Life Insurance CFOs See a Bright Spot for M&A Activity Over Next 12 Months, According to Tillinghast Survey

Most Significant Expansion Expected in North America and Asia

New York, NY, May 7, 2003 — Hindered by a lack of capital and unrealistic expectations from both sellers and buyers, it comes as no surprise that recent M&A activity has been relatively stagnant. Companies that formerly sought to grow their insurance business through mergers and acquisitions have been much less active. As a result, we have seen a sharp decline in both traditional mergers and acquisitions, and alternative deals, such as joint ventures. However, according to a recent Tillinghast – Towers Perrin (Tillinghast) survey of life insurance CFOs, many more companies are seriously considering M&A transactions in the near future than they have been in the recent past.

“The aversion to transactions over the past few years has led to pent up demand from buyers looking for growth opportunities,” says John Nigh, Principal and M&A Practice Leader. “No longer able to delay action, more companies are now willing to sell, as they are running out of time to strengthen their balance sheets in order to command a higher price. With more realistic price expectations, we anticipate that more transactions will be occurring.”

The majority of CFO respondents believe that over the next 12 months it is “highly likely” or “possible” that their company will acquire a block of business (71%) or a company (49%) — versus the past 12 months where 54% acquired or gave serious consideration to acquiring a block of business or a company (37%). Over 75% of respondents expect to expand their presence in North America and Asia. Respondents were mixed about expansion plans for Europe, and the most negative about their plans for Latin America.

Acquisitions and Divestitures: Goals Versus Impediments

A number of potential benefits may encourage companies to pursue an acquisition or divestiture strategy. When considering an acquisition, profitable growth (82%) and expanding/enhancing distribution capabilities (52%) were cited in the survey results as the top two objectives. However, executives are also mindful of the impediments that can stand in the way of completing a successful deal. The most frequently cited obstacles impacting future acquisitions include the “disconnect” between sellers’ and buyers’ views of value (52%), followed by capital issues and cash constraints (46%). For divestitures, top objectives chosen were exiting a non-core business (75%) or an under-performing business (60%), while the biggest impediments cited include general economic conditions (69%) and insufficient buyers (56%).

“CFOs are finding ways to respond to the challenging economic environment using both traditional and creative approaches,” says Mr. Nigh. “Rather than walking away from a potential deal, CFOs are more open to exploring alternatives, such as using reinsurance to offset the risk.”

M&A Transactions: A Mixed Experience

When asked about the success or failure of their past M&A transactions, companies were generally more positive about the success than indicated in other industry surveys. Forty-three percent of all respondents said that all or most of their transactions exceeded or met expectations. Nearly 40% cited poor planning and high prices as key problems when an M&A transaction didn’t meet or fell below expectations.

“By implementing a more rigorous strategic and financial due diligence process, transaction shortcomings, such as not anticipating foreseeable events and inflated company value, can be minimized,” says Mr. Nigh.

Outside Advisors Play Key Role in Past Transactions

The majority of companies surveyed used outside advisors at some point during their transaction. Over half of the respondents viewed the actuarial and legal services provided during a transaction as the most important to completing a successful M&A deal, while only 3% viewed information services and human resources as most important. Satisfaction with outside advisors generally aligns with importance. Nearly all of the respondents said that the performance of their tax (100%), legal (96%), accounting (96%), and actuarial (90%) consultants met or exceeded expectations.

“It’s not surprising that most companies place high importance on tax, legal, actuarial and accounting services contracted during an M&A transaction,” says Jack Gibson, Tillinghast’s North American Life Insurance and Financial Services Practice Leader. “When evaluating the business of an insurance company it is vital to involve an array of insurance-specific experts that can help companies assess the risk/reward tradeoff from a long-term viewpoint.”

Life Insurers Are Cautious About Growth in Premiums and Revenues in First Quarter 2003

Following the recent economic turmoil and mixed results to date, respondents expect only modest growth in first-quarter premiums and revenue versus the same quarter last year. Respondents are less optimistic about net income, where 68% are predicting either a decrease or little to no growth. Twenty percent of respondents predict an increase of more than 10% in first-quarter premiums over the same quarter last year. Only 10% of CFOs predict greater than 10% growth in revenues, while only 6% of respondents expect net income to increase by more than 10% versus the same quarter last year. Twenty-nine percent of respondents predict a decrease in net income.

“Given the continuing pressure on life insurers’ earnings from the equity market slump and the spread compression resulting from lower interest rates, asset defaults and write-downs, we don’t expect earnings to improve on a year-over-year basis,” says Hubert Mueller, Principal and survey sponsor.

These results reflect CFOs’ outlook at the time they completed the survey and may or may not reflect company performance that actually emerges. CFOs’ views on future financial results for the industry will be a regular feature of the Tillinghast – Towers Perrin Life Insurance’s CFO survey for tracking the direction of the industry over time.

About the Tillinghast – Towers Perrin North America Life Insurance CFO Survey

The Web-based survey, which was conducted in March 2003, is the fourth in a series of Tillinghast pulse surveys that explore issues important to the North American life insurance industry and its CFOs. The two-part survey examined CFO experiences and future plans for M&A transactions, as well as their expectations for first quarter results. The fourth survey had a respondent base of 35, or 49% of the program’s 71 registered program members. Respondents primarily include CFOs from large and mid-size North American life insurance companies: 71% were stock companies; 72% had a premium income of $1 billion or more; 29% were multinationals. For more information on the North American Life Insurance CFO program, please contact Michele Bacik, program leader, at 212-309-3921.

About Tillinghast – Towers Perrin

Tillinghast provides actuarial and management consulting to financial services companies and advises other organizations on their self-insurance programs. Tillinghast is a premier independent advisor to the insurance industry; our major clients include most of the world’s top insurers. Tillinghast operates as one global business, through a network of 42 offices in 20 countries. Tillinghast is a division of Towers Perrin, one of the world’s largest management and human resource consulting firms. The Towers Perrin family of businesses also includes Towers Perrin Reinsurance, a leading global reinsurance intermediary. Together, these businesses have over 9,000 employees in 23 countries. More information about Tillinghast is available at