New sales of variable annuities declined even further in the first quarter of 2009, falling to $30 billion from fourth-quarter sales of $32.7 billion-an 8.3% drop. That's a 26.7% year-over-year fall, relative to 2008's first quarter.

Sales did show improvement, though, as the first quarter came to a close. The March estimate of industry sales was $10.8 billion versus the January estimate of $8.75 billion—a 23.4% increase. But while any improvement is welcome news, the strength of sales in March may have been driven by the combination of annual tax planning, relatively strong equity market performance, and a rush to invest prior to the closing of living-benefit options.

MORE BAD NEWS

Assets under management also declined, falling 4.4% to $1.066 billion from December. The S&P 500 dropped 11.7% over the same period, but as AUM in the general account of the issuers and fixed-income separate account AUM now has a larger slice of the asset pie, AUM's rise and fall has a much lower correlation to the index.

MetLife regained the top spot with $3.7 billion in new sales and a market share of 12.5%. TIAA-CREF, AXA Financial, Prudential and John Hancock rounded out the top five with market shares of 11.7%, 9.7%, 7.0% and 6.9%, respectively.

In the third-party distribution channels, the top firms were AXA Financial with an 11.1% share of bank sales; MetLife with 14.2% of independent financial planner and 17.6% of wirehouse sales; and John Hancock with 16.8% of total sales by advisors affiliated with regional brokerage firms.

CHANGE ON THE HORIZON

The top-selling non-group product was Allianz Vision with $944.5 million in new sales, or 3.9% of total retail VA sales. Allianz closed several living-benefit riders as of April 1, and it's common to see sales spike when popular benefits remain available for a grace period after their termination is announced.

Venture III was closed to new sales as of April 3, and the living benefits offered in the others have either been removed or significantly modified. Recent changes include: Jackson National closed the FutureGuard 6 GMIB rider on April 6; AXA Financial closed the standalone GMWB and reduced the GMIB roll-up rate from 6.5% to 6% on Nov. 19, 2008, followed by a reduction to 5% in the Accumulator 8.2 series launched Feb. 17; and Riversource increased the current fee for their GMAB rider by 0.20%, the SecureSource Single Life GMWB by 0.25%, and SecureSource Joint Life by 0.30%. Riversource also discontinued the availability of the Aggressive model portfolio option under the GMAB rider.

Most significant changes to VA products fell into one of three categories: 1) restructuring of benefits, including fee increases, withdrawal rate and/or roll-up reductions, more conservative asset allocation requirements; 2) benefit closures; and 3) passively managed funds replacing actively managed funds for use under a guaranteed living benefit.

We expect to see any new products or riders that launch this summer to continue to offer lower guarantees, at a higher cost, and with less risk allowed in the portfolio. The products in the lab today will certainly offer less-lucrative benefits. However, the sobering reality of what negative returns can do to a portfolio (not to mention retirement plans) will help this industry grow-albeit less rapidly—in the coming months, as more investors embrace the idea of creating a floor against losses for a portion of their investments.

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