New sales of variable annuities totaled $40.9 billion in the 1st quarter of 2008, a 12.4% decrease from 4th quarter 2007 new sales of $46.7 billion and a 1.2% increase over 1st quarter 2007 new sales of $40.4 billion.

Assets under management (AUM) as of 3/31/08 dropped 5.9% to $1,396.5 billion from 12/31/07 AUM of $1,484 billion. Assets were down less than 1% from 3/31/07 total AUM of $1,397.8. Net flow was also down in the 1st quarter, to $7.2 billion from 4th quarter 2007 net flow of $9 billion, a 20.1% decline. On a year over year basis, however, net cash flow showed significant improvement, posting a 12.3% increase relative to the 1st quarter of 2007 total of $6.4 billion.

Once again AXA Equitable held the number one spot in variable annuity sales, with $3.6 billion in total new sales for the quarter. MetLife, holder of the number one spot in the 2nd and 3rd quarters of 2007, slipped to the number 4 ranking with $3.2 billion in total new sales for the 1st quarter of 2008. The top 3 positions have become increasingly competitive in the past year, with market share of 0.1% or 0.2% often determining rank. The top 5 companies were AXA Equitable with $3.6 billion in sales and 8.8% market share, TIAA-CREF at $3.5 billion and 8.6%, ING Group of Companies (a new entrant to the top 5, historically ranking, on average, in the lower half of the top 10) at $3.5 billion at 8.5%; MetLife at $3.2 billion and 7.8%, and finally Lincoln National at $2.9 billion and market share of 7.2%.

Sales of the top 25 VAs in the first quarter of 2008, including group products, totaled $21.4 billion, representing market share of 52.3%, which was an increase. For the full year 2007 the market share of the top 25 was 48.7%. The top retail product was John Hancock’s Venture III variable annuity, with over $1.12 billion in sales and a 2.75% market share. Venture III has total base insurance charges (M&E, administrative and distribution) of 1.65% and offers enhanced death and living benefits, including “for Life” GMWB and GMAB/GMWB combination riders.

Other 1st quarter 2008 top-selling retail variable annuities were ING’s Golden Select Landmark (new sales of $1.12 billion and market share of 2.74%); RiverSource’s RAVA 4 Advantage (new sales of $1.06 billion, 2.60% market share); AXA Equitable’s Accumulator Elite 2007 ($1.03 billion, 2.52% share); and American Skandia’s Xtra Credit Six ($0.96 billion, 2.36% share). Three of the top 5 retail products are L-shares: Venture III, GoldenSelect Landmark, and Accumulator Elite 2007. The other two offer a bonus feature: RAVA 4 Advantage and Xtra Credit Six.

As of this writing, Morningstar is in the process of completing the annual process of updating the 1,200+ VA contracts in its database for the May 1 filings, including subaccount changes and updates to variable annuity contract structure and death and living benefits. While we have not yet compiled and reviewed all the changes, some interesting product development trends have emerged during this process.

For example, the linking of death and living benefits with respect to withdrawals, where election of a guaranteed minimum withdrawal benefit extends dollar-for-dollar withdrawals to the death benefit value when withdrawals are kept within the limits prescribed by the living benefit, has been incorporated into benefit structures by several companies, including MetLife, Lincoln, and Hartford.

It works like this: assuming a $100,000 investment and an $80,000 contract value, a return of premium death benefit with a proportionate reduction feature would reduce the guaranteed death benefit of $100,000 (the “premium,” or invested amount) by $8,750 for a $7,000 withdrawal. Under the linked structure, the reduction in the return of premium death benefit would only be $7,000 if that amount represents the withdrawal allowed under the guaranteed minimum withdrawal benefit–in this example, 7% of the initial investment of $100,000.

This structure is also available from some companies attached to a maximum anniversary value death benefit, although generally for an additional charge. AXA-Equitable, Transamerica and Genworth are examples of companies that offer this arrangement. The principle is the same, but the dollar for dollar reduction can apply to a previously “locked” contract anniversary value.

In theory this may have an even greater impact, as a contract value attained at a market peak can be significantly higher than the value after a subsequent downturn (think mid-2000 vs. mid-2002).

In the event of such a significant downturn after a robust bull market, the death benefit may be significantly higher than current value, with pro-rata withdrawals having a commensurately greater impact. In the case of a $200,000 “locked” death benefit value and a $100,000 current value, a $10,000 pro-rate withdrawal reduces the death benefit by $20,000 (10% of $200,000) vs. only $10,000 under a dollar-for-dollar withdrawal arrangement. The “fall from the peak” scenario is precisely why dollar for dollar death benefits have all but disappeared from VA death benefits–in this example under older structures, where the withdrawal benefit did not exist to temper excessive surrenders, an investor could withdraw $95,000 (subject to minimum remaining balance requirements) and maintain a $105,000 death benefit indefinitely with a $5,000 contract value.

Look for more innovations like these that continue to position VAs as investment vehicles designed to generate income, preserve capital and contribute to bequeathment goals.

Frank O’Connor is product manager, VARDS, at Morningstar, Inc. He can be reached via email at