The Drivers of
17
The Drivers of Value Creation in Reinsurance
Transcript of The Drivers of
The Drivers of Value Creation in Reinsurance
Reinsurers have outperformed because of cyclical multiple improvement
3.8
6.6
7.1
3.7
ReinsuranceGlobal sector2
0.8
P&C
5.0
6.4
2.1
0.3
Multiline
–6.6
9.4
L&H
14.6
9.58.8
6.5
Cash flow contribution3
Growth in tangible equity5.5
–1.9
4.6
8.2
Contribution to average annual TSR, 2015–2019 (%)1
TSR drivers
Sources: S&P Capital IQ; Refinitiv; BCG ValueScience Center.Note: Components of TSR are multiplicative but converted and shown here as additive with remainders assigned to the multiple change field. Aggregation based on market cap weights at the start of the year. TSR calculated in each company's reporting currency. 1 TSRs run from December 31, 2014, to December 31, 2019. 2 Total industry sample = 96, omitting brokers and companies with negative tangible book value. 3 Includes dividend contribution and share count change.
Price/TBV change0.9
In the long run, growth drives TSR for top performers sectorwide
Percentage-point contribution to average annual TSR, 2015-20191
Top quartile, reinsurance (n=3)2 Top quartile, total industry sample (n=24)2
Sources: S&P Capital IQ; Refinitiv; BCG ValueScience Center. Note: Components of TSR are multiplicative but converted and shown here as additive with remainders assigned to the multiple change field. Aggregation based on market cap weights at the start of the year. TSR calculated in each company's reporting currency. 1TSRs run from December 31, 2014, to December 31, 2019. 2Total industry sample = 96, omitting brokers and companies with negative tangible book value. 3 Includes dividend contribution and share count change.
Growth intangible equity
Price/TBVchange
9.0
5-yearTSR
Cash flowcontribution3
9.0
2.0 20.0
Price/TBVchange
Growth intangible equity
Cash flowcontribution3
5-yearTSR
13.4
4.62.0 20.0
Sources: S&P Capital IQ; BCG ValueScience Center. Note: TSRs run from December 31, 2014, through December 31, 2019. Dividend contribution to cash return includes investment of dividends and special dividends, compounded daily. Components of TSR are multiplicative but converted and shown here as additive with remainders assigned to the margin and multiple change fields.
The performance of the largest listed global reinsurers varies widely
Average TSR by driver, 2014–2019 (%)
5 69
49 7 5 5
9
36
10
1213
96
76 4
7
78
7
114
–4
3
1515
–2
16
P/B multiple
6
1
2
2
13
17
–2
24
2
–17
Cash return
15 13
-
–1–8
12 11
–2
12
Book value growth
Total TSR
ArchCapital
HannoverRe
RenaissanceRe
RGA #12MunichRe
Weightedaverage
#6 #7 #8 #9 #10 #11
Sources: S&P Capital IQ; BCG analysis and estimates.1 Compounded annual growth rate of book value per share plus dividend per share, 2015–2019, excluding other comprehensive income.
Growth must be profitable, but few reinsurers operate above their cost of equity
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46
8
1012
1416
1820
2224
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–5 0 5 10 15 20 25
Aver
age
retu
rn o
n eq
uity
, 201
5–20
19 (%
)
Median: 10.8
Median: 10.2RGA
Munich ReRen Re
Arch Capital
Cost of equity
Book value CAGR, 2015–20191 (%)
Hannover Re
Source: BCG analysis.1Operating profit before tax divided by tangible book value of equity allocated to each segment; average of median RoTEs, 2015–2019.
On average, reinsurers also have lower RoTEs than primary insurers
Top quartile Bottom quartile Median
40
0
2022
L&H insurance
14
32
P&C insurance
19
1113
9
P&C reinsurance
17
9
4
15
8
L&H reinsurance
Aver
age
retu
rn o
n ta
ngib
le
equi
ty, 2
015–
2019
(%)1
8 ppspread
Top-quartile reinsurers deliverattractive RoTEs
4 ppspread
Source: BCG insurance RoE benchmarking database. Note: Apparent numerical discrepancies are due to rounding. 1P&C share of centrally allocated buckets (e.g., group functions, noncore business, and eliminations).
Here’s why: the underlying factors driving reinsurers’ RoTE reveal low underwriting margins and high capital intensity in P&C reinsurance
P&CreinsuranceRoTE
9%
UnderwritingRoTE
Groupcontribution1
InvestmentRoTE
100% minuscombined ratio
Investment income/financial assets
Financial assets/TBV
TBV/netearned premium
1%
–1%
8%
1%
105%
2.8%
317%
Loss ratio
Expense ratio 32%
66%
Source: BCG insurance RoE benchmarking database.Note: Any apparent discrepancies in totals are due to rounding. Market data as of August 31, 2020.1P&C share of centrally allocated buckets (e.g., group functions, noncore business, and eliminations).
The top five P&C reinsurers outperform mainly on investment RoTE
20
Hannover Re
37
IRB
21
SCOR China Re Munich Re
2015
IRB Hannover Re
0
SCOR Munich ReChina Re
–1
–6
00
Munich ReIRB Hannover Re SCOR China Re
5
19
5
–1 –1
Average underwriting RoTE, 2015–2019 (%)
Average group contribution, 2015–2019 (%)1
China Re
17
IRB
14
!Hannover Re SCOR
24
Munich Re
2116
Average investment RoTE, 2015–2019 (%)
Average RoTE, 2015–2019 (%)
Source: BCG insurance RoE benchmarking database.Note: Any apparent discrepancies in totals are due to rounding.1L&H share of centrally allocated buckets (e.g., group functions, noncore business, and eliminations).
Similarly, the top L&H reinsurers rely heavily on investment income
141516
China Re SCOR RGA
China Re-19
SCOR RGA
3
–2
Average underwriting RoTE, 2015–2019 (%)
8
China Re RGASCOR
0 0
Average group contribution, 2015–2019 (%)1
China Re !RGASCOR
1911
25Average investment RoTE, 2015–2019 (%)
Average return on tangible equity, 2015–2019 (%)
Sources: S&P Capital IQ; BCG analysis and estimates.Note: Market data as of August 31, 2020.
Investors are clearly worried about the long-term impact of COVID-19: reinsurers’ multiples have fallen to near 2010 levels, with wide disparities
0.9 0.9 0.9
1.11.0
1.2 1.2 1.2 1.2
1.4
1.0
20162010 20172011 20152012 2013 2014 2018 2019 August2020
–4–7
–16–18
–23–26
–30–32
–40–43
Average P/B multiple of the top ten reinsurers (%) Year-to-date drop in P/B multiple ofthe top ten reinsurers (%)
Successful reinsurers use human creativity and machine-generated insights to understand market dynamics and make informed decisions
Understand and predictScenario analysis driven by advanced analytics
Decide and select• Control risk aggregation• Portfolio adjustments• Capital allocation• Repricing and cost cutting
Manage the exposure• Political actions furthering claims inflation• Silent or “unknown” coverages: business interruption losses could erode reinsurers' capital • Liability aggregation risk: with COVID litigation in early stages, now is the time to understand the aggregate exposure from accelerated social inflation
Manage the cycle• Risk and pricing uncertainty remains high• Accelerated decline in demand in many lines, such as aviation and energy, as well as in the life savings business
Manage the capital• Lower for longer yields• Credit crisis still looming• Stress on capital• Cost pressure, old ways of addressing issues
Source: BCG analysis.
Leverage tech to improve human instincts and generate superior recommendations for business decisions based on data and insights
The bionic reinsurer augments human expertise and creativity with machine-generated insights…
Augmented insights generation
Adaptive processes and data management
Enriched recommendation and decisions
Generate faster, broader, and deeper analyses by combining human and tech expertise; free up time and resources to focus human capabilities on high-value-added activities
Technology supports the human in work, processes, and data management, ensuring that the optimal process is carried out for each person in different situations
Source: BCG analysis.
…and unlocks tremendous value
+5 pp Loss ratio
improvement
–3 pp Expense ratio
decrease
2xFaster
quote-to-bind
+5 ppHigher hit
ratio
+5%–10% Gross written
premium uplift
Source: BCG analysis.
Opportunities for bionic transformation span the value chain
DISTRIBUTION OPERATIONS
Bionicdistribution
Ensure adequate matching of
submissions with risk appetite; drive
seamless and fast processes with brokers though enhanced data exchange and tools for
better positioning
New business models and services
Enhance risk management
propositions and extend reach both internally
and externally with new product and service
offerings to distributors and end clients
Augmented underwriting
Leverage data to improve quality and
consistency of underwriting decisions
Smart portfolio steering
Improve transparency and consistency in
planning and monitoring the portfolio and manage exposure
actively
Advanced claims handling
Speed up the claims handling process;
increase value; reduce costs with AI fraud
detection and claim handling tools
Source: BCG analysis.
Tech and algorithms are not enough 70% of the value comes from transforming processes and people Algorithms
• Quality of the modeling
70%
Process, people, and culture• Quality and availability of data • Embed model in business processes • Changing the way people work
Technologies• Data platforms • Visualization tools
20%
10%
Source: BCG analysis.
Source: BCG analysis.
The bionic operating model requires new types of talent
Underwriters who understand the value of the new bionic model
People who understand the value of data so that they use it
People who can further the science
Digital talent (data scientists, UX and UI talent) and 21st century skills (learning agility, creativity)
Incentive systems aligned with new vision and goals
People who don’t react to a portfolio but want to be increasingly proactive
People who think beyond their area of expertise
People who can transform a bionic advantage into an offering (e.g., by turning an improved claims process into an offering)
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$
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Getting a bionic transformation right means balancing many different decisions
SET PURPOSE AND VISION HUMAN TECHNOLOGY OUTCOMES
How do we do the change management?
Do we have the right talent?
Where should we start?
What budget do we need? What is the optimal
handoff point?
Do we need a full new IT stack?
Do I do it all by myself?
How can we leverage what we've done before?
Do we need to do it all at once?
Can we do baby steps?
How soon will we see improvements?
Source: BCG analysis.
