Diversification strategies leave reinsurers undervalued

Reinsurers and investors are not capitalising on the potential attractiveness of the sector, according to PricewaterhouseCoopers (PwC), with the issue compounded by a lack of confidence in reinsurers’ business models and little distinction within the sector.

In a new report, the accountancy firm suggests companies need to move away from the diversified business model to attract greater interest from capital markets and improve shareholder returns, amid the current low-rate environment.

The study entitled “Daring to be different” states that 89% of the main listed reinsurers are trading at below 1 x tangible book value, while absolute returns offer little comfort as an investment in a basket of reinsurance stocks at the start of 2004 would have generated virtually zero total return to shareholders.

Meanwhile, 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.

However, PwC argues that the current economic environment 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.

The firm’s European insurance market reporting leader, James Quin, comments: “Clearly, the benefits of diversification and the distinction between reinsurers and other financial services companies are far from obvious to the capital markets.”

PwC’s insurance strategy leader, Achim Bauer, adds: “Reinsurers should … try to stand out from the crowd through strong leadership, scale, risk insight and partnership.

“They need to look beyond ‘managing the cycle’ to anticipate longer-term challenges.”

Tags: business models, PricewaterhouseCoopers, report, returns

Category: Financials, Insurance News