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Analysts See Cash Flow Rebound In 04

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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.

If net investment income has grown, Riegel says it must reflect a significant increase in general account assets.

The growth in transfers to segregated accounts could reflect an increase in the sale of VAs or customers moving from fixed account options in VAs which are held in the general account to variable options within VA contracts, he adds.

One thing that could be of concern to companies is a spike in interest rates, Riegel says, because if rates spike, surrenders could increase as consumers move their money to other products. The surrenders would be reflected in the benefits and loss-related payments that would reduce CFO. But, to date, rate increases have eased up, he adds.

The largest CFO change was posted by Chase Insurance Life & Annuity with a 6,393% increase in 2003 over 2002. A major reason was the companys 2,343% increase in premiums collected. Ordinary individual annuity considerations grew to $2.76 billion in 2003 compared with $5.4 million in 2002. Individual ordinary life grew to $737.1 million in 2003 up from $141.3 million in 2002.

In September 2003, Bank One Corp. completed the acquisition of Zurich Life. In January 2004, J.P. Morgan Chase & Co. and Bank One announced their intention to merge.

Great-West Life & Annuity saw a 528% increase in cash flow assisted by a 246% increase in miscellaneous income and a 38% decline in benefits and loss-related payments and a 67% decline in net transfers to separate and segregated accounts. The CFO increase was posted even with a 20% decline in premiums collected and a 15% decline in net investment income.

The 355% increase in CFO posted by First SunAmerica Life Ins. Co. was helped by a 202% increase in premiums collected in 2003 compared with 2002. The increase in premiums was due to a growth in individual annuity considerations, which grew to $1.29 billion in 2003 compared with $424.5 million in 2002.

Premiums collected at American National Insurance Co. grew 156%, contributing to the companys 248% increase in CFO. Individual annuity premiums in 2003 grew to $1.27 billion from $329.1 million in 2002 and group annuity premiums grew to $1.1 billion from $328 million during the same time frame.

National Western Lifes 243% growth in CFO can be attributed, in part, to a 149% growth in premiums collected. That total grew because group annuity premiums increased to $1.03 billion in 2003 from $265.3 million in 2002.

Reproduced from National Underwriter Edition, March 10, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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