New sales of variable annuities held steady in the third quarter, totaling $38.5 billion vs. $39.4 billion in the second quarter and $33.8 billion in the third quarter of 2010. On a year-todate basis, sales are solidly ahead of the year before, coming in at $116.7 billion compared with new sales of $99.5 billion in the same period in 2010, a 17.2% increase. Assets under management of $1.42 trillion were down 9.6% from second-quarter assets of $1.57 trillion due to market performance, as shown by a 14.3% drop in the S&P 500, and virtually unchanged from third-quarter 2010 assets of $1.42 tr.illion. A bright spot in the third quarter data was the significant increase in net cash flow, to $8.9 billion from $5.7 billion in the second quarter and $6.4 billion in the third quarter of 2010, increases of 56.1% and 39%, respectively. In fact, net cash flow of $8.9 billion is the highest reported since the fourth quarter of 2007. We expect continued strong sales and net cash flow in the fourth quarter, and 2011 fullyear new sales of at least $155 billion.

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Sales Winners

The ranking and market share table includes variable annuities sold to individuals in a group setting. If we remove these sales and focus on retail, MetLife was the leader by far in the third quarter, garnering a 26.1% retail sales market share and ranking first in all distribution channels. MetLife's new sales of $8.6 billion in the third quarter and $7.0 billion in the second quarter were the highest and second-highest variable annuity sales numbers ever reported, with its third-quarter sales 31% higher than the previous highest amount reported, $6.8 billion by Prudential for the first quarter of 2011. Prudential and Jackson National took second and third with market shares of 13.7% and 12.8%, respectively, and Lincoln Financial and Nationwide were fourth and fifth with market shares of 7% and 5.2%. The top firms by assets were MetLife at 13% of retail product assets, Prudential at 10.3%, Lincoln Financial at 7.8%, Hartford at 6.8% and AXA/Equitable at 6.6%. As companies continue to reevaluate their positions in the variable annuity market and some make the decision to exit the business, as John Hancock did recently, we expect further concentration of sales in the top companies. However, in the future, MetLife sales may drop as a result of benefit modifications such as lowering the fixed percentage increase of GMIB Max II to 5% from 5.5% on GMIB Max III in January.

The Marketing Difference

Robust sales and rising net cash flow reflect a surge of new money into variable annuity products offering lifetime income benefits enhanced with guaranteed growth features such as MetLife's GMIB Max II, Prudential's HD Lifetime Income, Jackson National's Lifeguard Freedom 6, Lincoln National's Lifetime Income Advantage and i4Life, and Nationwide's Lifetime Income Options. The income benefits offered by these five companies, whose combined sales account for 64.8% of all retail sales, include features geared not only toward securing income, but also to increasing income over time on a guaranteed basis through withdrawal deferral bonuses and/or fixed percentage increases. These are not the only firms to offer such features, of course. But these firms actively market their products, sell through multiple channels and carry strong credit ratings to offer investors confidence that they will be able to back guarantees that may need to provide insured income over multiple decades.

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