Revenue is King for P/C Insurers, But Bigger Isn’t Better, Study Reports

September 6, 2006

A comprehensive study of property and casualty insurance companies in North America, Western Europe and Australia has determined that the top line is more often the bottom line than previously thought. Bain finds that the revenue growth holds the strongest correlation with shareholder returns — surpassing other commonly-accepted industry measures of correlation to shareholder returns, such as an insurer’s combined ratio or loss ratio and even its profitability growth.

Bain also finds that two key competencies set the top performers in the P/C insurance industry apart: cultivating organic growth by retaining their best and most loyal customers and adding new ones, and, for those insurers that relied on mergers and acquisitions (less than half of the P/C insurers that Bain studied) — making regular, modest-sized deals rather than large “one off” deals.

Bain’s performance analysis of P/C insurers, from 1994 through 2004, found the best scenario to be a consistent 15 percent to 25 percent increase in annual revenue. Bain observed that, on average, each additional percentage point of revenue growth generated an equivalent increase in the total shareholder return premium, or the amount by which shareholder return produced by the company beat its national index average. But growth also had its limits. Companies that posted flashier, but more erratic, growth rates exceeding 25 percent per year, on average, produced smaller incremental return premiums. Beyond that threshold, each additional percentage-point increase in top line growth had a less predictable, and considerably smaller, impact on total shareholder return.

The multi-year analysis of the P/C sector also reveals that the conventional wisdom applied to banking and other financial services sectors — low cost structures as the trusted pathway to superior performance — does not necessarily translate to property and casualty insurers, according to Bain’s results.

“Shareholders reward property and casualty insurers first and foremost for consistent and disciplined revenue growth. Cost containment is not the overarching factor,” said Nick Palmer, Hong Kong-based Bain partner and high performance insurance study leader. “To maintain steady growth and shareholder satisfaction, insurance leaders typically excel in one or two strategic areas: organic customer growth and frequent acquisitions of regular bite size companies.”

Bain finds strong customer initiatives to be the most important prerequisite for solid revenue growth and total returns. High-performance insurers cultivate organic growth by identifying their most valuable customers and investing to increase sales to them; by recruiting new clients through referrals; and by lifting retention rates.

Progressive Casualty Insurance Company, Cincinnati Financial Corp. and Germany’s Allianz Group were singled out as companies that excel in designing the right products and services, delivering a superior customer experience and developing institutional capabilities that help delight customers.

Multiple acquisitions were also cited as a major factor explaining how P/C insurance growth leaders outperformed their peers. Insurers that rely on mergers and acquisitions to boost revenues make regular, modest-sized deals to add real value, and they integrate their new acquisitions quickly and seamlessly. Bain’s study cited Fidelity National Financial as a P/C insurance leader that followed a successful M&A route to become the largest title insurance company in the United States.

“When asked, nearly eight in 10 senior financial service industry executives believed their company offered a superior customer experience. Yet just 6 percent of their customers agreed,” said Ingo Wagner, head of Bain & Company’s Financial Services Practice in Europe. “That tells me that there’s a major opportunity for P/C insurers to re-connect with their most important customers.”

From an initial list of 706 insurers worldwide, Bain screened for publicly held companies that derived at least 60 percent of their revenues from sales of property and casualty products and for which at least five years of detailed financial data were available. The final sample included only companies from advanced economies of North America, Europe and Australia, for a total of 86 insurers.

Bain’s regression analysis investigated possible correlations between total shareholder returns and 17 measures of business mix and financial performance, including revenue growth, profitability growth, combined ratio and loss ratio.

Bain ran its study tests on data covering the decade from 1994 through the end of 2004.

Source: Bain & Company Inc.

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