To gain a window into the concerns and strategic priorities of life insurers in the coming years, one would do well to listen to those for whom balance sheets, cash flow statements and income statements are all-important: the companies’ chief financial officers.
I had the good fortune to hear three of them last December 17 during a CFO panel discussion held at the Annual Insurance Executive Conference, an event produced by National Underwriter Professional Network and sponsored by EY (formerly Ernst & Young).
The trio of CFOs on the panel — Robert Falzon of Prudential Financial Inc., Terrance Lillis of Principal Financial Group and Michiel van Katwijk of Transamerica Life Insurance Co. — explored a host of issues, ranging from retail distribution to international strategy, that are top of mind at their companies.
Expecting an uptick in rates
Consistent with widespread industry predictions, the panelists agreed that interest rates are due to rise in tandem with the Federal Reserve’s plans to “taper” or wind down its third round “quantitative easing.” Initially instituted following the credit crisis of 2007-2009, the monetary policy aimed to bolster the economy by increasing the money supply and, thereby, reduce interest rates.
However great the rise in rates—Prudential’s Falzon projected a 75-basis point increase in the 10-year T-bill rate—the uptick should be positive for the life industry, enabling carriers to achieve greater returns on their investment portfolios. The strengthened balance sheets should, in turn, allow the insurers greater flexibility to innovate and roll out more attractive products.
The panelists noted, however, that they’re not tying their fortunes to fluctuations in interest rates alone. In recent years, they’ve been taking steps to boost their bottom line by cutting expenses and by leveraging existing resources.
Following the credit crisis, said Lillis, Principal undertook “significant actions” to reduce costs — including cuts to staffing and business operations — the reductions spearheaded with a view to keeping revenue and expenses in alignment.
Prudential, in contrast, spent substantial sums in recent years on acquisitions, among them businesses domiciled in Japan and the U.S. Collectively, the purchases yielded for the company a combined “run rate” (annual revenue) approaching $350. In tandem with the acquisitions, Prudential has also been integrating its various businesses to achieve better synergies.
Transamerica, too, is looking generate synergies among its business units. Last year, said Katwijk, the company created a shared services center to combine financial and IT operations across the enterprise.
The search for efficiency gains extends to retail distribution. Though Principal Financial retains a captive agent totaling about 1,200 life insurance professionals, the insurer sells mainly through 350,000 wholesaler-affiliated advisors. The vastly larger third-party channel, said Lillis, is an “efficient distribution model” that has served the company well.
Prudential, which boasts a larger career agency system — about 2,800 agents — has scaled back its in-house sales force over the years. At its peak, said Falzon, Prudential’s career agent channel totaled 25,000 sales professionals nationwide. Compensating for the downsizing, Prudential has expanded third-party distribution to some 200 IMOs/BGAs.
While enabling cost savings, the outsourcing of retail distribution comes with a downside. “When you shift from captive distribution to third-party distribution, you control distribution less,” said Falzon. “And when you have less control over the process, products sales can accelerate or decelerate in ways you hadn’t anticipated. You therefore need to have finance mechanisms in place that allow you to respond to market changes more rapidly.”
With the loss of control, he added, comes a reduced emphasis on benefits and features that might distinguish company’s products from those of the competition. In the hands of an independent broker, the successful conversion of a prospect to a client will often hinge on the price — reducing the product’s value to that of a commodity.
To counteract this tendency, said Falzon, life insurers have to invest more than they might otherwise in product development and policy “bells and whistles” that might enhance the carriers’ value proposition.
That value proposition rests in part on the insurers’ ability to replicate their core competencies for markets outside the U.S. Lillis said Principal is extending its expertise in retirement planning and asset management to countries (notably those of Asia and Latin America) that are experiencing pressures they share with the U.S. Among them: aging populations; fiscal constraints on government spending for social programs; and employers that increasingly are going global.
Prudential, for its part, is already present in 37 countries, the two largest markets among them being the U.S. and Japan. China, India, Brazil and Malaysia, while promising emerging markets, are much small by comparison, said Falzon.
Transamerica, too, operates in 20 countries globally, but the company’s U.S. footprint is by far its largest. The reason: Though highly competitive, the U.S. market is more developed than most and, therefore, offers a superior return on investment.
Taking the long view
Perhaps. But whether life insurers will continue enjoy gains on their investments and achieve other strategic priorities will, in my view, depend in no small measure on the companies’ — and, in particular, their CFOs’ ability — to think long-term. That interest rates, distribution channels, markets and the like will continue to change is a given. What will separate the successful companies from the rest of the pack will be their capacity to stay focused on long-range strategic priorities amid the maelstrom of economic and business forces buffeting them daily.