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Insurers Beat Other Industries on Shareholder Value. Can It Last?

Global Industry Outperformed on Total Shareholder Return from 2012 through 2016, but Insurers Need to Emphasize Fundamentals and Financials Going Forward, Argues New BCG Report 

BOSTON—The global insurance sector created more value for shareholders over the past five years (from January 2012 through December 2016) than did other industries, returning 18.5% a year to shareholders, compared with a median of 16.2% for the 2,400 companies in the BCG 2017 Value Creators database. Top-quartile insurers had a median total shareholder return (TSR) of 25.3% over the period. But a report released today by The Boston Consulting Group (BCG), The 2017 Insurance Value Creators Report: A CEO’s Guide to Building Value, argues that the strategies employed by leading insurers may be less useful in the future. 

For many of the industry’s top performers, payout has expanded faster than the underlying fundamentals, and these dividend increases have played a big role in expanding valuation multiples. The value that investors have placed on increased payout has accounted for as much as 80% of the valuation multiple expansion and 65% of total returns for some players. These companies also divested high-cost, lower-return units and cut expenses, while costs at other companies rose.

In contrast, bottom-quartile insurers, which did not make many of the same financial moves, saw their price-to-book multiples shrink over the period. For the industry as a whole, multiples also trailed the broader market. 

“While there are many individual stories and underlying dynamics, capital allocation has played a meaningful—and sometimes dominant—role in the winners’ success,” said BCG senior partner Pia Tischhauser, global leader of BCG’s Insurance practice and report coauthor. “Many companies can still emulate the playbook of recent winners with portfolio restructuring and efficiency moves. Others need a new game plan. Going forward, industry leaders that want to deliver a new era of value creation will have to evolve their playbook and refocus their efforts on growth.”

BCG’s analysis of insurers shows that over a ten-year time frame, almost all TSR for top-quartile value creators comes from growth. However, insurers face the tough headwinds of market maturity, product commoditization, digital disruption, and changing customer behaviors.

In addition, each industry segment faces its own challenges. The property and casualty business is looking at major long-term disruption. Sales of life insurance policies and annuities have been essentially flat for more than a decade. Investment income has become a critical mainstay, yet that income stream is weakening, because low-risk investment yields remain depressed and central banks continue to drain the bond markets. The outlook for the commercial and reinsurance markets is potentially exciting. The rise of massive new industries and large category risks, including climate change, artificial intelligence, autonomous vehicles, and cyber-related risks, are big areas of opportunity. 

A few fortunate companies have viable avenues for value-creating growth because they have positions in fast-growing markets or they moved quickly into growing market segments. For most, however, the way forward will not be so clear cut. These companies will need to make tough decisions about where their opportunities lie, and they will very likely need to transform their businesses in order to achieve them.

Erick Wick, a BCG senior partner and report coauthor, said “There are two key questions: Can those players whose performance has relied heavily on a combination of rising payout, portfolio restructuring, and cost cutting pivot to create superior value the old-fashioned way—through growth, innovation, and improvement in the core business? And for those that have not yet played the cards of capital allocation and cost reduction, how long will they maintain the goodwill of their investors and boards of directors before a more activist approach is thrust upon them?” 

In a tough environment, even small changes in the trajectory of profitable growth can create substantial value. All insurers can benefit from a TSR-type analysis to take a hard look at where they stand today on the market maturity curve and with respect to their current positions and advantages in their lines of business, segments, and regions. Capital requirements and regulatory changes imposed in the wake of the financial crisis mean size and global scale no longer confer the advantages they once did. Scale in individual markets and segments is much more important.

A copy of the report can be downloaded here.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

ABOUT THE BOSTON CONSULTING GROUP

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with more than 90 offices in 50 countries.

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