Investment Performance of P. L. Insurers' Common Stock Portfolios: Comment and Authors' Reply

Abstract

In a recent issue of this Journal, Professors Trieschmann and Monroe (T-M) examined the investment performance of the common stock portfolios of both stock and mutual property-liability insurance companies.' In particular, they compared the performance of those portfolios with the performance of open-end investment companies over the period 1951-1968. They found (1) that investment companies earned significantly higher rates of return; (2) that average risk levels were higher for investment companies; (3) that investment companies did not, therefore, earn significantly higher risk-adjusted returns than did the property-liability company portfolios; and (4) that stock company portfolios did achieve significantly higher risk-adjusted returns than mutual companies. In view of these findings, T-M assert there is no basis for concluding that the investment performance of P. L. firms is inferior to that of investment companies.2 The validity of this assertion is, however, dependent upon the validity of the measure of risk-adjusted return used by T-M in their analysis. Unfortunately, recent empirical evidence indicates that the measure used is a seriously biased estimate of performance with the magnitude of the bias related to portfolio risk, 3 and, therefore, it raises doubts about the conclusions set forth by T-M. The purpose of this note is to re-examine the comparative performance of the property-liability company portfolios, using a more satisfactory method of measuring performance.4