Life Insurance CFOs Expect to Change How They Determine Capital Requirements, According to Towers Watson Survey

Greater use of economic capital expected; executives upbeat over first quarter 2010 results

NEW YORK, May 19, 2010 — While they haven’t significantly altered their approach to determining required capital as a result of the financial crisis, most North American life insurance chief financial officers (CFOs) said they are planning to adjust their strategies over the next 12 months, according to data from Evolving Capital Management Practices, the latest survey from global professional services company Towers Watson (NYSE, NASDAQ: TW).

Sixty percent of the CFOs surveyed said that in January 2008 they were using regulatory or rating agency capital requirements to manage their business overall. Over the last two years, there has been a modest increase, with 67% of respondents currently using regulatory or rating agency capital. However, over the next 12 months, the use of both is expected to drop significantly, with only 45% of respondents using these definitions of required capital to manage their business.

At the same time, CFOs expect to use economic capital (EC) more widely, increasing from 10% of respondents currently to 21% of respondents over the next year. Further, an increasing number of companies (31%) expect to use the maximum of regulatory, rating agency and EC to determine capital requirements in the next 12 months.

“Capital management is becoming a top priority for many companies,” said Jack Gibson, leader of Towers Watson’s life insurance consulting practice in the Americas. “That more than three-quarters of CFOs (77%) said that capital management practices — primarily determination of capital requirements, monitoring of capital position and management of capital levels — are receiving greater attention at their companies than they were in January 2008, speaks volumes to where they are focused.”

According to 73% of respondents, the heightened need for capital management is due, in large part, to the impact of the recent financial crisis on required capital, available capital, and capital-raising options and costs. Still, changes in rating agency requirements (50%) and the emergence of EC methodologies (27%) have had an impact as well.

“The global financial crisis and recession have put pressure on life insurers’ capital positions,” said Todd Erkis, Towers Watson director. “The amount of capital required has increased, while life insurers’ available capital has decreased. At the same time, the options available to raise capital have become more limited and more costly.”

Improved outlook for revenue and net income growth

Most respondents said they believe that GAAP net revenue and GAAP net income will increase at least 4%, compared to the same quarter last year. They were somewhat split on premium growth — 54% of respondents predicted growth in new life and annuity premiums over the same quarter last year; 25% expected premiums to stay the same, and 21% predicted a decrease.

Slightly more than 60% of respondents said that first quarter GAAP net revenue would increase over the same quarter last year, while only 4% predicted a decline. Finally, 73% said GAAP net income would increase compared to the same quarter last year. Interestingly, no respondents predicted a decrease.

After a precipitous drop in the revenue and net income indices in the first quarter of 2009, the Towers Watson growth indices � based on the weighted average of survey responses, which summarizes respondents’ year-over-year growth outlook � generally continued an upward trajectory. While the premium index fell slightly, from 103 to 101, the GAAP net revenue index rose slightly, from 104 to 105, and the GAAP net income index rose sharply, from 104 to 109, its highest level since the third quarter in 2003. Values between 97 and 103 are taken to be basically flat growth.

“The improved outlook, as well as the ongoing positive trend in the indices, are both a reflection of the overall improvement in the economic climate, as well as the depressed results of most companies in the first quarter of 2009,” said Mr. Gibson. “Last year was characterized by declines in new life insurance sales, and slow growth in revenues and net income.”

Among other survey highlights:

  • More than two-thirds (67%) said information on EC is used to both determine the “right” level of required capital and to more appropriately allocate capital to specific lines of business or geography; 63% said it’s used for risk-based strategic decisions and to facilitate discussions with rating agencies.
  • 90% of respondents indicated that they either currently calculate EC on a total company and/or line-of-business basis, or they plan to do so.
  • Over the next 12 months, 40% of companies expect to focus more on new securitizations and letters of credit to raise capital, versus 30% over the past two years. Fewer companies expect to have to resort to some of the more drastic measures used over the past two years to raise capital. For example, significantly fewer respondents expect to issue debt (37% two years ago, versus 20% who plan to over the next 12 months).

About the survey

Thirty life insurance CFOs (43% of the program’s 70 registered members) participated. Specifically, the survey explored how companies are determining, managing, funding and allocating capital in light of the popularity of EC methodologies, ongoing regulatory changes, rating agency requirements and economic turmoil. Since all survey questions were not applicable to all companies, the respondent base varied from question to question. Respondents primarily included CFOs from large and midsize North American life insurance companies; 59% had assets of $5 billion or more, and 17% were multinationals.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at