Variable annuities ended 2010 on a strong note by virtually all measures. New sales totaled $136.6 billion, a 10.3% increase over the $123.9 billion tallied in 2009. Momentum surged in the fourth quarter, with new sales of $37.1 billion reaching a two-year quarterly high, amounting to a 17.4% increase over the fourth-quarter 2009 level of $31.6 billion.
Year-end assets under management also reached a milestone of just over $1.5 trillion, an 11.2% increase over the $1.3 trillion at the end of 2009 and the highest amount recorded in almost 20 years of variable annuity asset tracking. New cash flow in the fourth quarter slipped a bit from second- and third-quarter levels, but at $5.4 billion was 84% higher than fourth-quarter 2009 net flow of $2.9 billion. Full-year net cash flow of $21.5 billion was up 26.9% over the $17 billion recorded in 2009.
Not since 2006 has the change in year-over-year net flow been more positive than the change in sales and, at 15.7%, the ratio of net flow to new sales was the highest since 2007. Both measures offer proof that new money is fueling sales rather than exchanges.
In 2010, sales ranks and market share were relatively unchanged. The No. 1 and No. 2 companies remained Prudential and MetLife, with market shares of 16.4% and 13.8%, respectively. Jackson National, with a 10.7% share, moved up one spot to third. TIAA-CREF slipped to fourth, and Lincoln Financial remained in the fifth position, with shares of 10.4% and 6.6%, respectively.
The distribution channel sales leaders were a bit more diverse last year. The No. 1 and No. 2 spots in the independent and bank channels went to Prudential and Jackson National; Prudential and MetLife were the top sellers in the wirehouse channel; MetLife and Jackson National were the stronges players in the regional channel; and MetLife and Ameriprise led the captive agency channel (excluding TIAA-CREF).
The topography of the variable annuity industry changed significantly in last year, when ING dropped out and, just days after the quarter ended, Genworth announced its departure. In addition, Ameriprise ended its third-party distribution business.
At the same time, the remaining companies began making benefits a bit more generous. They extended availability to younger policyholders, enhanced rewards for delaying withdrawals and increased withdrawal percentages slightly. Fee increases of 10 to 35 basis points generally accompanied these improvements.
A few companies launched new initiatives. For example, AXA announced its Retirement Cornerstone product that uses guaranteed and non-guaranteed "sleeves" to provide investors with a mechanism to fund a personal pension account over time by transferring assets into the guaranteed "sleeve." Guaranteed withdrawals are tied to Treasury rates, a risk management innovation sure to be copied by other companies.
A major theme for this year is likely to be partial transfer of guarantee risk to the investor from the insurer. Expect to see more innovations along the lines of the VIX-based withdrawal benefit fee structure developed by SunAmerica, dynamic rebalancing like the feature pioneered by Prudential, and perhaps hedging strategies baked into the underlying funds like those announced by ValMark and Milliman.
Frank O'Connor is director of insurance solutions at Morningstar.