Variable annuities have long been known to be poor products for almost all investors. Insurance companies, however, made tremendous profits in selling them and paid high commission to brokers. Now, in the wake of massive stock market declines,
variable annuities are starting to drag down the profits at such insurers.
According to a recent article by Lavonne Kuykendall in The Wall Street Journal, the damage is coming as insurers are also taking losses on the massive investment portfolios that back their insurance policies. Losses have come from holdings in the financial sector, from falling values in mortgage-backed securities, and unrealized losses in investment grade corporate bonds.
Since stock markets have fallen, insurers face reduced fee revenue as their annuity assets under management shrink. For accounting reasons, they also face charges against earnings related to the cost of acquiring the business.