New sales of variable annuities declined further in the first quarter of 2009, falling to $30 billion from fourth quarter new sales of $32.7 billion, an 8.3% drop. Relative to the first quarter of 2008, new sales were down 26.7% from that quarter’s $40.9 billion total.

A bright spot in the overall picture was the amelioration of the sales decline toward the end of the first quarter. The March estimate of industry sales was $10.8 billion vs. the January estimate of $8.75 billion, a 23.4% increase. While any improvement is welcome news, the strength of sales in March may have been anomalous and driven by the combination of annual tax planning, relatively strong equity market performance in March (8.5% gain in the S&P 500 vs. an 11% drop in February), and a rush to invest prior to the closing of living benefit options.

Assets under management (AUM) also continued to decline, falling 4.4% to $1,066.0 billion from December AUM of $1,114.8 billion. The S&P 500 declined 11.7% over the same period, but as AUM in the general accounts of the issuers and fixed income separate account AUM now account for a larger slice of the asset pie, the rise and fall of AUM has a much lower correlation to the index. For example, fixed income and general account assets of $478 billion represented a 44.8% share of total assets at the end of the first quarter of 2009 vs. $443.3 billion and a 31.3% share as of March 31, 2008.

MetLife regained the top spot in the first quarter with $3.7 billion in new sales and a market share of 12.5%. TIAA-CREF, AXA Financial, Prudential, and John Hancock rounded out the top 5 with market shares of 11.7%, 9.7%, 7.0%, and 6.9% respectively.

In the third-party distribution channels the top firms were AXA Financial with an 11.1% share of bank sales; MetLife with 14.2% of independent financial planner and 17.6% of wirehouse sales; and John Hancock with 16.8% of total sales by advisors affiliated with regional brokerage firms.

The top selling non-group product in the first quarter was Allianz Vision with $944.5 million in new sales, or 3.9% of total retail (non-group) VA sales. Allianz closed several living benefit riders as of April 1, 2009, and it is common to see a spike in sales when popular benefits remain available for a grace period after the announcement of their termination.

Rounding out the top 5 products were John Hancock Venture III with $831.7 million in sales and a 3.5% market share; Jackson National Perspective II ($774.6 million, 3.22% share); AXA Accumulator 2008 ($690.7 million, 2.87% share); and RiverSource RAVA4 Advantage ($669.6 million, 2.8% share). Venture III was closed to new sales as of April 3, 2009, and the living benefits offered in the others have either been removed or significantly modified.

Recent changes include:

–Jackson National closed the FutureGuard 6 GMIB rider on April 6, 2009.

–AXA Financial closed the stand-alone GMWB and reduced the GMIB roll-up rate from 6.5% to 6% on Nov. 19, 2008, followed by a reduction to 5% in the Accumulator 8.2 series incepted Feb. 17, 2009.

–Riversource increased the current fee for its GMAB rider by 0.20%, the SecureSource Single Life GMWB by 0.25%, and SecureSource Joint Life by 0.30%, as well as discontinuing the availability of the Aggressive model portfolio option under the GMAB rider.

As of May 21, 2009 the Morningstar variable annuity database was 97% updated for May 1, 2009 prospectus data. Broadly speaking, the majority of significant changes to variable annuity products fell into one of three categories:

1) Restructuring of benefits, including fee increases, withdrawal rate and/or roll-up reductions, more conservative asset allocation requirements.

2) Benefit closures.

3) Passively managed funds replacing actively managed funds for use under a guaranteed living benefit.

We expect to see any new products or riders launching during the summer months continue to offer lower guarantees, at a higher cost, and with less risk allowed in the portfolio.

While the products in the lab today will certainly offer less lucrative benefits, the sobering reality of what negative returns can do to a portfolio (not to mention retirement plans) will help this industry grow, albeit less rapidly, in the coming months as more investors embrace the idea of creating a floor against losses for a portion of their investments.

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