The 2022 Insurance Value Creators Report
US P&C insurers have performed well compared to their international counterparts. However, outperformance in the current macroeconomic environment demands a laser focus on profitable growth.
Uncertainty is a double-edged sword for insurers. Good underwriters recognize uncertainty as the basis for the success of the insurance industry. But uncertainty also makes it harder for insurers to expand their businesses profitably. From inflation and interest rates to climate change and cyber threats, today’s environment is rife with sources of uncertainty that are challenging for insurers to manage.
US property and casualty (P&C) insurers have weathered uncertainty relatively well in recent years. From 2017 through 2021, their average annual total shareholder return (TSR) was approximately 11%, compared with 7% for insurers across all regions and sectors. However, looking below the headline TSR figure for US P&C insurers, we see strong variations among top- and bottom-quartile performers and among market segments.
The many dynamic uncertainties in the business environment make it imperative for US P&C insurers to strengthen their capabilities to create sustainable long-term value. Our analyses point to profitable growth as the key to success. To maintain profitability while expanding their business, US P&C insurers must be agile to keep pace with the fast-evolving environment. To remain competitive, leaders will need to pursue efficiency, embrace embedded insurance and ecosystems as growth engines, future-proof the business for climate change, and strive for underwriting excellence.
US P&C Players’ TSR Outperformed the Global Average
In 2021, the average annual TSR for insurers across all regions we examined (the Americas, Europe, and Asia-Pacific) and sectors (P&C, life and health, reinsurers, and multiline insurers) was 16%—a marked improvement from –3% in 2020. However, the industry’s average annual TSR of approximately 7% for the five years from 2017 through 2021 was still below the cost of equity and placed the sector 27th among the 33 sectors we track. (We look at TSRs on a rolling five-year basis to illuminate long-term value creation; see “About Our Methodology.”)
US P&C insurers’ performance exceeded that of the overall global industry in the same five-year period with an annual TSR of approximately 11%. However, the sector-level average doesn’t tell the full story, as outperformance is possible in nearly all market segments.
Top-quartile insurers had a five-year average annual TSR of approximately 23%, versus approximately 3% for bottom-quartile players. Top insurers’ outperformance was driven primarily by stronger growth in tangible book value (TBV) (contributing 12 percentage points to TSR versus 7 percentage points for the entire US P&C sample) and multiple expansion (contributing 6 percentage points versus no contribution for the entire US P&C sample).
Across all US P&C segments, return on tangible equity (RoTE) remains a key driver of price to TBV (P/TBV) multiples, according to BCG’s SmartMultiple analysis. Investors’ expectations for RoTE explain approximately 40% of P/TBV variations among insurers, and RoTE is essential for enabling the growth of TBV. The consistent top performers typically deliver strong RoTE and growth to achieve sustained profitable growth.
Comparing Performance Across Market Segments
Performance and its underlying drivers varied significantly across different segments of the US P&C market.
PROGRESSIVE LEADS AMONG PERSONAL INSURERS
Personal insurers delivered a five-year annual TSR of approximately 17%. Progressive led the pack with its 28% TSR during the period, reflecting a strong contribution from growth (19 percentage points) and moderate multiple expansion (4 percentage points). Progressive’s significant boost to the segment’s average TSR is evident when we exclude the company from the analysis: the rest of the personal insurers in our sample delivered an average five-year annual TSR of approximately 10%, which was only slightly above the cost of capital. Progressive’s exceptional TSR demonstrates that underwriting discipline and data-driven decision making are key drivers of outperformance in US personal lines in this fast-evolving environment.
In the second half of 2021, results for all personal insurers were weighed down by a postpandemic rebound in frequency and the severity of auto claims driven by higher-than-expected replacement costs, used-car prices, and labor rates.
Publicly traded insurtechs, on the other hand, have all destroyed value since their IPOs, with annual TSRs of –50% to –90%. This value destruction highlights the challenges of achieving breakout profitable growth in insurance. (See “Insurtechs Must Shift Their Focus to Profitability.”) As one of many examples of the struggles insurtechs face, Hippo announced this July its intention to file for a reverse stock split after a period of noncompliance with New York Stock Exchange requirements—the company’s average closing price was less than $1 for a consecutive 30-trading-day period.
A comprehensive review of personal insurers must include an assessment of the performance of mutual insurers, as they account for more than 55% of the segment’s premium. Five of the top-ten US personal lines insurers are mutuals, including market share leader State Farm.
Because mutuals are not publicly traded, it is not possible to calculate their TSRs. A reasonable proxy, however, is total value creation (TVC): the sum of TBV growth plus accumulated cash dividends. From 2017 through 2021, the TVC performance of personal-lines-focused mutuals lagged that of publicly traded personal lines insurers by approximately 60%. The gap is largely attributable to mutuals’ lower return on equity (4% versus 19% for stock players) and lower annual GWP growth (3% versus 4% for stock players).
Mutuals’ RoTE is also lower, which our benchmarking shows is a function of three main factors: stock players’ better loss ratio (approximately 7 percentage points lower), better expense ratio (approximately 2.5 percentage points lower), and more efficient capital position reflected in their underwriting and investment leverage. However, these comparisons are not perfect. Mutuals differ from stock players when it comes to capital-management philosophies, cost of equity, and incentives. These differences reflect mutuals’ distinctive mission and stronger long-term orientation.
The Challenges to Long-Term Value Creation
The macroeconomic environment—including the continued impact of COVID-19, extraordinary liquidity injections, supply chain disruptions, and the war in Ukraine—has generated significant headwinds for US P&C insurers. Delivering breakout profitable growth and improving RoTE will become harder as secular challenges still loom while other challenges emerge:
- Upward Pressure on Loss Costs. Claims-related costs are rising in response to upward pressure from a spike in economic inflation, supply chain disruptions, a greater frequency and severity of extreme weather events, and the continued growth of social inflation. Because inflation impacts all aspects of insurers’ business, its effects on value creation are significant. (See “How Inflation Affects Value Creation.”)
- The Growing Power of Intermediaries. Value in the US P&C industry continues to be captured disproportionally by brokers rather than by underwriters. Although the cumulative effect of this long-term trend remains unclear, one must assume that brokers will continue to gradually gain a stronger competitive position. Additionally, insurance services providers, such as third-party claims administrators and technology providers, are also growing profitably.
- Emerging Threats. Climate change and cyber risks present both threats and opportunities. As an example of a threat, commonly used natural catastrophe models do not adequately represent the risk of extreme weather events because of shortcomings in estimating their frequency and severity. As examples of opportunities, cyber insurance rates have been increasing by triple digits over the past quarters and the renewable energy premium globally is expected to double by around 2027.
- Evolving Competitive Landscape. Nontraditional players (such as OEMs and digital marketplaces) and consumer trends (such as digital or hybrid behavior, shared mobility, and sustainability awareness) also pose threats and opportunities.
By Nathalia Bellizia, Paul Nelson and Eric Wick
Full report available here