Although returns-on-equity for the property/casualty insurance industry are lagging in the mid-to-upper single-digit range, equity analysts expect companies they recommend with “Buy” ratings to garner returns in the mid-double-digits, according to a survey commissioned by Accenture.
The recently published survey of 68 insurance equity analysts from North America, Asia Pacific, Europe, Africa and Latin America, which was performed in March and April, revealed that the analysts expected the highest-performing global insurers to deliver an average pre-tax ROE of 14.2 percent in 2012.
Through six months, the actual average return for the p/c industry was 6.9 percent, according to figures published by ISO and the Property Casualty Insurers Association of America in October, rebounding from a 3.5 percent ROE for 2011. Nine-month 2012 figures are expected this week.
“It did surprise me, given the eurozone crisis and the volatile elections, that [the analysts’] expectations have increased,” said John Del Santo, global managing director of Accenture’s Insurance practice,” commenting on the fact that the 14.2 figure is on par with averages tallied in two prior studies, conducted in 2008 and 2010, and that half of the analysts surveyed in 2012 expect higher returns from recommended insurers in the next three years.
The analysts “continue to raise the bar” on what they expect high-performing insurers to deliver financially, Del Santo said. “I would have thought they would have had an ROE number in the 10 percent-ish range,” he said.
The survey of 68 analysts, performed by the Institutional Investor Market Research Group and published last month by Accenture, included 38 analysts who focus exclusively on p/c, Del Santo said.
Carving out just North American analysts from the group, the average expected ROE drops slightly to 13.7 percent.
“If they’re going to recommend an insurance company as an investment, they’re going to expect a fairly strong ROE and at least some growth,” Del Santo said, referring to the fact that the analysts expect average annual growth of 6.4 percent from the p/c insurance companies to which they give their “Buy” recommendations. That figure actually came down from the prior study, when the average expected growth figure was 7.5 percent.
The analysts “want to see evidence that they’re heading in the right trajectory,” Del Santo said. “Sometimes, they’ll give them a pass on strict numbers if they’re convinced that [the company is] doing the right things in terms of cost reduction, or doing the right thing in terms of new channels, new markets, new products,” he said, reading behind some of the survey numbers, which also revealed the analysts’ views on top challenges facing p/c insurers and their opinions about what insurers should focus on as they develop near-term profit and growth strategies.
“They look for what insurance companies are doing around risk management, for example,” Del Santo said, citing that as one of the broad categories that bubbled up from questions asking for more qualitative feedback.
“Does an insurer have something unique and insightful around the portfolio risks that they’re insuring? Do they have strong analytics and a unique pricing strategy around certain lines of business because they have done something with their data?” Those are also factors the analysts reward, Del Santo said.
Asked what they believe should be the most important priorities for p/c insurers, 59 percent of the analysts said “risk control,” while 29 percent said “sustainable growth.” In response to a related question—asking the analysts to select the “critical value-drivers” for insurers over the next three years”—100 percent of the analysts said “pricing strategy” was either “critical” or “important,” while 92 percent pointed to “data analysis” as a value-driver.
With respect to “pricing strategy,” 76 percent of the analysts listed it as a “critical” value-driver, while 24 percent said it was “important.” Breaking down the 92 percent who selected “data analytics,” 51 percent identified it as “critical,” while another 41 percent said it was an “important” value driver.
“In the survey we did a few years ago, there was a lot more focus on technology and operations than in this one,” Del Santo told Insurance Journal. In the latest survey, published in November, there were points made about risk management, underwriting and pricing, he said, suggesting that the prior views, which are more focused on outcomes than process—remain “buried under the feedback” of the latest survey. “To me, a lot of that implies the company has a strong handle on its data and is able to mine the data analytically.”
Asked to share his personal insights about carriers that are hitting the analysts’ growth and return targets within Accenture’s client base, Del Santo said some have done acquisitions or have grown in new markets. While monoline regional carriers might have a tough time doing that, they might command the market in a certain region for a line of business, allowing them to achieve better results, he said.
In general, Del Santo said top-performing p/c carriers Accenture he has worked with several strategy buckets:
• Some “are executing on an analytics-driven strategy, [applying] analytics to everything from the front-door [question of who] the right customers are, and whether they’re going to have a lifetime value, and then what they’re expecting and how to serve them better.”
• For others, there is a lot of focus on “operational efficiency” and expense reduction—in other words, making sure they can serve their customers and deliver their insurance products “cheaper, better and faster than the competition.”
“Those companies tend to be investing in either new or consolidated [technology] platforms— shutting down some of the noise they’ve got in their technology portfolios.”
• There’s also a set of companies that is focused on multi-channel strategies—”trying to be all things to all channels and keeping them tightly integrated under one brand or one set of brands.”
• Finally, some companies say they simply “have a value proposition for customers,” regardless of channel. There is “much more rallying around customers than we’ve seen in the past,” Del Santo said.
The analysts’ responses are in line with these carrier objectives for the most part. According to the survey, when the analysts were asked to select p/c carrier actions and capabilities that are most likely to support organic growth in the next three years, 84 percent said “understand and predict customers behavior and needs,” while 79 percent said “develop and implement a multi-channel distribution” strategy.
The analysts also cited product development and diversification into new lines of business as possible organic growth strategies.
On the merger-and-acquisition front, all of the analysts said “M&A growth in emerging markets” was important, with 63 percent saying it was “critical” as a source of growth over the next three years. Only 45 percent of the analysts viewed M&A in mature markets as critical or important.
The Accenture survey report also details the analysts’ views on the biggest external near-term challenges for p/c insurers, compares results with prior surveys, and contrasts responses for analysts in different parts of the world.
Del Santo noted in the latest survey, analysts had much greater concerns about the impact of regulations in Europe and the United States, and whether insurers will be agile enough to address whatever new regulations they face. “That was a delta [change] over the last survey. I was surprised that that floated [near] the top of the list,” he said.
Selected as an important challenge by 46 percent of the analysts, “new regulations and reforms” ranked third behind “environmental issues,” such as the increasing volatility of natural catastrophes (58 percent) and volatility in investment returns (55 percent).
The full report, “Accenture Insurance Equity Analyst Survey: Outperforming the Market in Uncertain Times,” is available on Accenture’s website, http://www.accenture.com.