# VI. OPERATIONS **AND PROFI;TABILITY**

# **a.** Operating **Expense** Ratios

In describing the operating systems, expenses and financial results of the companies that constitute the life insurance industry in the United States, it must be recognized that there are wide variations among individual firms--large and small, stock and mutual, old and new firms. Nevertheless, rough guidelines to operating ratios of various kinds are provided by annual tabulations of industry operating data.

All-industry data tabulated by the ACLI for the year 1989 show insurance company income dollars as arising 69.7 percent from premiums and annuity considerations, while the remaining 30.3 percent was from net investment earnings and other income. On the outgo side, benefit payments were 53.1 percent, additions to policy reserve funds were 30 percent, and additions to special reserves and surplus funds were 1.7 percent of the insurance dollar. Operating expenses were divided into commissions to agents for 4.7 percent of the total, with another 7 percent going to home office and field office expenses. Finally, taxes were 2 percent of the insurance dollar, while dividends to shareholders of stock companies were _1.5_ percent of the industry total. (For stock companies alone, shareholder dividends were 2.4 percent of their insurance dollars.) As noted, these shares vary widely by line of business; thus, investment earnings accounted for 29.4 cents of each life insurance dollar but were 47.6 percent of each annuity income dollar, according to a special study by ACLI for the year 1983. On the outgo side, the life insurance line added 20.6 percent of its dollar income to reserves, while the annuity line set aside 63.3 percent for reserves in 1983.

Operating expenses, which made up 11.7 percent of company outgo in 1989, are further broken down in another ACLI tabulation which shows commissions as 41.5 percent of the expense total, with 22.6 percent going to salaries and wages and 4.3 percent for contributions to employee benefit plans. Advertising expenses were 1.4 percent, real estate costs made up 4.4 percent and all other operating expenses accounted for 25.8 percent of the total. Investment operations required 11 percent of total operating expenses, while insurance operations accounted for the remaining 89 percent.

All of the foregoing expense shares have remained fairly stable in recent years. However, there were wide differences between the exp^,nse ratios reported by stock and mutual companies, evidently because of differing methods of conducting business and the lines of business in which they were engaged. For example, mutual companies paid 29 percent of their operating expenses in salaries and wages, while stock companies paid 19 percent. Conversely, mutual companies paid a lower share of total expenses in commissions at 26 per.ent, compared with 51 percent paid by stock companies out of their expense dollars. Also, investment operations accounted for 19 percent of the expense dollars of mutual companies, while stock companies paid a much lower 6 percent of total expenses on investments.

# b. Profitability Measures

Because of the unique accounting system used by life insurance companies, profitability of the industry has always been difficult to measure or to compare with other financial institutions or corporations. For insurers, profitability is affected by a host of factors including actual mortality experience, investment earnings, capital gains or losses, the scale of policyholder dividends, and federal and state taxes.

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