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August 12, 2001 at 08:00 PM
Banks do it, asset managers do it, even staid old insurers do it. They fall in love with fee income.
Life insurance has traditionally produced low returns on shareholder equity and, therefore, low valuations for publicly traded stock life insurance companies.
One way to increase return on equity is to reduce equity, by paying large shareholder dividends to parent companies (or shareholders). In 2000, 44 of the 100 largest U.S. life insurers reduced their total surplus.
Another way is to stabilize, and increase, operating earnings, by maintaining stable operating margins on an increasing asset base by collecting fee income on Separate Account variable life and variable annuity products.
Many life insurers have concluded that it is easier to generate profits through fee income on popular products, than to produce large profit margins on unpopular products.
In 2000, 68 of the 100 largest life insurers (ranked by general account invested assets) produced fee income from separate account products, and 25 of these companies generated fee income exceeding $100 million.
Table 1 lists those of the 100 largest life insurers (and four others) with $100 million of fee income in 2000, and expresses such fees as a percentage of statutory earnings (before policy dividends and federal income taxes).
The ratio of fee income to earnings can be distorted. First, the larger the percentage of business written in the separate account, the higher this ratio may be.
Second, such fees are before separate account operating expenses, which are charged to the general account. If a company had $100 million of separate account fees, and $50 million of corresponding operating expenses charged to the general account, and no other gain or loss, Table 1 would display a 200% ratio.
Table 2, while also subject to distortion, shows fee income as a percentage of 12/31/00 separate account assets for 10 companies with fee income exceeding $300 million.