Updated Perspectives on the Bulk Annuity Market
Last summer we wrote about prominent developments within the bulk annuity market. PIC received a capital investment of £400m, allowing it to further penetrate the large-scale bulk annuity market; meanwhile Aviva announced its decision to focus on schemes with assets less than £50m. Developments since then corroborate this evidence of segregation within the market:
- PIC completed the UK’s largest bulk purchase annuity transaction yet,
- Market speculation surrounds MetLife’s bulk annuity carrier, which may be up for sale,
- Legal & General purchased Lucida,
- Canada Life decided to withdraw from the bulk annuity market,
- Medically underwritten bulk annuity transactions grow as a de-risking option.
The Players
PIC continues to make inroads in all areas of the market, offering solutions to both the smallest and largest schemes. Recently, it concluded the largest buy-out in UK history with the EMI Group Pension Fund. The transaction has passed liabilities worth £1.5bn to PIC, as well as responsibility for 20,000 members, further cementing PIC as a dominant player in the market.
In June this year, Legal & General Assurance Society announced its intention to purchase failed competitor Lucida for £151m. This deal, which is expected to be completed by the third quarter of 2013, will serve to consolidate L&G’s position as a leader in the bulk purchase annuity business, holding on average a market share of one fifth by premiums written over the past three years. L&G is expecting to benefit from a £66m release of capital and reserves immediately following acquisition.
Goldman Sachs’ acquisition of Paternoster in 2012 has contributed to reinforce Rothesay Life’s role as a key player in the bulk annuity market, as the transfer of all of Paternoster’s long term business helped Rothesay’s pre-tax profits at the end of 2012 to double from 2011. Rothesay appears short of neither capital nor business opportunities; in a list of the ten highest value transactions conducted in the market’s history, Rothesay was the single most represented company, with three listed transactions worth a total of £2.2bn.
Rothesay Life is fully owned by the Goldman Sachs Group; however developments in 2012 saw it seek additional sources of capital from that supplied by its parent, with £120m worth of capital investment swapped out for £100m of perpetual subordinated debt from MassMutual. Furthermore, 2013 saw Rothesay pay a first dividend of £225m to Goldman Sachs. It is now moving to establish its presence in the market as an entity in its own right, seeking to favourably answer the question asked of it by Trustees: “are you a standalone insurance company or are you a captive vehicle for Goldman Sachs?”
Prudential has also maintained its role as a prominent player. Its selective approach to bulk transactions, focussing on larger and less frequent deals, has earned it a total share of 11% of the value of all premiums written since 2010. It has written two of the five largest deals in bulk purchase annuity history, which totalled just under £2bn.
The graph below shows the total value of premiums written by each company during 2012 and gives a clear indication of the current balance of forces as these key players continue to vie for dominance.
The Underdogs
In early 2013, market speculation grew that MetLife Assurance had been put up for sale by parent company MetLife Inc., the US’s largest life specialist. Despite claiming in December to expect 2013 profits of around $5.5bn (£3.6bn), MetLife Inc. had been adversely affected in 2012 by an extended period of low interest rates in the US and it’s GI arm suffered a significant loss due to claims in the wake of Hurricane Sandy. The bulk purchase annuity business demands large capital investment by nature, and so any decision to sell MetLife Assurance may reflect MetLife Inc.’s decision to redirect capital investment with the aim of producing more immediate returns. As yet, MetLife has not confirmed whether rumours of the sale are true.
This possible sale echoes Aviva’s decision in 2012 to withdraw from the large-scale annuity market, focussing on transactions worth less than £50m. This decision was attributed to the company’s failure to meet economic hurdle rates on this business line. The company had announced previously that it had £2.6bn worth of deals in the pipeline, but would refuse to write any unless it met target returns.
In December, we brought news of how bulk annuity provider Lucida closed to new business after being put up for sale by hedge fund Cerbus Capital in June 2012. This was due in part to Lucida’s failure to dominate this competitive market, as one of several specialist pensions insurance companies established in direct response to the growing desire for UK companies to transfer the risks presented by their defined benefit pension schemes.
In a similar move, Canada Life has recently announced that it is no longer interested in the bulk purchase annuity market.
The New Entrants
In May this year, we talked about medical underwriting as a niche developing within the bulk purchase annuity market.
Partnership, which had at that time conducted three low-value transactions totalling £6.5m, continues to grow, having conducted its fourth and largest transaction to date in June this year. The deal, with Imperial Home Décor, involved the transfer of 140 members’ pension liabilities, worth £5m in total. Furthermore, the company completed its Initial Public Offering in July this year, valuing the company at £1.54bn. It will continue to focus on enhanced annuities and we are not aware of any plans to enter the standard bulk annuity market.
Despite entering the market in 2012, we are not aware of any deals that Just Retirement have completed.
Medical underwriting is a relatively new offering in the bulk annuity market and entails a number of important considerations for pension schemes. As the insurer offerings are refined and more consistent approaches are adopted, we would anticipate growth in this area, albeit a growth that is focussed on smaller transactions.
The Future
The graph below shows the average transaction values each year for the six insurers with the largest shares in the bulk annuity market. Clear segregation can be seen between the practice of companies transacting with smaller schemes and those focussing on larger, less frequent transactions; each company is focussing on a clear section of the market. 
We expect that as the year progresses, the market will continue to be comprised of few dominating competitors, winning high value schemes, and other insurers which are likely to use specialist tools to differentiate themselves from the competition. Last year we wrote about how the total bulk annuity market value had increased notably in recent years, worth over £5bn in 2011, up from just £1.2bn in the early 2000s. The size of the market, and its clear potential for growth, may tempt some new entrants to try to carve out a niche of their own.
There is a growing demand for Trustees to be sure that they are able to have confidence in their chosen insurer in terms of financial strength and operations, and to ensure that any transaction made is in the interests of their members.