Towers Perrin Survey Indicates Increased Life Insurance Merger and Acquisition Activity in Next 12 Months

STAMFORD, CT., May 9, 2007 – CFOs at major life insurance companies believe mergers and acquisitions within their industry will significantly increase over the next 12 months.

According to the latest CFO survey from the Tillinghast business of Towers Perrin, 57 percent of the respondents said it is possible or highly likely they will acquire another company in the next 12 months. Seventy-seven percent said it is possible or highly likely they will acquire a block of business from another company.

The survey indicates that companies are undertaking acquisitions primarily to achieve profitable growth in addition to achieving more effective use of available capital.

“These survey findings confirm that senior executives view an acquisition as a sound strategic complement to organic growth and that acquisitions can be done on a basis that is as profitable as — if not more profitable than — organically generated business,” said John Nigh, Tillinghast M&A Practice Leader. “This is definitely consistent with what we have seen empirically within the life insurance M&A arena and is more upbeat than our previous findings as to the perceived ability to execute transactions profitably,” he said.

This survey is the 16th for Tillinghast in a periodic series that engages more than 70 North American life insurance companies and their CFOs three times per year. It focused on mergers and acquisitions within the life insurance industry, examining future and previous activity.

Better Due Diligence Increases Transaction Satisfaction

CFOs are more satisfied with recent M&A experiences. Nearly three quarters (72 percent) stated that all or most of their M&A transactions over the past three to five years met or exceeded their expectations. This is up significantly from a 2003 Tillinghast CFO Survey in which only 43 percent expressed a high level of satisfaction. This upward trend may in part be attributed to the fact that respondents increasingly rely on outside advisors to improve the success rate of their transaction, particularly legal and actuarial services.

For those companies where M&A transactions did not meet expectations, respondents pointed to several people-related issues, including incompatible cultures, clash of management styles and inability to implement change.

“This shift seems to indicate that companies have become better at financial due diligence, in part due to the involvement of more advisors, both internal and external, in the M&A process than previously,” Nigh said. “However, people-related issues remain a major impediment to M&A success. This suggests that strategic due diligence around appropriate fit may not be as meticulously pursued as is financial due diligence.”

Few CFOs Looking to Divest

While a majority of CFOs expect to acquire another company or a block of business, fewer companies are planning to undertake divestitures. Eighty-three percent of respondents said they are not planning to divest any part of their business over the next 12 months. And while 54 percent said they would be interested in acquiring the individual life business of another company, only nine percent of CFOs said they would consider divesting their companies’ individual life business.

Business Value Is a Big Impediment

Of the CFOs considering a divestiture, 92 percent said there is too large of a disconnect between the buyer’s and seller’s views on the value of a piece of business. Among those CFOs considering buying a piece of business a smaller number, 44 percent, said the disconnect in value was too large. The biggest impediment from a buyer’s point of view was that there are an insufficient number of companies or blocks of business at the right size available for sale.

“These results suggest that the biggest disconnect between buyers and sellers is that buyers are often unwilling to pay for the strategic or franchise value related to the transaction,” said Jack Gibson, Managing Principal for the firm’s North American life insurance practice. “However, other responses in the survey make it clear that CFOs expect companies to overcome this hurdle,” Gibson added.

Most Companies Buy Reinsurance Directly from a Reinsurer

In another section of the Tillinghast CFO survey, CFOs indicate that the purchase of domestic or offshore/foreign reinsurance is the most popular alternative M&A transaction. Most companies (70 percent) buy reinsurance directly from a reinsurer, and nearly half of these companies purchase through intermediaries or other outside consultants in addition to going direct. And despite increasing demands for analytical support from reinsurers and intermediaries, price remains the primary factor in choosing a reinsurance provider.

“This finding makes it clear that reinsurers cannot expect to leverage facultative support and mortality research into more favorable pricing,” Jack Gibson noted.

Moderate Returns Expected for First Quarter

CFOs’ outlook was not as optimistic as in prior quarters. Fifty-eight percent of respondents predicted four percent or higher growth in new life and annuity premiums over the same quarter last year (down from 69 percent in the previous survey). Sixty percent of respondents expected first quarter GAAP net revenue to increase by four percent or more compared to the same quarter last year (down from 68 percent) and 57 percent said that GAAP net income would increase four percent or more over the prior quarter (down from 61 percent). However, Tillinghast’s CFO Survey Growth Indices for new life and annuity premiums and GAAP net revenue remained constant at 105 while the index for GAAP net income dropped from 105 to 104.

“CFOs’ reduced optimism about sales and GAAP earnings reflects the fact that companies are coming off a very strong 2006 earnings season, which will make it harder to beat or even match prior year numbers,” according to Hubert Mueller, Principal and CFO survey leader.

About Tillinghast’s Life Insurance CFO Survey

The Web-based survey was conducted in February and March, 2007. This survey is the 16th in a part of a series of Tillinghast pulse surveys that explore issues important to the North American life insurance industry and its CFOs. The three-part survey focused on issues relating to mergers and acquisitions, as well as securitization and reinsurance and had a respondent base of 35. Respondents primarily included CFOs from large and midsize North American life insurance companies; 57% had assets of $5 billion or more and 17 percent 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.

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