Share buy-backs not the best way to deal with excess capital, broker says
The property/casualty insurance and reinsurance industries are getting a raw deal from the investment community, according to Bill Kennedy, CEO of analytics, capital markets, specialty practices and advisory groups.
Speaking at the broker’s annual press conference at the Monte Carlo Rendez-vous, Kennedy pointed to the low valuations the capital markets currently assign to insurers and reinsurers. According to Guy Carpenter and Bloomberg data, the property/casualty insurance sector’s average share price has been between 0.8 and 0.9 times their book value. This compares with 1.4 back in 1990 and a 20-year average of between 1.3 and 1.4 times.
“Is the industry being unfairly punished by the investment community? Our view is yes,” said Kennedy. One reason for the share price discount to book value, argues Kennedy, is the investment community’s perception that insurers and reinsurers are bad at allocating capital. However, Kennedy feels this is a misconception. “Over 70% of companies have made returns that exceeded their cost of capital and so are adding to shareholder value,” said Kennedy. “We disagree with the notion that property/casualty insurers and reinsurers are poor allocators of capital.”
Despite the low valuations of companies, which would typically be precursor to mergers and acquisitions, Kennedy expects activity to be muted. This is because, with share price valuations so low, companies acquisition currency is too cheap.
While Kennedy contends most reinsurers’ capital allocation has been good, he questioned the industry’s recent capital management approach. Several reinsurers are returning excess capital to shareholders through increased dividends and share buy-backs, but Guy Carpenter believes reinsurers should instead be using the capital to invest in innovation and branching out into new areas.
“With so much excess capital currently in the marketplace, carriers should be looking for value-accretive opportunities to deploy capital rather than sending it back and sacrificing longer term returns.” He argued that the demands for reinsurers to return excess capital to shareholders were coming more from short-term investors rather than those with longer investment horizons.
Henry Keeling, president and CEO of Guy Carpenter’s international operations added: “There are many ways insurers and reinsurers can deploy capital to grow their businesses, from new technology to emerging risks and markets. Returning capital doesn’t create profitable growth and increased market share. Innovation, on the other hand, does.”
One area in particular Keeling highlighted as a growth opportunity is micro-insurance – insurance for those with low incomes that could not afford standard products, typically in developing countries.
“We see micro-insurance as a way to create social good but also as an opportunity for the industry of unprecedented size,” adding that microinsurance currently represented $1bn of premium but has a potential market size of $5 trillion.
