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May 6, 2011
© 2011 TransUnion LLC All Rights Reserved
KEYNOTE ADDRESS
Future of the Insurance Industry
Bob MoretteSenior PartnerBain &Company
Future of the P&C Industry?
• Slow growth
• Mediocre profitability
• Commoditization
• Traditional channel decline
• Consistent growth
• Strong returns
• High performing companies
• Dynamic innovation
© 2011 TransUnion LLC All Rights Reserved2
or
Agenda
P&C industry overview Lessons from
otherindustries New rules of
the gameFinal thoughts
3 © 2011 TransUnion LLC All Rights Reserved
P&C industry has experienced slow growth over the past 30 years
Note: NPW: Net premiums writtenSource: A.M. Best; ISO; Insurance Information Institute
4 © 2011 TransUnion LLC All Rights Reserved
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Average = 8%
Average = 4%
Consistent profitability has been elusive
Note: Median Cost of Capital for the P&C Industry was ~10% (2010)Source: ISO; A.M. Best (2009F); Insurance Information Institute; Cost of Capital is Median Cost of Equity Capital for SIC code 6331 in 2010,
from the Ibbotson Cost of Capital yearbook (Morningstar)
5 © 2011 TransUnion LLC All Rights Reserved
Relatively consolidated, but…
Source: AM Best; SNL Financials
6 © 2011 TransUnion LLC All Rights Reserved
…significant share change.
Source: Credit Suisse 2008
-10
-5
0
5
10%
Share point change by channel
84-89
-6.6
1.4
5.2
89-94
-3.7
0.8
2.9
94-00
-3.0
6.0
-3.1
00-06
-0.7
4.5
-3.7
Captive agentsDirect responseIndependent agents
“Donor” channel now captive agents
7 © 2011 TransUnion LLC All Rights Reserved
Commoditization: Price! Price! Price!You could save hundreds
in minutes on your auto insuranceSave on your auto insurance.Find out how much now.
8 © 2011 TransUnion LLC All Rights Reserved
Select few players are outperforming
Note: Companies shown are the top 10 highest NPW in 2010; dashed lines represent top quartile growth and outperforming ROESource: SNL Financials, Return on Average Equity data for specified P&C divisions of each corporation or holding group
9 © 2011 TransUnion LLC All Rights Reserved
Agenda
P&C industry overview Lessons from
otherindustries New rules of
the gameFinal thoughts
10 © 2011 TransUnion LLC All Rights Reserved
Other industries have faced similar challenges
Airlines
Credit Cards
Gambling
Defense
Challenging returns?
Stagnant or declining revenue?
Disruptive threat?(technology, new entrant,
etc)
Personal LinesInsurance
11 © 2011 TransUnion LLC All Rights Reserved
Airlines: Legacy carriers faced significant challenges in the late 1990s
….and was under attack by low-cost competitors
Industry consistently struggledwith profitability…
-10
-5
0
5
10%
US Airlines Net Margin
1980 1990 2000
Required margin for >15% ROE
Note: ROE calculation estimated based on selection of leading airlinesSource: ATA, company financials
12 © 2011 TransUnion LLC All Rights Reserved
Continental met this challenge by ruthlessly reconfiguring its footprint…
*LCC growth in New York attributable to introduction of Jet Blue hub at JFKSource: SEC Filings, DOT Form 41, Analyst reports, Annual Reports; Bain Analysis
“Cut” “Fix” “Keep” “Add”
-20
-10
0
10
20%
Percent reduction in non-fuel expenseper ASM (post 9/11)
Contin
ental
-18%
United
-9%
America
n
-8%
USAir
-5%
Delta
14%
Legacyaverage
Year filed for bankruptcy:
N/A 2002 2005N/A 2002
Continental optimized route network by exiting unattractive hubs
And reduced overall non-fuel expense by 20%
13 © 2011 TransUnion LLC All Rights Reserved
• Shifted mix to higher revenue customers- Grew premium business revenues >20%, through excellent customer service and
NPS implementation- Expanded international footprint through partnerships and JVs to >40% of global
revenue base (e.g. Star Alliance)- Developed new suite of travel products and services targeting international and
business class customers (e.g. airport fast tracking/seating upgrades, lounge access)
• Unbundled the product to create revenue opportunities- Phased out amenities once included in the price of the ticket, generating an
incremental ~$30M per year in ancillary revenues (e.g. food/beverage services)- Implemented new fees for baggage checking services ($25 per item)
Source: DOT Form 41, Analyst reports, Annual Reports; Bain Analysis
…and fixing the revenue side.
14 © 2011 TransUnion LLC All Rights Reserved
Credit Cards: The 1980s credit card market was booming, but fragmented and simplistic
• Virtually unregulated industry
• Simple decision metrics: – Debt-income ratios– Unadjusted credit scores
• Uniform pricing:– 19.8% interest– $20 annual fee
• Dramatic growth:– Share of consumer spending
doubled– Accounted for 70% of revolving
debt in 1989
Source: HBS Case Study: “Capital One Financial Corporation” May 2001
15 © 2011 TransUnion LLC All Rights Reserved
Fairbank and Morris believed credit cards offered a unique opportunity
Source: HBS Case Study: “Capital One Financial Corporation” May 2001
1. Ability to record every interaction with a customer
2. Ability to customize products to each customer
3. Ability to turn a business into a scientific lab where every decision could be systematically tested via thousands of experiments
4. Ability to roll out products nationally after they have been proven to work, without incurring brick-and-mortar costs
5. Potential to reinvent the entire economics of a business
6. No other competitor recognized this opportunity
1
2
3
4
5
6
16 © 2011 TransUnion LLC All Rights Reserved
Capital One’s success was driven by an information-based strategy
Source: HBS Case Study: “Capital One Financial Corporation” May 2001 (quote from page 7); BCG Case Study “Customer Relationship management at Capital One (UK)”
1 price for each customer:Each customer carries a specific credit risk that drives an optimal price
Test and learn:Understand correlation between behaviors and level of risk
Product proliferation:Wide range of products, targeted to narrow customer segments
+
=
17 © 2011 TransUnion LLC All Rights Reserved
Constant testing created a virtuous cycle of improved segmentation and profitability
Source: Graphic from Case Study “Customer Relationship management at Capital One (UK)”http://www.authorstream.com/Presentation/rakesh208-709520-customer-relationship-management-capital-one-uk/
18 © 2011 TransUnion LLC All Rights Reserved
0
10
20
30
$40B
Market capitalization, Capital One
1995
5
1999
34
As a result, Capital One experienced monumental growth
0
100
200
300
$400M
Capital One Net Income
1995
127
1996
155
1997
189
1998
275
1999
363
Source: HBS Case Study: “Capital One Financial Corporation” May 2001
Net income grew 185% in 5 years…
… and market capitalization increased by 600%
19 © 2011 TransUnion LLC All Rights Reserved
Gambling: In the 1990s, Harrah’s was faced with intense competition as others innovated
The Mirage Hotel, Las Vegas
The MGM Grand Hotel, Las Vegas
Harrah’s had to determine how to defend their position and grow in existing markets
Source: HBS case study “Harrah’s Entertainment” by Rajiv Lal, June 2004
20 © 2011 TransUnion LLC All Rights Reserved
• Competitors began introducing flashy, themed properties
• No new jurisdictions were planning to legalize gambling
Marketing Experiment Example:
Harrah’s “Total Rewards” cardTiered based on the expected
value of each customer
In response, they focused on customer loyalty… and harvested data to do so
$125 in hotel room and
steak dinner
$60 in free chips
vs.
Despite the reduced value, customers of the same segment preferred the chips
Source: HBS case study “Harrah’s Entertainment” by Rajiv Lal, June 2004
21 © 2011 TransUnion LLC All Rights Reserved
• Harrah’s CEO hired a Harvard professor to turn marketing into a quantitative, data-driven strategy
• Launched a loyalty card to gather customer data
• Mined that data and built statistical models to predict customer lifetime worth
• Segmented customers based on expected worth and behavior
• Conducted marketing experiments to determine the most effective approach for each customer segment
As a result, Harrah’s growth outpaced the marketby 3x
Source: HBS case study “Harrah’s Entertainment” by Rajiv Lal, June 2004
22 © 2011 TransUnion LLC All Rights Reserved
Defense: General Dynamics faced dramatic declines in its revenue base in the early 90’s
Source: Bain analysis, company reports
23 © 2011 TransUnion LLC All Rights Reserved
GD identified and prioritized bright spots in their portfolio where they could win…
24
Mar
ket a
ttrac
tiven
ess
Invest and growMaintain
Manage for cash
StrongWeak
High
Low$800M
ArmoredVehiclesMilitary
Aircrafts
Space Launch system
Electronics
Aircraft Components
MissilesSubmarines
SmallCommercial
Aircraft
Exit
Competitive position
Fit with core competencies
High
MediumLow
Assessment of GD businesses
Source: Bain analysis, company reports
“We have adopted a 'plan of contraction' that reflects our intention to place our non-core businesses in other hands as their markets permit and appropriate transactions can be negotiated.”
William Anders, CEO, 1992
© 2011 TransUnion LLC All Rights Reserved24
… by divesting 70% of their revenue but setting the stage for substantial, refocused growth
Source: S&P Industry Overview; Prudential; company reports
Operating margin
GD refocused its business and shrunk from $10B to $3B, while improving operations within
its core
Divested…• Space systems (Martin Marietta)
From a strong base, GD grew aggressively by adding two new cores
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Divested…• Tactical aircraft (Lockheed)• Cessna (Textron)• Missiles (Hughes)• Electronics (Carlyle Group)
25 © 2011 TransUnion LLC All Rights Reserved
Agenda
P&C industry overview Lessons from
otherindustries New rules of
the gameFinal thoughts
26 © 2011 TransUnion LLC All Rights Reserved
Which new rules of the game do you live by?
Rule with lowest costsDifferentiate on
brand/value and/or customer niche
Data/analytics/insights
Loyalty and advocacy
27 © 2011 TransUnion LLC All Rights Reserved
0
1
2
3
4
$5B
P&C industry advertising spend
1996
0.9
1997
1.1
1998
1.3
1999
1.7
2000
1.7
2001
1.6
2002
1.7
2003
1.9
2004
2.3
2005
3.0
2006
3.4
2007
4.1
2008
4.4
10%
(96-03)CAGR
18%
(03-08)CAGR
Brand-building is driving massive growth in advertising spend
Source: SNL Financial (2008)
28 © 2011 TransUnion LLC All Rights Reserved
Ad spend moving from simply “price” to differential brand and customer propositions
Differentiate on quality/service…. …or emphasis on segments
Focus on value“Lowest price for you”
“We’re here for you” “We understand your special needs”
Plays to the advantage of larger incumbents29 © 2011 TransUnion LLC All Rights Reserved
0
5
10
15
20
25
30
35
GEICO
17
ProgressiveDirect
Taxes
General Expenses
Other acquiring
21
Expense ratio (2010)
Captive Agents comparable
Ind. Agents comparable
Costs will remain an important battleground
Source: AM Best, SNL, Company Financials
How low can direct costs go?
How low do costs need to be to stay
competitive while outperforming
on value?
30 © 2011 TransUnion LLC All Rights Reserved
Information (and the ability to commercialize) will be an increasingly potent weapon
Per
cent
of l
osse
s
Population (sorted by predicted risk)
Source: Progressive Investor Relation Meeting, June 2010
31 © 2011 TransUnion LLC All Rights Reserved
Product or service meets basic needs
Product or service works as expected
Problems are resolved as
expected
80s and 90s: Satisfaction
The basics: “Eliminating nuisance
factors”
Ordinary services delivered
exceptionally
Exceptional services/ features
delivered well
2000+: Loyalty/AdvocacyDifferentiators:
“Creating the wow-factor”
Capturing new customers is only part of the battle, long-term success will depend on keeping them loyal
32 © 2011 TransUnion LLC All Rights Reserved
The payoff from investing in loyalty is significant
~30% higher profits
Profit for given volume of total agency book; indexed
~5.4x higher NPV
Lifetime profit from new policyholder (NPV); indexed
Agency Value of Loyalty Policyholder Value of Loyalty
Source: Bain Analysis; Bain & Co Ind’t PH Top-down Survey; Policyholder satisfaction survey; JD Power; Dec 2009 Agent satisfaction survey; salesforce.com
33 © 2011 TransUnion LLC All Rights Reserved
USAA
Am
ica
Erie
AAA
Sta
teFa
rm
Auto
-Ow
ner
s
Am
eric
anFa
mily
Har
tfor
d
Mer
cury
Nat
ionw
ide
Alls
tate
Prog
ress
ive
Farm
ers
Alli
ed
Saf
eco
Trav
eler
s
Enco
mpas
s
Liber
tyM
utu
al
Han
over
-Citiz
ens
AIG
Extraordinary range in client satisfaction exists in both property…
2010 Net Promoter Score, Property Insurance Provider
Industry Avg (7)
Source: Top-down policyholder NPS survey, N=129,662. Note: All competitors shown collected more than 200 responses.
34 © 2011 TransUnion LLC All Rights Reserved
…and auto.U
SAA
Am
ica
Erie
AAA
Sta
teFa
rm
Auto
-Ow
ner
s
Har
tfor
d
GEIC
O
Sta
teFa
rm
Prog
ress
ive
Am
eric
anFa
mily
Alls
tate
Nat
ionw
ide
Merc
ury
Han
over
-Citiz
ens
Trav
eler
s
Saf
eco
Alls
tate
Farm
ers
Alli
ed
Trav
eler
s
Liber
tyM
utu
al
Enco
mpas
s
AIG
2010 Net Promoter Score, Auto Insurance Provider
Industry Avg (18)
Source: Top-down policyholder NPS survey, N=129,662. Note: All competitors shown collected more than 200 responses.
35 © 2011 TransUnion LLC All Rights Reserved
Source: Bain & Co Ind’t Agent Top-Down NPS Survey, 4/20/10. N = 1215; Individual company names have been disguised
There are also opportunities with agents2010 Net Promoter Score (Independent Agents)
Industry Avg = 22
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Agents that are promoters quote more, close more, and have higher share of agent book
Source: Bain analysis, Dec 2009 Agent satisfaction survey
Average 2009 close ratio(New Policies / Quotes);indexed
Median quotes written (2009); indexed
Likelihood to Recommend Carrier to a Customer
Company share of Agent’s book2009 Average;indexed
37 © 2011 TransUnion LLC All Rights Reserved
Agenda
P&C industry overview Lessons from
otherindustries New rules of
the gameFinal thoughts
38 © 2011 TransUnion LLC All Rights Reserved
Final thoughts: Key questions to consider• Where is my competitive advantage?
-Today/tomorrow?– Pricing/selection? – Brand? – Loyal/Advocacy?
• Do I have a distinct (enough) value proposition?– Against what segments? – Which agents?
• How competitive are my underwriting/selection tools?– Are they allowing me to keep up or fall behind?
• Are we changing fast enough?
• Do we need to make fundamental changes in our emphasis, footprint or business model?– Doing too many things and not any well enough?
© 2011 TransUnion LLC All Rights Reserved39