Variable annuities ended the year on a strong note by virtually all measures. 2010 new sales totaled $136.6 billion, an increase of 10.3% over 2009 sales of $123.9 billion. Sales momentum surged in the 4th quarter, with new sales of $37.1 billion reaching a two-year quarterly high and posting a 17.4% increase over 4th quarter 2009 new sales of $31.6 billion. Year-end assets under management reached a milestone of just over $1.50 trillion, an 11.2% increase over year-end 2009 assets of $1.35 trillion and the highest recorded in almost 20 years of variable annuity asset tracking. This also represents a return to pre-crisis asset levels as the previous high water mark of $1.49 trillion was reached in the third quarter of 2007. New cash flow in the 4th quarter slipped a bit from 2nd and 3rd quarter levels, but at $5.4 billion was nevertheless 84% higher than 4th quarter 2009 net flow of $2.9 billion. $21.5 billion in full year net flow was up 26.9% over the $17.0 billion recorded for 2009. Not since 2006 has the change in year-over-year net flow been more positive than the change in sales, and at 15.7% the ratio of net flow to new sales was the highest since 2007; both measures point to improvement in terms of new money vs. exchange fueled sales.

Sales ranks and market share remained relatively unchanged from 2009. The number one and number two companies remained Prudential and Metlife with market shares of 16.4% and 13.8% respectively. Jackson National, with a 10.7% share of the market, moved up one spot to rank third in 2010. TIAA-CREF slipped to fourth and Lincoln remained in the fifth position, rounding out the top five with shares of 10.4% and 6.6% respectively. For a bit of historical perspective,

in 2010 the top five companies had a combined market share of 57.0% as compared to a 42.8% share for the top five companies in 2005; those companies were TIAA-CREF (10.3%), MetLife (9.5%), Hartford (8.6%), AXA (8.0%), and Lincoln National (6.4%).

The distribution channel sales leaders were a bit more diverse. The number one and number two spots in the Bank and Independent channels went to Prudential and Jackson National, Prudential and Metlife were the top sellers in the Wirehouse channel, MetLife and Jackson National were strongest in the Regional channel, and MetLife and Ameriprise led the Captive Agency channel (ex TIAA-CREF). Rounding out the top five in each channel were Nationwide, MetLife, and Pacific Life in the Banks; MetLife, Lincoln National, and Allianz in the Independent shops; Sun Life, Nationwide, and SunAmerica in the Wirehouses; Protective, John Hancock, and Prudential in the Regional Firms; and finally AXA, SunAmerica, and Thrivent in the Captive Agencies.

2010 also saw changes in the topography of the variable annuity industry, with ING and Genworth exiting the industry entirely (Genworth actually announced on 1/7/2011) and Ameriprise ceasing third party distribution. Tinkering with living benefit structures, relatively slow after the rush to dial back or shelve benefits after the financial crisis, began to pick up in the second half of 2010. Changes in 2010 trended toward making benefits modestly more generous, for example by extending availability to younger ages, enhancing rewards for delaying withdrawals, and/or slightly increasing withdrawal percentages. Fee increases from 10 to 35 basis points generally accompanied these improvements. A few companies went the product innovation route, for example AXA launched the Retirement Cornerstone product that uses guaranteed and non-guaranteed “sleeves” to provide investors with a mechanism to fund a personal pension account over time by transferring assets into the guaranteed “sleeve.” Guaranteed withdrawals are tied to treasury rates, a risk management innovation sure to be employed by other companies. A major theme for 2011 is likely to be the partial transfer of guarantee risk from the insurer to the investor; expect to see more innovations along the lines of the VIX-based withdrawal benefit fee structure recently developed by SunAmerica, dynamic rebalancing like the feature pioneered by Prudential, and perhaps hedging strategies baked into the underlying funds like those recently announced by ValMark and Milliman.

Frank OConnor is Director, Insurance Solutions at Morningstar, Inc.