Insurance Equity Analysts Favor Emerging-Markets Expansion, Predict Increased M&A Activity, According to Accenture Global Survey of 100 Analysts
P&C analysts rank climate change and other environmental issues as the industry’s top challenge
Conducted by Institutional Investor Market Research Group as part of Accenture’s High Performance Business research, the survey queried more than 100 leading insurance equity analysts in 14 of the world’s largest insurance markets and covered a diverse range of topics, including profit and growth strategies, capital utilization priorities, critical industry challenges, operational excellence and industry top performers.
Among the survey’s other key findings: More than three-quarters (77 percent) of analysts rate operational efficiency improvement – or “transformation” – programs as the most valuable use of capital after share-buybacks and dividend increases (cited by 83 percent of respondents). Nine out of ten (89 percent) P&C analysts cited climate change and environmental issues among the industry’s top three challenges, making it the most widely cited P&C industry challenge in the survey.
“The determinants of success within the $3.7 trillion insurance industry are rapidly changing, as new threats and opportunities emerge both regionally and globally,” said Serge Callet, managing director of Accenture’s Insurance practice. “We tapped the collective insights of these critical industry observers to deepen our understanding of how insurers can earn superior ratings and how they can achieve high performance in a challenging market environment.”
Life Insurance Analysts Reward Expansion into Emerging Markets
The vast majority (85 percent) of life insurance analysts said expansion initiatives by North American, European and Japanese insurers into Brazil, Russia, India, China, Mexico or South Korea will be a key driver of superior ratings over the next three years. Asked to identify the preferred means of expansion into such emerging markets, life analysts were far more likely to cite organic growth as a high priority (cited by 82 percent) than to cite M&A (48 percent).
“While opportunities for life insurers vary by geography and market circumstances, our research suggests that analysts overall are looking to reward carriers with bold visions for the longer-term opportunities in emerging markets,” said Callet. “The winners will be those who have flexible, scalable and efficient operations and can strike the best partnerships and joint ventures around the globe.”
P&C Analysts Predict M&A But Favor Organic Growth
More than two-thirds (71 percent) of all P&C analysts surveyed said they anticipate a “significant increase” in merger and acquisition (M&A) activity in 2008. At the same, the findings indicate significant differences by geography, with P&C analysts in North America three times as likely as those in Europe to predict a significant increase in M&A activity.
“The logic of consolidation within the property and casualty industry, particularly in North America, may be gaining favor as the economy slows and as rates soften,” said John Del Santo, managing director of Accenture’s Insurance practice in North America. “However, our research suggests that analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized.”
P&C analysts globally attached modest importance to M&A in terms of earning superior ratings, but they widely favored organic growth:
- Less than half (45 percent) ranked M&A among the most valuable uses of capital;
- Two-thirds (67 percent) said that M&A within mature markets is important or critical to earning superior ratings over the next three years, compared with 84 percent who said the same of organic growth; and
- One-third (33 percent) described M&A within mature markets as “unimportant” to earning superior ratings over the next three years, compared with 16 percent who said the same of organic growth.
DelSanto added: “M&A winners will focus on rigorous deal discipline and early post-merger integration planning in order to quickly realize synergies and demonstrate a path to profits.”
P&C and Life Analysts Strongly Favor Operational Efficiency Programs
Operational efficiency improvement – or “transformation” – programs were ranked only slightly behind share-buybacks and dividend increases among the most important uses of capital, but significantly ahead of product and service innovations, M&A and business line expansion.
“One of the most remarkable findings of our research is that such a vast majority of analysts hold such bullish views on longer-term transformation programs and see an opportunity for insurers to outperform the market through increased efficiency,” said Callet. “Our recent analysis suggests that when it comes to return on equity, transformation programs can have an equal or greater positive effect than share buybacks can.”
Further highlighting the analysts’ focus on efficiency, “aging systems and IT modernization” was the second most widely cited industry challenge among both P&C and Life analyst respondents.
Climate Change Cited as top P&C Industry Challenge
“Climate change and environmental issues” was the most widely cited industry challenge among P&C insurers – ahead of aging systems and IT modernization (85 percent), new regulations and reforms (76 percent), cross-border competition (69 percent), terrorism and geopolitical instability (61 percent), growing risk to investment portfolios (59 percent), changing customer demographics (58 percent), workforce demographic changes (52 percent), and competition from banks (35 percent) and capital market firms (27 percent).
Among the survey’s other findings:
- The majority (57 percent) of analysts said that IT investment in areas such as policy administration, claims management, process optimization and call centers are “critical” to the insurance industry over the next three years, with another 34 percent describing such IT investment as “important.”
- Eighty-two percent of analysts said the insurance analyst community would benefit from more education on new technologies and their role in business performance.
Accenture commissioned a quantitative survey of 108 insurance equity analysts around the world, including 49 P&C analysts, 28 life analysts, and 31 general insurance analysts. The telephone survey was designed by Accenture, with contributions from Institutional Investor Market Research Group and several former insurance equity analysts, and was conducted by Institutional Investor Market Research Group from December 2007 through January 2008. Respondents included 44 analysts in the United States; 26 in the United Kingdom; eight each in Japan and Germany; five in France; four in Switzerland; three each in Italy and Canada; two in South Africa; and one each in Belgium, the Netherlands, Norway, Spain, and Sweden.
About AccentureAccenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With 178,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is www.accenture.com.