ACORD recently conducted the US Value Creators Study, focusing on the 100 largest non-life insurance groups in the US, representing nearly 90% of written premiums and nearly 100% of the industry’s market capitalization – $9.1 trillion over 20 years are included in the study. The study analyzed the statutory financial returns of companies in all 50 states, both publicly traded and mutual, and included interviews with senior executives.
The research divided these top 100 carriers into three categories: Sustainable Value Creators, Hollow Value Creators and Value Destroyers. A proprietary free cash flow model measures value creation related to timing, size, duration and resources.
Who made how much?
The non-life insurance industry generated $182 billion in value over 20 years. Over the 20-year period studied, the non-life insurance industry had $9.4 trillion in capital, which — based on a required rate of return of 7.4% — would imply a cost of capital of $695 billion. Sixty-four percent of the insurers in the study generated cash flows greater than their cost of capital, generating a value of more than $229 billion. Cash flow generated by the remaining 36 companies fell short of the required capital requirement by a total of $84 billion.
- Sustainable Value Creators are insurers that achieve required returns through underwriting and investment activities. The top 10% carriers in the Sustainable Value Creator category generated 78% of the total value created by all 100 carriers.
- Hollow Value Creators are insurers that achieve required returns through investing activities but fail to generate value through underwriting. The top 10% of carriers in the Hollow Value Creator category generated 3% of the total value created by all 100 carriers.
- Value Destroyers are the insurers that fail to generate value during the study period. The top 10% of carriers in the Value Destroyer category destroyed 27% of the total value created by all 100 carriers.
The research found that focus on underwriting discipline and cost management was key to value creation in the P/C industry. Long-term value creation was important for the best-performing carriers.
Sustainable value creators – what do they do well?
The best-performing carriers in the Sustainable Value Creator category focused on long-term value creation, strong underwriting discipline and effective cost management. They had higher underwriting margins, higher return on equity and lower expense ratios. These carriers achieved an 11.8% return on invested capital and generated $229 billion in value, or 126% of the value created by the 100 insurers in the study. Sustainable value makers with an NPV of more than $3 billion generated more value per premium dollar than any other cohort – 5.4% compared to a study average of 2.0%.
Sustainable Value Creators also had the highest level of digital capabilities. These companies typically spent more than the average of 3.5% of premium income on IT – some more than 6.5%.
Sustainable Value Creators wrote a balanced mix of personal and commercial lines. They spent 58.7 cents of every premium dollar on claims costs, compared to an average of 61.2 cents. They also spent 11.4 cents on damage repair costs (LAE), versus the average of 11.7 cents. These carriers spent 70.1% of premium dollars on claims, versus a top 100 average of 72.9%.
Despite the increase in the cost of capital in recent years, 83% of Sustainable Creators in this year’s survey have maintained high levels of performance in at least four of the past five years. More than two-thirds (68%) were classified as sustainable in all five of the past five years.
Hollow Value Creators – Stuck in the middle
The best-performing carriers in the Hollow Value Creator category had higher investment income, but lower insurance margins and return on equity. Their focus was on investment income, but they were weaker in underwriting discipline and expense management.
Hollow Value Creators had higher back office spend than the other cohorts and the top 100 average and a slightly larger commercial book.
The underwriting business of the 23 Hollow Value Creators consumed $22 billion of the $59 billion of value generated by investments for a net value created of $37 billion. Without their investment income, they would have fallen into the Value Destroyer category.
Value Destroyers – What Went Wrong?
Over the past year, the Value Destroyer cohort has quadrupled, from 9% to 36% of the companies surveyed. Many Hollow Value Creators from the same study conducted in 2021 became Value Destroyers in 2022.
The best performing airlines in the Value Destroyer category had lower underwriting margins and return on equity and higher expense ratios. These carriers exhibited weak underwriting discipline and poor cost management and were not focused on long-term value creation.
Value Destroyers tended to focus more on personal matters and generated significantly less value through per-company investment operations than both Sustainable and Hollow Value Creators — $500 million versus $1.2 billion and $2.6 billion, respectively. In total, the $84 billion in value destroyed by these 36 insurers was more than the value created by the next 92 Value Creators combined.
Working on sustainability
The study concludes that specific characteristics and practices drive sustainable value creation in the non-life insurance sector. The most successful companies had solid strategies and goals, including:
- Aligning strategy and capabilities: Sustainable Value Creators invested in processes, organizational characteristics and technologies that were consciously aligned to support one or more of the fundamental insurance strategies.
- Execution Excellence: Sustainable Value Creators focused on customer relationships while choosing the right risks, they were more aware and focused on the industries they endorsed, and they overpaid their distribution partners and underpaid claims and LAE costs.
- Change, Talent & Culture: Sustainable Value Creators have demonstrated their ability to consistently attract, retain and develop better people and sustain a culture of customer service and innovation.
- Standardized data exchange: Sustainable Value Creators leveraged the benefits of ACORD standards and other assets for standardized data exchange.
subjects
Carriers USA Personal Auto
