Conning & Company Study Says Some Variable Annuity Insurers Will Emerge Stronger From Current Downturn.

Business & Insurance Editors

HARTFORD, Conn.--(BUSINESS WIRE)--May 8, 2002

- Reliance on Surrenders Stunted Market's Growth Opportunities

- Variable Annuity Sales for Some Insurers Should Recover as

Economy Does

Sales of variable annuities surged to $137 billion in 2000, but fell dramatically in 2001. Further, much of the sales activity in 2001 resulted from insurers trading assets with each other through contract "surrenders." Both the lower sales and the higher surrenders created problems for insurers. However, focus on new customer acquisition strategies and help from a revitalized economy may create a market rebound for annuity products, according to a new study from Conning & Company.

In the study, "Variable Annuity Marketplace: Thriving in Unfamiliar Terrain," Conning & Company found that surrenders grew 28% annually from 1997 to 2000, roughly twice the rate of premium and deposit growth. (In the same period, premiums and deposits grew at an average rate of about 14% while expenses increased 13% annually.)

"The long-term outlook for the industry is bleak if sales are driven by surrenders," said Elvin Turner, Vice President at Conning and author of the study. "If variable annuity insurers are trading dollars with each other, they are not growing the market. Further, dollars from new buyers are not available to buffer temporary drops in demand from existing customers. The fact that large numbers of new buyers are not yet in the market is one of the reasons that variable annuity sales hit a wall in 2001."

In the decline of 2001, however, Conning found the seeds of hope for variable annuity insurers. First and foremost, with a relatively small customer base, about 6% of the U.S. population, variable annuity insurers have an opportunity to attract many more new buyers who are in a position to benefit from the product. Insurers' current practice of selling primarily to existing annuity owners does not exploit the product's potential or enhance their financial results.

"To attract new customers, some variable annuity insurers are wisely developing new products and new ways of marketing them," said Turner. The Guaranteed Minimum Income Benefit (GMIB) is one example of a new product that addresses a marketing drawback for variable annuities. Typically, variable annuities pay an income in retirement that rises with positive equity markets and drops with falling markets. The GMIB feature creates a floor guarantee amount below which the payments cannot fall. This combination of an opportunity to benefit from market appreciation and a guaranteed minimum payment may entice potential buyers who would never have considered them before to evaluate variable annuities.

Another key conclusion of the study is that marketing, product development and distributor relationships must be considered in the context of expense management. One of the realities of the variable annuity market today is that industry sales, assets and revenues have dipped temporarily. While an improving economy should restore industry sales growth, all insurers will not benefit equally from this recovery, according to Conning. The better-positioned insurers are prudently investing in their business. Other insurers, however, are cutting expenses in a way that will adversely impact their longer-term competitiveness. As a result, insurers will be in very different positions as the markets recover. The insurers that will thrive in 2002 and beyond will continue to pursue the three basic goals--managing surrenders, increasing premiums, and controlling costs--and will work closely with their distributors to understand the needs of new and existing buyers. Insurers that apply their resources to identify segments of potential buyers, design products to meet their needs and align distribution to effectively deliver the products should see increased demand for their annuity offerings. This approach represents a radically different strategy for some insurers, since it will require them to expand their focus beyond distributors to the buyers.

The Conning study, "Variable Annuity Marketplace: Thriving in Unfamiliar Terrain," is available from Conning & Company for $750 by calling toll free [phone] or [phone]. A complete listing of all Conning Strategic Studies can also be found by visiting the company's web site at www.conning.com.

About Conning

Conning is one of the largest asset managers specializing in insurance company investments in the United States, a leading source of private equity capital to financial services companies and a nationally respected provider of research publications on the insurance industry. Conning is located at CityPlace II, 185 Asylum Street, Hartford, CT 06103.