Earnings Hits Drive 30 Percent Differential in Insurer Price-to-Book Value: Aon Re Study
16 Aprile 2008 - 10:15PM
PR Newswire (US)
Study shows value of effective enterprise risk management CHICAGO,
April 16 /PRNewswire-FirstCall/ -- Aon Re Global, a unit of Aon
Corporation (NYSE:AOC), announced the release of its Price-to-Book
study, which quantifies a more than 30 percent valuation
differential that can exist for companies producing consistent
quarterly earnings over those companies with more volatile
earnings. (Logo:
http://www.newscom.com/cgi-bin/prnh/20041215/CGW049LOGO) Insurance
company stocks show a strong positive relationship between their
prospective return on equity (ROE) and price-to-book multiple.
Furthermore, the data shows this relationship is far steeper for a
company that has produced a stable stream of earnings than for one
which has had one or more earnings hits. The study found the
earnings-hit break-point to be a quarterly loss of 150 percent or
more of average quarterly profit. For a company projecting a 15
percent ROE, the Aon Re Global analysis shows a price-to-book
valuation differential of 30 percent between companies with no
earnings hits since 1999 and those that have had one or more hits.
The study underscores the shareholder value that can be created
through consistently and successfully managing to a prudent level
of enterprise risk. Examples of earnings hits since 1999 include:
-- Sept. 11, 2001 World Trade Center losses; -- reserve development
from the 1998-2001 soft market period; -- reserve development from
asbestos losses; -- 2004 and 2005 hurricanes; -- investment losses
from the bear market beginning in 2000 and the dot-com bust. The
Aon Re study found that companies with no earnings hits since 1999
saw their price-to-book ratio increase by 8.5 points for each 1
point increase in prospective return on equity, whereas companies
with one or more earnings hits since 1999 saw their price-to-book
ratio increase by 3.3. points for each 1 point increase in
prospective return on equity. For a company projecting a 15 percent
return on equity, this translates into a price-to-book valuation
differential of 1.3 with hits versus 1.7 without hits, a 30 percent
difference. "Insurance company stocks show a strong positive
relationship between their prospective return on equity and
price-to-book multiple," said Stephen Mildenhall, executive vice
president and chief actuary at Aon Re Services. "This relationship
is far steeper for a company that has produced a stable stream of
earnings than for one which has had one or more earnings hits. Our
study clearly shows the value in effective enterprise risk
management and risk transfer programs." Stock Price Reaction to
Hurricanes Katrina, Rita & Wilma Aon Re Global has also
performed an analysis of the stock price reaction to reported
losses from hurricanes Katrina, Rita and Wilma in 2005. The Katrina
study found that post-event stock price declines were predicted
best by Katrina-specific losses, rather than by losses from
Katrina, Rita and Wilma combined, indicating a greater sensitivity
to a single large loss than to an aggregation of smaller events.
The threshold for primary companies with a loss of 10 percent or
less of shareholder value was a net, after-tax event loss of 3-6
percent of equity or 21-34 percent of estimated current year
earnings. For a typical company, a Katrina event loss in this range
would not generate an earnings hit. The Price-to-Book regression
study shows that investors are aware that insurance company results
will be subject to some volatility, but that they are very averse
to extreme, book-value destroying events. For more information,
visit: http://aon.mediaroom.com/index.php?s=53&item=199. About
Aon Corporation Aon Re Global, the world's leading and most
preferred reinsurance intermediary, provides clients with
integrated capital solutions and services through a world-class
network of experts in more than 35 countries. Clients are better
able to differentiate and meet their business objectives with Aon
Re Global's best-in-class treaty and facultative reinsurance
placement services, capital markets expertise, and relevant
analytics and technical expertise, including catastrophe
management, actuarial, and rating agency counsel. Aon Re Global was
named best reinsurance broker in 2007 and 2006 by readers of
Business Insurance, in 2007 by readers of US Insurer and in 2006 by
readers of Reinsurance. Aon Corporation (NYSE:AOC) is the leading
global provider of risk management services, insurance and
reinsurance brokerage, human capital and management consulting.
Through its 36,000 colleagues worldwide, Aon readily delivers
distinctive client value via innovative and effective risk
management and workforce productivity solutions. Our
industry-leading global resources, technical expertise and industry
knowledge are delivered locally through more than 500 offices in
more than 120 countries. Aon was named the world's "best broker" by
Euromoney magazine's 2008 Insurance Survey. Aon also was ranked by
A.M. Best as the number one global insurance brokerage in 2007
based on brokerage revenues, and voted best insurance intermediary,
best reinsurance intermediary, and best employee benefits
consulting firm in 2007 by the readers of Business Insurance. For
more information on Aon, log onto http://www.aon.com/ Media
Contacts Rahsaan Johnson 312.381.2684
http://www.newscom.com/cgi-bin/prnh/20041215/CGW049LOGO
http://photoarchive.ap.org/ DATASOURCE: Aon Corporation CONTACT:
Rahsaan Johnson of Aon Corporation, +1-312-381-2684, Web site:
http://www.aon.com/
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