New sales of variable annuities declined in the third quarter, dropping 2% to $30.6 billion from $31.2 billion in the second quarter of 2009 and down 17.3% from third quarter 2008 sales of $37 billion.

Prudential led the industry with an unprecedented 19% market share and a 72.6% increase in sales relative to the second quarter. MetLife, second in the industry with an 11.2% market share, saw a 23.6% decrease in sales, however.

Rounding out the top 5 were TIAA-CREF (11.2% market share, sales down 4.4%), Jackson National (9.5% market share, sales up 29.3%), and Lincoln Financial (6.5% market share, sales up 3.7%).

Assets under management continued to increase, buoyed by positive market returns. As of Sept. 30, 2009, VA assets totaled $1.311 billion, a 10.6% increase over June 30 assets of $1.186 billion. Once again 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% over the same period (almost exactly the percentage increase in the prior quarter).

Assets in fixed accounts dropped by 0.1% after rising by 0.7% in the first quarter, while Money Market assets fell another 10.7% after falling 9.6% in the second quarter. This puts Money Market assets back to roughly second quarter 2008 levels after a 6.2% decline in the first quarter followed a 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 16% in the third quarter, compounding the 19.4% second quarter gain in that category and again reflecting positive flows in addition to market gains. Overall, assets and flow data in the quarter continued to signal an appetite for the riskier asset classes.

Prudential’s L-share APEX II product led the market in the third quarter with $1.7 billion in sales and 7% market share (excluding group products). Jackson National’s Perspective II product held the number two spot with $1.5 billion in sales and a 6.4% retail market share, followed by Prudential XTra Credit Six ($1.2 billion and 5.2% share), Prudential Advisors Plan III ($1 billion and 4.3% share, and Jackson National Perspective L ($1 billion and 4.2% share). All 5 of these products continue to offer living benefits.

Qualified plan sales fell to 68% in the third quarter from 75% in the second quarter, but were still historically quite high. Living and death benefit guarantees are still very much in focus (since considerations like tax deferral are irrelevant when the product is purchased inside a qualified plan). Again, just over 85% of third 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.

Anecdotally, election rates for optional living benefits are running as high as 90% on new sales, indicating increasing demand for these protections. As long as companies are able to solve for the risk of profitably offering these guarantees we should see robust and rapid growth with an economic recovery, and potentially a boost in non-qualified sales for tax deferral plus guarantees.

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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