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Equity Analysts Expect Higher Profitability From Insurers Despite Difficult Market Conditions, According To Accenture Survey

Insurance equity analysts expect higher profitability, despite difficult market conditions, from the best-performing insurers and will reward those that expand into emerging markets, according to findings of a global survey by Accenture (NYSE: ACN).

Commissioned by Accenture and conducted by Institutional Investor Market Research Group, the survey queried 68 leading insurance equity analysts in 16 countries and covered a diverse range of topics, including profit and growth strategies in the context of major industry challenges.

The survey reveals that the equity analysts expect the insurers they recommend with “Buy” ratings to deliver an average pre-tax return on equity (RoE) of 14.9 percent in 2012, compared to 13.7 percent in 2011. Profitability expectations will continue to rise, with half of the overall respondents expecting higher pre-tax RoE in the next three years from insurers with “Buy” ratings.

“Given that the average pre-tax RoE was 11.8 percent in 2011 for the 20 largest global insurers 1, the expectations set by the equity analysts for 2012 are quite challenging,” said John Del Santo, global managing director of Accenture's Insurance practice. “The overall industry is affected by the difficult economic conditions and ever-more stringent regulatory environment, while property and casualty insurers have to struggle with higher volatility of catastrophe claims and life insurers with low interest rates and weak demand. Insurers will have to convince the analyst community that they have the right strategy to navigate these challenges while raising the bar for revenue growth and profitability, if they want to earn superior ratings.”

Analysts reward expansion into emerging markets

Expansion into emerging markets is considered by analysts as important or critical to earn superior ratings:
  • All P&C insurance analysts said merger and acquisition (M&A) initiatives by North American, European and Japanese insurers into Brazil, Russia, India, China, Mexico or South Korea are an important or critical driver of superior ratings over the next three years.
  • A majority (88 percent) of life insurance analysts said organic growth in these emerging markets is important or critical to earn superior ratings in the next three years.

“While emerging markets may be crucial to the future performance of global groups, they are no panacea,” said Thomas Meyer, managing director of Accenture's Insurance practice for Europe, Africa and Latin America. “Many countries are resisting the efforts of global carriers to enter their markets and compete against local firms. Also, the lack of homogeneity of emerging markets, where the cultural differences are more significant than in Europe, makes it difficult for insurers to achieve economies of scale across borders. Thus, a global operating model which allows the insurer to capitalize on its proven assets, processes and capabilities, while adapting to local needs, is essential to expanding into such markets profitably.”

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