Performance - Shareholder returns: Cut to the core

Like all financial services companies, the insurance industry took a pounding following the 2008 credit turbulence. But insurers have weathered the storm better than the rest of the sector and have lately returned to favour among investors. Insurance stocks have rebounded smartly from the losses they suffered following the credit-market meltdown — but the relative strength of insurance as a group masks large variations in the performance of individual companies.

Which raises the question, how do the top-performing insurers create value for shareholders across all phases of the business cycle?

To find out, Bain & Company recently analysed the total shareholder returns of 100 publicly listed insurance companies with a market capitalisation of at least $500m (£335m). Screening for those that produced TSR of at least 5% annually over both the past five and 10 years, the original list was whittled down to 30 consistent performers.

The performance leaders are a diverse lot. Nearly two out of three are property and casualty underwriters, but the list also includes life insurers, composite insurers, reinsurers and brokers. They are also broadly dispersed geographically. Most are headquartered in the major markets of Europe and North America. But nine top performers are based in emerging markets — including the top five, which turned in 10-year TSR compounded annual growth rates ranging from 26% to 35%.

Elitist characteristics
As a group, the elite 30 share a few telling characteristics that differentiate them from their peers. For one thing, they are considerably smaller than their counterparts. Compare the average market capitalisation of $6.5bn for the performance leaders versus $10.3bn for the others in the sample. They also operate in fewer markets — just nine, on average, compared with 22 for their competitors.

Many of the companies in the top 30 choose to remain small and concentrate on boosting profitability rather than pursue size for its own sake. Indeed, the large, global composite insurers in the sample yielded the poorest 10-year returns — each posted a negative TSR, compared with a positive 11.4% annual average for the top 30.

But three key traits in how they approach, organise and manage their businesses set the performance leaders apart from the laggards.

First, they identify clear strategic priorities and focus on them intently. Competitive leadership is fundamentally grounded in a well-defined core business organised around attractive customer segments, geographic markets or lines of business. Insurers with a clear strategic purpose develop superior capabilities for appraising underwriting risks and managing claims, which in turn produce the highest returns.

For example, Topdanmark, a Danish P&C insurer that has turned in a 10-year TSR of 19%, has carved out a market-leading position as an insurer of SMEs focusing on its home market of Denmark, and with a particular strength in the agricultural sector. Similarly, by maintaining a focus on its home market of Austria, and the culturally aligned countries of Central and Eastern Europe, Vienna Insurance Group capitalised on its geographic expertise to sustain an annual TSR of 7% over the 10-year period.

In the US, Pro Assurance excels in its strategic niche selling professional liability insurance principally to physicians, dentists and other healthcare providers and facilities. The company has deepened its core business strength over the past two years through a pair of targeted acquisitions of other professional liability underwriters.

Second, the top performers build and enhance distinctive expertise — particularly in underwriting and claims management. Insurance remains at its heart a people business, and industry leaders excel at hiring the best talent and fostering their professional development. When they make strategic acquisitions, they make retention of the ablest people a top priority.

Many of the top 30 performance leaders stress rigorous, in-depth training. In the US, Brown & Brown, for example, operates an internal university that instructs new recruits in technical skills and imbues them with the organisation’s company culture. QBE, an Australian P&C insurer that posted a 19% 10-year TSR, requires its underwriters to have a comprehensive knowledge of their clients’ businesses and the territories within which they operate.

Another US insurer, Chubb Group, built its reputation as a premier multiline underwriter by investing in unparalleled customer relationships and serving high-value niche markets. For decades, Chubb trained service-oriented agents and expert brokers in a network of proprietary commercial institutes it spun off as a separate company in 1970 and, ultimately, sold in 2004.

Pushing expertise
Finally, the TSR leaders build organisations that push expertise close to the customer. The consistent performance leaders in our sample do not typically pursue the purported advantages of scale. With scale-driven costs making up just 10% to 15% of an insurer’s total costs, these insurers recognise that the potential savings are not big enough to boost overall returns and that sheer size can impede operational effectiveness.

Rather than fixate on cost cutting, the performance leaders identify the needs of attractive customer segments, develop the right products for them, underwrite risks properly, assess claims accurately and, in the process, generate high levels of customer loyalty and renewals.

Our analysis has found that many of the performance leaders are highly decentralised, enabling subsidiaries organised by business line or geography to operate independently. For example, WR Berkley, a US-based commercial lines writer, operates in five P&C business segments, each of which is a grouping of highly focused insurers in its individual domain. In France, April Group is structured around multiple broking companies operating in specific niches. These, in turn, are tied together in a matrix of divisions and distribution channels, supported by captive insurers.

Taking a decentralised approach in order to focus on a core business or geography allows managers and frontline employees to excel at developing their expertise and serving their customers with undivided attention. As the results of our analysis demonstrate, that’s an approach that pays shareholders of top-performing insurers big dividends.

Jonathan Hughes is a partner in the London office of Bain & Company and a member of the firm’s global financial services practice.

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