Unusual suspects: companies best known for selling stocks or issuing credit cards are making inroads into the life insurance marketplace through selling and manufacturing life and annuity products.

In the hallowed halls of the life insurance market, many of the leading companies began writing their first policies long before airplanes, tea bags, and Model Ts were invented. Along the way, these giants honed the craft of writing life insurance and annuity products. More recently, they've grown accustomed to competing with each other as they hungrily look for new distribution channels.

Some of these new channels--including brokers and wirehouses--aren't content with simply selling insurance and annuity products for someone else; they are underwriting or manufacturing the products themselves.

For instance, among the top 30 sellers of annuities in 2003, three are companies that many people would not think of as life insurance companies: American Express, Merrill Lynch and Fidelity Investments.

While annuities are primarily asset-accumulation vehicles that do not require underwriting, companies must have an insurance license to manufacture them. But, Fidelity Investments, in addition to selling term life insurance, has added a new variable universal-life product to its repertoire. American

Express said its most popular life insurance product is also a variable universal-life product.

While some in the insurance industry may question whether these firms are in direct competition with traditional life insurers, there's no doubt that they are part of the changing market landscape.

"Banks and brokerage firms are significant long-term competitors to insurance companies," said Mike Levinson, chief executive officer of ReMark Americas, a financial services direct-marketing firm. "Clearly, in the world of insurance agents, I don't think there's any question that those alternative channels are going to have a major impact on how insurance is distributed."

More companies are finding different ways to skin the financial services cat, said Richard K. Berry, a principal of Towers Perrin with the firm's Tilling-hast business.

"The traditional notion of a life insurance company--someone with a broad range of products, a captive field organization, selling in a traditional fashion--has been challenged," Berry said.

Stock Jockeys Selling Insurance

American Express, Merrill Lynch and Fidelity Investments all are making inroads into the life and annuity marketplace. All offer diversified financial services, including financial planning.

American Express, perhaps most famous for its "Don't Leave Home Without It" credit cards, is one of the largest financial services companies in the world and the ultimate parent of five life/health companies and two property/casualty carriers. With $2.63 billion in capital and surplus for the first nine months of 2003, American Express's life operations, led by Minneapolis-based IDS Life Insurance Co., ranked as the 23rd-largest life insurer in the United States, according to A.M. Best Co. data.

Merrill Lynch, perhaps best known for its iconic bulls charging down Wall Street, is also one of the largest financial service companies in the world. Its insurance manufacturing arm, Merrill Lynch Life Insurance Co., mainly focuses on the sale of variable annuities "as these wealth accumulation products are a good strategic fit with the portfolio of products and services offered to clients through" Merrill Lynch's financial advisers, according to A.M. Best Co. reports. With $289.6 million in capital and surplus for the first nine months of 2003, Merrill Lynch ranks as the 95th-largest life insurer, according to A.M. Best Co. data.

Fidelity Investments Life Insurance Co. is owned by FMR Corp., which is known as Fidelity Investments, the largest mutual fund and 401(k) retirement plan provider in the United States. With $432.1 million in capital and surplus for the first nine months of 2003, FILI was the 83rd-largest life insurance company in the United States, according to A.M. Best Co. data.

Insurance products are a natural fit for all three companies, experts said.

"If you look at their business platforms--selling wealth accumulation vehicles to upscale customers--insurance fits there nicely," said Michael Cohen, vice president at A.M. Best Co. "They have, and will continue to make inroads in the insurance business. Are they going to be one of the biggest writers? Not in the foreseeable future, but they have built a presence justifying them being there. They can get a volume of business that is worth their efforts."

Berry of Towers Perrin said these types of companies can leverage their existing relationships to sell additional products, including life insurance and annuities.

"It's additional glue that bonds relationships," Berry said.

Fidelity Looks to Grow

"Our competition is not really the full-service life insurance companies; it's more of the brokerage firms, the Vanguards and Charles Schwabs, who deal with similar clients," Russ Garner, senior vice president of sales for Fidelity Investments Life Insurance Co., said. "But as we begin to get more into life insurance products, and we continue to do more in the life insurance area, we may end up seeing more competition with traditional life insurance companies."

Fidelity Investments Life offers both variable and fixed deferred annuities, variable and fixed income annuities and term life insurance with variable features and guaranteed minium death benefit options, and also distributes third-party offerings. At the end of 2003, Fidelity rolled out a variable universal-life product, its first entry into the permanent life insurance marketplace, Garner said.

He said the company got into the insurance business because its customers demanded it.

"We felt it was important for us to have our own suite of products so our customers don't have to go outside," Garner said. "We see the need to meet the demands that our customers have. We've met those needs with annuity products over the years. As the population ages and demographics change, there's a big emphasis on wealth transfer, and life insurance is a big part of that. We really want to position ourselves well, especially with the high-net-worth people."

Fidelity Investments Life is in the enviable position of having customers calling to buy annuities and life insurance.

"Fidelity customers are accustomed to good value. If they are shown an annuity by their life insurance agent, they might say, 'I like that idea,' and they'll call Fidelity to see if they can get a better deal," Garner said. "That's not typical for most insurers."

Garner estimated as many as 20% to 30% of the company's sales are generated by customers contacting the company. "Fidelity has a huge retail customer base as well as a huge institutional customer base. We try to make sure they are aware that we have annuity and life insurance products, and that prompts the phones to ring," Garner said.

Yet the company's sales of annuities to its retail households still has a relatively light penetration at 5%. That means there's lots of room to grow, Garner said.

Fidelity Investments Life sells about 75% of its business through 92 retail investment centers. Another 23% to 24% of business comes through telephone sales. The company also does business with financial planners who offer Fidelity Investments' other products.

When Fidelity Investments Life Insurance sees a demand for a product that it doesn't want to underwrite, it sells third-party products. For instance, for fixed deferred annuities, Fidelity Investments Life sells products produced by traditional life insurers including John Hancock Financial Services Group, Travelers Life & Annuity Co., GE Financial and Principal Financial Group, Garner said.

"Fidelity doesn't want to be in the business of manufacturing guaranteed income products," Garner said.

Fidelity Investments Insurance also offers permanent life insurance through third-party vendors, including Manulife Financial Group, Nationwide Provident, and Sun Life Assurance Company of Canada.

Even though Fidelity Investments Life has rolled out its own variable universal-life product--which is currently available in 15 states--Fidelity Investments Life expects to keep those third-party products on the shelf, even when its own product is approved in all 50 states. "We'd rather have [them] available than not," Garner said.

He said it's going to take some time for Fidelity Investments Life to grow its life insurance business. "We will do more life insurance sales in 2004 than in 2003, and then it was about 1% of our sales mix," he said. Garner declined to say what Fidelity's goals for the products are.

The Name Game

American Express said its brand gives it an advantage over the multi-line life insurance companies it views as competition.

"We want to grow our insurance and annuities groups into world-class businesses. That means we need to pursue growth in a number of directions: fine-tuning products to better address customer needs, enhancing our service, expanding out distribution, increasing our market penetration and improving operating efficiencies," Mark Schwarzmann, senior vice president of insurance and annuities at American Express Financial Advisors, said in a statement.

The company is building up its insurance and annuity business by "investing in product improvements, new product development and service enhancements. We're also exploring additional distribution opportunities," Schwarzmann said.

American Express financial advisers also sell third-party products, and market their own products through third parties, including 25 or so banks and two networks that deal with smaller banks.

The biggest challenge that American Express faces in growing its annuity line is "'helping clients better understand the impact of a long retirement on their overall financial picture," Schwarzmann said. "Clients are not saving enough to fund their retirement, nor do they recognize the reality of increased longevity and what financial resources would be necessary in order to fund a retirement that could last 20 to 30 years."

American Express said its most popular life insurance product among its target customers--the mass affluent market--was variable universal life insurance with an average face value at year-end 2003 of $324,000. For annuities, the most popular product is a variable annuity with a 10-year surrender charge schedule and an average policy size of $56,000.

If You Can't Beat Them ...

Some might say there are 76 million reasons for American Express, Merrill Lynch and Fidelity Investments to sell annuities and life insurance.

"The life insurance sector is very competitive, and you can expect the competition in the sector to increase for one very good reason: We are looking at an enormous demographic bulge of baby boomers heading toward retirement," said Robert Hartwig, chief economist at the Insurance Information Institute. "The American Express, Merrill Lynches and others want to offer a full range of financial products to their clients. It complements the other sorts of wealth management vehicles they offer. Whether it's brokerage services or variable annuities, there's a place for life insurance and they don't want their customers to go somewhere else to find it. If customers become even a little promiscuous, they won't come back. And every financial services company has found that the more products they can sell to the client, the more loyal that client will be."

Traditional insurers, including Hartford Life and American International Group's American General, said companies such as American Express, Merrill Lynch and Fidelity Investments are not necessarily competition.

"We are the leading distributor of life insurance through wire houses, banks and independent broker/dealers. We distribute our products through companies like Merrill Lynch. We view companies like Merrill Lynch as partners, not competition," said Michael Kalen, head of sales and marketing for Hartford Life's individual life division. Hartford Life sells more life insurance through brokers, particularly wire houses, than any other distribution channel.

"These alternative channels--the unusual suspects moving into wealth management--want to position themselves not just as investment experts, but as investment and insurance experts. Hartford Life has been a leader in helping these firms increase the sale of life insurance," Kalen said.

Hartford Life partners with financial planners and stock brokers to offer expertise in insurance. "What you'll find is financial planners or stock brokers very easily assimilate the retirement benefits of annuities, which are primarily sold as a retirement vehicle. But on the life side, particularly for high net worth clients, life insurance is complicated. Many will do annuities, but not life insurance," Kalen said.

He said Hartford Life helps facilitate the sale by providing support to stock brokers and financial planners, and by being the one to ask the difficult underwriting questions necessary to purchase life insurance.

The stock broker helps the client fill out a half-page form, and then arranges for the client to call into a call center, where they will be asked the questions about their health.

"That cuts the time from application to issue in half," Kalen said. "It takes it out of the hands of the producer, so they don't have to go from a relationship about financial planning to one about personal health. A lot of producers don't like to ask a lot of health-related questions."

American General Life, a subsidiary of American International Group, distributes its products through a variety of channels, including subsidiaries American General Securities Inc. and Independent Advisor Network.

J. Andrew Kalbaugh, president of American General Securities and Independent Advisor Network, said he's very familiar with companies such as American Express, Merrill Lynch and Fidelity Investments.

"We view them as competition, but also sell their products," Kalbaugh said. "It's naive not to assume that these guys can't have an impact."

American General Securities is a retail broker/dealer with 2,100 registered representatives. It acts as a traditional independent financial platform, selling mutual funds, annuities, variable life insurance, financial planning, stocks and bonds. It doesn't exclusively sell American General products.

Independent Advisor Network is an insurance distribution outlet through independent agents. Also owned by American General, the network provides tools and resources to independent agents, including products, services, underwriting, education and professional development.

"Consumers want a long-term relationship," Kalbaugh said. "The independent agent that we focus on has a leg up on the competition. Equity markets have changed the landscape ... they drove a stake through the heart of the independent investor. The consumer is now looking for an adviser."

He said consumers are looking for solutions to their problems, not necessarily products.

"An adviser will go in and say, 'Tell me what your financial needs are. What keeps you up at night?' The product is a solution, not necessarily a sale," Kalbaugh said.

American General has big plans. By reaching out to households with $100,000 to $1 million in investable assets--instead of the "mega-affluent" market of $3 million and more--the company's "goal is to be the dominate provider of life insurance domestically" Kalbaugh said.

He said he'll continue to keep an eye on the unusual suspects in the marketplace.

"I view any good firm not necessarily as a threat, but as competition you need to pay attention to. As long as you focus on the market, and you have resources and expertise, you will do pretty good. Where people get challenged is when they drift too far away from their skill set," Kalbaugh said.

Fidelity Investments Life Insurance Co.

A.M. Best Co. No.: 09138

Parent Company: FMR Corp., known as Fidelity Investments

2003 New Variable Annuity Sales: $607.4 million

Rank Among Issuers of Variable Annuities in 2002:28

Business Commencement: 1981

Headquarters: Boston

Products: Fidelity Investments sells both variable and fixed deferred annuities, variable and fixed income annuities and term life insurance with both variable features and guaranteed minimum death benefits options, as well as distributing third-party products. Marketing efforts are primarily targeted toward penetrating Fidelity Investments' established client base of more than 4 million retail households. Fidelity is the largest mutual fund and 401(k) retirement plan provider in the United States. The target household has or is accumulating wealth for retirement of more than $100,000 in invested assets.

Reinsurance: The company retains coverage per individual life of $25,000 plus 30% of excess over $25,000 with a maximum net retention not to exceed $100,000 on its life insurance business to limit large case exposure.

Source: A.M. Best Co. and Finetre Corp.

IDS Life Insurance Co.

A.M. Best Co. No.: 06592

Parent Company: American Express Co.

2003 New Variable Annuity Sales: $3.97 billion

Rank Among Issuers of Variable Annuities in 2002:12

Business Commencement: 1957 When Purchased by American Express: 1984

Headquarters: Minneapolis

Products: American Express markets its products in all states, and offers a portfolio of fixed and variable life insurance and annuity contracts, and disability income insurance. It also offers brokerage and advice services for retail clients, and advisory and retirement services to institutional clients. Its main goal is to provide insurance and annuity contracts to the financial planning client base of American Express Financial Corp., including retail operations--the majority of its existing clients--including financial advisers, direct services and online services; third party, including financial intermediaries such as banks, thrifts and broker/dealers; and institutional, including both corporations and foundations.

Reinsurance: The maximum amount of life insurance retained by IDS Life is $750,000 on any policy insuring a single life and $1.5 million on a policy insuring a joint-life combination. The company retains only 20% of the mortality risk on most new variable universal-life insurance policies and only 10% on most other term/life policies.

Financial History: IDS Life's historically strong investment results and overall profitability allowed it to increase capitalization in recent years, in spite of paying dividends to its parent company of more than $1 billion. However, after posting $650 million in net realized losses in 2001, largely due to the deterioration of its high-yield portfolio, IDS received a $400 million equity infusion from American Express. In 2002, the company made another contribution of $400 million to enhance IDS's financial strength.

Source: A.M. Best Co. and Finetre Corp.

Merrill Lynch Life Insurance Co.

A.M, Best Co. No.: 09537

Parent Company: Merrill Lynch & Co.

2003 New Variable Annuity Sales: $947.7 million

Rank Among Issuers of Variable Annuities in 2002:26

Business Commencement: 1986

Headquarters: Pennington, N.J.

Products: Historically, Merrill Lynch had focused on manufacturing and selling interest-sensitive and variable life insurance and annuities; however, its primary emphasis will be the sale of variable annuities. The products are designed to be attractive to Merrill Lynch's core clientele, mainly high net worth households with $250,000 to $10 million of net assets.

In 2001, Merrill Lynch Life Insurance stopped manufacturing and selling estate planning life insurance products due to changes in the tax environment and lack of scale in business; however, it will continue to serve all in-force policies. It's also aiming to capture the wealth accumulated by an aging population's maturing 401(k) plans through the introduction of a rollover annuity. Before 1988, Merrill Lynch Life had been involved with the sale of a nominal volume of ordinary life insurance, but beginning in 1989, it had a new corporate emphasis on the sale of single-premium deferred annuities and modified guarantee annuities.

Merrill Lynch distributes its products solely through its network of 10,000 financial advisers. In addition to selling proprietary products, Merrill Lynch's financial advisers also sell insurance and annuity products from several other well-known organizations. Merrill Lynch Life's investments are managed by Merrill Lynch Investment Managers, which has more than $400 billion assets under management and is one of the world's largest investment managers. Merrill Lynch & Co. has more than $1.3 trillion in assets in client accounts, along with more than $400 billion in assets and $22 billion in shareholders equity on its balance sheet, according to A.M. Best Co. reports.

Reinsurance: The maximum net retention on any one life is $500,000 for ordinary and variable life business.

Financial History: Merrill Lynch Life has been able to turn excess capital over to its parent through dividends, but also needed help in recent years. In 2002, Merrill Lynch Life's capital deteriorated as statutory losses, mainly the result of significant reserve additions, eroded roughly 50% of its capital base. Part of Merrill Lynch Life' s balance sheet strength was restored following a capital infusion by Merrill Lynch, and an ongoing shift in Merrill Lynch Life's business profile toward variable products.

Source: A.M. Best Co. and Finetre Corp.