The 1st quarter of 2007 saw variable annuity sales exceed $40 billion for the second time in a year. New sales of $40.1 billion were slightly lower than the record 2nd quarter 2006 new sales of $40.9 billion, but higher than 4th quarter 2006 new sales of $39.7 billion.

On a quarter over quarter basis, the top sellers of variable annuities remained relatively stable in terms of ranking and market share, although AXA Equitable notably moved into the number 2 spot with an 8.74% market share, up from 8.34% in the 4th quarter of 2006. Other top 15 companies with large gains in market share relative to 4th quarter were Pacific Life (5.65% to 6.19%) and Jackson National (4.88% to 5.16%).

The breakdown of sales by distribution channel does not reveal any major new trends, although it is worth noting that the regional, captive agency, and wirehouse channels have dropped slightly in the past year, while the independent financial planner and bank channels have gained. The bank channel was up just slightly, to 13.5% from 13.4% a year ago, while the increase in the independent financial planner channel was greater, rising to 34.2% from 31.7% in the first quarter of 2006.

Individual product sales reveal some interesting characteristics of today’s variable annuity market. Analysis of the top 10 products (by dollar increase in 1st quarter 2007 sales over 4th quarter 2006) reveals strong growth in several product designs. These 10 products represent about 18% of new sales (excluding TIAA-CREF) and include a wide variety of product structures and features.

AXA Equitable Accumulator Elite, an L-Share product with optional income and withdrawal benefits, had the largest quarter over quarter increase, $189.1 million. But AXA Equitable Accumulator Plus, RiverSource RAVA 4 Advantage, MetLife Investors Series XC, and Lincoln Choice Plus Assurance–all bonus products with traditional B-share structures–also saw large gains in sales. Hartford Leaders Outlook, Pacific Life Innovations Select, and AIG SunAmerica Polaris Choice III are 3 other L-share products with robust sales increases, but Fidelity Personal Retirement–a stripped down, low cost C-share product–also increased sales by over $95 million.

From the simple low cost structures to feature laden bonus contracts, it appears the current crop of variable annuities has something for everyone.

Assets under management continued an upward trend, reaching $1,389.9 billion as of 3/31/07. This represents a 1.4% increase over 12/31/06 total assets of $1,370.6 billion. Among individual top 15 companies, John Hancock had the largest percentage increase in assets, with a 3.31% increase to $49.9 billion, from 12/31/06 assets of $48.3 billion. Other companies with significant increases in assets under management include Jackson National (+3.17%), MetLife (+3.16%), AIG/SunAmerica/VALIC (+2.89%), and Allianz Life (+2.76%).

First quarter net flow recovered slightly from its precipitous drop last quarter, increasing 23.1% to $6.4 billion, from $5.2 billion in the 4th quarter of 2006. The industry has yet to see the kind of solid increases in net flow that would definitively demonstrate that higher sales levels reached in recent quarters are more the result of new money than 1035 exchanges, but any upward trend is a welcome sign.

Net cash flow in variable annuities has been a subject of much debate in the industry. Is the gap between net cash flow and total sales largely the result of the inclusion in total sales of 1035 exchanges? Or is it more the result of dollars being removed from the industry entirely, through full surrenders, partial withdrawals and/or benefit payments?

Statistics have been published putting 1035 exchanges at 85% of total sales, which seems very unlikely. In order for 1035 exchanges to reach that level, there would have to be only 2 cash flow activities taking place: new dollars deposited to new or existing contracts, and 1035 exchanges transferring value from one contract to another. In this 2-action state, the difference between total new sales and net cash flow would be equal to 1035 exchanges. For the first quarter of 2007, this would imply 1035 exchanges of 84% ($40.1 billion in total new sales less $6.4 billion in net cash flow equals $33.7 billion of 1035 exchanges, or just over 84% of total new sales).

In reality, net cash flow is reduced by surrenders and benefit payments, so the actual percentage of 1035 exchanges would be significantly lower. If, for example, total surrenders and benefit payments average 3% of total net assets per year, we would need to add back roughly $10.4 billion to net cash flow in the first quarter to account for that activity. This hypothetical example implies that net cash flow before surrenders and benefit payments, which might be termed “net sales,” was $16.8 billion, implying a ratio of 1035 exchanges to total new sales of 58%. This is still quite high, of course, but not the picture of an industry that is only recycling old business that the former calculation implies.

While there is no directly surveyed statistical data that can be used to calculate the exact ratio of 1035 exchanges to total new sales, this back-of-the-napkin calculation acknowledges all cash activity and makes the point that there is very likely more new money flowing into the variable annuity industry than one might conclude by looking solely at sales and net cash flow data.