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Equity analysts look favorably on robust insurer risk management

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Equity analysts prefer strong risk management practices among insurers rather than a focus purely on generating returns on investments according to a survey released on Friday.

The survey, “Assessing Insurers in a Period of Rapid Change Insurance Analyst Survey 2016,” issued by Marsh & McLennan Cos. Inc. units Mercer L.L.C. and Guy Carpenter & Co. L.L.C., also found that about 90% of respondents favor a strong asset liability management approach as an attractive attribute of an insurer’s investment policy. 

Completed in October, the survey of 38 respondents found that other popular areas are low investment risk, diversification of investment risks and having a capital-efficient asset strategy. Mercer and Guy Carpenter said they conducted the survey of sell-side and buy-side equity analysts because many investors are directly influenced by the views of insurance equity analysts.

“Analysts typically favor companies that are reducing probable maximum losses (PMLs) in the
current rate environment,” the study said. “However, they would generally prefer insurers to reduce these by writing less business rather than with retrocession, although we observe that the latter remains popular with many insurers.”

Many analysts view low interest rates as the biggest downside risk for insurers, the survey said, and this view has likely informed analysts’ views on performance across insurance sectors.

The survey said that “it appears that equity analysts across the board are cautious about the growth prospects for the industry and would like underwriting and investment policies to reflect this.”

“Many equity analysts would like to see management prioritizing measures around cost reduction, divestment of inefficient businesses and organic growth over (mergers and acquisitions),” the report said. “Furthermore, it appears that analysts believe there is more opportunity for improvement in underwriting in comparison to investments.”

The majority of analysts would like to see more disclosure around reserves and capital adequacy, the survey said, noting that many companies are still coming to grips with additional disclosures for analysts and investors, “and we can expect this to evolve over the next few
years.”

The study said opinion is equally divided on the weight put on annual actuarial review
results. Some analysts tend to view assumptions as being too optimistic in the current climate and prefer to rely on their own analyses, the report said.

Just over half of the analysts surveyed believe M&A activity in the insurance industry is likely to increase over the short term, with less than 10% expecting a fall in M&A levels.

The ongoing low-yield environment and the flood of external capital into the insurance industry have depressed and are expected to continue to depress profitability, the report said, which puts pressure on insurers to find other means to extract value.