New sales of variable annuities fell 10% in the third quarter of 2008, to $37 billion from $41.1 billion in the previous quarter. YTD sales were also off 10% year-over-year, dropping to $119 billion from 2007 third-quarter YTD sales of $132.1 billion. VA sales have trended downward since May, and if the slide continues, fourth-quarter sales may fall to $30 billion. The last time VA sales were below the $30 billion mark was six years ago. This would mean closing 2008 with new sales under $150 billion, lower than 2006 new sales of $154.9 billion.

Fixed annuities, however, saw zooming sales in the third quarter, setting a record of $27.1 billion. That is up 54% from 2007's third quarter and 10% from the second quarter of 2008. "There's a flight to safety, and fixed annuities have great interest rates compared to CDs and Treasuries now, so it's only natural that money would flow out of VAs and into fixed," says Jeremy Alexander, CEO of Beacon Research." Fourth quarter is shaping up to be even bigger."

Top Sellers

MetLife took the top spot in the quarter with a 10.2% market share. TIAA-CREF followed closely with 9.8% of total new sales and AXA Financial/MONY was third with an 8.6% market share. ING fell to fourth with an 8.0% share, and Lincoln National held at fifth place with 7.5% of third-quarter sales.

The No. 1 and No. 2 selling non-group products in the second quarter were ING GoldenSelect Landmark and AXA Equitable Accumulator Elite 2007, both L-share products distributed through all third-party channels, with the strongest sales through independent planners and wirehouse firms. Landmark ranked second in the Independent channel and fourth in the wirehouse channels, while Accumulator Elite 2007 was in the No. 2 spot in wirehouse and 12th in independent sales. The top-ranked product in the independent planner channel, Jackson National Perspective II, offers an optional bonus feature and a buy down to a five-year surrender charge.

Plunging Assets

Assets under management (AUM) also dropped significantly, falling to $1,295.3 billion from $1,497.2 billion at the end of 2007. Assets dropped ranged from a nearly 30% drop in Hartford Life's VA to a modest 6% decrease in TIAA-CREF VAs. The change in AUM is a function of both returns of the underlying investments and net cash inflow or outflow, but most of the impact in the past few months has, of course, been due to negative returns.

With the S&P 500 down about 21% for the year as of Sept. 30, 2008, and down another 26% since then, for a whopping 41%-plus drop as of this writing, it's likely that total industry AUM will have ended the year below $1 trillion, a level not seen since 2003.


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Uncharted Territory

The modern VA industry has never traversed a market or economic environment like this one. Not only is the industry faced with devastating losses in nearly every asset class, volatility of returns is in uncharted territory as well. With volatility, the cost of options and rising numbers of VA investors with "in the money" guarantees, the future is challenging.

The cost of living benefits will increase, and the value of the guarantees will decrease, but the silver lining is the opportunity to put renewed vigor into raising investor awareness of the role VAs can play in protecting wealth. Nobody can predict when the market will recover, or whether this will be a "lost decade." But there's no better time for advisors to discuss investment strategies that may have formerly been rejected.

Market recoveries tend to happen quickly, and investors on the sidelines often miss out. This year will be an interesting one for VAs. While historically a bull market product, VAs could finally resonate with larger numbers of investors and come into their own in the way they're thought of, sold, invested in and written about in the popular press.

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