Lower Costs Help Cushion Falling Returns For Insurers: Conning
Its no surprise that a steep drop in interest rates has put a dent in life insurers investment returns over the past 5 years. But a new study by Conning Research and Consulting Inc., Hartford, suggests that improving investment costs for insurers have helped soften the blow.
Life insurers saw gross investment returns fall from 8.1% to 6.8% from 1999 to 2003, due to tumbling interest rates, corporate defaults such as Enron and WorldCom, and rating agency downgrades, Conning notes.
Meanwhile, federal fund interest rates plunged from 6.5% to 1% from mid-2000 to the end of 2003, their lowest level in 50 years.
For corporate bonds, rates fell from about 7.4% to 4.4% between December 1999 and June 2003.
However, an improving investment expense ratio helped temper these setbacks, improving each year during the study period.
The life industrys average investable general account assets grew at an annual rate of 8.3% from 1999 to 2003, from around $1.6 trillion to $2.2 trillion. Conning defines investable assets as assets over which the companies portfolio managers have direct control. They include cash as well as invested assets.
Income earned from the industrys investable assets increased from $122 billion to $144 billion from 1999 to 2003, an annual growth rate of 3.7%. But the values of the assets grew at a much faster rate of 8.3% in that time. (See chart.)
Income earned by the industry on invested assets grew from $136 billion to $154 billion between 1999 and 2003, while net investment income grew from around $130 billion to a bit more than $144 billion in the period, Conning says in its study, “Investment Profile of the Life Insurance Industry-2004 Edition.”
At the same time, investment expenses increased from $9.2 billion to $9.7 billion.
However, as a percentage of average invested assets, the expense ratio actually fell from 52 basis points in 1999 to 40 basis points in 2003, Conning found.