Good times ahead for retirement solutions providers

A higher life expectancy and rising retirement age are contributing to the boom in retirement solutions.

By Trefis Jun 21, 2012 10:30AM
TrefisImproving life expectancy and a rising retirement age limit are set to push the annuities market in the U.S., benefiting insurance companies such as MetLife (MET), Manulife Financial (MFC), Hartford Financial Services Group (HIG) and Prudential Financial (PRU).

With doubts being raised about the solvency of the social security provision, Americans are encouraged to look for sources beyond government entitlement to secure their financial positions and avoid any chances of outliving their financial resources. The U.S. government has acknowledged that the official retirement age will rise from the current limit of 67 in the near future.

Robert Benmosche, CEO of AIG (AIG), recently said in an interview that he believes that increased life expectancy and global economic conditions could push retirement ages to as high as 80 years.

Security for a longer life

The present retirement age for Americans born after 1960 to claim full benefits is 67 years, and early retirement at the age of 62 leads to a 30% reduction in monthly social security benefit.

In concurrence with the rise in retirement age, life expectancy in the U.S. has also been rising, from 75.7 years in 2004 to 78.5 years in 2010 and is expected to increase even further with advancements in medical technology. The average lifespan of an American citizen post retirement, or the length of retirement, is following a similar trend, increasing from from 8.1 years in 1950 to 20 years in 2007.

These conditions, along with awareness among American youth regarding their financial future, (See Hartford Financial Targets Youth To Drive Retirement Plans) have been a major contributor to the recent boom in the retirement solutions market, as customers approaching the retirement age opt for security of guaranteed income provided by annuities over riskier assets such as equities.

Rising annuity sales

Annuity sales in the U.S. increased by 8% year-over-year in 2011 to $240.3 billion and are expected to grow further in the current market conditions. The baby boomers (Americans born between 1946 and 1964) continue to have a major impact on this rise as they approach retirement age.

Metlife and Prudential are the market leaders in annuity sales in the U.S. Metlife reported a 20% year-over-year increase in earnings generated through annuity sales in the first quarter of 2012, (See MetLife's Strong Performance Offset By Derivative Losses) and is pulling back from the variable annuity market to cut risks. (See MetLife Updates: Cutting Back On Variable Annuities While Looking For Growth Abroad)

We expect annuity sales to continue to rise through our forecast period, for both Metlife and Prudential.

Prudential Retirement Revenues

We have a price estimate of $54.02 on Prudential's stock, which is 15% above the current market price. You can gauge the impact of a change in annuity sales by modifying the forecast above.

More from Trefis

Tags: aigMETPRU
Jun 21, 2012 1:28PM
with the reduction of interest rates the cost of annuities stinks.
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