The U.S. Individual Annuity Market

BeFi Web Seminar for February 28, 2007

The U.S. Individual Annuity Market

by Matthew Drinkwater, Ph.D., FLMI, PCS Assistant Director, Retirement Research

LIMRA International

The U.S. Individual

Annuity Market

Matthew Drinkwater, Ph.D., FLMI, PCS Assistant Director, Retirement Research LIMRA International

Annuities 101

What is an

annuity

?

Contract between an insurance company

and an owner wherein the company pays

a guaranteed income to the owner for the

rest of the annuitant’s life and/or for a

Annuities 101

March April May June…

Owner Insurance Company

Why Is Lifetime Income Important?

Annuities – The Essentials

Deferral Length

Deferred Products

Annuitized payouts begin after deferral period

Who Buys Annuities?



Need guaranteed accumulation and/or

income



Age



Fixed annuity buyer avg. age = 65



Variable annuity buyer avg. age = 55



Immediate annuity buyer avg. age = 70



Higher income / assets levels



Have personal financial advisor,

insurance agent, etc.

Sources: LIMRA International, Annuitization Study: Profiles and Attitudes (2004); Deferred Annuity

Who Sells Annuities?



Must be licensed to sell life/annuity

products in state



To sell variable products, must also be a

registered representative



Distribution channels…

Direct Stockbrokers/wirehouses

Captive agents Banks

Who Sells Immediate Annuities?

Top 20 Sellers as of 3rd Quarter 2006

Western Southern Group Lincoln Financial Group

Thrivent Financial for Lutherans Jackson National Life

Protective Life ING

Principal Life Insurance Company IDS Life

Old Mutual Financial Network Genworth Financial

New York Life Fidelity Investments Life

Nationwide Life Aviva Life Mutual of Omaha Allstate Financial MetLife AIG

Massachusetts Mutual Life AEGON USA

0.5 0.8 0.7 0.6 0.5 _{0.3 0.3 0.3} 2.8 2.8 2.1 2.4 3.0 3.6 4.8 _{4.8 5.3} 5.4 5.9 0.3 0.2 0.2 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 D ol la rs in b ill io ns Fixed immediate Variable immediate

What’s Selling?

Payout Annuity Sales Sluggish

$15.8 $13.8 $16.4 $12.5 $13.5 $14.6 Total Market 5.7 5.6 5.3 5.4 4.3 3.8 Immediate annuities $10.1 $8.2 $11.1 $7.1 $9.2 $10.8 Annuitizations ($ bil) 0.6% 0.5% 0.8% 0.6% 0.7% 0.8% Annuitization rate 2005 2004 2003 2002 2001 2000

What’s Selling?

Annuitizations Are Infrequent

What’s Selling?

Deferred & Variable Products Dominate

January through December, 2006



Deferred sales = $224.2 billion



Variable = $160.3 billion



Fixed = $63.9 billion



Immediate sales = $6.2 billion



Almost all fixed

What’s Selling?

Guaranteed “Living Benefits” in VAs



Evolved from death benefits introduced in

1990s



Guaranteed Minimum Income Benefit



Guarantees value of base applied to payout

will not fall below minimum amount



Amounts invested in separate accounts can

grow beyond guaranteed amount



Benefit matures after 7 to 10 years



Annuitization required to exercise benefit



Mortality factors applied to payout may be

What’s Selling?

Guaranteed “Living Benefits” in VAs



Guaranteed Minimum Withdrawal Benefit



Guarantees withdrawals until benefit base is

exhausted, regardless of actual investment performance



Benefit base usually equals premiums paid

less withdrawals



Usually annual maximum withdrawals of 7%

of benefit base



Benefit can be used immediately

What’s Selling?

Guaranteed “Living Benefits” in VAs



Guaranteed Minimum Withdrawal Benefit

for Life



Guarantees withdrawals for life, regardless of

actual investment performance



Benefit base usually equals premiums paid

less withdrawals



Usually annual maximum withdrawals of 5%

of benefit base



Benefit can be used immediately

What’s Selling?

Guaranteed “Living Benefits” in VAs

Living Benefit(s) Available, 80% Living Benefit Not Available, 20% Owner elected benefit(s), 60%

New Variable Annuity Sales, 2nd _{Quarter, 2006}

$18.9 billion

Sources: LIMRA International, U.S. Individual Annuities, Second Quarter (2006); and Variable

2 Reduces total amount of assets

2 Amount of income generated would be too small

2 Costs and fees

2 Reduces value of estate for heirs

3 Dying too soon

4 Missed investment opportunities

4 Fixed income won’t keep up with inflation

11 Untrustworthiness of co.; concerns about ethics/solvency

12 Inability to access money for emergencies; lack of liquidity

35% Loss of control of assets

Results represent categorized open-ended responses. Source: LIMRA International,

Retirement Income Preferences (2006).

Why Aren’t More Selling?

Why Aren’t More Selling?

Desire for CONTROL

4% 7% 22% 27% 24% 15% 1 2 3 4 5 6 Retirees Average rating = 4.06 Converting some of your savings into guaranteed lifetime income and no longer having control of those savings Keeping control of your savings and taking withdrawals that are not guaranteed to last for your lifetime

Why Aren’t More Selling?

Salesperson Objections



“Lack of liquidity”



“Not a good value for the money”



Customers too young



Limited knowledge of immediate

annuities



“Withdrawal features on deferred

products are superior”



“No inflation protection”

Are GLBs The Answer?

Maybe…

Maintain control

Remain invested in market for long-term growth

Guaranteed

Helps to shift focus to income needs

They are selling!

…Maybe Not

Add to VA costs Complicated!

Hedging requirements Don’t maximize income Not as tax-efficient as annuitization

Interest In Annuitization Linked to

Lifetime Needs

Not enough to cover basic living expenses 52% Will guaranteed lifetime income sources be enough to cover basic living expenses in retirement?

Very or somewhat

interested 37%

Interested in converting portion of assets into guaranteed income to fill this income-expense gap?

Retirees

Interest In Annuitization Linked to

Lifetime Needs

Not enough to cover basic living expenses 62% Very or somewhat interested 52%

Will guaranteed lifetime income sources be enough to cover basic living expenses in retirement?

Interested in converting portion of assets into guaranteed income to fill this income-expense gap?

Pre-Retirees

Future Developments

Products and Features

 More guaranteed living benefits

 On fixed products also

 Smaller companies will be squeezed

 “Longevity insurance”

 Impaired-risk annuities

 Medically underwritten immediate annuities

 Higher payouts if long-term care is needed

Future Developments

Other Trends

 Retirement plan rollover market expansion

 Erosion of tax-deferral advantage over taxable

alternatives

 Possible tax breaks on lifetime payouts

 Return to “normal” interest rate environment

should help fixed and immediate annuity sales

 Growing awareness of retirement income and

P R E S E N T E D B Y

Shlomo Benartzi

Co-Founder, BeFi

Associate Professor Co-chair of the Behavioral Decision Making Group The Anderson School at UCLA

Warren Cormier

Co-Founder, BeFi

President, Boston Research Group