The Changing Individual Annuity Market Joseph Montminy Assistant Vice President, LIMRA

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1 The Changing Individual Annuity Market Joseph Montminy Assistant Vice President, LIMRA This publication is a benefit of LIMRA membership. No part may be shared with other organizations or reproduced in any form without LIMRA s written permission.

2 Agenda Topics covered today: o o o Annuity sales and market trends GLB elections and utilization rates Guaranteed lifetime income opportunity This presentation is a benefit of LIMRA membership. No part may be shared with other organizations or reproduced in any form without LIMRA's written permission. 2

3 The new normal for the annuity industry Volatile Equity Market Unprecedented Low Interest Rates Consumers Demand for Guarantee Regulations & Capital Requirements Costs of hedging are very high Fund out-flow from equity to bonds The Fed to keep interest rate low until 2015 Low fixed rate returns across the board More severe impact on the insurance companies than the financial crisis was. After the market tumble, demand for annuity s living benefit guarantees remain high Income now and Income later market High capital and reserve requirements for U.S. companies The Dodd-Franks Act Page 3

4 Dollars in Billions Variable and fixed annuity sales declined in 2012 $67.7 Variable Fixed 31.0 $61.3 $55.5 $54.1 $51.5 $57.0 $56.0 $57.9 $59.5 $61.9 $60.1 $56.9 $55.0 $57.3 $54.7 $ Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 Source: U.S. Individual Annuities survey, LIMRA Page 4

5 Dollar in billions Top companies are carefully managing variable annuity business Prudential Annuities MetLife Jackson National TIAA-CREF Lincoln Financial AXA Equitable $8.6 $6.8 $4.4 $3.7 $3.8 $3.6 $3.5 $3.4 $2.8 $3.2 $2.1 $2.2 $1.8 $1.5 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Source: U.S. Individual Annuities survey, LIMRA Quarterly sales represent total VA sales. Page 5

6 Dollars in Billions Indexed annuity sales hit record high; Fixed-rate deferred annuity sales drop $36.7 $1.6 $1.9 $7.0 $19.0 $29.2 $1.4 $2.0 $23.6 $3.5 $1.3 $21.1 $1.8 $1.3 $2.4 $1.8 $1.5 $14.1 $10.6 $9.5 Struct. Settlements SPIA MVA Book value Indexed $21.8 $21.4 $21.3 $19.3 $1.5 $1.5 $19.4 $20.0 $1.3 $2.1 $2.0 $1.2 $1.4 $1.4 $2.2 $1.7 $1.6 $1.8 $1.8 $1.8 $1.4 $1.4 $1.3 $1.4 $8.4 $7.4 $8.3 $7.9 $6.6 $6.9 $8.5 $20.3 $18.9 $1.3 $18.1 $18.6 $17.9 $17.7 $2.2 $1.3 $1.1 $1.4 $1.2 $1.9 $1.2 $1.3 $1.8 $1.9 $1.2 $2.0 $2.0 $1.3 $1.2 $1.0 $1.0 $6.2 $5.8 $5.5 $5.0 $4.9 $7.2 $8.2 $7.5 $7.0 $7.0 $8.2 $8.7 $8.2 $7.1 $8.1 $8.7 $8.3 $8.1 $8.6 $8.7 $8.5 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 Source: U.S. Individual Annuities survey, LIMRA. Fixed-rate deferred annuities = book value + market value adjusted annuities. Page 6

7 Dollar in billions Security Benefit rapidly moves to #2 indexed annuity spot Indexed Annuity Sales $2.34 Allianz Security Benefit American Equity AVIVA $1.12 $1.24 $1.03 $0.98 $0.60 $0.73 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 Source: U.S. Individual Annuities survey, LIMRA Page 7

8 Dominant distribution channel varies by product type 2012 Annuity Market Share by Product Types Variable Deferred Indexed Deferred Fixed-Rate Deferred Fixed Immediate Income 25% 1% 12% 12% 9% 3% 1% 5% 18% 4% 30% 19% 4% 15% 8% 17% 33% 82% 34% 9% 5% 32% 22% Third party 62% Third party 45% Banks Full Service Natl. B-D Indep. Agents Indep. B-D Career Agents Direct & Others Source: U.S. Individual Annuities survey, LIMRA, Fixed-rate deferred excludes structured settlements. Fixed-rate deferred annuities = book value + market value adjusted annuities. Page 8

9 GLBs are driving VA and Indexed annuity sales Variable Annuity GLB Election Rates Indexed Annuity GLWB Election Rates 88% 88% 88% 90% 90% 88% 87% 84% 67% 62% 64% 70% 69% 71% 71% 74% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: Variable and Indexed Annuity Guaranteed Lifetime Withdrawal Benefit Elections Quarterly Surveys, LIMRA Election rates are based on when any GLB riders are available. Page 9

10 IRAs are an important source of funding Percent of Deferred Variable Annuity Retail Sales Percent of Deferred Indexed Annuity Retail Sales Percent of Deferred Fixed-Rate Annuity Retail Sales 59% IRA Nonqualified 62% IRA Nonqualified 57% 61% 72% IRA Nonqualified 66% 71% 61% 51% 58% 51% 50% 41% 49% 42% 38% 49% 43% 39% 34% 39% 28% 29% '00 '02 '04 '06 '08 '10 '12 '06 '07 '08 '09 '10 '11 '12 '06 '07 '08 '09 '10 '11 '12 Source: U.S. Individual Annuities survey, LIMRA Retail = IRA + Nonqualified annuity sales. Fixed-rate deferred annuities = book value + market value adjusted annuities.

11 Dollar in billions The rollover market will grow to $575 billion by 2016 IRA Rollovers $575 $432 $ E 2010E 2012E 2014E 2016E Note: Shaded bars (years 2008 through 2016) are estimates/projections. Sources: Investment Company Institute, The IRA Investor Profile: Traditional IRA Investors Rollover Activity, 2007 and 2008 (2010), and LIMRA analysis. Retirement Income Reference Book, LIMRA

12 Referrals can help you grow your annuity business VA Indexed Traditional Fixed Top Reason to buy annuity: Supplement Social Security or pension income 55 % 46% 42% High Level of understanding: (top 2 box out of 7) Before purchase After purchase 21% 49% 18% 50% 21% 47% Satisfaction: Very or somewhat satisfied 75% 83% 86% Own multiple annuities: 62% 59% 48% Will recommend: Very or somewhat likely to recommend 83% 85% 83% Source: U. S. Deferred Annuity Buyers Attitudes and Preferences, LIMRA, Survey based on 1,200 deferred annuity buyers (440-VA, 229-indexed, and 531-Traditional fixed) who have purchased an annuity in the last 3 years - the most recent purchase is a deferred variable annuity and current age is 40 years or more. Page 12

13 Two-thirds of VA GLWB buyers were Baby Boomers Percent of VA GLWB buyers by age Percentage of buyers 6.0% 4.0% 2.0% Baby Boomers 68% 0.0% Age of Buyer Note: Based on 384,761 GLWB contracts issued in Source: Guaranteed Living Benefit Utilization Study 2011 Data, LIMRA Page 13

14 Young buyers use qualified money to buy VA GLWBs Percent of VA GLWB Owners by Sources of Funds Nonqualified IRA 29% 48% 29% 53% 71% 52% 71% 47% Age less than 70 Age 70 and above Age less than 70 Age 70 and above Issued before 2011 Issued in 2011 Source: Guaranteed Living Benefit Utilization Study 2011 Data, LIMRA Page 14

15 Source of money influences VA GLWB withdrawal behavior GLWB utilization by source of funds and age of owners Percentage of owners taking withdrawals IRA Nonqualified 100% Age 70 75% 50% 25% 0% Under age Age 85 and over Current Age of Owner Source: Guaranteed Living Benefit Utilization Study 2011 Data, LIMRA Page 15

16 Systematic withdrawals are the preferred method of withdrawals Percent of GLWB Owners Taking Withdrawals Through SWPs 100% IRA Nonqualified 84% 91% 75% 82% 50% 50% 50% 25% 0% Age < Current Age of Owner Source: Guaranteed Living Benefit Utilization Study 2011 Data, LIMRA Page 16

17 Owners taking non-systematic withdrawals are more likely to surrender Surrender Rate by Mode of GLWB Withdrawals Non-systematic Withdrawals Systematic Withdrawals 15% 13% 11% 9% 7% 7% 3% 3% 2% 2% 4% 2% 4% 4% 2% 2% Under or older Current Age Source: Guaranteed Living Benefit Utilization Study 2011 Data, LIMRA Page 17

18 There are over 22 million households with assets between $100,000 and $3.5 million Low net worth Assets<$100k Financial Assets Held by Households (HH) by Wealth Status (Dollar in billions) Middle market $100k -$249k Mass Affluent $250k-$499k Affluent $500k-$999k High net worth $1mil-$3.5 mil Mega-millionaire 3.5 mil + Retired All Ages $367 $599 $873 $1,673 $2,717 $4, mill HHs 3.7 mill HHs 2.5 mill HHs 2.4 mill HHs 1.6 mill HHs 0.5 mill HHs 10.2 million HHs $5.9 Trillion Not Retired Baby Boomers $515 $820 $1,021 $1,557 $3,169 $3, mill HHs 5.0 mill HHs 2.9 mill HHs 2.2 mill HHs 1.8 mill HHs 0.5 mill HHs 11.9 million HHs $6.6 Trillion Source: LIMRA analysis of 2010 Survey of Consumer Finances, Federal Reserve Board, 2012 Households = HH; Baby Boomers are between age 45 to 64 in 2010 Page 18

19 $650 billion of assets are interested in converting a portion into annuities with guaranteed lifetime income Opportunity for Annuity with Guaranteed Lifetime income in Retirement (in billions) Age Total Not Retired $214 $146 $70 $44 a $474 Retired $30 b $49 $49 $42 $170 Interested in converting a portion of assets into an annuity with guaranteed lifetime income: Not Retired 37% 48% 37% 38% 40% Retired 29% 29% 23% 13% 21% Sources: LIMRA analysis of 2010 Survey of Consumer Finances, Federal Reserve Board, 2012 and LIMRA Retirement Study Consumer Phase, Based on 5,296 consumers that include 1,533 retirees, 1,391 pre-retirees (age 55+ and not retired), 955 late boomers (age 45 to 54 and not retired), and 1,417 from Gen X and Gen Y (under age 45 and not retired). The LIMRA analysis is based on retirees, pre-retirees and late boomers aged 45 to 80 with household investable assets between $100,000 and $2 million.. a Because of the low sample size of not retired aged between 70 to 80, the guaranteed income opportunity of $14.4 billion has been added with the preceding age group of b For the same reason, guaranteed income opportunity of $12.1 billion for retiree age group of 45 to 54 has been added with age group Page 19

20 Thank You Contact Information: Joseph Montminy, A.S.A., M.A.A.A. Assistant Vice President, LIMRA Retirement Research Phone: (860)

21 HARTFORD ATLANTA MIAMI TORONTO LONDON KUALA LUMPUR SHANGHAI HO CHI MINH CITY SEOUL 2010, LL Global, Inc. SM This publication is a benefit of LIMRA membership. No part may be shared with other organizations or reproduced in any form without LL Global s written permission.

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