Good Hands Take Big Write-Down (Morningstar)

Brett Horn: Hello! I’m Brett Horn, Associate Director of Equity Research area at Morningstar. I’ll stay reported numbers this week that we’re fairly ugly. I invited Jim Ryan our—and discover all state to here to discuss with me. All state numbers and are take on the insurance in general. Thanks for joining me Jim. Jim Ryan: Thank you. Brett Horn: So, let’s get right to it. What were the numbers? What they able to collect? Jim Ryan: Well the numbers are pretty awful and most that was driven by investment right downs in the life insurance compound of the company. As you probably know illustrate his property and casualty as well as life insurance. Life insurance right down is came from instruments that they invest in and they had a rather detrimental effect on the company. Property in casualty wasn’t all that bad considering that was a second largest year for catastrophic losses for all estate. And in fact if you took out property in casualty was a very good year in property in casualty. All in all though the—even though that was pretty bad they do generate about 3 ½ billion dollars in operating cash well. The problem we’ve got is that the equity of the company was shrinking. It’s gone from 21 billion at the beginning of 2008 to 12 billion at the end of the year. So, that’s the matter of concern for us. Brett Horn: I know we’re conscious on the industry is as a whole right now but were you particularly concern about life it look likes it gets a little more some of the situation in PNC right now. Can you explain what are the differences are there? Jim Ryan: Well the main thing we look at when we compare a life versus property in casualty is the investment portfolio. And in that instance we look at two different components. Which is one would be investment leverage and the other would be the term of investment for the tail of the policy I mention help explain what that’s all about. The investment leverage is the amount of equity that the company has to the investment portfolio. So, if you’re look at those way and say, if they had 10% of equity to the investment portfolio that would be in that $10 in invest able assets versus $1 in equity for the company. Property in casualty is quite to be different, tend to be similar on average about 30%. And the reason that they’re becomes important is understand age with all the investment right downs. It doesn’t take a whole lot of investment right down to constrict the equity of a company. For example, let’s suppose that you had a 5% right down on the investment portfolio with an insurance company that would mean that there equity would drop in half. Because we go from 10% to 5%, it wouldn’t be great for the property in casualty going from 30 to 25% but still that’s a quite a bit better. The other thing that we look at is the tail of the policy. Now I mentioned the tail of the policy, that’s the time between the times that the policy is issued and when they claim might be thought to occur. For property in casualty companies that very short term, they expect that if they’re going to pay out the claim is going to come sooner within the year to issuing the policy. Life companies on the other hand they have a 20 to 25 year arisen or even longer. So, they invested instruments to have a longer duration which the market susceptible to write down sees days. The main thing though that they taken to account is, with all the write downs of financial instrument this days the effect on the life insurance company balance sheet. And share whole of there equity is much more concerning to us in for the property and casualty. Brett Horn: Now in all states, I know—we’ve been conscious on the insurance industry since really September when the markets fall apart because of those investment portfolio issues. But all stables one we thought was a relatively save pick because of the PNC business. Jim Ryan: Right. Brett Horn: So, what change? Jim Ryan: Most of the companies we cover are either life insurance or property in casualty. And it was very easy to say were property and casualty with there investment leverage being lower was a little bit safer. But what really can come out of the blue at you is just how much this right downs and the life insurance balance sheet can affect the entire company. And I that’s was headed them most in terms of our assessment of all state, the other part that catastrophic loss are something that you come to expect. It’s unusual that you had the worst and second worst years in there history within the year period but overtime it’s well manage company from property in casualties to employment so it’s so feel good about that. What really is our concern, what surprises them most was what happen in the fourth quarter of last year in terms of right down the financial instruments and investments. And that’s kind of the blind side us, we didn’t think that the right down would be getting or near the size that it was. Brett Horn: So, some rise to be we still like the company from operate to point of view we select strategy. It says really in tell the kind of market situations clears up that we would require a bigger merge to the safety until this. Jim Ryan: Right. We’ve raise star uncertainty rating on the company and that’s because they’re such a wide variety of outcomes. What can happen with company over the near term, that we just heard a little bit more caution? Brett Horn: Okay. So I’ve take a two to—from the brother point view—what about insurance as whole? How’s people view at this point? Jim Ryan: I would think that insurance as a whole should be viewed with quite a bit of uncertainty and that should be approach cautiously. While it may be true that property in casualty is a little bit better insulated from what’s happening in financial markets. There is another side to property and casualty had to worry about and that’s the effect on the consumer. This week and the all states conference call the CEO was mentioning or maybe it was the operating manager that consumer is starting cut back in the other insurance. Which means, that the raising to deductible dropping collision in certain instances. And the other part being car sales is also a big component of income for the PNC companies particularly other insurance. With those down there is also an effect on all state from that two. Brett Horn: So, they could hit on the operating side as well. Jim Ryan: They get here on the operating side and you’ve got the really look of what’s going to have and with the investment portfolio particularly life insurance over the next six months to a year. Brett Horn: Well thank you for joining me Jim. And in summary of course the insurance industry will concentrate now. I’m Brett Horn with Morningstar and thank you for joining us.