same period.Top-quartile US P&C companies did even better,notching a five year average annual TSRof 20%—among the highest in any industry or sector.
US P&C leaders’resilience throughout the economic turmoil of 2022 was rooted in their focus onunderwriting results and in the resulting strong return on tangible equity (RoTE),which correlateshighly with TSR.Indeed,it appears that US P&Cleaders cracked the insurance value creation code—and BCG’s insurance industry value creators reports have documented the success of the topcompanies over the past several years.Their principal challenge going forward is to stay the courseand continue generating superior results.
But warning signs are flashing.The P&C segment is undergoing a structural shift.Future underwritingexcellence will hinge on companies’ability to foresee and adapt to significant macro-environmentalchanges,such as geopolitical instability,supply chain disruption,and the expanding effeds of climatechange.Underwriting excellence will also depend more than ever on carriers’ability to embraceadvances in digital capabilities and Al.If they are going to continue to outperform,top quartile USP&C companies must take a hard look at their portfolios’strengths and objectively assess what is likelyto change over the next five years and by how much.
Although leaders must stay focused on the fundamentals,they must also recognize that doing so maynot be enough to guarantee that they remain on top.As our 2023 insurance industry value creatorsreport points out,relative TSR performance across companies fluctuated strongly over the past tenyears.Only 16%of insurance leaders maintained their performance,meaning that only one in six top-quartile performers in the period from 2012 to 2017 retained that ranking in the 2018 to 2022 period.
This artide looks at the US P&C segment and what companies need to do to continue to outperformtheir insurance industry peers and the market as a whole.
The Fundamentals Matter
As we have observed many times,TSR for insurance companies has three drivers:growth in tangiblebook value (TBV),change in the multiple of price to tangible book value (P/TBV),and the contributionfrom cash flow (dividend yield and share buybacks).In the long term,TBV growth and cash flow arethe major contributors to TSR.In the short to medium term,changes in the P/TBV multiple mattermore.Improving RoTE is critical to increasing P/TBV multiples.
The insurance industry’s global average annual TSR of 4%reflects positive contributions from TBVgrowth and cash flow and negative contributions from contracting P/TBV multiples.From January 2018to December 2022,the global insurance industry’s market capitalization(which can be calculated astangible book value multiplied by P/TBV)remained roughly flat at around $2.2 trillion.(See Exhibit 1.)Market caps of Asia-Pacific companies declined by some $126 billion,led by shrinking multiples formuliline and life and health players,while North America market caps increased by a similar $128
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