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L&G execs see no asset restraints on pension risk transfer deals

Legal & General Group PLC's growth in bulk annuities will not be constrained by access to the appropriate assets to back the deals, according to CFO Jeff Davies.

Bulk annuity deals, also known as pension risk transfer schemes, have been a big source of growth for U.K. life insurers in recent years. Companies buy bulk annuities from insurers to lay off the liabilities from their defined benefit pension schemes.

L&G completed £6.3 billion in U.K. bulk annuity deals in the first half of the year, which it said was a record. The period included a £4.6 billion buy-in of Rolls Royce's pension scheme, which is the largest U.K. bulk annuity deal to date. The company also wrote £400 million of international pension risk transfer deals in the first half, which included its first deal in Canada, and its largest deal in the U.S. so far, worth more than $200 million.

The rapid growth of U.K. bulk annuities has prompted some to warn of a potential shortage of suitable long-duration assets to back the deals.

But during an earnings conference call, Davies said L&G was "definitely open for business in the second half" for bulk annuity deals despite its bumper first half.

"We are making all the metrics stack up with the assets we are sourcing and don't see constraints on that," he said. Davies also said the company has "considerable surplus generation on an ongoing basis" from a capital standpoint.

L&G CEO Nigel Wilson said he expects the U.K. bulk annuities market overall, which was once a £3 billion-a-year market, to exceed £30 billion on an annual basis over the next few years. L&G has a 30% market share of this business, he said.

Wilson anticipates L&G writing about £50 billion of deals over the course of the next five years. "There is nothing we can see that is going to blow us off track from doing that," he said.

The company has executed further pension risk transfers in the U.S. since June, according to Wilson. L&G is "breaking away" from the sub-$100 million deals and moving into the midsize bracket, he said.

Wilson did caution that the company's success rate could diminish as it goes further up the chain, making it difficult to predict how much of the available pipeline the company would convert. "As we get into bigger classes, maybe the probability [of winning deals], because we are new into those classes, will be less," he said.

L&G reported a 13% year-over-year rise in group profit after tax to £874 million in the first half from £771 million in the same period of 2018. Operating profit at Legal & General Retirement Institutional, which writes the bulk annuity deals, jumped 45% to £524 million from £361 million.