Economic Value Analysis Increasingly Seen as Major Strategic Tool
New York, N.Y., March 12, 2002 –Executives of stock life
insurance companies in North America still have some way to go before achieving greater
focus on the management of shareholder value, according to a recent Tillinghast –
Towers Perrin study of shareholder value management practices in the life insurance industry.
“While this study points out some of the challenges to
companies trying to manage their business based on shareholder value, it also shows how
the industry can realize that goal over the next three years,” says Alastair
Longley-Cook of Tillinghast – Towers Perrin’s Hartford office and coleader of its
shareholder value initiative.
“The industry is struggling with lower revenue and
fewer opportunities for profitable acquisitions. This study demonstrates that life
insurers need tools, such as economic value analysis, to assess and communicate their
strategies better to their own people and the market,” says Mike Lombardi, a
principal in the firm’s Toronto office and coleader of the study.
The study consisted of a survey of senior executives in
North American stock life insurance companies and subsequent interviews with a sample of
those executives and investment analysts in the United States and Canada who follow the
life insurance industry. The study probed current practice on the four dimensions of
shareholder value management: strategy, metrics, communication with the market and
The strategy of choice for insurers to increase shareholder
value has been and will continue to be mergers and acquisitions. Sixty-two percent of
respondents predict M&As to be one of their company’s top four priorities over the
next three years, even though analysts are skeptical about their future effectiveness. One
leading analyst noted that “it was easier to achieve P/E arbitrage in the mid-90s and
succeed with an M&A strategy. Today it is much harder.” Other strategies to
increase shareholder value, focused on inherent growth, can be expected to decline. For
example, “growing existing distribution channels” will drop from 62% to 52% as a
top priority. “Innovating products” will drop from 48% to 38%. Executives say
they will pursue these strategies even though many report that they have not been
effective in the past.
Internal Financial Metrics
Today, insurers use a number of different measures as their
key internal financial metrics. For example, 91% use return on equity as a key financial
metric, and 40% rate it as their most important metric. The percentages are the same for
earnings growth. But 86% of respondents say their current most important metric has
weaknesses that “hamper our ability to manage toward long-term value creation.”
Relatively few life insurance companies today (33%) use
economic value to measure the internal value of organizations. However, the study found
that the number of companies using economic value is likely to rise to 50% over the next three years.
External Communications: The Market
Seventy-two percent of executives believe their company is
undervalued, and 76% attribute this in part to the market’s reliance on GAAP measures.
Other reasons cited by executives include the complexity of industry accounting and
financial practices, cited by 86%; the short-term focus of investors, cited by 52%; and
the complexity of insurance products, cited by 43%.
According to the study, the use of economic value measures
in communicating externally with the market will triple over the next three years, with
33% (up from 10%) using them as one of the top two techniques. At the same time, other
measures will decline, such as focus on “earnings growth” (to 38% from 62%).
One executive stated that “our employees are strongly
motivated to improve the company and increase shareholder value, but the tools are not in
place to empower employees and create a ‘clear line of sight’ between that goal and what
they actually do in their jobs.” Survey findings support this view: 100% of
respondents say their company culture supports changes necessary to shareholder value
creation, and 95% say people at all levels are motivated to increase shareholder value;
however, only 67% believe people at all levels think like owners or understand how their
actions influence shareholder value.
Mike Lombardi concludes, “This study points to the
very real challenges of managing shareholder value in the life insurance industry in North
America. But the good news is that the study, as well as our own consulting experience,
shows some executives and companies finding a way out of these difficulties and developing
a ‘clear line of sight’ between shareholder value, strategy and organizational alignment,
grounded in ‘economic value’ as the key financial metric.”
The full report on shareholder value management in the
North American life insurance industry, “Creating Shareholder Value in the Life
Insurance Industry,” can be obtained by calling 1-800-525-6741.
About Tillinghast – Towers Perrin
Tillinghast – Towers Perrin provides actuarial and
management consulting to financial services companies worldwide. Our consultants help
clients improve business performance through quantitative analysis, insight and execution.
Tillinghast – Towers Perrin consultants also work with health sector organizations
and provide risk management consulting to organizations of all types. Tillinghast –
Towers Perrin is part of Towers Perrin, one of the world’s largest independent consulting
firms, with nearly 9,000 employees and 79 offices in 75 cities worldwide. Additional
information is available at www.tillinghast.com.