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SpotlightonUSPropertyandCasualty

The2022InsuranceValueCreatorsReport

SEPTEMBER02,2022

By

NathaliaBellizia

,PaulNelson,and

EricWick

USP&Cinsurershaveperformedwellcomparedtotheirinternationalcounterparts.However,outperformanceinthecurrentmacroeconomicenvironmentdemandsalaserfocusonpro?tablegrowth.

Uncertaintyisadouble-edgedswordforinsurers.Goodunderwritersrecognizeuncertaintyasthebasisforthesuccessofthe

insuranceindustry

.Butuncertaintyalsomakesitharderforinsurerstoexpandtheirbusinessespro?tably.From

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in?ationandinterestratestoclimatechangeandcyberthreats,today’senvironmentisrifewithsourcesofuncertaintythatarechallengingforinsurersto

manage.

“

Pro?tablegrowthisthekeytosuccessforUSP&Cinsurers.

USpropertyandcasualty

(P&C)insurershave

weathereduncertaintyrelativelywellinrecentyears.From2017through2021,theiraverage

annualtotalshareholderreturn(TSR)wasapproximately11%,comparedwith7%forinsurersacrossallregionsandsectors.However,lookingbelowtheheadlineTSR?gureforUSP&Cinsurers,weseestrongvariationsamongtop-andbottom-quartileperformersandamongmarketsegments.

ThemanydynamicuncertaintiesinthebusinessenvironmentmakeitimperativeforUSP&Cinsurerstostrengthentheircapabilitiestocreatesustainablelong-termvalue.Ouranalysespointtopro?tablegrowthasthekeytosuccess.Tomaintainpro?tabilitywhileexpandingtheirbusiness,USP&Cinsurersmustbeagiletokeeppacewiththefast-evolvingenvironment.Toremaincompetitive,leaderswillneedtopursuee?ciency,embraceembeddedinsuranceandecosystemsasgrowthengines,

future-proofthebusinessforclimatechange

,andstriveforunderwritingexcellence.

USP&CPlayers’TSROutperformedtheGlobalAverage

In2021,theaverageannualTSRforinsurersacrossallregionsweexamined(theAmericas,Europe,andAsia-Paci?c)andsectors(P&C,lifeandhealth,reinsurers,andmultilineinsurers)was16%—amarkedimprovementfrom–3%in2020.However,theindustry’saverageannualTSRofapproximately7%forthe?veyearsfrom2017through2021wasstillbelowthecostofequityandplacedthesector

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27thamongthe33sectorswetrack.(WelookatTSRsonarolling?ve-yearbasistoilluminatelong-termvaluecreation;see“AboutOurMethodology.”)

ABOUTOURMETHODOLOGY

Thisyear’sUSP&Cinsurancesamplecomprisesthelargeststock-listedUSinsurers—the22primaryinsurerswithamarketcapitalizationofmorethan$1billionattheendof

2021.1

Thesecompanies’TSRsarestraightforwardtomeasurebycombiningsharepricegainsandtheimpactofdividendsandshare-countchange.What’smoreinterestingisdisaggregatingtheTSRsintotheircomponents.

Ininsurance,TSRderivesfromthreesources:growthintangiblebookvalue(TBV),changeinthepricetoTBV(P/TBV)multiple,andcash?owcontribution(comprisingdividendyieldandsharebuybacks).Overthelongrun,TBVgrowthandcash?owarethemajorcontributorstoTSR.Overtheshorttomediumterm,changesintheP/TBVmultiplematteralotmore.

Themostimportantchallengeformanagementistomaketherighttradeo?samongincreasingTBV,deployingfreecash?ow,andexpandingorprotectingP/TBVmultiples.BCG’sTSRmethodologycanhelpmanagementtobettermeetthesechallenges.Ithelpsinsurerssimulatesuchtradeo?sandmakeinformeddecisionsaboutfactorssuchasportfoliofocus,capitalallocation,andbusinessunits’?nancialtargets.

Makingtherighttradeo?srequiresanaccurateunderstandingoftheimpactofstrategicandoperationaldecisionsnotonlyonTBVgrowthandfreecash?owbutalsoontheP/TBVmultiple.BCG’sSmartMultiplemethodology,anintegralpartofourTSRmethodology,usesregressionanalysistoestimatedi?erencesinP/TBVmultiples.(Seetheexhibit.)InUSP&Cinsurance,approximately85%ofthevarianceinacompany’sP/TBVmultiplecanbeexplainedbyfundamentals:pro?tabilitymetrics(suchasRoTE),dividends,businessmix(personal-lineconcentration),balancesheethealth(debttocapitalratio),andpredictedrevenuegrowth.Whenwe

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helpaninsurerchartacourseforsuperiorshareholdervaluecreation,wedevelopaplanthataccountsforthetradeo?samongtheTSRdrivers(TBVgrowthandfreecash?ow,forexample)andtheexpectedimpactofeachfactorontheclient’sP/TBVmultiple.Ouranalysisalsoconsidersrisksandlong-termstrategicimplications.

USP&Cinsurers’performanceexceededthatoftheoverallglobalindustryinthesame?ve-yearperiodwithanannualTSRofapproximately11%.However,thesector-levelaveragedoesn’ttellthefullstory,asoutperformanceispossibleinnearlyallmarketsegments.(SeeExhibit1.)

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Top-quartileinsurershada?ve-yearaverageannualTSRofapproximately23%,versusapproximately3%forbottom-quartileplayers.(SeeExhibit2.)Topinsurers’outperformancewasdrivenprimarilybystrongergrowthintangiblebookvalue(TBV)(contributing12percentagepointstoTSRversus7percentagepointsfortheentireUSP&Csample)andmultipleexpansion(contributing6percentagepointsversusnocontributionfortheentireUSP&Csample).

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AcrossallUSP&Csegments,returnontangibleequity(RoTE)remainsakeydriverofpricetoTBV(P/TBV)multiples,accordingtoBCG’sSmartMultipleanalysis.Investors’expectationsforRoTEexplainapproximately40%ofP/TBVvariationsamonginsurers,andRoTEisessentialforenablingthegrowthofTBV.TheconsistenttopperformerstypicallydeliverstrongRoTEandgrowthtoachievesustainedpro?tablegrowth.

ComparingPerformanceAcrossMarketSegments

Performanceanditsunderlyingdriversvariedsigni?cantlyacrossdi?erentsegmentsoftheUSP&Cmarket.(SeeExhibit3.)

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PROGRESSIVELEADSAMONGPERSONALINSURERS

Personalinsurersdelivereda?ve-yearannualTSRofapproximately17%.Progressiveledthepackwithits28%TSRduringtheperiod,re?ectingastrongcontributionfromgrowth(19percentagepoints)andmoderatemultipleexpansion(4percentagepoints).Progressive’ssigni?cantboosttothesegment’saverageTSRisevidentwhenweexcludethecompanyfromtheanalysis:therestofthepersonalinsurersinoursampledeliveredanaverage?ve-yearannualTSRofapproximately10%,whichwasonlyslightlyabovethecostofcapital.Progressive’sexceptionalTSRdemonstratesthatunderwritingdisciplineanddata-drivendecisionmakingarekeydriversofoutperformanceinUSpersonallinesinthisfast-evolvingenvironment.

Inthesecondhalfof2021,resultsforallpersonalinsurerswereweigheddownbyapostpandemicreboundinfrequencyandtheseverityofautoclaimsdrivenbyhigher-than-expectedreplacementcosts,used-carprices,andlaborrates.

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Publiclytradedinsurtechs,ontheotherhand,havealldestroyedvaluesincetheirIPOs,withannualTSRsof–50%to–90%.Thisvaluedestructionhighlightsthechallengesofachievingbreakoutpro?tablegrowthininsurance.(See“InsurtechsMustShiTheirFocustoPro?tability.”)Asoneofmanyexamplesofthestrugglesinsurtechsface,HippoannouncedthisJulyitsintentionto?leforareversestocksplitaeraperiodofnoncompliancewithNewYorkStockExchangerequirements—thecompany’saverageclosingpricewaslessthan$1foraconsecutive30-trading-dayperiod.

INSURTECHSMUSTSHIFTTHEIRFOCUSTOPROFITABILITY

WhilepubliclytradedP&Cinsurersaredoingwell,insurtechsarestrugglingtosatisfytechandinsuranceinvestors.Investorspouredmoneyintotheinsurtechmarketin2021,withfundingreachingarecordlevelof$14.4billion.Sofarin2022,fundinghasslowedsigni?cantly,downbymorethan40%inthe?rsthalfofthisyearcomparedwiththe?rsthalfof2021.Inaddition,theTSRsofpubliclytradedinsurtechsaredownsharplyrelativetopersonalinsurersandtheS&P500.(Seetheexhibit.)

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Whatwentwrong?Initially,techinvestorsrewardedstartupsthatdeliveredtop-linegrowth,fastquotes,andbetteruserexperiences.Thecheapfundingallowedinsurtechstobuilddisruptivedigitalcapabilitiesanddeliversatisfyingcustomerexperiencesthatincumbentswereslowtobringtomarket.However,asthehypesurroundinginsurtechssubsided,itbecameclearthattheirbusinessplanswereinadequateandshortsightedforacomplexandhighlyregulatedindustryinwhichthecostofgoodssoldisunknownatthetimeofsale.AlthoughearlyIPOsbene?tedinvestorswhocashedout,theyhurtinsurtechs’sustainability.Itishardtosimultaneouslypleasetechinvestors,whotendtobefocusedongrowth,andinsuranceinvestors,whoaremoreorientedtowardincomeandpro?ts.

Theearlysuccessesandongoingstrugglesofinsurtechsdemonstrateafundamentaltruthabouttheinsurancebusiness:growthiseasy,butpro?tablegrowthishard.Thepressureonpro?tabilityisespeciallystrongforcompaniesexpandingintonewstates,linesofbusiness,perils,andcustomersegments.Therisksinclude:

?AdverseSelection.Companiesseekinggrowthmightinadvertentlyattractrisksdeclinedbyothercarriers,whichcouldhaveasigni?cantimpactonlossratios.Unfamiliaritywithunderwritingnuancesthatestablishedinsurersapplytopricerisksalsohurtsthelossratio.Indeed,formanyinsurtechs,itseemsthatunderwritingwasanaerthought.

?Mispricing.Newentrantsmustrelyonotherinsurers’publicly?ledpricingtomakeupfortheirinadequateinsightsanddata—forexample,theylackadeepunderstandingofpolicyholdersandclaims-experienceddata.However,thisrelianceonothercompanies’pricingmeansthatnewplayersmightnotconsiderimportantnuanceswhenestablishingtheirrateplansandoverallpricingstrategy.

?ClaimsLeakage.Becausenewplayershavelessexperience(andscale)inadjudicatingandmanagingclaims,theymightbemorepronetohigherlossadjustmentexpensesandoveralllossratios.

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?ReinsuranceInstability.Launchingnewproductsindi?erentstatesthattargetdi?erentcustomersmayleadtovolatileresultsfornewentrants.Thistendstoraiseconcernsamongreinsurancepartners,leadingtohigherreinsuranceratesandtightertermsandconditions.

Insurtechsalsoseemedtohaveunderestimatedthecapitalrequirementsassociatedwithabalance-sheet-orientedbusiness.Fastgrowthsigni?cantlyacceleratestheircashburn,puttingevenmorepressureontheirbusinessmodels.

Thesechallenges,amongothersstemmingfromalackofexperienceanddatainnewmarketsegments,leadtoa“newbusinesspenalty”fornewentrantssuchasinsurtechsandacompetitiveadvantageforestablishedplayers.

Delayedpro?tabilityandthechallengesofreachingscaleareshiingthepowerdynamicsawayfrominsurtechstowardincumbents.SonessinpublicmarketshasmadethepathtoanIPOmuchmoredi?cultatthevaluationlevelsseeninthepast,whilerisinginterestrateshavediminishedprivateinvestors’willingnesstopursueriskyinvestmentsinsearchofyield.

Lookingahead,insurtechs’valuationsmightcontinuetofall,andthebottomislikelybelowthatoftraditionalinsurancecompanies.WealreadyseeevidenceoftheconsequencesofsharplydecliningvaluationsinHippo’sneedtodoareversestocksplitandLemonade’sacquisitionofMetromile.Highin?ationandaloomingrecessionmightexacerbatethedownwardpressureonvaluations.Tosurvive,insurtechswillneedtosharpentheirfocusonunderwritingpro?tability.

Incumbentscanbene?tfromthisenvironment.Theongoingchallengesmayleadstrugglinginsurtechstoincreasinglypursuepartnerships,commercialagreements,andevenM&Awithpeersandincumbentcarriersandbrokerstoachievepro?tabilityand/orsurvive.Incumbentsmaybeabletogainaccessatattractivepricestotheskills,capabilities,andassetsthatinsurtechshavebeennurturing.Instabilityinprivatemarketsmayalso

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drivetalenttomorestableplayers,givingincumbentsachanceto“acqui-hire”teams.

Acomprehensivereviewofpersonalinsurersmustincludeanassessmentoftheperformanceofmutualinsurers,astheyaccountformorethan55%ofthesegment’spremium.Fiveofthetop-tenUSpersonallinesinsurersaremutuals,includingmarketshareleaderStateFarm.

Becausemutualsarenotpubliclytraded,itisnotpossibletocalculatetheirTSRs.Areasonableproxy,however,istotalvaluecreation(TVC):thesumofTBVgrowthplusaccumulatedcashdividends.From2017through2021,theTVCperformanceofpersonal-lines-focusedmutualslaggedthatofpubliclytradedpersonallinesinsurersbyapproximately60%.(SeeExhibit4.)Thegapislargelyattributabletomutuals’lowerreturnonequity(4%versus19%forstockplayers)andlowerannualGWPgrowth(3%versus4%forstockplayers).

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Mutuals’RoTEisalsolower,whichourbenchmarkingshowsisafunctionofthreemainfactors:stockplayers’betterlossratio(approximately7percentagepointslower),betterexpenseratio(approximately2.5percentagepointslower),andmoree?cientcapitalpositionre?ectedintheirunderwritingandinvestment

leverage.2

(SeeExhibit5.)However,thesecomparisonsarenotperfect.Mutualsdi?erfromstockplayerswhenitcomestocapital-managementphilosophies,costofequity,andincentives.Thesedi?erencesre?ectmutuals’distinctivemissionandstrongerlong-termorientation.

COMMERCIALINSURERSDELIVERSOLIDPERFORMANCE

Commercialinsurershada?ve-yearannualTSRofapproximately10%,supportedbyreboundingexposuresandafavorablepricingenvironmentsincelate

2019.3

Althoughthehardmarketmayhavepeakedin2021,once-in-a-generationlevelsof

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in?ation,supplychaindisruptions,andthewarinUkrainemayextend?rmpricingformost,ifnotall,lines.

Wehaveobservedinterestingdynamicsacrosssubsectors:

Specialty-FocusedCommercialInsurers.Theseinsurershada?ve-yearannualTSRofapproximately8%,althoughwithahighdispersionofresultsacrosswinnersandlosers.Therewasanapproximately60percentage-pointgapbetweentop-rankingKinsale(witharemarkable48%?ve-yearannualTSR)andthenegativeTSRofplayersthatperformedpoorlyandhavehigherexposuretomorechallengingmarketsegments.

Top-performinginsurersfocusedonsegmentsinwhichtheycouldsustainablysetpricesthatexceedprojectedlosscost—takingadvantageoffavorabletailwinds,strongunderwritingdiscipline,anddi?erentiatedcapabilities.Manyarealsoleveragingtechnologytodi?erentiatethemselvesthroughlowerexpensesandimprovedriskassessmentorbydeliveringabetterexperienceforclientsorbrokers.

Bottom-quartilespecialtyperformersappeartohavebeendisadvantaged,inpart,byaheavyemphasisonless-favorablemarketswheretheywerenotabletomatchratetoriskoradequatelymanageriskconcentration.Severalbottom-quartileperformersreportedpoorresultsintheirexcessandsurplus(E&S)portfolio,whichmayhaveresultedfromoverexposuretocatastropheperilsandlossesovertheperiodstudied,especiallyinpropertylines.WithE&SrepresentingalargeandgrowingshareoftheUSspecialtysector,commissionsfortheselinesareaboveaverageowingtothemultilayereddistributionstructurethatincludeswholesalers,retailbrokers,andmanaginggeneralagents(MGAs).Thisexpensepro?lereinforcesthecriticalityofexcellentunderwritingtoachievestrongreturnsinthesespecialtymarkets.

Nonspecialty-FocusedCommercialInsurers.Thesetraditionalcommercialinsurersdelivereda?ve-yearannualTSRofapproximately10%,whichwasthehighestamongcommerciallines.Thedispersionofresults—approximately10

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percentagepointsbetweenthetopandbottomperformers—wasmuchlowerthanforspecialtyinsurers.Super-regionalinsurers(suchasSelective)performedparticularlywell,withsolidunderwritingpro?tability,manageablenaturalcatastrophelosses,andstronginvestmentcontribution.

Thesolidperformanceofcommercialinsurerswasdwarfedbythatofbrokerage?rms,whichhada?ve-yearannualTSRofapproximately23%.(SeeExhibit6.)Thismightnotbeaperfectcomparisonbecause,incontrasttoinsurance,brokerageisacapital-lightbusinesswithminimalbalancesheetriskandstrongcash-?owgeneration.However,itisnoteworthythatbrokeragecommissionsandfeeshaveremainedsteadyovertheyears.Proximitytocustomersandthescaleresultingfromongoingmarketconsolidationareimportantcontributorstothestrongpositionoflargebrokers.Theyallowbrokerstocontinuouslyexpandtheirbreadthofservicesandinvestindi?erentiatingcapabilities,includingdigital,data,advancedanalytics,andtechnology.

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Asanindicationofbrokers’marketstrength,privateequity(PE)?rmshavesteadilyincreasedinvestmentsinbrokerage?rmsoverthepastdecade.In2021,PE-backedbrokerswerethebuyersin63%ofbrokerageacquisitions,upfrom34%in2016.Thenumberofbrokerageacquisitionshasalsogrowneachyear,fueledalmostentirelybyPEinvestments.

P&CPLAYERSWITHEVENLYSPLITPERSONALANDCOMMERCIALLINES

UNDERPERFORM

Finally,playerswithevenlysplitbooksofbusinessacrosscommercialandpersonallines(thatis,TheHanoverandTravelers)delivereda?ve-yearannualTSRofapproximately8%.Comparedwithinsurersthatfocusoncommerciallines,theseplayershadalowercontributionfromgrowth(by2percentagepoints)andahighercontributionfromcash?ows(by3percentagepoints).

Theseplayers’underperformancerelativetotheoverallcommercialandpersonallinessectorswasnotsubstantial.Evenso,itcorroboratesourviewthatthegreatercomplexityoftheirbusiness,includingadiversityofclients,distributionchannels,andmarketdynamics,o?setsthepotentialbene?tsofdiversi?cation.WehaveobservedthissametrendformultilineinsurersovertheyearsinourglobalValueCreatorsseries.

TheChallengestoLong-TermValueCreation

Themacroeconomicenvironment—includingthecontinuedimpactofCOVID-19,extraordinaryliquidityinjections,supplychaindisruptions,andthewarinUkraine—hasgeneratedsigni?cantheadwindsforUSP&Cinsurers.Deliveringbreakoutpro?tablegrowthandimprovingRoTEwillbecomeharderassecularchallengesstillloomwhileotherchallengesemerge:

?UpwardPressureonLossCosts.Claims-relatedcostsarerisinginresponsetoupwardpressurefromaspikeineconomicin?ation,supplychaindisruptions,agreaterfrequencyandseverityofextremeweatherevents,andthecontinuedgrowthofsocialin?ation.Becausein?ationimpactsallaspects

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ofinsurers’business,itse?ectsonvaluecreationaresigni?cant.(See“HowIn?ationA?ectsValueCreation.”)

?TheGrowingPowerofIntermediaries.ValueintheUSP&Cindustrycontinuestobecaptureddisproportionallybybrokersratherthanbyunderwriters.Althoughthecumulativee?ectofthislong-termtrendremainsunclear,onemustassumethatbrokerswillcontinuetograduallygainastrongercompetitiveposition.Additionally,insuranceservicesproviders,suchasthird-partyclaimsadministratorsandtechnologyproviders,arealsogrowingpro?tably.

?EmergingThreats.Climatechangeand

cyberrisks

presentboththreatsandopportunities.Asanexampleofathreat,commonlyusednaturalcatastrophemodelsdonotadequatelyrepresenttheriskofextremeweathereventsbecauseofshortcomingsinestimatingtheirfrequencyandseverity.Asexamplesofopportunities,cyberinsurancerateshavebeenincreasingby

tripledigitsoverthepastquartersandtherenewableenergypremiumgloballyisexpectedtodoublebyaround2027.

?EvolvingCompetitiveLandscape.Nontraditionalplayers(suchasOEMsanddigitalmarketplaces)andconsumertrends(suchasdigitalorhybridbehavior,sharedmobility,andsustainabilityawareness)alsoposethreatsandopportunities.

HOWINFLATIONAFFECTSVALUECREATION

AlthoughtheP&Cinsuranceindustryisnotin?ation-orrecession-proof,ithasdemonstratedresilienceduringperiodsofeconomichardship.Inmanycases,customersareobligatedtopurchaseP&Cinsurance,andinsurerscantypicallypasscostincreasesviarateadjustmentsatrenewals.Inresponsetohigherrates,however,someconsumersandbusinessesmaydecidetoreducecoverageandretainmorerisk,creatingsomeheadwindsforpremiums.

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In?ationcanbeatailwindfortheinsuranceindustry—butonlyifinsurersexpectitandappropriatelypriceitin.However,becausetheindustryneitherexpectedthecurrentin?ationaryspikenorraisedratesenough,in?ationhasnegativelya?ectedvaluecreationinrecentquarters.Requiredrateadjustmentsvarywidelybyline:inpersonallines,ratehikesareacceleratingsigni?cantly,whileincommerciallines,thecurrentenvironmentcouldfurtherprolongthehardmarket.

In?ationa?ectsmanycomponentsofP&Cinsurers’incomestatementsandbalancesheetsintheshortandlongterm,anditsimpactdi?ersbylineofbusiness.Forinstance:

?Inshort-tailpropertylines,losscostsareheavilya?ectedbyeconomicin?ationbecausethecostofmaterialsandwagesarethemaindriversofclaimscosts.Currentforecastssuggestthatin?ationwillnegativelya?ectthesedriversthrough2022andwellinto(ifnotbeyond)2023.Theadverse?nancialresultsreportedfor2021and2022indicatethatshort-tailedlineshavealreadybeena?ected.Personalinsurers,forinstance,are?lingrateincreases.Commercialpropertyinsurersareadjustingpricesandrestrictingterms,conditions,andlimits,whichcouldprolongthehardmarketcycle.

?Inlonger-tailliabilitylines,losscostsarelessheavilyindexedtoeconomicin?ationandmostheavilyin?uencedbywage,medical,legal,andsocialin?ation.In?ationmainlya?ectsthebalancesheetsoflong-taillines.Prolongedin?ationcouldcreatesigni?cantriskstothereservingpositionsthatunderpinlong-taillines.

Thepervasiveimpactsofin?ationintheinsuranceindustryhavesigni?cantimplicationsforvaluecreation.Byincreasinglosscostatafasterpacethanratesandexposureunits,in?ationpushesdow