It is no secret that as investors continue their flight to safety, the variable annuity boom has at least deflated, if not entirely gone bust.More conservative retirement products are now in favor.

Sales of variable annuities topped out at $151.63 billion last year, representing a 15% drop from 2007, according to Morningstar. Meanwhile, U.S. sales of fixed annuities hit an estimated $107 billion in 2008, up 60% from 2007, according to data from the Beacon Research Fixed Annuity Premium Study.

In the fourth quarter of 2008, sales of fixed annuities reached roughly $34.1 billion, the third straight quarter of record sales since the study began six years ago. Jeremy Alexander, chief executive officer of Beacon Research in Evanston, Ill., is expecting this sales trend to continue when first quarter 2009 numbers are released.

"The fourth quarter was a pivotal quarter," he says. "That was the quarter that fixed surpassed sales of variable. But there was sort of an underlying story going on even before that-a large portion of dollars going into variable annuities were actually being put into fixed accounts and that's been increasing for awhile."

The trend points to another underlying story, one that now calls into question the efficacy of the industry's strategy to pour so many resources into variable annuities as it awaits the estimated $17 trillion in assets that will enter the market as baby boomers begin to retire en masse. What if, like Detroit's doomed dedication to the SUV, insurers find themselves caught up in a bear market with a suddenly unattractive product on their hands?

"What will be interesting is how things shape up going forward," Alexander says. "Will there be a permanent flight to safety after being hurt so badly? Clearly there has been some serious damage done to the variable side of the business."

Keep it Simple

Al Close, senior vice president of Symetra Financial's insurance subsidiaries in Bellevue, Wash., says that investors are looking toward more conservative, more traditional annuities. For those in retirement, this means fixed deferred or immediate annuity products.

"They basically want to get one of those pensions that their parents had," he says. "Really the only way you can do it, frankly, is through some sort of income annuity strategy."

Which is not to say, however, that Symetra's variable annuity business has bottomed out as the company's other products draw more interest. In fact, Close notes that its variable annuity sales-specifically its Focus VA-have remained relatively steady through the market downturn.

What this means is that as people have gone back to basics, products that have been built conservatively are poised to draw the most interest. This in and of itself is not particularly revealing, but what perhaps gets overlooked is that even variable annuities-which carry the reputation for being too costly and too complex-can still sell in a down market as long as they have been designed right.

"If you go to consumers and ask them why they are not putting money from other sources into variable annuities, the two answers they come up with are cost and complexity," Close says. "With over 3,000 different riders on 600-plus different variable annuity contracts, they can't keep them straight, and they know they cost a lot."

Penn Mutual, like many of its peers, has reeled back some of the living benefits on its variable annuities, while also raising its fees. Nonetheless, the company still expects to see strong first-quarter sales, says Ray Caucci, vice president of product development for Penn Mutual in Horsham, Pa.

"We're fully hedged, and we have strong control over managing the assets that back those living benefit guarantees," he says. "But we're not immune to the market forces that impact those asset purchases, namely the cost of hedges."

Tom Hamlin, chief executive officer of Somerset Wealth Strategies and a branch manager of Raymond James in St. Petersburg, Fla., says that if insurance companies are going to "remain a player in the game," they have to reduce their benefits and raise their expenses. He notes that some companies, like MassMutual and Allianz, have even gone a step further and completely pulled their living benefits altogether.

But the problem with the retirement system is that there are no guarantees, he adds, so annuities remain important. "No one can afford to be 50 feet from the top of Everest and roll all the way back down the mountain," he says. "The biggest challenge for insurance companies is trying to deliver an affordable product to the consumer that's not going to put the company out of business."