11.7% 1.6%3 Restaurants 18.8% 1.9%

24 Property-Casualty Insurance 11.2% 5.5%

48 Oil Equipment/Service 12.5% 12.5%49 Steel 1.5% 12.5%50 Miscellaneous Metals 8.8% 15.8%

Life insurance shows up near the top.

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ROE Coefficient of Variation 1973-2002

CoefficientAverage of

ROE Variation

1 Restaurants 18.8% 10.1%2 Telephone 12.2% 12.7%3 Electrical Equipment 16.6% 13.3%

30 Property-Casualty Insurance 11.2% 48.9%

48 Airlines 4.4% 185.3%49 Machine Tools 5.1% 193.5%50 Steel 1.5% 841.0%

Again, property-casualty is in the third quartile.

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S&P 500 Property-Casualty Insurance Index Relative to S&P 500

Yet, property-casualty stocks only modestly underperformed the market.

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Final Thoughts

Property-casualty insurance is at best a mediocre business

There are many investments better than an average insurance company

One characteristic that makes the industry interesting is the wide variation in performance of individual insurers. Some are consistent outperformers.