The U.S. Individual Annuity Market

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1 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 BeFi Forum 2007

2 The U.S. Individual Annuity Market Matthew Drinkwater, Ph.D., FLMI, PCS Assistant Director, Retirement Research LIMRA International Behavioral Finance Forum Webinar February 28, 2007

3 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 specified number of years in exchange for a single payment to the company.

company pays a guaranteed income to the owner for the rest of the

4 Annuities 101 Insurance Company Owner Annuitant March April May June

5 Why Is Lifetime Income Important? Source: Human Mortality Database, University of California, Berkeley (USA), and Max Planck Institute for Demographic Research (Germany). Available at Mortality rates based on 1999 experience. LIMRA International tabulations.

(USA), and Max Planck Institute for Demographic Research (Germany).

6 Annuities 101 Categories Individual vs. group Deferral length Deferred Immediate Product type Fixed Variable Tax-qualification

7 Annuities The Essentials Deferral Length Deferred Products Annuitized payouts begin after deferral period Mainly used for accumulation Some allow multiple payments Immediate Products Annuitized payouts begin immediately Used for guaranteed income Single payment

accumulation Some allow multiple payments Immediate Products

8 Annuities The Essentials Product Type Variable Fixed Deferred Products Fixed Deferred Variable Deferred Deferral Length Immediate Products Guaranteed minimum interest rate (during deferral period) Investments performance reflects market Not guaranteed* *Usually

Immediate Products Guaranteed minimum interest rate (during

9 Annuities The Essentials Deferred Products Deferral Length Immediate Products Equal payments Product Type Variable Fixed Fixed Deferred Variable Deferred Fixed Immediate Variable Immediate Payments increase or decrease based on market performance

Fixed Deferred Variable Deferred Fixed Immediate Variable

10 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 Owners (in progress)

age = 70 Higher income / assets levels Have personal financial advisor, insurance agent, etc.

11 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 Captive agents Independent agents Stockbrokers/wirehouses Banks Other channels Brokers/financial planners

variable products, must also be a registered representative

12 Who Sells Immediate Annuities? Top 20 Sellers as of 3rd Quarter 2006 AEGON USA AIG Allstate Financial Aviva Life Fidelity Investments Life Genworth Financial IDS Life ING Jackson National Life Lincoln Financial Group Massachusetts Mutual Life MetLife Mutual of Omaha Nationwide Life New York Life Old Mutual Financial Network Principal Life Insurance Company Protective Life Thrivent Financial for Lutherans Western Southern Group Source: LIMRA International, U.S. Individual Annuities

Financial IDS Life ING Jackson National Life Lincoln Financial Group Massachusetts Mutual Life MetLife Mutual of Omaha

13 What s Selling? Payout Annuity Sales Sluggish Dollars in billions Fixed immediate Variable immediate Source: LIMRA International, U.S. Individual Annuities, Fourth Quarter 2006 (2007).

14 What s Selling? Annuitizations Are Infrequent Annuitization rate 0.8% 0.7% 0.6% 0.8% 0.5% 0.6% Annuitizations ($ bil) $10.8 $9.2 $7.1 $11.1 $8.2 $10.1 Immediate annuities Total Market $14.6 $13.5 $12.5 $16.4 $13.8 $15.8 Annuitization rate = Dollars annuitized divided by average deferred assets in force. Source: LIMRA International, The 2005 Individual Annuity Market: Sales and Assets (2006).

7 Total Market $14.6 $13.5 $12.5 $16.4 $13.8 $15.

15 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 Source: LIMRA International, U.S. Individual Annuities, Fourth Quarter 2006 (2007).

Deferred sales = $224.2 billion Variable = $160.3 billion Fixed = $63.

16 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 less generous

Income Benefit Guarantees value of base applied to payout will not fall below minimum amount Amounts

17 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 Annuitization not required to exercise benefit

until benefit base is exhausted, regardless of actual investment performance Benefit base

18 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 Annuitization not required to exercise benefit

withdrawals for life, regardless of actual investment performance Benefit base usually

19 What s Selling? Guaranteed Living Benefits in VAs New Variable Annuity Sales, 2 nd Quarter, 2006 Living Benefit Not Available, 20% Living Benefit(s) Available, 80% Owner elected benefit(s), 60% $18.9 billion Sources: LIMRA International, U.S. Individual Annuities, Second Quarter (2006); and Variab le Annuity Guaranteed Living Benefits Election Tracking, Second Quarter 2006 (2006).

Not Available, 20% Living Benefit(s) Available, 80% Owner elected benefit(s), 60% $18.

20 Why Aren t More Selling? Consumer Objections Loss of control of assets Inability to access money for emergencies; lack of liquidity Untrustworthiness of co.; concerns about ethics/solvency Fixed income won t keep up with inflation Missed investment opportunities Dying too soon Reduces value of estate for heirs Costs and fees Amount of income generated would be too small Reduces total amount of assets 35% Results represent categorized open-ended responses. Source: LIMRA International, Retirement Income Preferences (2006).

; concerns about ethics/solvency Fixed income won t keep up with inflation Missed investment opportunities Dying too soon Reduces value

21 Why Aren t More Selling? Desire for CONTROL Retirees Converting some of your savings into guaranteed lifetime income and no longer having control of those savings 4% 7% 22% 27% 24% 15% Keeping control of your savings and taking withdrawals that are not guaranteed to last for your lifetime Source: LIMRA International, Retirement Income Preferences (2006). Average rating = 4.06

22 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 Source: LIMRA International, Sales Representatives Attitudes Regarding Immediate Annuities (2006).

23 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 Guarantees can be lost if too much is withdrawn

24 Interest In Annuitization Linked to Lifetime Needs Retirees 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? Not enough to cover basic living expenses 52% Very or somewhat interested 37% Source: LIMRA International, Retirement Income Preferences (2006).

25 Interest In Annuitization Linked to Lifetime Needs Will guaranteed lifetime income sources be enough to cover basic living expenses in retirement? Pre-Retirees Interested in converting portion of assets into guaranteed income to fill this income-expense gap? Not enough to cover basic living expenses 62% Very or somewhat interested 52% Source: LIMRA International, Retirement Income Preferences (2006).

26 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 Combination products (long-term care / annuity)

27 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 decumulation issues

29 PRESENTED BY 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 BeFi Forum 2007

Important Information about your Annuity Investment

Robert W. Baird & Co. Incorporated Important Information about your Annuity Investment What is an Annuity Contract? An annuity is a contract between you and an insurance company, under which you make a