NU Online News Service, Dec. 1, 3:21 p.m. EST

Stock share buy-backs are a well accepted practice for improvingshareholder value, but investors and insurers may not benefit inthe property and casualty insurance industry, according to ananalyst's note.

In a commentary on the p&c industry titled "[Excess CapitalConundrum] A Brief Homily Against Share Repurchases," Deutsche BankSecurities Inc.'s Joshua Shanker wrote this week that the industrywas spared the credit disruptions other financial servicescompanies experienced during the 2008-2009 credit crisis.

As a result, Mr. Shanker said there is now a "perceived excessequity" that is being used to return "a significant amount ofcapital."

He said, "While investors applaud the initiative, we questionthe wisdom of buying back stock in a period of low earningsvisibility in an industry that typically recapitalizes itself atits bottom."

Mr. Shanker said that typically the practice of repurchasingshares makes sense when shares are valued on a price-to-earningsbasis. The p&c insurance industry prices its stocks onprice-to-book basis. He said the price-to-earnings basis repurchase"concentrates an investor population who can enjoy increasedproportional ownership in future earnings."

For the p&c industry, he said, earnings are likely "headeddownward, perhaps to zero."

Today, many p&c insurers are trading below book value andrepurchases "have proven to be modestly accretive to stated bookvalue," pushing back on the analyst's skepticism. However, hisresearch suggests that aggressive buy-back practice is notimproving the value of stocks for p&c companies, Mr. Shankersaid, but there is a risk that stock prices could fall if thebuy-backs cease.

He said there is a "high probability that many companies aremisstating their reserve positions and that p&c insurers shouldbe valued as a multiple of tangible book value of equity per share(BVPS) excluding accumulated other comprehensive income,particularly bond gains, which he called "the most conservativeapproach available to us."

He noted that insurers' downside risk for investors is naturaldisasters, such as hurricanes and earthquakes, "as well asprolonged earnings erosion from risking loss and inflationtrades."

On the upside for insurers, if bonds continue to rally, thatwill cause BVPS to inflate "even if those gains are neverrealized."