Are capital markets undervaluing the insurance sector?

Capital markets could be undervaluing the insurance sector, according to a poll taken at the International Insurance Society (IIS) Seminar held in Toronto on June 21. The poll was taken at a panel discussion moderated by Frank Ellenbuerger, global head of insurance for KPMG. The event included more than 300 global insurance executives.”There is a general perception that the insurance sector is misunderstood by the capital markets and, as a result, is systematically undervalued,” Ellenbuerger said. “The Standard and Poor Insurance Index shows that the sector has gradually deteriorated over the last few years and, unsurprisingly, this was further accelerated by the global financial crisis, resulting in relative underperformance.”Despite strong growth in the IFRS book value per share of European insurers, an increase of 250% since 2004, this trend is not reflected in the performance of insurance stocks, Ellenbuerger commented. “Stock performance has not mirrored the recovery of book values after the crisis,” he said.The panel examined whether or not this is evidence of a profound crisis confidence in the insurance sector.About a two-third majority of the people polled agreed accounting standards contributed towards undervaluing the insurance market.”The fact that accounting standards setters have been debating insurance accounting for 14 years now is a good indicator of the difficulties in defining an appropriate model for our business,” Ellenbuerger commented. “This may indeed be due to the singularity of the insurance business model.”About half of those polled did not believe new and proposed fair value-based accounting standards (under International Financial Reporting Standards) will increase transparency and contribute towards the value of insurance stock.”Most insurers are attracted by the potential for greater consistency and comparability through global accounting standards,” said Neil Parkinson, the national insurance sector leader for KPMG in Canada. “However, many insurers, particularly in the life insurance sector, are concerned that the currently proposed IFRS standards for insurance could result in significantly greater volatility in reported income and capital – some of it “accounting volatility” that would not reflect the underlying business results. “This could lead insurers to make still greater use of non-GAAP measures to explain their results to users, in preference to their basic financial reporting, which would work against achieving benefits from global standards.”