The value of U.K. bulk annuity deals completed in 2018 could reach £40 billion following Prudential Plc's sale of £12 billion in liabilities to Rothesay Life Plc, a pensions consultancy said March 14.
Prudential had been expected to sell part of its U.K. annuity book, and Rothesay had emerged as a front-runner to pick up the business. Earlier estimates had suggested that the eight U.K. insurers active in the bulk annuity market would take on £30 billion of liabilities in 2018 compared with the roughly £12 billion worth of deals done in 2017.
The U.K. bulk annuity market is active because pension schemes are keen to off-load their defined benefit pensions liabilities. Insurers, meanwhile, are keen to take on these liabilities as an opportunity for growth in an otherwise stagnant market. In addition, some insurers want to exit the U.K. annuity market.
James Mullins, partner and head of risk transfer solutions at Hymans Robertson, said: "Today's announcement that £12 billion of Prudential's existing annuity portfolio will transfer to Rothesay Life, combined with the recent news that Phoenix is taking on Standard Life's annuity portfolio means that the total value of annuity liabilities taken on by the eight insurers currently active in the buy-in and buy-out market is expected to be around £40 billion in 2018, before allowing for any further consolidation of insurer annuity business."
The bulk annuity market is fueled by three main types of transactions. The most common are buy-ins, in which an insurer sells a bulk annuity to a pension scheme to cover the liabilities for part of the scheme. Buy-outs are where an insurer assumes responsibility for an entire defined benefit scheme and sells an annuity directly to the scheme's members.
The third, and usually biggest, type of deal is the back book transfer, wherein an insurer takes on another insurer's annuity book, as with the Prudential/Rothesay deal. There were no such deals in 2017, but they were expected to make a reappearance in 2018.
Time to digest
One concern is that back book deals could use up some of the capacity for buy-ins and buy-outs. The size of the Prudential deal, which roughly equals all the buy-ins and buy-outs completed in 2017, is expected to keep Rothesay Life busy for a while, RBC Capital Markets analyst Gordon Aitken said in a March 14 research note.
"This is a huge chunk for Rothesay to take on and it will mean that it will not compete for a while at the top end of the bulk annuity market, which is good for Legal & General," Aitken wrote, adding that the size of the deal means that it "will take some time for the market to digest."
Back book transfers can make it more difficult to find assets to back buy-ins and buy-outs, according to Mullins. He noted that to price such deals competitively, insurers need to find illiquid assets to match pension schemes' cash flows.
"When an insurer takes on an existing annuity portfolio from another insurer, it is common for a certain amount of transitioning of the underlying assets, which will frequently target the very same illiquid assets that could otherwise be used to provide attractive bulk annuity pricing to a pension scheme," he said. "This means that, in 2018 more than ever, pension schemes need to carefully plan how they approach the insurance companies for buy-in and buy-out quotations and demonstrate why they should be a high-priority case, using in-depth knowledge of the insurance market."
Prudential could sell more of its annuity book to other insurers at some point, although it is unclear when. Prudential's U.K. annuity book totaled £32.6 billion before the Rothesay Life deal.
Speaking to analysts at a March 14 conference, John Foley, CEO of Prudential's M&G Prudential U.K. and Europe unit, said the company would "keep that option alive" to transfer more of its back book, but added: "We have nothing on the table right now. We will evaluate what's best for shareholders, what's best for our business in the longer term, and for the moment there are no plans."
