New sales of variable annuities recovered modestly in the second quarter, increasing 4.3% to $31.2 billion from a multi-year low of $30 billion in the first quarter of 2009. However, sales were still down 24% from second quarter 2008 sales of $41.1 billion.

The improvement was far from broad-based, with some companies showing large declines from the first quarter, while others posted significant increases. Some companies, such as Phoenix, with an 82% drop in sales, show signs of all but exiting the business. Larger companies such as ING (down 39%) and AXA Equitable (down 37%) are suffering large drops due to the closing or substantial modification of their living benefit guarantees.

Allianz (down 55%) was also a major decliner, but largely as a result of falling back from dramatically elevated first quarter sales driven by advisors scrambling to close business prior to the termination of popular guarantees.

Big gainers included Ohio National (up 101%), Guardian (up 99%), Prudential (up 60%), and New York Life (up 54%). Ohio National continues to offer an accumulation benefit; Guardian and Prudential have not closed their lifetime withdrawal benefits; and New York Life offers an accumulation benefit and has been busy touting its financial strength.

Assets under management also saw the first increase in several quarters, gaining 11.3% to $1.187 billion from $1.067 billion in the first quarter. The increase in total assets was driven in large part by positive returns in U.S. equities, with the S&P 500 index increasing by 15.2% over the same period.

Assets in fixed accounts increased by 0.7% after dropping 2% in the first quarter, while money market assets fell 9.6%, in their second straight quarterly drop. Money market assets slid 6.2% in the first quarter after a dramatic 21.1% increase in the fourth quarter of 2008. Assets in the large cap blend category, where nearly a quarter of separate account assets are invested, grew by 19.4% in the second quarter, indicating positive flows in addition to market gains.

Overall, assets and flow data in the quarter indicate an increasing appetite for the riskier asset classes.

MetLife again led the industry in sales in the 2nd quarter with a 14.4% market share, followed closely by TIAA-CREF (11.5%), Prudential (10.8%), Jackson National (7.2%), and Lincoln National (6.1%).

The concentration of sales in top companies is at a historical high point. These top 5 companies represented 50% of second quarter sales vs. the top 5 companies claiming 46% of sales 5 years ago. This trend is likely to continue as some companies find it difficult or undesirable to compete effectively in the guaranteed income benefit market, which is perhaps an apt description of the majority of the variable annuity market today.

Jackson National’s Perspective II product led retail sales in the second quarter, followed by Prudential Apex II, John Hancock Venture, MetLife Investors Series L, and Perspective L, Jackson National’s L-share version of the Perspective product. All 5 of these contracts share the characteristic of continuing to offer living benefits, albeit at a higher cost and/or lower potential benefit.

Fully 75% of sales reported in the second quarter were in qualified plans, indicating that living and death benefit guarantees are very much in focus (since considerations like tax deferral are irrelevant when the product is purchased inside a qualified plan).

Just over 85% of 2nd quarter retail (non-group) sales occurred in products that still offer some form of withdrawal guarantee, just about the same as the percentage prior to the credit crisis.

Investors and advisors, then, are showing a clear preference for companies and products that offer these guarantees, and companies that discontinue these benefits and still hope to gain market share will find a tough row to hoe absent other external factors such as a significant increase in income and/or dividend and capital gains taxes.

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


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