Variable Annuities Recover Profitability in 2003

Industry Seeks New Features to Entice Baby Boomers

(Hartford, CT) April 26, 2004 – Variable Annuities rode out the “perfect storm” that hit the capital markets in recent years, returning to profitability in 2003, according to a study by Conning Research & Consulting.

Preliminary data in the study, “Variable Annuities: An Industry in Transformation,” reveal that the individual annuity industry returned a profit of $7 billion in 2003, primarily due to the swing on variable annuities. In 2002, the combined individual annuity industry lost about $691 million on a statutory basis, mostly from variable annuity challenges.

“After a couple of brutal years, it appears that 2002 was the bottom in terms of industry performance,” said Stephan Christiansen, Director of Research at Conning. “We expect strong profitability to continue in 2004, positioning the industry well in the face of the unprecedented opportunity presented by the large baby boomer population that will be retiring over the next 25 years. That said, there are a number of structural issues with variable annuities that will need to be addressed.”

The study identifies specific challenges that will affect the industry’s ability to provide positive performance for insurers in both profits and asset growth.

“Historically, variable annuities have been positioned as a wealth accumulation product and competed with mutual funds through a strong reliance on tax advantages. The advantages offset the higher costs relative to mutual funds” said Christiansen. “However, the 2003 tax law changes affecting dividends and capital gains have essentially removed tax preferences as a significant competitive advantage. So the question is, what’s next?”

In the study, Conning Research & Consulting presents the competitive marketplace and looks at the need for expense reduction and more sophisticated risk management to sustain the viability of the variable annuity product in the face of increased volatility and lower long-term expected equities returns. In addition, the study addresses the importance-especially after the 2003 tax law changes-and sometimes surprising performance of product features and enhancements such as guaranteed death benefits and guaranteed living benefits.

“Over the last few years these guarantee features have become a major source of competitive advantage for the industry” said Christiansen. “Variable annuity carriers are testing the waters for the right mix of features to appeal to the large baby boomer segment, but this product innovation, while being absolutely vital, also presents some long-term risks to the insurer.”

“Variable Annuities: An Industry in Transformation” is available for sale from Conning Research & Consulting, Inc., by visiting the company’s Web site at

About Conning Research & Consulting, Inc.

The Conning name has represented excellence in independent insurance industry research for more than 90 years. As a result of its wealth of experience and intimate knowledge of the insurance industry, Conning understands industry challenges and opportunities and can provide in-depth insights and analyses. Headquartered in Hartford, Conning provides both public and proprietary research as well as consulting services to the financial services industry.