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 “substantialtransformation,” according to a study byPricewaterhouseCoopers.

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

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

Achim Bauer, insurance strategy leader at PwC, says in astatement, “Too often, reinsurers' strategies have been built ondiversification as an excuse to be everything to everybody and theresult is a commoditized and opaque industry.”

He adds that with differentiation “being drawn predominantly ona cost of cover and ease of transaction basis, reinsurance hasbecome a mere cost to insurance buyers, rather than a valuablerisk-management tool. Leading reinsurers should instead try tostand out from the crowd through strong leadership, scale, riskinsight and partnership. They need to look beyond 'managing thecycle' to anticipating longer-term challenges.”

According to the report:

• 89 percent of reinsurers are undervalued despite uncorrelatedrisks' attractions.
• The market has lost confidence in the traditional, diversifiedreinsurance model.
• Reinsurers need to re-think their strategies to improveshareholder returns.

Reinsurers and investors are not capitalizing on the potentialattractiveness of the sector as a source of uncorrelated cashflows, leading to an undervaluation of the industry, the reportfinds. This issue is being compounded by a lack of confidence inreinsurers' business models and little distinction within thesector.

The PwC report suggests companies will need to move away from'diversified' business models to attract greater capital marketsinterest and improve shareholder returns, amid the current low-rateenvironment.

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

The research also reveals that absolute returns offer littlecomfort—an investment in a basket of reinsurance stocks at thestart of 2004 would have generated virtually zero total return toshareholders, with very little difference between European andU.S./Bermuda reinsurers.

The current environment of high macro uncertainty should makereinsurance stocks an attractive option as sector earnings are, forthe most part, uncorrelated to other asset classes and fluctuationsin macroeconomic variables. Yet, capital market valuations oflisted reinsurers continue to disappoint.

James Quin, European insurance market reporting leader at PwC,says, “The uncorrelated risk argument for investing in reinsuranceought to be very attractive in the current environment butvirtually all listed reinsurers are trading at material discountsto tangible book value. Clearly, the benefits of diversificationand the distinction between reinsurers and other financial servicescompanies are far from obvious to the capital markets.”

With many reinsurers pursuing a diversification strategy, thisleaves investors with little option but to differentiate betweencompanies purely on a relative yield basis. The report suggestsreinsurance companies' search for diversification is often viewedby investors as undermining accountability and as a justificationfor growth and “mission creep” over returning cash toshareholders.

Reinsurers also need to rethink their strategies in terms of thechanging risk environment. Faced with limited growth potential inthe traditional risk-transfer market, the reinsurance industry'spositioning in the value chain, as well as its geographical andproduct focus, is set to change significantly. Reinsurers must alsorecognise that their customer base will be undergoing substantialtransformation and will look and act differently in the future.