UK bulk annuity market takes off with record £12bn deal

by Artemis on March 14, 2018

The United Kingdom market for bulk annuity transactions, which see pensions or life operators transferring and reinsuring large portfolios of annuity liabilities, took off today with a record £12 billion reinsurance deal and continued activity in this market could eventually stimulate more longevity hedging.

The transaction which was announced this morning saw life, pensions and longevity re/insurer Rothesay Life providing the reinsurance capacity to back a £12 billion chunk of Prudential plc’s annuity book, which was managed under the M&G Prudential brand, as part of a demerger process.

This reinsurance deal covers an annuity book containing around 400,000 policyholders, which makes the deal the largest reinsurance transaction of its kind in the UK. It’s a step on the road to a full Part VII transfer of the portfolio, which is expected to be completed by the end of 2019.

A transaction of this size demonstrates the ability of reinsurance capital to provide large solutions for life entities and pensions, almost equaling the size of the entire UK bulk annuity market from 2017 where transactions totaled just £12.4 billion.

James Mullins Partner and Head of Risk Transfer Solutions at Hymans Robertson commented on the transaction, “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.”

As these deals grow in size there is going to be the potential for transactions to begin to segregate out the longevity risks associated with them, in order to optimise the appetite for risk from reinsurance capital sources.

Re/insurers can only take on so much of the annuity portfolio risk and in some cases players would prefer to be on the other side of a longevity hedge or reinsurance arrangement, rather than a full annuity book reinsurance deal.

John Baines, a partner in Aon’s Risk Settlement Group, also said, “This market development is the culmination of a long process and during that period it’s pleasing that appetite for pension scheme transactions remained undiminished and pricing remained very attractive, even in the context of a mega deal in the market. We believe this shows the UK market has matured, remains very competitive and can cope with this kind of change.

“There will also have been other insurers in the market with an eye on this. In fact, we expect their appetite has only increased as a result of this deal. So while it is a clearly very significant deal we don’t believe there will be any fundamental change to the way the bulk annuity market acts during 2018 – we think it remains on target for at least £30 billion, as we predicted in late 2017.”

That’s the other factor at play here. Deals of such size demonstrate the appetite of reinsurance capital and its ability to soak up pension and longevity related risks, either in bulk form or segmented out as longevity risk transfer deals.

Consultants expect the market for these risks to remain competitive, leading to attractive reinsurance pricing for those seeking to capitalise on re/insurer appetite for these large asset and liability backed deals.

Whether there is a capital markets role in future, to further optimise the transfer of pension risks by finding efficient ways to channel suitable risks to capital market investors remains to be seen. But the continued development of the market bodes well for those with a desire to access such risks.

With pressure expected on reinsurance pricing due to recent data showing that lower levels of mortality improvement continue in England and Wales, the timing is ripe for those seeking longevity risk transfer related solutions.

Read about many historical longevity swap and reinsurance transactions, in our Longevity Risk Transfer Deal Directory.

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