ICMR highlights asset management as key frontier in underwriting returns on equity

The International Center for Market Research (ICMR) has identified asset management as a pivotal factor shaping returns on equity (RoE) in the insurance industry.

The shift in risk-free rates to decade-long highs has accentuated the significance of investment contributions as a critical component of shareholder returns.

Drawing inspiration from Warren Buffett’s famous analogy, ICMR underscores that for insurers capable of securing underwriting profits throughout economic cycles, it is tantamount to endowing shareholders with investment float at no cost.

The transformation in investment markets, with risk-free rates surging from 1-2% to over 5% in the last 24 months, has positioned investment strategies as a key source of shareholder value.

Contrary to the aftermath of the 2008 financial crisis, where insurers outsourced investment management of their float assets, ICMR now emphasises the pivotal role of investment strategies in delivering shareholder returns.

The current landscape sees a convergence of underwriting and investment considerations, with capital efficiency taking on a new dimension—investment contribution by class as a crucial factor in determining underwriting portfolio mix.

The revelation becomes evident in the asset leverage chart of each syndicate at Lloyd’s, where investment float is showcased as a function of estimated economic capital adequacy (ECA).

Some syndicates exhibit asset leverage up to four times the value of their effective shareholders’ equity, and at prevailing risk-free rates of approximately 5%, this investment return can yield up to a 20% return on equity independently.

The well-established relationship between returns on equity and valuation is exemplified in the chart plotting syndicates’ estimated price-to-book multiples against reported returns on equity from 2020-2022.

Higher average returns correspond to elevated estimated price-to-book multiples, demonstrating the direct impact of investment strategies on valuation.

For insurers in the competitive pack, the ability to outperform peers is advantageous, potentially resulting in a higher valuation multiple.

However, ICMR highlights that those capable of achieving top quintile outperformance stand to significantly enhance potential valuation rewards, transforming the dynamics before considering an initial public offering (IPO).

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