Majority of Reinsurers are Undervalued, PwC Reports

NU Online News Service, Sept. 12, 2:48 p.m. EDT

To remain viable, reinsurers need to be looking to the future, recognizing that their customer base will be seeing “substantial transformation,” according to a study by PricewaterhouseCoopers.

The main drivers of value, such as distinctiveness, specialism, effectiveness and orientation with stakeholder interests “have been discarded,” according to the report launched at the Monte Carlo Reinsurance Rendez-vous.

Instead, strategies have been built on diversification as an excuse to be “everything to everybody” and the result is a commoditized and opaque industry, the report finds.

Achim Bauer, insurance strategy leader at PwC, says in a statement, “Too often, reinsurers’ strategies have been built on diversification as an excuse to be everything to everybody and the result is a commoditized and opaque industry.”

He adds that with differentiation “being drawn predominantly on a cost of cover and ease of transaction basis, reinsurance has become a mere cost to insurance buyers, rather than a valuable risk-management tool. Leading reinsurers should instead try to stand out from the crowd through strong leadership, scale, risk insight and partnership. They need to look beyond ‘managing the cycle’ to anticipating longer-term challenges.”

According to the report:

  • 89 percent of reinsurers are undervalued despite uncorrelated risks’ attractions.
  • The market has lost confidence in the traditional, diversified reinsurance model.
  • Reinsurers need to re-think their strategies to improve shareholder returns.

Reinsurers and investors are not capitalizing on the potential attractiveness of the sector as a source of uncorrelated cash flows, leading to an undervaluation of the industry, the report finds. This issue is being compounded by a lack of confidence in reinsurers’ business models and little distinction within the sector.

The PwC report suggests companies will need to move away from ‘diversified’ business models to attract greater capital markets interest and improve shareholder returns, amid the current low-rate environment.

The report demonstrates the capital markets are not convinced in the traditional, more diversified reinsurance model. Analysis conducted by PwC shows that the vast majority (89 percent) of the main listed reinsurers are trading at below book value.

The research also reveals that absolute returns offer little comfort—an investment in a basket of reinsurance stocks at the start of 2004 would have generated virtually zero total return to shareholders, with very little difference between European and U.S./Bermuda reinsurers.

The current environment of high macro uncertainty should make reinsurance stocks an attractive option as sector earnings are, for the most part, uncorrelated to other asset classes and fluctuations in macroeconomic variables. Yet, capital market valuations of listed reinsurers continue to disappoint.

James Quin, European insurance market reporting leader at PwC, says, “The uncorrelated risk argument for investing in reinsurance ought to be very attractive in the current environment but virtually all listed reinsurers are trading at material discounts to tangible book value. Clearly, the benefits of diversification and the distinction between reinsurers and other financial services companies are far from obvious to the capital markets.”

With many reinsurers pursuing a diversification strategy, this leaves investors with little option but to differentiate between companies purely on a relative yield basis. The report suggests reinsurance companies’ search for diversification is often viewed by investors as undermining accountability and as a justification for growth and "mission creep" over returning cash to shareholders. 

Reinsurers also need to rethink their strategies in terms of the changing risk environment. Faced with limited growth potential in the traditional risk-transfer market, the reinsurance industry’s positioning in the value chain, as well as its geographical and product focus, is set to change significantly. Reinsurers must also recognise that their customer base will be undergoing substantial transformation and will look and act differently in the future.

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