Annuity writers downplay fears over Bush proposals. (Briefing).

President Bush's proposals for new tax-free savings accounts might look like more bad news for the variable-annuity industry, but industry consultants, players and observers said that's not necessarily the case.

Writers' profits--based largely on assets under management--have been pummeled by the bear market in stocks. Now the president's proposed savings accounts could hurt the viability of the variable-annuity product itself in that the new accounts would be tax-free investment vehicles, while distributions from annuities still would be taxed.

Legislative compromise; annuities' existing protection and payout features; and new product innovation could mitigate the pressures that would be put on annuity writers as a result of Bush's proposal, Andrew S. Kligerman, an equity analyst with Bear, Stearns & Co., wrote in a report.

Kligerman singled out Hartford Financial Services Group Inc. and Lincoln National Corp. as annuity players that "could come under pressure given the uncertainty around Bush's savings and dividend tax elimination proposals."

The president's plan, part of the budget he submitted to Congress on Jan. 31, calls for three new types of accounts: Lifetime Savings Accounts, Retirement Savings Accounts and Employer Retirement Savings Account. Individuals could fully fund all three types of accounts each year.

While the appeal of such new accounts would be undeniable, annuity industry sources said the impact on total variable-annuity sales--both nonqualified and qualified--might not be much. That's because the people who buy non-qualified variable annuities are likely to still have money available for them, and because insurers would likely sell more variable annuities within the new accounts, according to Noel Abkemeier, consulting actuary and principal at the Virginia office of Milliman & Robertson.

Abkemeier said smart investors deploy their savings dollars in a way that makes the best use of tax-advantaged vehicles--employer-sponsored plans, followed by Individual Retirement Accounts and nonqualified savings plans that are funded with already-taxed money and offer deferral of taxes on earnings. Abkemeier estimated that if about 80% of variable annuities currently are nonqualified and 20% qualified, he might expect the proposed tax-free savings accounts to eventually shift that ratio to about 60% nonqualified and 40% qualified. "If they are selling the same amounts of product, writers won't care a lot whether it is nonqualified or qualified;' he said. "So it won't be a big problem for them." Insurers have two decades of experience in selling variable annuities inside of IRAs or tax-qualified plans.

Bryan Haviland, public relations officer for Nationwide Financial, said that while it's too early to tell how the proposal would impact the industry, the company doesn't believe "it's the kind of gloom and doom as it's been cast by some media accounts."

RELATED ARTICLE: At a Glance

Bush Savings Proposal vs. Variable Annuities

New Proposals

* Lifetime Savings Accounts allow contributions up to $7,500 each year and tax-free withdrawals at any time.

* Retirement Savings Accounts allow contributions up to $7,500 each year with tax-free withdrawals beginning at age 58, or upon death or disability.

* Employer Retirement Savings Accounts sweep all retirement plans such as 401 (k)s, thrift, 403(b), 457 and SIMPLE accounts into one new account. This year's contribution limit remains at $12,000.

Variable Annuity Plans

* Nonqualified plan distributions are taxed.

* Annuitized payouts are guaranteed to last a lifetime or stipulated period.

* Product innovations, including death benefits, minimum-income promises, and guaranteed minimum withdrawals regardless of investment performance.

* Can be used as investments inside Lifetime Savings and Retirement Savings accounts.