Variable annuity new sales were $33.2 billion in the 2nd quarter of 2005, a 5.8% increase over 1st quarter sales of $31.1 billion and almost equal to 2nd quarter 2004 sales of $33.3 billion.

As a result of strong 1st quarter 2004 new sales of $34.4 billion, 2005 mid-year total new sales of $64.5 billion lag the mid-year 2004 total of $67.7 billion by 4.8%.

It seems likely that 2005 variable annuity new sales will be roughly equal to the $128.5 billion recorded in 2004.

Of the Top 25 companies, the five companies with the greatest sales momentum in 2005, as measured by the ratio of 6/30/05 year-to-date sales to 2004 full-year sales, are as follows: MetLife (including Travelers), 68.4%; IDS Life, 67.7%; Ohio National, 65.5%; Northwestern Mutual, 62.5%; and Jackson National, 61.3%.

MetLife’s market share increased 36.1% in the 6/30/05 year-to-date period vs. 2004; IDS, 34.8%; Ohio National, 30.3%; Northwestern Mutual, 24.5%; and Jackson National saw a 22% increase in new sales market share.

The acquisition of Travelers Life & Annuity Company by MetLife further consolidates variable annuity sales within the Top 25 companies in the industry, with 96.3% of year-to-date sales accounted for by this group. There are a total of 48 parent companies tracked in the VARDS database. This contrasts with an 87.3% market share for the Top 25 and 67 parent companies five years ago (6/30/00 year-to-date figures).

The distribution of sales by share class in the 6/30/05 year-to-date period did not change dramatically vs. 2004. Bonus product sales were unchanged at 27.1% of total sales, B shares dropped from 30.8% to 28.6%, and C shares dropped from 4.3% to 3.6%. L shares continue to gain ground, increasing from 16.4% of total sales in 2004 to 17.6% in the first half of 2005.

Guaranteed living benefits, and in particular the Guaranteed Minimum Withdrawal Benefit (GMWB), continue to play a significant role in driving variable annuity sales. Of the $54.6 billion in non-group variable annuity sales reported for the 6/30/05 year-to-date period, $42.5 billion, or 78%, offered a GMWB.

The Guaranteed Minimum Income Benefit (GMIB), though not as widely available as the GMWB, was available in contracts representing 52.3% of sales over the period, while the least common living benefit, the Guaranteed Minimum Accumulation Benefit (GMAB), was available in 28% of non-group contracts sold.

A relatively new living benefit, the hybrid type, is elected as a single rider, but the investor may have the option to either create an annuity income by exercising the benefit as a GMIB, or create income using guaranteed withdrawals, or simply access a guaranteed value after a declared waiting period.

The Guaranteed Minimum Withdrawal Benefit, in particular, seems to be evolving into various distinct benefit types as companies look for ways to distinguish their offerings in the marketplace. The “For Life” feature, which guarantees a fixed withdrawal amount for life regardless of actual account value, has been available from a few companies for some time but is becoming more common. Other distinctive designs include a tiered bonus arrangement, where the guaranteed withdrawal base increases the longer one waits to exercise the benefit, and combination death/living benefits, where one guaranteed benefit base is created that either can be exercised as a living benefit or is paid out as a guaranteed death benefit amount.

Rather than the migration toward unbundled products forecast several years ago, when many predicted that the most successful products would be those that allowed the investor to select from a large menu of independent options, variable annuity product design today may be moving toward unified benefit structures that limit the number of elected options but provide the flexibility to exercise the benefit in different ways depending on changing needs that cannot be predicted years in advance.

For instance, while a GMIB can be suitable for someone in excellent health on the purchase date of the annuity, exercising the benefit to create an annuity stream of income may not be optimal 10 years later if a serious or terminal illness has developed; having the option to access the guaranteed benefit base without annuitizing increases the potential value of the benefit. Hybrid benefit structures may also benefit both the insurer and the consumer in other ways, as in the case of a combination living and death benefit–one cannot exercise both but may need either, so the cost of the hybrid may be lower than the cost to elect each independently, reflecting the reduced risk to the insurer.

Assets under management in variable annuities reached $1.134 trillion as of 6/30/05, a 2.9% gain over 3/31/05 assets of $1.102 trillion.

Of the Top 25 companies, the five largest percentage asset gains were achieved by Allianz, with an 11.4% increase; Jackson National, 11%; Pacific Life, 7.2%; Lincoln National, 3.5%; and AXA Financial, 2.5%.

The pie chart of allocated assets accompanying this article has been re-formatted for 2nd quarter 2005. The VARDS product line was acquired by Morningstar, Inc. on Jan. 1, 2005. The classification of variable annuity subaccounts in the VARDS database has been changed from an Investment Objective methodology to the Morningstar Investment Categories and Asset Classes. As there are 64 Investment Categories, far too many for a high level pie chart, modified asset classes focusing on market capitalization and other subaccount groupings, such as “Specialty” for REIT, natural resources, technology, etc., are used for clarity and brevity.

Finally, net cash flow, which has been on the decline this year, was $5.2 billion in the 2nd quarter, bringing year-to-date total net flow to $10 billion, or 15.5% of new sales, in contrast to 2004 net cash flow of $40.2 billion, or 31.3% of new sales.

Frank O’Connor is product manager, VARDS products, at Morningstar, Inc. He can be reached at frank.oconnor@morningstar.com.