The insurance sector is beating other industries on delivering shareholder value but insurers may find this more difficult to do going forward unless they adjust their game plan.

According to the global management consulting firm Boston Consulting Group (BCG), 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 percent a year to shareholders, compared with a median of 16.2 percent for the 2,400 companies. The insurer studied are in the BCG 2017 Value Creators database. Top-quartile insurers had a median total shareholder return (TSR) of 25.3 percent over the period.

While that is good news, the BCG report, 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 percent of the valuation multiple expansion and 65 percent 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 10-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, analysts note.

In addition, each industry segment faces its own challenges. The property/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.

BCG says 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, according to the analysis. 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, the report concludes.

“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?” according to Erick Wick, a BCG senior partner and report coauthor. “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.

Source: The 2017 Insurance Value Creators Report: A CEO’s Guide to Building Value