Strategy

Product Strategy

Product strategy plays a crucial role in shaping the future of insurance companies. Key aspects it influences are:

• Quality of the Balance Sheet (Assets/Liabilities Risk)
  • Risk of ending with higher asset risks. US/UK life insurers (Legal and General, Phoenix, Athene)
  • Reserving issues on liabilities. US variable annuities underwriters (Jackson National, Brighthouse)
  • Duration mismatch between assets and liabilities. Japan / Korean / German life industry
• Profitability of the Business
  • Risk of weaker P&L due to negative spread (incase of duration mismatch businesses),
  • Higher earnings volatility due to reserve charges
• Predictability of Cash Flows
  • Balance sheet issues lead to weaker capital and cash flows volatility
• Short tail Property and Casualty insurers
  • Short tail Motor/home insurers, product strategy is largely a source of volatility for P&L and cash flows but balance sheet stays relatively stable.
• Long tail Property and Casualty insurers
  • Commercial lines insurers and/or reinsurers product strategy could bring in significant source of volatility for P&L, cash flows and balance sheet.

Business model strategy

• Growth – good or bad:
  • Usually, growth is perceived to be a key attraction for investors to determine investment ideas, however in insurance growth is not necessarily a positive. If growth is delivered in a concentrated way and/or high macro risk line of business and/or with high initial cost base then it lead to weaker profitability / cashflows and balance sheet concerns in future
• Underwriting vs. Investment income:
  • In the European insurance context we have noticed that investors tend to value insurance risk far more than investment risk. For life it's the biometric risk and for non life it's the underwriting risk. Classic example of observable valuation differences are Nordic insurers vs. core European P&C insurers, Pan Asian insurers vs. Chinese life insurers
• Capital return is a rewarded risk:
  • European insurers are the best performing sector in Europe since 2011 and a large part of that is due to its consistent capital return profile. Dividends have grown by an average 5-6% over past 10-15 years and currently total capital return yield is >7%. Even during COVID, large part of the sector was able to pay dividends showcasing cash generative business model.
• Restructuring – perceived as a black hole:
  • When an insurer encounters balance sheet issues related to asset quality or product mispricing, these challenges can endure over an extended period. Transforming a legacy life insurance portfolio requires years of management effort, and investors often fail to give credit for the efforts for long.

ESG

• ESG has become a main stream topic with the investors over past decade and as a result most investors incorporate ESG factors into their investment criteria. Ishka helps insurers navigate ESG aspect within the firm, supports disclosure, peer benchmarking studies etc.

Other strategy related focus areas

• Client marketing strategy
• ALM management
• Capital management