Mr. Paisan: Clearly the low light was the overall market, the fear factor in the market for anything financial, which includes property-casualty and, of course, the property-casualty space obviously has investments in a lot of the troubled assets that were out there, but significantly less than most other financial institutions. So I think the thing that troubles me the most is the fact that investors have just painted the property-casualty business with the same brush as all other financials even though they perhaps shouldn't be. But the overall fear factor in the market, coupled with the fact that the property-casualty space has had a significant amount of write-downs, has adversely affected the sector in general. So the industry is not immune to the overall problems in the financial markets. The property-casualty sector had, at least through the third quarter, about $50 billion worth of write-downs and probably will have another $20 billion or $30 billion worth of write-downs in the fourth quarter. So the investment side of the equation was, and probably will continue to be, an issue. Usually it's the liability side that freaks investors out, but in 2008, it was the asset side and that happens once every 10 or 20 years. In fact, the last time the industry experienced something similar to this was in the mid- 1970s.
TWST: How bad was the industry exposure to the toxic assets that have been
floating around?
Mr. Paisan: When you look at what the exposure was and how bad it was, you have
to put it in perspective. Relative to other financials, the exposure was quite
mild. Put them against the banks, the broker-dealers or the life insurance
companies, it's much more benign, which is a good thing in that the average
credit quality of the property-casualty portfolio is typically better. On the
other hand, they were heavily invested in some of the toxic assets, such as
commercial mortgages and residential mortgages and other credit-related assets.
So just like the rest of the financial services sector, the p&c companies have
had their exposures.
The good news is the industry's exposure was a lot less than other financial
institutions, but on an absolute basis, their exposure was enough that we're
talking about, at the end of 2008, perhaps close to $80 billion worth of write-
downs on, call it, $600 billion worth of capital. So that's a significant chunk
of capital being taken out in a very, very short period of time. That $80
billion does not include the additional roughly $40 billion in catastrophe
losses in 2008. Of course, therein lies the opportunity for investors in 2009
and 2010 as the supply/demand dynamics shifted more favorably.
Tickers included in this excerpt: AIG, CB, TRV, ACE, ACGL, PRE, XL, HIG
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