The competition to offer rich new variable annuity guarantees might be forcing some midsize U.S. VA players off the field.[@@]

Andrew Henckler, an analyst at Moody’s Investors Service, New York, comes to that conclusion in a review of the VA market.

For VA issuers, profit margins tend to be low and distribution costs tend to be high, Henckler writes.

“The recovery of the [sales] commissions paid and the ultimate profitability of VA blocks typically is contingent on assumptions that asset values and asset-based fees will increase 7% to 10% annually and that the policies will remain in force for several years,” Henckler writes.

In the real world, the surrender rate is about 10%, and surrender volume was so high in 2003 that net VA sales amounted to just 37% of total VA sales, Henckler adds.

Henckler predicts that some midsize VA issuers will try to expand sales to create a sustainable edge over competitors.

Another group of midsize issuers “has decided that the VA market is not attractive enough to justify the high level of distributor compensation and bewildering and ever-changing array of product features,” Henckler writes.

Some of the disenchanted insurers are scaling back their VA operations, and some are continuing to offer conservatively priced, conservatively designed annuities to keep distributors happy until they can find buyers for their blocks of VA business, Henckler writes.