Product Mi, Distribution Impact Ratios

Kevin Ahern, a managing director with Standard & Poor’s Corp., New York, says that, in general, costs are trending down, in part because companies are making an effort to become more efficient. He says that when analyzing premiums, guaranteed investment contracts should be factored out since there tends to be very little overhead associated with them.

But, he notes that overall, consolidation, improvements in areas such as technology and management’s desire to improve bottom lines are advancing expense improvements.

Expense efficiencies can make a difference in returns, he says. For instance, Ahern says it is a factor in the 15-20% returns banks average compared with the 10-12% returns in the life insurance industry.

Factors including the potential cost of corporate governance initiatives such as the Sarbanes-Oxley Act of 2002 could cause expenses to trend upward in the future and could contribute to further consolidation, Ahern says.

Companies commented on their results for both years.

Distribution structure and product mix are key things to look at when comparing expenses as a percent of premiums, says Barry Belfer, a vice president-finance with Guardian Life Insurance Company of America, New York.

Stock companies, Belfer says, sell a different mix of business that includes a lot more annuities, while mutual companies sell more whole life, variable life and universal life products. In addition, stock companies sell very high dollar amounts of business and pay small commissions because they are selling through brokers rather than through the career agency system, he continues.

Another factor, Belfer notes, is that the premium line in the annual statement now includes GICs, COLI/BOLI business and deposit contracts. Several years ago, before changes to reflect Codification of Statutory Accounting Principles, these deposit-type contracts were aggregated on a separate line, he says. So, in the case of at least two major mutual companies, premiums in the denominator are higher and the expense ratio lower.

If deposit-type contracts are removed from the equation, such companies would have higher expense ratios, he says.

In terms of Guardian’s expense control efforts, Belfer says it has undertaken cost controls that have brought down the rate from 27.8% in 2001 to 20.7% in 2004. This effort included taking out $100 million in expenses by outsourcing IT operations to India, reducing staff and reducing field expenses a bit, Belfer adds.

The expense rate in 2004 at Unum Life incorporates expenses associated with a multistate settlement regarding payment of claims, according to Linnea Olsen, director of investor relations with UnumProvident Corp., Chattanooga, Tenn.

In both 2003 and 2004, expenses were affected by commissions and expense allowances on reinsurance ceded, the company says.

Humana Insurance Company, Louisville, Ky., has businesses that include PPO operations, which have expense and lapse percents that run higher than pure life insurance companies, says Mary Sellers, a company spokesperson. Over the past 5 years, the average expense percent has been between 16.2%-18.2%, she adds. The expense rates also include the company’s self-insured business, Sellers says. That business is new and includes net administrative expenses but does not yet include the premiums that would offset those expenses, she continues.

A number of other companies did not return calls asking for comments.

One of the biggest contributors to expenses are commissions paid