NU Online News Service, Oct. 15, 3:30 p.m. – The winners in the variable annuity markets over the long haul will be carriers that maintain profitable pricing, even if it means losing market share in the short run, says a new analysis from Moody’s Investors Service, New York.

“The dramatic and prolonged decline in the equity markets over the past two and a half years has still not mitigated the intensity of VA market competition in the non-qualified market, particularly in those annuities sold through the broker markets,” Moody’s says in a new report, “Ghosts of Bubbles Past: Equity Markets Haunt Variable Annuities.”

Most VAs sold around the peak of the U.S. bull market will generate returns far below their manufacturers’ expectations, due to the fall in the equity markets, Moody’s says. Prices in the $100-plus billion in the VA market may not become more sensible until some competitors pull out of the market, which Moody’s describes as “overcrowded.”

Aggressive life insurers that built up VA assets near the top of the bull market would be hurt the most, the report says.

The report concludes that it is unlikely that recently sold VAs will ever meet insurers’ profit targets. Due to thin margins, earnings on these products will be low. Still, Moody’s expects that a typical annuity marketed during late 1999 can still be expected to produce a positive internal rate of return. Long term, companies that are disciplined on pricing and that can withstand market volatility should eventually see “acceptable” returns if they carry a diversified line of annuities.

“In many ways, the distributor is the real winner in the process,” says Moody’s. “The distributor takes a commission up front, leaving the resulting risks for the consumer and the insurance company,” the report observes.

Moody’s predicts many insurers with less than $10 billion in VA assets will soon need to reassess the value of carrying the products.