New sales of variable annuities slipped in the third quarter, dropping 2% to $30.6 billion. That's down 17.3% year-over-year from third quarter 2008 sales of $37 billion.

Prudential led the industry with an unprecedented 19% market share and a 72.6% increase in sales relative to the second quarter. MetLife came in second in the industry with 11.2% market share, though the company did suffer from a significant 23.6% drop in sales. TIAA-CREF came in next, taking 11.2% of market share, though it also saw sales fall 4.4%. Jackson National took 9.5% market share with sales rising 29.3%, and Lincoln Financial had 6.5% market share, with sales up 3.7%.

MARKETS BOOST RETURNS

Though sales were down, assets under management continued to increase in the third quarter. As of Sept. 30, 2009, VA assets totaled $1,311 million-a 10.6% increase over June 30, 2009 assets of $1,186 million.

This increase was largely driven by positive returns in U.S. equities, as the S&P 500 shot up 15% over the same period (almost exactly the percentage increase in the prior quarter).

The bad news continued, however, for the Money Market portfolio. Money Market's assets fell another 10.7% in the third quarter of last year, after the 9.6% it dropped the previous quarter. This puts Money Market assets back to roughly where they were in the second quarter of 2008. At that time, the portfolio saw a 6.2% decline, following a 21.1% increase in the fourth quarter of 2008.

AN APPETITE FOR RISK

Assets in the large-cap blend category-where nearly a quarter of separate account assets are invested-grew by 16% in the third quarter, compounding the 19.4% second quarter gain in that category and again reflecting positive flows in addition to market gains. Overall, assets and flow data in the quarter continued to signal an appetite for riskier asset classes. Where is all that fear?

Prudential's L-share APEX II led the market in the third quarter with $1.7 billion in sales and 7% market share (excluding group products). Jackson National's Perspective II held the No. 2 spot with $1.5 billion in sales and a 6.4% retail market share, followed by Prudential XTra Credit Six ($1.2 billion and 5.2% share); Prudential Advisors Plan III ($1.0 billion and 4.3% share); and Jackson National Perspective L ($1.0 billion and 4.2% share). All five of these products continue to offer living benefits.

Qualified plan sales fell to 68% in the third quarter, from 75% in the second, though they are still historically quite high. Living- and death-benefit guarantees are still very much in focus as well, since considerations like tax deferral are irrelevant when the product is purchased inside a qualified plan.

ROBUST GROWTH AHEAD?

Again, just over 85% of third-quarter retail (non-group) sales occurred in products that still offer some form of withdrawal guarantee-just about the same as the percentage prior to the credit crisis. Election rates for optional living benefits are running as high as 90% on new sales, indicating increasing demand for these protections.

Therefore, as long as companies are able to solve for the risk of profitably offering these guarantees, we should expect to see robust and rapid growth with an economic recovery-and potentially a boost in non-qualified sales for tax deferral plus guarantees.

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