The depressed market value on fixed-income securities is expected to hurt the financial performance of life insurance companies, according to a survey of their chief financial officers.

The survey, conducted by Towers Perrin, suggests that the sluggish economy is forcing CFOs to alter their investment and product strategies, especially with respect to asset/liability management (ALM) and hedging for variable annuities (VA). A total of 27 CFOs participated in the Internet-based survey between May and June.

About half (52%) of respondents predicted growth in new life and annuity premiums in the second quarter, compared to the same quarter last year. Another 20% predicted a decrease.

Over one-third (35%) of respondents said they expect first quarter GAAP net revenue to increase over the same quarter last year, while 34% predicted a decline. Finally, 31% said GAAP net income would increase compared to the same quarter last year, versus 39% who predicted a decrease.

Towers Perrin’s growth indices (based on the weighted average of survey responses) summarizing respondents’ year-over-year growth outlook, saw an increase in the second quarter of this year, but it remained below historic levels. Values between 97 and 103 are taken to be basically no growth. The premium index rose to 104 from 101; the GAAP net revenue index increased to 100 from 97, and the GAAP net income rose to 98 from 95, the survey found.

Meanwhile, 70% of life insurance company CFOs indicated that depressed market values on fixed-income securities will hurt their company’s financial performance over the next 12 to 24 months, and more than 20% reported that the impact will be “significant.”

The two areas that CFOs see as most affected by the financial climate are capital and surplus (80%) and their company’s balance sheet (76%), according to the survey.

Nearly 60% of respondents have increased their analysis of risky asset classes while reducing their asset purchases to hold more cash. Additionally, 41% of the firms have eliminated riskier asset classes from their portfolios.

“Despite emerging signs of an economic recovery, we are still very much deep in a recession that began last year, and should expect more defaults in 2009 and at least part of 2010,” said Jack Gibson, managing principal and leader of Towers Perrin’s Americas Life Insurance Practice, in a statement. “Given the elevated levels of unrealized losses in life insurers’ asset portfolios, more strain on capital is inevitable.”

The majority of respondents (53%) indicated credit risk as the largest market risk exposure their firms are facing, more than double that for equity risk or interest-rate risk. Still, the majority of companies are not hedging credit risk, as only 13% of CFOs said they are focusing on hedging this risk. Rather, 100% said the focus of the company’s hedging program is equity market risk; 60% cited volatility risk, and 53% indicated the focus is on interest-rate risk.

Additionally, more than two-thirds of CFOs surveyed (67%) pointed to credit spread risk and interest-rate risk as major challenges in managing asset/liability risks. The overwhelming majority (94%) are managing credit risk by constraining their investment policy to limit the amount/percentage of assets that may be held in each credit category, the survey found.

“While these companies are closely managing their credit spread and interest-rate risks, the tools and techniques these firms are using have not changed much since the late 1980s and early 1990s, when they were first used in the market,” said Hubert Mueller, Towers Perrin principal and survey leader. “I think there needs to be a new way of looking at how to manage some of these risks, particularly credit risks, where many companies were severely hit over the past year.”

Based on the survey results, it appears that hedging programs have survived extensive scrutiny from both third parties and company boards, and appear to be the “weapon of choice” to combat market risk. Sixty-seven percent of the CFOs queried said they were “satisfied “with their companies’ hedging programs; 27% said they were “highly satisfied.” Only 6% expressed dissatisfaction with hedging programs.

“Insurers seem to have reset their expectations for hedging programs as a consequence of the financial crisis,” said Dave Czernicki, Towers Perrin senior consultant. “Companies have seen first hand that, without a sufficient hedging program in place, the situation could have been far worse. There have still been some issues associated with hedging programs. Most notably increased basis risk, market illiquidity and increased transactional costs.”