Legal & General Group Plc has a £17 billion pipeline of potential U.K. bulk annuity deals, compared to its usual level of around £10 billion, the insurer's top executives said March 7.
The company also sees potential to grow in the U.S. defined benefit pensions market and is looking at potential bolt-on acquisitions.
Bulk annuity deals allow pension schemes to transfer defined benefit pension risks to insurers. The market is growing because defined benefits are costly and risky for companies to maintain, so they are keen to remove the liabilities from their books.
Bulk annuity deals worth around £12 billion were completed in the U.K. in 2017, and another active year is predicted for 2018 — a prediction that Legal & General's pipeline supports.
"Client demand from U.K. pension plans remains substantial, and the pipeline of transactions we are in active discussions with has risen to £17 billion," Legal & General CFO Jeff Davies told analysts during a 2017 earnings call. "The U.S. defined benefit pensions market has similar potential, with the market growing year-on-year. We will continue with our measured approach as we look to expand."
CEO Nigel Wilson said: "We usually have about £10 billion in the hopper." But he noted that the key was how many of the potential deals Legal & General converts. It wrote £3.4 billion of bulk annuities in 2017.
Wilson also stressed that the company would not look to do deals at any price in the highly competitive U.K. bulk annuity market, where seven other insurers are competing for transactions.
"We have a lot of pricing discipline around that, so we are not going to chase any particular individual transaction because we have an ever-increasing breadth of opportunities we are being presented in the market," he said. "We certainly have enough risk appetite, capital and direct investments to support a pretty high level of growth in 2018 from the size of the back books we have got."
Bolt-on acquisitions
Legal & General will also consider bolt-on acquisitions as it looks to deploy its capital. Wilson said the company runs a "very capital-light model" that generates around £500 million of extra cash a year "that we are not actually using as a business, hence the cash balance keeps going up and up."
Acquisitions are part of the plans for using the extra capital.
"We have a series of bolt-on acquisitions we are thinking of making," the CEO added. "[Legal & General Investment Management CEO] Mark [Zinkula] has been thinking of making one in America for a few years, and he is still thinking of it in 2018. I hope this year, he gets on and does one of them. We need a greater direct investment capability in the United States."
Wilson also said there were further opportunities in the general insurance business, run by Cheryl Agius, and the retail retirement business, headed by Chris Knight.
The expansion plans come after L&G boosted its annual profit by 50% in 2017 to £1.89 billion from £1.26 billion in 2016. Earnings per share were up to 31.87 pence from 21.22 pence. The results were helped by a one-off £246 million benefit arising from the revaluation of the company's net deferred tax liabilities in the U.S. Excluding the one-off U.S. tax benefit and a £247 million mortality release, earnings per share were up 9% to 23.1 pence.
Wilson described the results as "another terrific year" for Legal & General. The share price was up by 0.81% at 260.10 pence at 1.19 p.m. in London on March 7.
