New variable annuity sales rose 2.6% in the fourth quarter of 2009, although they were down 3.8% from the previous fourth quarter. Year-over-year, new sales plummeted almost 19%, from $151.6 billion in 2008 to $123.1 billion in 2009. That's the lowest annual new sales figure since 2002, when sales reached $112.4 billion after bottoming out at just over $107 billion in 2001.

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The asset picture was brighter, with total assets at the end of 2009 showing an almost 20% increase over year-end 2008, driven primarily by vastly improved equity markets. But flows were down; VAs took in a net flow of $17 billion in 2009 ($2.9 billion in the fourth quarter), down 26.4% from 2008. While flows were certainly lower last year, they were still in positive territory, and there has yet to be a year-or even a quarter-where the industry as a whole is in net redemption.

EXCHANGES SLOW

A few top companies posted impressive year-over-year sales gains in 2009. Prudential, the industry leader with $16.1 billion in new sales and a 13.1% market share, saw a 58% rise in sales over 2008. MetLife, in the second spot, grew sales by 10% to end 2009 with a 12.5% share of the market. Fourth-place Jackson National was another big gainer, with new sales jumping 54.7%, to end the year with a market share of 8.1%.

For the rest of the top 10, the news was more negative. From ING plummeting 63% to AXA and John Hancock each ending 2009 with a 45% drop, 2009 saw reductions in sales and market shares across the board. To some extent, however, comparisons to prior years are difficult to use as a measure of consumer interest, as a key dynamic has fundamentally shifted.

It's commonly held, though seldom and incompletely measured, that VA policy exchanges represent a significant percentage of sales in any given quarter. It has been true through both bull and bear markets (although bull markets certainly magnify the effect). This is largely because, for the past decade or more, each succeeding generation of benefits has been richer than the last. Death benefits gave way to income benefits, which were largely trumped by return of principal withdrawal benefits, which in turn were eclipsed by guaranteed lifetime withdrawal benefits (GLWBs) and ultimately GLWBs with step-ups, roll-ups, deferred withdrawal credits and more aggressive permitted portfolio allocations.

In other words, investors were incentivized to trade in their old models. In late 2008 and 2009, though, investors were better off in their existing products. Locked-in high-watermark benefit values and richer benefit provisions are powerful incentives to remain in an existing product, choking off the flow of sales driven by exchanges and dropping overall sales as a result.

TOP PRODUCTS

The top-selling product in 2009 was Jackson National's Perspective II with $5.3 billion in sales, followed closely by Prudential's APEX II with $4.6 billion. Both products offer GLWB benefits.

There are two features common to those benefits. One is freedom in portfolio allocation when electing Prudential HD Lifetime 6 and JNL Lifeguard Select. The other is nondiscretionary proprietary formulas that systematically transfer cash from higher-risk separate account investment options to a bond portfolio or fixed account based on the relationship between the benefit liability and the contract value. Investment flexibility is undeniably important to advisors and investors using VA products with lifetime withdrawal guarantees. FP

Frank O'Connor is director of insurance solutions at Morningstar.