3Q VA Sales Slipped 11% From 2Q's Record High

Of particular interest is the fact that the other 2 contracts in the top 5, Perspective II and RAVA Plus, have longer surrender charges but also offer an optional purchase payment bonus feature. This suggests that for some investors, the appeal of the bonus feature trumps concern about being "locked in" for longer periods.

Assets under management rose modestly from 2nd quarter levels, to $1.29 trillion from $1.26 trillion, a 2.4% increase. Compared with the end of 2005, assets increased 8.4%, up from $1.19 trillion. Positive returns as well as improved net flows contributed to the increase.

Among the top 25 companies, the largest gains in assets under management in the first 9 months of 2006 were posted by Pacific Life, with a 34% increase; Jackson National, up 24.3%; New York Life, with a 24.1% increase in assets; RiverSource Annuities, up 16.9%; and John Hancock, with an increase of 16.1% in VA assets.

Some of these increases in assets under management offer a window into the popularity of living benefits. For example, John Hancock's top selling VA product, Venture III, had a 35.4% increase in assets under management from 12/31/05 to 9/30/06. The top 3 subaccount investment options in terms of gain in assets were the JH Trust Lifestyle Growth Series II, with a 67.5% increase; JH Trust Lifestyle Balanced Series II, in which assets increased 41.2%; and JH Trust Lifestyle Moderate Series II, with a 30.9% increase over the period. Although not a top subaccount by increase in assets, JH Trust Lifestyle Conservative Series II increased 21.4%.

One might argue that these gains primarily reflect growing interest in Lifestyle funds, whether in variable annuities or mutual funds, as a "hands off" approach to investing, and that is certainly part of the story. But interestingly, JH Trust Lifestyle Aggressive Series II only increased assets by 3.1% in the first 9 months of 2006. As it happens, the Aggressive Series II is the only one of the Lifestyle investment options that is not available when electing John Hancock's Principal Plus for Life, which potentially accounts for the disparity in asset growth.

It is also worth noting that the relative change in assets in these subaccounts is directly proportional to the risk profile of each option–i.e., the riskier the investment, the greater the increase. This is intuitively to be expected–with the guarantee elected, the investor can take more risk. Analysis of the asset data in contracts with a similar structure, where the most aggressive Lifestyle or fund-of-funds investment option is not available when electing the living benefit, yields similar results.

Assets by investment category have not shifted a great deal since the end of 2005, although assets in the allocation category have risen about 13%, reflecting the requirement in many contracts that a fund-of-funds type asset allocation investment option be selected upon the election of a living benefit. Also, as is common in a period of positive market returns, the percentage of total assets in fixed accounts has dropped 11.5% as of 12/31/05, from 22.8% to 20.5% at the end of September 2006.