The variable annuities business, one of the fastest-growing segments of the financial services industry in recent years, is entering a new, more difficult era.

These retirement savings products, created by insurance companies and increasingly sold through banks, have come under assault from the consumer press and some financial advisers for carrying heavy fees. At the same time, changes in tax law have taken some of the shine off the products.

The upshot: A number of leading underwriters are experimenting with new pricing strategies. Some are lowering fees on broker-sold annuities, while others are introducing "no-load" products that bypass the broker altogether.

Though such measures may well help sales, they are almost certain to lead to new pressures on profitability, industry executives say. Indeed, many of the players who poured into the field over the past few years may soon find themselves forced out.

"A lot of people are going to figure out that they don't have the critical mass to be in this business," said Eli Broad, the chairman of Los Angeles-based SunAmerica, which specializes in annuities underwriting.

Until now, the news has been mostly good for sellers of variable annuities. The products, hybrids of mutual funds and life insurance, have been showing up in retirement savings accounts across America.

Helped by a strong stock market, variable annuity sales have jumped almost 20-fold since 1985, to $87.7 billion in 1997, according to Atlanta- based Variable Annuities Research and Data Service. The group projects that annual sales will exceed $150 billion in 2000.

For insurance companies, the popularity of the product has helped offset stagnant sales of traditional life insurance. And it has given the brokerage units of banks a sensible way to diversify beyond mutual funds and securities. Some 13% of all variable annuities are now sold through banks and credit unions.

In recent months, however, criticisms of the product have come in a steady drumbeat.

A variable annuity's brokerage-related fees are on average almost half a percentage point higher on a yearly basis than are fees on broker-sold mutual funds, detractors point out. And annuities are taxed as ordinary income at the time of withdrawal rather than at the lower capital gains rate.

Furthermore, Congress' decision last year to lower the capital gains tax rate only helped mutual funds, which are taxed mostly at that rate, at the expense of variable annuities.

A controversial February cover story in Forbes magazine proclaimed that variable annuities were a "rip-off."

"I don't understand how variable annuities can continue to grow," said Harold Evensky, a financial planner in Miami. "I think these investments are sold, not bought, and there are obviously a lot of good salespeople out there."

In the first quarter of this year, variable annuity sales fell for the first time in five consecutive quarters. Though many annuity professionals dismiss that as a fluke, some wonder whether all the concerns are finally taking a toll.

"The lowering of the capital gains rate did take away some of the attractiveness of variable annuities," said James Hide, the annuity product manager at Cleveland-based KeyCorp.

To fight back, leading insurers Nationwide Life and the life insurance underwriting group of Citicorp are coming out with product offerings that carry lower sales-related charges.

And while the no-load side of the business is currently quite small-only 3% of all variable annuity sales bypass the broker and are sold direct- underwriters and consultants alike expect this to grow steadily over the next few years.

"I do think that fees will continue to go lower into the future, particularly because some of the products are priced out of the stratosphere," said Peter W. Cummins, a senior vice president for sales and marketing with Hartford Life Insurance Co., the nation's largest underwriter of variable annuities.

Such conditions will help intensify the shakeout that many in the industry feel is inevitable.

Said Ronald L. Ziegler, a vice president with Aegon Financial Services Group, a Cedar Rapids, Iowa annuities underwriter:"There are some players that will drop out or be bought out.

"But most of the big players will be survivors," he said.

Though the rate of annual growth in the variable annuity industry is slowing a bit-from 44% in 1996 to a projected 15% this year according to Variable Annuities Research and Data-it is unlikely to flatten out anytime soon. That's because a combination of factors is driving sales of these products.

Unlike a normal mutual fund investment, the assets in a variable annuity contract, normally a mix of stocks and bonds, can build up on a tax- deferred basis until the owner decides to withdraw funds after age 59.

At a time when many Americans are concerned about their ability to save enough dollars for retirement, marketers are selling variable annuities as an ideal vehicle for after-tax or nonqualified retirement accounts.

The pitch goes something like this: Use the tax-sheltered status of your 401(k) or individual retirement account to make investments in mutual funds and stocks and bonds. But once you have hit the limit in these investment accounts, turn to variable annuities, which carry tax-sheltered status regardless of how large an investment you make.

Brokers are touting two other advantages that variable annuities hold over mutual funds: the ability to structure a contract so that it provides an annual payout for the rest of one's life, and a life insurance benefit.

But a growing number of underwriters recognize that they have to do more to make these products attractive to customers.

Last November, for example, Nationwide, the second-largest underwriter of annuities, launched a low-fee variable annuity for its "Best of America" family called the Future Annuity.

The annual mortality and expense charge, which normally goes to pay brokers and the insurance wrapper, is 95 basis points a year, about half a percent lower than the average.

'We believe that lower fees are the future of the business," said Karen Eisenbach, president of Nationwide Financial Institution Distributions Agency Inc.

And Aegon Financial Services, a subsidiary of the Dutch insurer, Aegon NV, is underwriting a "no-load" product that mutual fund giant Vanguard Group is selling directly to its customers.

A customer of this annuity pays a mortality and expense charge of only 38 basis points, more than a full percentage point below the industry average. Moreover, the product lacks surrender charges for cashing out early.

Says Aegon's Mr. Ziegler: "As variable annuities become more known, the need for advice will lessen and you will see more no-load annuities."

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