Second-quarter variable annuity results were weak.[@@]

Suneet Kamath, an analyst at Sanford C. Bernstein and Company L.L.C., New York, dissects the figures this week in a new research note.

“Based on data from 6 leading U.S. variable annuity writers, we would describe 2Q05 trends as disappointing,” Kamath writes. “Should these trends continue, VA growth will remain challenged.”

Customers withdrew the equivalent of about 2.9% of the assets in the contracts at the beginning of the period, and that withdrawal rate is up from an average of 2.7% reported for the prior 5 quarters.

“Given that much of VA business written in the late 1990s will soon be eligible for penalty-fee withdrawals, the uptick in 2Q05 could mark the start of a trend,” Kamath warns.

Kamath is bullish on Aflac Inc., Columbus, Ga., and Prudential Financial Inc., Newark, N.J., because of their relatively low level of exposure to the VA market.

“Aflac does not sell variable annuities and is showing sales momentum in the U.S. and Japan,” Kamath writes.

Prudential does sell variable annuities, but it gets a smaller share of its net earnings from VA sales than competitors do, Kamath says.

Insurers that want to grow their VA business in the current climate must accept more risk, Kamath adds.

“This trend reflects the fact that insurers have had to change the value proposition of VAs from one focused almost exclusively on tax-deferred growth to one that is aimed at providing guarantees, which increases risk,” Kamath writes.