Third quarter new variable annuity sales of $36.5 billion were off almost 11% from the 2nd quarter’s record high of $40.9 billion. With the exception of an 11% increase in quarterly sales reported by RiverSource Annuities (formerly Ameriprise), the drop was industry-wide. However, with 3rd quarter year-to-date sales at $115.2 billion, the industry is still at a historic high.

With quarterly sales continuing to hover around historic highs, it seems likely that industry sales will reach or exceed $150 billion in 2006.

While a fall in sales volume was almost inevitable given highs reached in the 1st and 2nd quarters, the more intriguing statistic is the 13.4% increase in net cash flow. Net flow has been rising steadily this year: 1st quarter net flow was $7 billion; 2nd quarter was $8.2 billion; and 3rd quarter was $9.3 billion. In fact, 3rd quarter year-to-date net flow of $24.5 billion is already 20% higher than net flow for all of 2005. It is too early to predict a surge in new money being attracted to the industry, but this is nonetheless a positive trend after several quarters of decline.

Among the top selling companies there was some shift in rankings in the 3rd quarter. RiverSource Annuities jumped from 11th to 5th on their strong sales, while MetLife Companies fell from the number 1 spot to 3rd place. TIAA-CREF and AXA Financial each jumped one spot to claim the 1st and 2nd slots, respectively. Hartford Life continued to occupy the 4th position.

While all companies except RiverSource saw a decline in quarter over quarter sales, among the Top 25 companies the top 5 market share gainers were RiverSource, with a 24.7% increase; Sun Life with 10.4%; Genworth with 10%; Nationwide with 9.8%; and Ohio National, with a 9.6% increase in market share.

On a year-to-date basis, and excluding contracts used exclusively or primarily in group plans such as 403(b), the top 5 contracts, with a combined non-group market share of 16.7%, were John Hancock Venture III, with new sales of $4.3 billion; Jackson National Perspective II at $3.3 billion; RiverSource Annuities Retirement Advisor Advantage (RAVA) Plus at $3.2 billion in new sales; Pacific Life Innovations Select at $3.2 billion; and AXA Equitable Accumulator Elite at $2.3 billion.

Venture III, Innovations Select, and Accumulator Elite are L-share (limited surrender charge period contracts) while also offering living benefit guarantees, suggesting that protection against investment loss combined with increased liquidity is resonating with investors.

Of particular interest is the fact that the other 2 contracts in the top 5, Perspective II and RAVA Plus, have longer surrender charges but also offer an optional purchase payment bonus feature. This suggests that for some investors, the appeal of the bonus feature trumps concern about being “locked in” for longer periods.

Assets under management rose modestly from 2nd quarter levels, to $1.29 trillion from $1.26 trillion, a 2.4% increase. Compared with the end of 2005, assets increased 8.4%, up from $1.19 trillion. Positive returns as well as improved net flows contributed to the increase.

Among the top 25 companies, the largest gains in assets under management in the first 9 months of 2006 were posted by Pacific Life, with a 34% increase; Jackson National, up 24.3%; New York Life, with a 24.1% increase in assets; RiverSource Annuities, up 16.9%; and John Hancock, with an increase of 16.1% in VA assets.

Some of these increases in assets under management offer a window into the popularity of living benefits. For example, John Hancock’s top selling VA product, Venture III, had a 35.4% increase in assets under management from 12/31/05 to 9/30/06. The top 3 subaccount investment options in terms of gain in assets were the JH Trust Lifestyle Growth Series II, with a 67.5% increase; JH Trust Lifestyle Balanced Series II, in which assets increased 41.2%; and JH Trust Lifestyle Moderate Series II, with a 30.9% increase over the period. Although not a top subaccount by increase in assets, JH Trust Lifestyle Conservative Series II increased 21.4%.

One might argue that these gains primarily reflect growing interest in Lifestyle funds, whether in variable annuities or mutual funds, as a “hands off” approach to investing, and that is certainly part of the story. But interestingly, JH Trust Lifestyle Aggressive Series II only increased assets by 3.1% in the first 9 months of 2006. As it happens, the Aggressive Series II is the only one of the Lifestyle investment options that is not available when electing John Hancock’s Principal Plus for Life, which potentially accounts for the disparity in asset growth.

It is also worth noting that the relative change in assets in these subaccounts is directly proportional to the risk profile of each option–i.e., the riskier the investment, the greater the increase. This is intuitively to be expected–with the guarantee elected, the investor can take more risk. Analysis of the asset data in contracts with a similar structure, where the most aggressive Lifestyle or fund-of-funds investment option is not available when electing the living benefit, yields similar results.

Assets by investment category have not shifted a great deal since the end of 2005, although assets in the allocation category have risen about 13%, reflecting the requirement in many contracts that a fund-of-funds type asset allocation investment option be selected upon the election of a living benefit. Also, as is common in a period of positive market returns, the percentage of total assets in fixed accounts has dropped 11.5% as of 12/31/05, from 22.8% to 20.5% at the end of September 2006.