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Life & Annuity:
Navigating in a Perfect Storm

L&A insurers are weathering troubling financial times. The industry's exposure to credit losses, minimum rate guarantees, low interest rates, and variable annuity guarantees, combined with a sluggish economy, are among the many challenges rocking insurers' operations. In 2002 and 2003, leading industry-rating companies such as Fitch Ratings, Standard & Poor's and A.M. Best downgraded more insurers than they upgraded and revised their industry outlooks from "Stable" to "Negative." The combination of volatile markets and negative financial trends led to a measured deterioration of the industry's credit fundamentals.

However, the long-term outlook for the industry remains positive due to factors such as adequate capital to support operations and risks, embedded profits in existing blocks of business, marketplace demands for industry products, and strong distribution capabilities.

TowerGroup contends that life insurers are quickly dividing into two distinct camps of leaders and acquisition targets based on their ability to negotiate the current environment and position for the next growth cycle. Acquisition targets will be those insurers operating unprofitable or marginal businesses that lack adequate scale or capital. Other challenges may include poor distribution capabilities and underperforming asset management operations. Leaders will have scale, market presence, a diversified business model, and a strong capital base. Other characteristics of leaders may include investment in innovative technology and customer service to gain competitive advantage.

The competitive environment will not become any easier, and insurers can expect increased pressure from other insurers with a strong capital base and from non-insurance providers, such as banks and retail broker/dealers. Each is positioning to take advantage of this market. As a result, we expect L&A insurers to focus on distribution initiatives such as new business processing and channel and agency management. Another area of focus will be financial controls and compliance to address important developments in financial reporting.

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