A slight decline in operating cash flow in 2003 from 2002 should be reversed in 2004, reflecting a rebound among life insurers, industry analysts say.
The top 50 life insurers posted a 2% decline in cash flow from operations (CFO) in 2003, according to data from the NAIC annual database as compiled by National Underwriter Insurance Data Services/Highline Data. In 2003, CFO totaled $120.12 billion compared with $122.16 billion the year before.
Cash flow from operations is one indicator of how profitably a company or industry is performing. For life insurers, contributors to cash flow include premiums, net investment income and miscellaneous income, while subtractions include benefits and loss-related payments; net transfers to separate and segregated accounts as well as protected cells; commissions and expenses; dividends to policyholders; and federal and foreign income taxes.
The cash flow decline was posted in spite of a 5% increase in premiums collected and a 6% improvement in net investment income, data for the top 50 companies indicates. Premiums rose to $293.8 billion in 2003 from $279.5 billion in 2002, while net investment income grew to $89.4 billion in 2003 from $84.6 billion.
Offsetting those increases were accompanying increases in items that would reduce CFO. For the top 50 companies, benefits and loss-related payments increased 5% to $196.21 billion in 2003 from $187.7 billion, while net transfers to separate and segregated accounts and protected cells increased by 127% to $21.1 billion in 2003 from $9.2 billion. Premiums to general account products are reflected in CFO.
“2004 was an absolutely fantastic year” with improvements in revenue and premium reflecting public perception that the markets are performing better, says Michael Barry, a managing director with Fitch Ratings, New York. There has been more robust top-line growth for life insurers and that should be reflected in 2004 CFO, he continues.
A report issued by Moodys Investors Service, New York, in February 2005 noted the improved financial performance of U.S. life insurers and a healthier operating environment that prompted a stable outlook for the industry.
The report noted the increase in equity market values that started in the second half of 2003, buoying variable annuity sales and reviving earnings.
One of the strengths noted in the report and by Moodys Managing Director Robert Riegel, is predictable premiums and benefit flows. The persistency of life insurance is relatively fixed, making it a “pretty stable environment for life companies.”
Riegel says lingering low interest rates pushed down investment yields by 50-75 basis points in 2003 from 2002.