Dramatic Industry Consolidation Expected to Continue
STAMFORD, CT., November 7, 2006 — More than three-quarters (77%) of life insurance CFOs cited the growing level and complexity of regulations as their biggest concern for the market and economic environment in 2007, according to the latest CFO survey from the Tillinghast business of Towers Perrin. Interest rates were a close second, with 70% of respondents citing concerns about potential volatility in rates as a key challenge.
When asked about specific regulatory, tax and legislative challenges, 40% cited increased regulatory/rating agency scrutiny of risk management practices, a sharp rise when compared to the 2004 survey, where only 14% cited it as a major issue. This jump clearly reflects a shift among regulators and rating agencies who have stepped up their scrutiny of companies� enterprise risk management (ERM) practices. Not surprisingly, over half of CFOs (55%) stated that enhancing ERM is their number one response to current regulatory, tax and legislative issues facing their companies.
�Since 2004, when we found that insurers were not doing enough to address ERM, many CFOs have taken significant steps forward,� said Jack Gibson, Managing Principal for the firm�s North American life insurance practice. �As the external focus on company finances has intensified, more companies are embracing ERM practices as a strategic management tool to provide a comprehensive understanding of risks and volatility to better compete in the marketplace.�
This survey is the 15th for Tillinghast in a periodic series that engages more than 70 North American life insurance companies and their CFOs. It focused on examining primary challenges facing companies� growth, profit and risk objectives in the coming year, and how they are responding to those challenges.
Consolidation and Expansion Remain Strong
The top 10 life insurance companies have seen a significant increase in their market share of total U.S. industry assets since 2004. In fact, the 51% market share at the end of 2005 exceeded the 45-50% estimate predicted two years ago.
CFOs expect substantial increases in the concentration of market share among larger life insurers to continue:
23% of respondents expect market share of the top10 life insurance fleets to grow to over 60% of total U.S. assets by the end of 2010, compared to 51% currently.
57% of CFOs predict that market share will grow by 5% or more to at least 56%.
�These responses provide a strong signal that the significant M&A activity that has occurred over the past 12-24 months among larger U.S. life insurers will continue,� said John Nigh, Managing Principal and M&A Practice Leader. �There is clearly a trend that suggests that both companies and consumers believe bigger is better from a scale and qualitative perspective, which is driving the M&A activity. However, the recent successful acquisition activity can only remain so if companies continue to be rigorous and thorough in their pricing and due diligence.�
Distribution and Product Performance Continue to Trouble CFOs
Internally, CFOs are most concerned about expense management, distribution effectiveness and product performance. Many are worried that life insurance products are not meeting sales targets (60%) and their life insurance products or prices are not competitive enough (53%).
�CFOs� apprehension about life insurance sales reflects the market trend over the past decade when sales increases have barely kept pace with inflation, in comparison to annuity sales, which have grown at a healthy 8% per year. As a result, rating agencies are increasingly concerned about companies� growing exposure to volatile annuity sales and profitability,� said Hubert Mueller, Principal and CFO survey leader. He added, �Life insurance companies need to respond proactively to address third parties� concerns about product performance and life sales.�
New Products and Markets Seen as a Solution
To address the economic, expense, distribution and product challenges they are facing, 60% of CFOs said their companies are expanding into new products or markets, while almost half (47%) are expanding distribution. This is not a surprise, given that 45% of all respondents indicate that inadequate scale is the primary obstacle to achieving their company�s objectives�further fueling consolidation. �CFOs should play a crucial role in helping management understand the importance of investing in new markets and product expansion without jeopardizing the company�s finances,� added Mueller.
Moderate Returns Expected for Third Quarter
The outlook from CFOs was not as optimistic as in prior quarters. More than two-thirds (69%) of respondents predicted 4% or higher growth in new life and annuity premiums over the same quarter last year, with 15% forecasting greater than 10% growth. Over two-thirds (68%) of respondents expected third quarter GAAP net revenue to increase by 4% or more, and 61% said it would increase by 4% or more compared to the same quarter last year. However, Tillinghast�s CFO Survey Growth Indices for GAAP net revenue and GAAP net income dropped three index points (from 108 to 105) since the second quarter, indicating a more moderate growth outlook. This is consistent with the slowdown of the economy in the third quarter of 2006.
Looking ahead to 2007, 73% of respondents believe annuity sales will increase by a minimum of 4%; in line with actual growth in recent years, but companies are much more reserved in their expectations for life insurance sales growth. Only 17% of CFOs anticipate year-over-year life insurance sales to increase by at least 4%, and 73% expect sales to remain relatively flat. These results reflect the CFOs� outlook at the time they completed the survey and may or may not reflect company performance that actually emerges.
About Tillinghast�s Life Insurance CFO Survey
The Web-based survey was conducted in August and September 2006 and is the 15th 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 focused on key challenges facing companies in 2007, and had a respondent base of 31. Respondents primarily included CFOs from large and midsize North American life insurance companies; 46% had assets of $5 billion or more and 13% were multinationals.
About Towers Perrin and Tillinghast
Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. Through its Tillinghast business, Towers Perrin provides consulting and software solutions to insurance and financial services companies and advises other organizations on risk financing and self-insurance. Tillinghast helps clients improve business performance in areas related to their financial, risk, product, distribution and capital issues. The firm�s other businesses are HR Services, which provides human resource consulting, and Reinsurance, which provides reinsurance intermediary services. Together, these businesses have offices and business partner locations in 25 countries. More information about Tillinghast is available at www.towersperrin.com/tillinghast.