Underwriting, Investing and Value: Evidence from Simulation and from Market Data

Abstract

This study draws on established literature to frame the hypotheses that a property‐casualty insurer generates value from its underwriting operations. The study relies bothon results from a multi‐period simulation of an insurance firm and on results from regressions using two panels of data on publicly traded property‐casualty insurers. The study’s results suggest a positive relation between underwriting performance and value regardless of the period of analysis. When investing performance is scaled by the risk‐free rate, its relation to value is neutral or negative, depending on the period of analysis. An explanation for the study’s findings is that property‐casualty insurance firms have a comparative advantage in underwriting. By comparison, regulatory and operational constraints prevent the investing operations of these insurers to replicate benefits like those associated with levered investment trusts. An unexpected finding is that the ability of a property‐casualty insurer to generate revenue amplifies the impact of underwriting performance on value. The study concludes with a discussion of the strategic implication of its results.