Variable annuities are starting to drag following the recent turbulence in the financial market leads to the stock markets decline. As their sales fuel the profits on which life insurance companies to a certain extent rely on, their lack lustre figures of late are causing concern. The huge investment portfolios that back life insurance companys policies have been taking losses as holdings in the financial sector buckle. When holdings like the Lehman Brothers securities buckle in addition to the falling values of some of their mortgage backed securities the losses felt by insurance companies can be catastrophic.

The shaky ground that the market rests on at the minute is heavily contributing to the suffering of insurance companies as they are hit with not only the actual failings of some of their investments, but the threat of others following suit and the notion of being hit with additional losses. The unrealised threat came to light after some companies were hit with millions of dollars in losses as their investment grade corporate bonds of all stripes were almost crippled by large declines in recent weeks.

The fear being realised about variable annuities is that while they have the advantage of being one of the tax advantaged investment products with subaccounts that are akin to mutual funds, they are directly influenced by the markets fluctuations. As we experience the markets fall, insurers are being faced with reduced fee revenues as the annuity assets they have under management shrink. For accounting reasons insurers also face charges against the earnings that relate to the acquiring of the business. The 26 per cent drop in the DJIA was completely stripped by the Dow Jones Life Insurance Index which has plummeted 47 per cent over the last four weeks.

Morgan Stanleys analyst Nigel Dally said that he is anticipating the most challenging quarter for the life insurers in many years. This sentiment had credence added to it when the retirement specialists Lincoln National Corp. revealed that its retirement business has seen a ten per cent drop to its retail deposits going into their retirement and insurance products. This disappointing result in sales will invariably drag on their third quarter earnings. Taking a DAC, deferred acquisition cost charge will help reflect the affect the downturn in the market will have on the earnings of their investment type products.

Fred Crawford, Lincoln Nationals chief financial officer said that a bright spot would come if customers were to decide that guaranteed returns annuities were safer than gambling on the markets movements on their lonesome. This comes from the positive figures that have come from companys offering fixed annuities, they report that their products which offer a minimum rate to the customer have been doing well recently.

Ratings firm A.M. Best Co., state that the sales of individual variable annuities were down 13 per cent through the first six months of the year. This decent was a factor in the firms negative outlook for the U.S. life insurers ratings and the woeful stories coming in from various life insurers is proving the prophecy to be true. One such suffering company was Hartford Financial Services whose third quarter variable annuity deposits were just under guidance. They will be taking a $915 million third quarter DAC charge which will amount to approximately $3.05 a share.

MetLife Inc., currently one of the largest variable annuity providers in the market that their third quarter decline has cut its net earnings for the third quarter by fourteen cents a share due to a combination of higher DAC costs and a reduction to the variable annuity fee revenue.

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