Variable annuity sales in the U.S. fell marginally to $38.4 billion in the fourth quarter of 2011, after seeing an increase for six consecutive quarters, according to trade group Limra.  Total sales of variable annuities were up 13% in 2011 compared to the previous year largely due to strong sales in the first half of the year. MetLife (NYSE:MET), the largest seller of variable annuities in the U.S., recorded a 16% q-o-q decline in sales to $7.2 billion in Q4 2011. Prudential Financial (NYSE:PRU), Hartford Financial (NYSE:HIG) and Manulife (NYSE:MFC) also reported sales declines in the fourth quarter.
The declining sales in variable annuities has come at a time when demand for retirement products is getting stronger. The fast-changing U.S. demographics is playing an important role in fueling demand for annuity products. There are currently more than 42 million retirees in the U.S. and the number is expected to grow to 65 million by 2025. 
However, for the companies providing variable annuities, managing risk that comes with such sales is important to their profitability. Variable annuities provide guaranteed income to customers regardless of the market conditions, which can lead to losses for companies in a volatile market. Canada’s third largest insurer, Sun Life Financial, booked $525 million in losses in Q4 2011 fueled by the guarantees, and the company recently announced it is also exiting the U.S. variable annuity market. 
Although we believe that the retiring baby boomer population in the U.S. will fuel the demand for annuities for many years to come, the sales growth in variable annuities will cool off as insurers become more risk averse in a volatile market, and reduce the benefits associated with these products to reflect the realities of low interest rates and high cost of hedging risks.
Our price estimate for MetLife stands at $39.23, in line with the current market price.Notes: