Capital Management and Availability of Future Capital Are Key Concerns for U.S. Life Insurance Industry

Half Are Considering Securitization for Future Capital Needs

Stamford, CT., August 2, 2005 – A majority (70%) of North American life insurance company CFOs consider capital management to be a key concern for them today and expect that to continue over the next three to five years, according to the latest CFO survey of the Tillinghast business of Towers Perrin. The survey showed that CFOs’concerns about current and future availability of capital are driving nearly one third (30%) of respondents to actively explore one or more alternatives for raising capital.

The survey – the 11th in a Tillinghast series of periodic surveys among more than 70 life insurance CFOs – focused on issues related to managing and raising capital. Nearly all (93%) respondents said that maintaining and growing new business is a major source of demand on capital, followed by rating agency demands (59%), facilitating non-organic growth (56%) and regulatory issues (44%).

“There continues to be tremendous pressure on life insurance companies to demonstrate profitable growth, and efficient use of capital is vital to achieving this goal,” said Jack Gibson, Managing Principal for the North American Life Insurance Practice. “Many companies are experiencing profits that are inadequate relative to the capital required and are not providing a competitive return for their stakeholders.”

Insurers Looking Outside the Box

The survey found that many CFOs are actively considering nontraditional sources of managing capital, such as reinsurance and securitization. While authorized (57%) and offshore reinsurance (44%) are currently the most popular means of addressing capital needs, securitization is showing a dramatic increase in popularity as an attractive and viable alternative.

Only 4% of respondents currently use securitization to address capital needs, but 50% said they will consider it in the next two to three years, ranking it second only to reinsurance. Respondents are currently using or exploring securitization for managing statutory surplus strain on Universal Life (UL) business associated with Actuarial Guideline 38 (66%) and term life business associated with Regulation XXX (55%).

Beyond securitization, respondents said they are considering surplus notes (73%), trust preferreds (40%) and funding agreements (13%) as other sources for obtaining capital in the next two to three years.

“We believe that the growth in popularity of securitization as a means of financing risks is the confluence of two trends,” said John Nigh, Managing Principal and M&A Practice Leader. “The first is stronger reinsurance pricing and the second is the willingness of the financial markets to provide funds for these securitizations.”

Third-Party Pressures Driving Capital Management Trends

“CFOs’use of alternative methods for better capital management highlights the increasing demands placed on life insurers by third parties, such as analysts and rating agencies, to achieve steady growth in GAAP earnings and GAAP ROEs over time,” said Hubert Mueller, Principal and Survey Leader. In fact, one of the primary reasons respondents use reinsurance is to reduce earnings volatility (54%), while 50% use securitization to enhance their GAAP Return on Equity (ROE).

Other popular reasons for using reinsurance include:

  • Less expensive than funding capital needs independently (54%)

  • Allows better mortality pricing (50%)

Other reasons cited for pursuing securitization transactions include:

  • Mitigating letter-of-credit exposure (50%)

  • Limiting reinsurer credit exposure (33%)

  • Avoiding high reinsurance cost (33%)

  • Raising capital (33%)

“We believe that the growing trend toward securitizations and other non-traditional capital sources is a healthy consequence of the increased transparency of insurance products. As a result, insurers have the ability to consider non-traditional sources of capital funding that, with the exception of surplus notes, were really not available a few years ago,” said Nigh. Nearly three quarters of CFOs are considering surplus notes.

Positive Outlook for Second Quarter

More than 60% of respondents predicted growth of at least 4% in new life and annuity premiums in the second quarter, compared with the same period last year, while 29% believed the increase would be more than 10%. Over half (56%) expected revenues to increase by at least 4% versus the same quarter last year, while 59% predicted net income to increase at least 4% over the same quarter last year.

“We find this positive outlook somewhat surprising, given the pressure on spreads from lower interest rates and the lack of momentum in the stock market,” Mueller added.

About Tillinghast�s Life Insurance CFO Survey

The Web-based survey was conducted in June 2004 and is the eighth in a series of Tillinghast pulse surveys, which explore issues important to the North American life insurance industry and its CFOs. This three-part survey, which examined issues relating to financial reporting methodologies, had a respondent base of 32. Respondents primarily included CFOs from large and midsize North American life insurance companies; 64% had assets of $5 billion or more, and 16% were multinationals. For more information on this survey program, please contact Sarah Prevett, program leader, at 212-309-3979.

About Towers Perrin and Tillinghast

Towers Perrin is a global professional services firm that helps organizations around the world improve their performance through effective people, risk and financial management. Through its Tillinghast business, Towers Perrin provides global actuarial and management consulting to insurance and financial services companies and advises other organizations on risk financing and self-insurance. Areas of focus include mergers, acquisitions and restructuring, financial and regulatory reporting, risk, capital and value management, and products, markets and distribution. The firm�s other businesses are HR Services, which provides human resource consulting and administration services, and Reinsurance, which provides reinsurance intermediary services. Together, these businesses have over 8,000 employees and 78 offices in 76 cities in 24 countries. More information about Tillinghast is available at