Investment Performance of P-L Insurers' Common Stock Portfolios

Abstract

The purpose of this study was to compare the performance of property-liability insurance company common stock portfolios with the performance of open-end investment companies. In addition, the portfolio performance of the property-liability stock companies was compared with that of mutual firms. Rates of return for the investment companies were found to be significantly greater than that for either the stock or mutual insurance companies. However, average risk levels were also higher for investment companies, and based on risk-adjusted returns no significant differences were found between either stock or mutual companies and the investment companies. Within the property-liability industry the performance of stock company portfolios was significantly better than that of mutual company portfolios. Based on tests between size and return, no significant correlation was found between portfolio size and profitability. This result supports findings of earlier studies on life company portfolios by Gentry and Pike. Insurance has been defined as an activity involving prediction of losses to be suffered by any of two or more entities, collection of funds from all participating entities, and payment of all or part of such collected funds to entities suffering losses stipulated as being subject to the insurance. 1 This paper is concerned with the management of the collected funds before the funds are redistributed to those individuals or firms that suffer insured losses. More specifically this study is a comparative analysis of the portfolio performance of stock property-liability (P-L) James S. Trieschmann, D.B.A., is Assistant Professor of Finance at the University of Missouri -Columbia. Robert J. Monroe, D.B.A., is Assistant Professor of Finance at the University of MissouriColumbia. This paper was submitted in October, 1971. 1 Long, John D., Risk and Insurance Theory, Property and Liability Insurance Handbook, John D. Long and Davis W. Gregg, editors. Homewood, Illinois: Richard D. Irwin, Inc., (1966), p. 28. companies, mutual property-liability companies, and investment companies. The period under observation for this study is from 1951 to 1968. In addition, tests are conducted to determine if there is any relationship between the size of a portfolio and the profitability of that portfolio. Also, two measures of profitability are tested to determine whether different ranking distributions are created.