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

Stock share buy-backs are a well accepted practice for improving shareholder value, but investors and insurers may not benefit in the property and casualty insurance industry, according to an analyst's note.

In a commentary on the p&c industry titled "[Excess Capital Conundrum] A Brief Homily Against Share Repurchases," Deutsche Bank Securities Inc.'s Joshua Shanker wrote this week that the industry was spared the credit disruptions other financial services companies experienced during the 2008-2009 credit crisis.

As a result, Mr. Shanker said there is now a "perceived excess equity" that is being used to return "a significant amount of capital."

He said, "While investors applaud the initiative, we question the wisdom of buying back stock in a period of low earnings visibility in an industry that typically recapitalizes itself at its bottom."

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

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

Today, many p&c insurers are trading below book value and repurchases "have proven to be modestly accretive to stated book value," pushing back on the analyst's skepticism. However, his research suggests that aggressive buy-back practice is not improving the value of stocks for p&c companies, Mr. Shanker said, but there is a risk that stock prices could fall if the buy-backs cease.

He said there is a "high probability that many companies are misstating their reserve positions and that p&c insurers should be 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 conservative approach available to us."

He noted that insurers' downside risk for investors is natural disasters, such as hurricanes and earthquakes, "as well as prolonged earnings erosion from risking loss and inflation trades."

On the upside for insurers, if bonds continue to rally, that will cause BVPS to inflate "even if those gains are never realized."

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Share Buy-Backs May Not Benefit Shareholders Or Insurers

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