Thursday 6 August 2015

FINANCIALS UK life insurer revenue lifeline sees patchy start to year

Reuters

* After record 2014, Q1 saw company deals worth 800 mln pounds
* Deficits, deal complexity hitting volume of deals
* Just 27 pct of firms looking to do a full deal - Aon
LONDON, Aug 3 (Reuters) - A revenue boost to British life insurers from companies looking to pass on their pension scheme risk is looking uncertain, as low interest rates make scheme deficits wider and deals harder to reach.
Insurers are putting their faith in so-called bulk-annuity deals to fill a hole left by changes to the pensions industry earlier this year, which have at least halved demand from individuals for annuities providing an income for life.
Leader of the pack in bulk annuities last year was Legal & General, with two deals alone bringing in more than 5 billion pounds ($7.8 billion) in premiums.
But after a record 13 billion pound year for bulk business in 2014 for the sector as a whole, sales fell off in the first quarter of 2015 to 800 million pounds ($1.3 billion) of premiums, compared with around 4 billion in the same quarter a year earlier, analysts say.
While business traditionally picks up in the second half of the year, a weaker than expected showing as insurers begin to report earnings this week may cut overall revenue growth from annuity sales.
The complexity of these bulk deals means some can take many months to be structured, making the deal pipeline irregular and hard to plan for. The administrative burden for scheme trustees and competition from new-entrant insurers also makes deals harder.
Mark Paxton, bulk annuity consultant at Barnett Waddingham, said for insurers expanding into bulk annuities from individual deals, "it's taking longer than they thought, they are finding out how difficult it is."
As a result, second-quarter data, due to be released as insurers begin reporting earnings this week, is expected to be light, said Gordon Aitken, analyst at RBC.
Companies with big pension scheme deficits are looking to close them to new members and then either continue to run the schemes themselves, or sell the risk on to an insurer, thereby removing all liability from their balance sheets.
But prolonged low interest rates means many company schemes do not have enough money in them. Funding is currently below 85 percent, data from the Pension Protection Fund showed.
To close the gap, companies have several options. One is to invest in riskier assets to try to improve returns; another is to hope interest rates rise to help make their income-bearing investments more profitable.
MORE CASH
Companies can also pump more cash directly into the schemes to make a deal with an insurer more likely, or if a full deal is too hard to reach, they can do a partial deal, where an insurer buys some of the risk.
Absent a closing of the gap, much of the 2 trillion pounds in defined benefit pension scheme liabilities currently with UK Plc is likely to remain there.
That has not stopped more insurers including Scottish Widows, LV= and Canada Life looking to challenge existing providers such as Legal & General.
Scottish Widows, part of Lloyds Banking Group, said last week it completed its first bulk annuity transaction in the first half and planned more deals this year, while Vanessa Owen, head of retirement solutions products at LV=, said it was a "logical area for us to investigate and we are actively pursuing opportunities".
For Paul Traynor, international head of insurance at BNY Mellon, the need for data to provide an accurate estimate of how long pensioners will live could be a barrier to entry, as "the established players have decades of data".
While company boards may be more prepared to make cash injections into their schemes as the year ends and they have a better idea of cashflows, the prospect of a UK base rate rise over coming months means some companies may prefer to wait and see if it helps close their deficits.
Jay Shah, head of origination at bulk annuity provider Pension Insurance Corp, said that if interest rates were higher, "we would be flooded with people wanting to buy out their pension schemes".
Consultants KPMG have predicted the bulk annuity market could grow to 20 billion pounds a year by 2020, which would more than compensate for a recent halving in the market for individuals to buy annuities.

But a study by consultants Aon Hewitt on Monday showed that just 27 percent of schemes surveyed had identified a full bulk annuity deal as their long-term objective, with the remainder planning to keep running the schemes themselves. ($1 = 0.6402 pounds) (Editing by Sinead Cruise and David Holmes)

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