Life insurers are operating in a challenging and fast-changing environment, with their businesses under enormous pressure from a range of external forces. To gain insight into the factors driving the ratings of insurance companies, as well as the strategies that insurance CEOs should adopt to improve valuations of their companies, we at Accenture commissioned a survey of leading insurance equity analysts around the world.
Examining the results
Perhaps the most surprising finding of the survey is the bullish expectations which analysts have of the life industry's top performers. In 2012 as in previous years, analysts are demanding strong growth in annual revenue, as well as a nine-percent increase in pre-tax return on equity over 2011. Since insurers are still struggling with the global economic crisis, along with weak demand and new regulatory requirements, merely maintaining their positions might have seemed like a reasonable expectation, but equity analysts continue to expect revenue and ROE growth.
A survey question about the impact of the tough market conditions provides insight into analysts' thinking: No fewer than 55 percent expect the impact to be positive for the industry's front runners. Analysts anticipate that the weaker players, unable to adapt to the more challenging environment, will lose share, be acquired or eliminated. The leaders, however, will be forced to strengthen their capabilities and will have greater capacity for growth.
The research indicates that organic growth is likely to be more important than inorganic growth, with analysts expecting insurers to concentrate their efforts somewhat more on emerging markets (with 44 percent saying these are critical) than mature markets (25 percent). However, they predict that mergers and acquisitions in emerging markets (20 percent) will contribute to growth—significantly more so than in mature markets (4 percent).
While organic growth will be challenging over the next three years, analysts believe that to achieve it insurers will need to better understand and predict customer behavior and needs. More than a third (36 percent) say this is critical. Other key factors include the ability to develop and implement a multi-channel distribution strategy (28 percent), and introduce new, relevant products (24 percent). Important opportunities for insurers include expanding the business in new markets, improving risk control and enhancing asset management capabilities.
Achieving the goals that equity analysts have set for life insurers, including a return on equity in excess of 15 percent, will not be easy. The industry is facing more severe headwinds than most insurance executives have ever experienced.
Demand is low and volatile, at least in mature markets, due to customers' financial straits, their lack of confidence in equity-based investments, and their general mistrust of financial institutions. Low interest rates have decimated investment returns.
Stock market volatility has made high-return guarantee products a risky proposition; and, while repricing would help, the market resists this notion. Additionally, regulations are forcing insurers to hold larger capital reserves and incur greater sales and other costs.
We see five main areas of opportunity for life insurers seeking to meet or surpass equity analysts' expectations for profitable growth:
