"The variable insurance product industry has faced new challenges over the last year as a result of a slumping stock market. According to the National Association for Variable Annuities, combined net assets of variable annuities declined approximately 15 percent during the first three quarters of 2002, which follows a fall in net assets of more than 7 percent in 2001. Declining asset values have forced some variable annuity providers to increase reserves in order to cover obligations associated with guaranteed death benefits.

"As the markets have dropped, the value of variable annuity death benefits has in some cases exceeded the value of their corresponding variable annuity contracts. Providers, as a result, are on the hook to cover these death benefits upon an insured's death, which could expose companies to losses.

"Similarly, shrinking assets have negatively affected the ability of variable annuity and variable life providers to recoup past marketing and distribution costs, which depends upon generating sufficient asset-based fee revenue. Some companies have already been forced to take write-offs against current operating income due to the inability to recoup these costs. Not surprisingly, variable annuity sales have declined in 2002."

Source: Paul F. Roye Director, Division of Investment Management U. S. Securities & Exchange Commission in a Speech to SEC Staff: Understanding Securities Products of Insurance Companies, Practicing Law Institute 2003 Conference, January 2003)