New variable annuity sales fell a slight 0.7% in the first quarter of 2010, to $31.2 billion, from $31.4 billion in the fourth quarter. But they were up 4.63% from the depressed first quarter 2009 level of $29.8 billion.

While not as strong as previous sales recoveries-for example VA sales increased 10.8% in 2003, coming off the 2000-2002 bear market-this time around an explosion of living benefit options did not accompany the rebound in market performance. With living benefits now more expensive and restrictive, on balance, muted future sales growth is expected unless more advisors utilize the product, and more investors understand and embrace it.

POSITIVE TRENDS

Assets continued to rise in the first quarter due primarily to positive market returns. As of March 31, 2010, total assets in variable annuities were $1,397.5 billion, up 3.2% over year-end 2009 assets of $1,353.7 billion, and 31% higher than the $1,067.3 billion under management in VA products as of the end of the first quarter of 2009.

Net flows of $3.6 billion in the first quarter of 2010 were 24% higher than reported net flows of $2.9 billion in the fourth quarter of 2009. However, the number of companies reporting data increased in Q1, so the change would have been negative if the same companies reported net flow data for both periods. In any event, net flows continue to exceed surrenders, income withdrawals and benefit payments, which is a positive.

CONSOLIDATION CONTINUES

A small number of companies continue to lead the market, with continued concentration of sales in the top 10 companies. Of the top five companies (excluding TIAA-CREF), Prudential remains the top seller of variable annuities with $4.9 billion in first-quarter sales and a 15.6% market share. MetLife was a not-too-close second with $4 billion in sales and a 12.9% share of the market. Jackson National, Lincoln Financial and AXA Equitable round out the top five retail sellers with 10%, 6.5% and 4.7% of the market, respectively. (TIAA-CREF group VA sales are included in total VA sales and account for 11% of the total VA market.)

The top 10 companies now account for 75% of variable annuity sales, up from about 69% five years ago, as the industry continues to consolidate and scale becomes increasingly important in offering competitive death and living benefit guarantees. The top five retail products in the first quarter were Jackson National Perspective II, with $1.56 billion in sales; Prudential APEX II ($1.24 billion); Jackson National Perspective L ($1.10 billion); Prudential XTra Credit Six ($1.01 billion); and Prudential Advisors Plan III, with $0.91 billion in first-quarter sales. (VALIC Portfolio Director actually ranked fifth with $0.96 billion in sales, but while available for retail use, this product is primarily sold into the group plan market.) These five products are also the top five sellers in the independent planner channel, and in fact all five report the bulk of their sales in this channel.

Strong compensation and the continuation of guarantees, albeit somewhat more expensive and restrictive, are clearly appealing to independent advisors. They view the product as profitable for their businesses and as a unique vehicle for their clients seeking both growth and a safety net.

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