New sales of variable annuities continued to decline in the fourth quarter of 2008, falling to $32.6 billion from third-quarter sales of $37 billion, an 11.9% drop. More alarming is the 30.2% drop from the $46.7 billion sold in the fourth quarter of 2007. On a full-year basis, sales were down 15.3% in 2008, dropping from $178.8 billion at the end of 2007 to finish 2008 at $151.5 billion.

Assets under management took another precipitous drop, falling 13.3% for the quarter to $1,123.6 billion, from $1,295.3 billion in September. For the year, AUM dropped nearly 25% from $1,497.3 billion. Without a significant recovery, we expect total industry assets will fall further, settling at about $1 trillion in the first quarter of 2009, where they were in 2003 and early 2004.

TOP PLAYERS

TIAA-CREF led the sales rankings for 2008, not surprising given the sharp drop in retail product sales in the latter half of 2008. MetLife, AXA Equitable, ING Group and Lincoln National came next. These top five companies accounted for 43% of VA sales in 2008. Prudential, John Hancock, AIG Sunamerica, Hartford and Pacific Life were the next five companies in the rankings, with a combined 29% market share.

The top-selling non-group product in 2008 was ING GoldenSelect Landmark, an L-share product with $4.09 billion in sales. While not the top-selling product in any one distribution channel, it sold well in the bank channel and was ranked second and fourth, respectively, among independents and wirehouses. John Hancock Venture III, also an L-share VA, ranked second in total new sales with $4.07 billion. Venture III was the leading product sold in the wirehouse channel in 2008 with 7.2% of sales, but its fifth-place ranking in the indie channel allowed the Landmark product to edge it out of the overall No. 1 spot.

Pacific Life's Pacific Voyages dominated the bank channel with a 5.6% market share; Jackson National's Perspective II took the top position in the indie channel with a 4.7% share. Polaris II A-Class Platinum led the regional channel with a 7% share, and Riversource RAVA4 Advantage was the top- selling non-group product in the captive agency channel, with 8% of sales.

LOOKING AHEAD

Though I'm often asked to project VA sales as far out as 10 years, I believe any projection beyond the current year is inherently flawed and any resemblance between those projections and actual sales data is purely coincidental.

That said, I can at least postulate a brighter picture for variable annuity sales in 2010, assuming some level of stabilization and signs of positive returns in the equity markets. Non-qualified variable annuity sales have slowly lost ground to qualified sales, which accounted for over 67% of total sales in the fourth quarter of 2008, a new high. In the fourth quarter of 2006, the percentage of sales attributed to qualified plans was just over 59%.

This trend may reverse as advisors discuss two important topics with their (relatively) affluent clients this year: investment risk and taxation. Protecting against the former when positioning assets to participate in market gains-while mitigating the potential reversion to a pre-1997 tax structure-is a job neatly suited to the variable annuity. It is hard to imagine we won't see some momentum in sales building from the confluence of these factors. While our expectation for 2009 is for VA sales in the $130 billion range, to paraphrase Warren Buffet, the "best days may lie ahead" for variable annuities.

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