The Drivers of Value Creation in Reinsurance Reinsurers have outperformed because of cyclical multiple improvement Contribution to average annual TSR, 2015–2019 (%)1 14.6 6.5 7.1 9.5 3.8 8.2 8.8 TSR drivers 3.7 5.5 Cash flow contribution3 0.8 6.4 6.6 9.4 Growth in tangible equity 4.6 5.0 Price/TBV change 2.1 0.9 –1.9 0.3 –6.6 Global sector2 Reinsurance P&C Multiline L&H Sources: S&P Capital IQ; Refinitiv; BCG ValueScience Center. Note: Components of TSR are multiplicative but converted and shown here as additive with remainders assigned to the multiple change field. Aggregation based on market cap weights at the start of the year. TSR calculated in each company's reporting currency. 1 TSRs run from December 31, 2014, to December 31, 2019. 2 Total industry sample = 96, omitting brokers and companies with negative tangible book value. 3 Includes dividend contribution and share count change. In the long run, growth drives TSR for top performers sectorwide Percentage-point contribution to average annual TSR, 2015-20191 Top quartile, reinsurance (n=3)2 Top quartile, total industry sample (n=24)2 2.0 20.0 2.0 20.0 9.0 4.6 13.4 9.0 Growth in Price/TBV Cash flow 5-year Growth in Price/TBV Cash flow 5-year tangible equity change contribution3 TSR tangible equity change contribution3 TSR Sources: S&P Capital IQ; Refinitiv; BCG ValueScience Center. Note: Components of TSR are multiplicative but converted and shown here as additive with remainders assigned to the multiple change field. Aggregation based on market cap weights at the start of the year. TSR calculated in each company's reporting currency. 1TSRs run from December 31, 2014, to December 31, 2019. 2Total industry sample = 96, omitting brokers and companies with negative tangible book value. 3 Includes dividend contribution and share count change. The performance of the largest listed global reinsurers varies widely Average TSR by driver, 2014–2019 (%) Total TSR 24 Book value growth 7 17 16 15 15 15 12 1 13 13 9 12 13 6 2 7 11 P/B multiple 12 7 4 3 11 6 6 4 8 2 7 10 9 9 9 6 7 6 Cash return 5 4 5 5 2 3 –2 –2 –2 –4 –17 –1 –8 Hannover Arch Renaissance RGA Munich Weighted #6 #7 #8 #9 #10 #11 #12 - Re Capital Re Re average Sources: S&P Capital IQ; BCG ValueScience Center. Note: TSRs run from December 31, 2014, through December 31, 2019. Dividend contribution to cash return includes investment of dividends and special dividends, compounded daily. Components of TSR are multiplicative but converted and shown here as additive with remainders assigned to the margin and multiple change fields. Growth must be profitable, but few reinsurers operate above their cost of equity 26 Median: 10.8 24 22 20 18 16 Hannover Re 14 12 RGA 10 Median: 10.2 Cost of equity 8 6 Munich Re Arch Capital 4 Ren Re Average return on equity, 2015–2019 (%) 2015–2019 equity, on return Average 2 0 –5 0 5 10 15 20 25 Book value CAGR, 2015–20191 (%) Sources: S&P Capital IQ; BCG analysis and estimates. 1 Compounded annual growth rate of book value per share plus dividend per share, 2015–2019, excluding other comprehensive income. On average, reinsurers also have lower RoTEs than primary insurers 40 32 1 Top-quartile 22 19 reinsurers deliver 20 17 15 attractive RoTEs 8 pp 4 pp 13 spread spread equity, 2015–2019 (%) 2015–2019 equity, 14 11 Average return on tangible tangible on return Average 9 9 8 4 0 P&C insurance L&H insurance P&C reinsurance L&H reinsurance Top quartile Bottom quartile Median Source: BCG analysis. 1Operating profit before tax divided by tangible book value of equity allocated to each segment; average of median RoTEs, 2015–2019. Here’s why: the underlying factors driving reinsurers’ RoTE reveal low underwriting margins and high capital intensity in P&C reinsurance Loss ratio 66% 100% minus combined ratio 1% Underwriting 1% RoTE Expense ratio 32% TBV/net earned premium 105% P&C Group reinsurance 9% –1% contribution1 RoTE Investment income/ financial assets 2.8% Investment 8% RoTE Financial assets/ TBV 317% Source: BCG insurance RoE benchmarking database. Note: Apparent numerical discrepancies are due to rounding. 1P&C share of centrally allocated buckets (e.g., group functions, noncore business, and eliminations). The top five P&C reinsurers outperform Average underwriting RoTE, 2015–2019 (%) mainly on investment RoTE 19 5 5 –1 –1 IRB Hannover Re SCOR China Re Munich Re Average RoTE, 2015–2019 (%) 37 Average group contribution, 2015–2019 (%)1 0 0 0 –1 21 20 20 15 –6 IRB Hannover Re SCOR China Re Munich Re IRB Hannover Re SCOR China Re Munich Re Average investment RoTE, 2015–2019 (%) 24 21 17 14 16 IRB !Hannover Re SCOR China Re Munich Re Source: BCG insurance RoE benchmarking database. Note: Any apparent discrepancies in totals are due to rounding. Market data as of August 31, 2020. 1P&C share of centrally allocated buckets (e.g., group functions, noncore business, and eliminations). Similarly, the top L&H reinsurers rely Average underwriting RoTE, 2015–2019 (%) heavily on investment income 3 –2 -19 Average return on tangible equity, 2015–2019 (%) China Re SCOR RGA 16 15 14 Average group contribution, 2015–2019 (%)1 8 0 0 China Re SCOR RGA China Re SCOR RGA Average investment RoTE, 2015–2019 (%) 25 19 11 Source: BCG insurance RoE benchmarking database. China Re SCOR !RGA Note: Any apparent discrepancies in totals are due to rounding. 1L&H share of centrally allocated buckets (e.g., group functions, noncore business, and eliminations). Investors are clearly worried about the long-term impact of COVID-19: reinsurers’ multiples have fallen to near 2010 levels, with wide disparities Average P/B multiple of the top ten reinsurers (%) Year-to-date drop in P/B multiple of the top ten reinsurers (%) 1.4 1.2 1.2 1.2 1.2 1.1 –4 1.0 1.0 –7 0.9 0.9 0.9 –16 –18 –23 –26 –30 –32 –40 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 August –43 2020 Sources: S&P Capital IQ; BCG analysis and estimates. Note: Market data as of August 31, 2020. Successful reinsurers use human creativity and machine-generated insights to understand market dynamics and make informed decisions Manage the exposure Understand and predict • Political actions furthering claims inflation Scenario analysis driven by • Silent or “unknown” coverages: business interruption losses could erode advanced analytics reinsurers' capital • Liability aggregation risk: with COVID litigation in early stages, now is the time Decide and select to understand the aggregate exposure from accelerated social inflation • Control risk aggregation • Portfolio adjustments Manage the cycle • Capital allocation • Risk and pricing uncertainty remains high • Repricing and cost cutting • Accelerated decline in demand in many lines, such as aviation and energy, as well as in the life savings business Manage the capital • Lower for longer yields • Credit crisis still looming • Stress on capital • Cost pressure, old ways of addressing issues Source: BCG analysis. The bionic reinsurer augments human expertise and creativity with machine-generated insights… Enriched recommendation and decisions Leverage tech to improve human instincts and generate superior recommendations for business decisions based on data and insights Augmented insights generation Generate faster, broader, and deeper analyses by combining human and tech expertise; free up time and resources to focus human capabilities on high-value-added activities Adaptive processes and data management Technology supports the human in work, processes, and data management, ensuring that the optimal process is carried out for each person in different situations Source: BCG analysis. …and unlocks tremendous value +5 pp –3 pp Loss ratio Expense ratio improvement decrease +5%–10% 2x +5 pp Gross written Faster Higher hit premium uplift quote-to-bind ratio Source: BCG analysis. Opportunities for bionic transformation span the value chain DISTRIBUTION OPERATIONS Bionic New business Augmented Smart portfolio Advanced claims distribution models and services underwriting steering handling Ensure adequate Enhance risk Leverage data to Improve transparency Speed up the claims matching of management improve quality and and consistency in handling process; submissions with risk propositions and extend consistency of planning and increase value; reduce appetite; drive reach both internally underwriting decisions monitoring the portfolio costs with AI fraud seamless and fast and externally with new and manage exposure detection and claim processes with brokers product and service actively handling tools though enhanced data offerings to distributors exchange and tools for and end clients better positioning Source: BCG analysis. Tech and algorithms are not enough 70% of the value comes from transforming processes and people Algorithms 10% • Quality of the modeling Technologies 20% • Data platforms • Visualization tools Process, people, and culture • Quality and availability of data 70% • Embed model in business processes • Changing the way people work Source: BCG analysis. The bionic operating model requires new types of talent $ Underwriters who understand the Incentive systems aligned with new value of the new bionic model vision and goals $ People who understand the value of People who don’t react to a portfolio but data so that they use it want to be increasingly proactive People who think beyond their area People who can further the science of expertise Digital talent (data scientists, UX and UI $ People who can transform a bionic advantage talent) and 21st century skills (learning into an offering (e.g., by turning an improved agility, creativity) claims process into an offering) Source: BCG analysis.