Can European Insurers Create Value?
Beaujean, Marc, Bo, Lars Jacob, Muth, Michael, Simensen, Simen Vier, Wels, Thomas, The McKinsey Quarterly
The market is sending a clear message: Insurers must radically improve their performance and increase their size, simultaneously
Core skills - buying and selling as well as leveraging intangible assets - will be key
The era of the traditional European multiline insurer is over. These players have become lumbering conglomerates with clients ranging from individuals to large corporations and products from life insurance through property and casualty to asset management.(*) This breadth could increasingly be a handicap. Different product market segments enjoy very different prospects for growth and profitability, and the skills and business models needed to succeed will vary from one to another [ILLUSTRATION FOR EXHIBIT 1 OMITTED].
Indeed, multiline executives are already finding it difficult to obtain superior returns and growth across such a range of businesses. Their immediate challenge will be to find ways of managing this diversity. Many European multiline insurers will have to change if they are to develop each business on its own merits. They must abandon their customary undifferentiated management approaches and adopt a multibusiness governance model in which management approaches are tailored to the particular challenges facing the various businesses.
In time, many European multiline insurers, in particular the small and medium-sized players, will also have to take the step of focusing their business portfolio on those businesses where they command or can build sustainable advantages. They must develop superior core skills, primarily in specific product market segments but also in selected parts of the business system such as pension administration or claims handling. In addition, they must grow through mergers and acquisitions and achieve focus through divestments, spinoffs to the stock market, or joint ventures.
In the end, only a handful of huge European insurers will manage to achieve excellence in several business segments, and thus earn the right to aspire to become global financial powerhouses. Meanwhile, both" smaller poorly performing multiline insurers and large, lumbering conglomerates risk becoming acquisition targets.
Investors are already sending the traditional conglomerates a message to change. In general, the insurance industry in Europe lagged behind domestic stock market indices in most European countries between 1990 and 1998, and found itself under intense competitive pressure (see the boxed insert, "The forces of change"). But there are indications that the market values signals of bold change. Storebrand, Norway's biggest insurer, saw its stock rise by 50 percent in six months in 1997/98 after an investment banking analysis revealed what its life and property and casualty business would be worth as separate businesses, and after top management publicly acknowledged that breakup was an option.
A few insurers deemed by investors to be on the right track are surging ahead, providing shareholder returns well above stock market indices [ILLUSTRATION FOR EXHIBIT 2 OMITTED]. In Europe, the top 20 value creators in insurance have increased their share of total industry market capitalization from less than 40 percent in 1990 to more than 60 percent in 1997.
In Europe, the value-creation winners include Aegon and Swiss Re; in the United States, SunAmerica and UICI were star performers. These players have two characteristics in common. First, they have achieved profitable growth without increasing their capital base proportionately, leveraging such intangible resources as the people, systems, and skills within their organizations. This is reflected in high ratios of market capitalization to net asset value (price-to-book) [ILLUSTRATION FOR EXHIBIT 3 OMITTED]. Second, the majority possess focused business portfolios, choosing to play in only a few arenas. Yet there are also high performing insurers with broad business scope, such as Travelers and ING, that have succeeded in differentiating their management approaches from one business to the next. …