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.

Third, an insurer with rapid growth in new business may incur sales commissions that exceed fee income. Rapid growth produces larger fee income but reduces earnings.

Fourth, the recent stock market decline has caused reinsurers to raise mortality charges for death benefits on separate account products. This has lowered earnings for primary companies that cede mortality risks.

Table 1 totals for the 29 companies show total fees of $10 billion in 2000, accounting for 57% of statutory earnings before policy dividends and federal income taxes.

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.

Fee income ranged from a high of 210 basis points for IDS Life, to a low of 80 basis points for Metropolitan. The 10 companies collected $6.5 billion of fee income, equal to 130 basis points, on $495 billion of assets.

Hartford Life Insurance Company and Hartford Life & Annuity had $989 million and $828 million, respectively, of fee income, as Hartford Financial Services ranked first in individual variable annuity sales in the life industry in 2000.

Nationwide and Prudential each had $784 million of fee income. Prudential was the nation’s largest variable life insurer, with a 20% market share, at 12/31/00, while Nationwide ranked in the top 5 companies in both individual variable annuity sales and variable universal life sales.

IDS Life, with the highest ratio of fee income to assets, specializes in both individual variable annuity sales and variable universal life sales written through the American Express network of financial advisors.

Yes, in springtime, an insurance company CEO’s thoughts do turn to love, even if it’s only of fee income.

Frederick S. Townsend, a founder of The Townsend & Schupp Company, is an investment banker in Hartford, Conn.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 13, 2001. Copyright 2001 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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