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.