According to L&G’s chief executive officer, the pipeline of deals that allow companies to cede some or all of their pension liabilities to insurers is at an all-time high as the market takes advantage of rising interest rates.
The risk transfer market, one of the key areas for revenue growth being targeted by UK life insurers, has rebounded from a pandemic lull. This has been exacerbated by rising interest rates, which have pushed the funding level of pension schemes to their highest level in a decade and made an agreement viable for many.
L&G has completed £4.4 billion in bulk annuity deals in the first six months of the year, including its largest-ever US deal and pension scheme deals for British Steel and Heathrow Airport, among others. That compared to £3.1 billion in the first half of last year.
The surge in activity helped the insurer post an operating profit of £1.2bn in the first half, beating analysts’ expectations and the same period last year.
“It’s fair to say that we’re having more active conversations than at any time in our 35-year history [risk transfer] business,” said Sir Nigel Wilson, Chief Executive of L&G. The same effect meant some deals expected to close in 2024 “were brought forward to 2023,” he added.
Around £2 trillion of pension liabilities – essentially the future payouts to pensioners – are on the balance sheets of UK companies. In a statement released Monday, JPMorgan estimated that $600 billion of that could be transferred to insurers over the next decade.
The analysts cited rising employer contributions over the past five years, which have boosted funding levels alongside higher interest rates, as key factors helping pension systems close deals. L&G has a five-year target of £40bn to £50bn in deals for the UK and $10bn in the US.
Elsewhere, L&G’s investment management division posted record inflows of £65.6 billion in the first half, but assets under management fell from £1.33 trillion to £1.29 trillion in troubled markets, hurting profits.
Shares of L&G, which had marked some of the increased transaction volumes in a July updatewere marginally lower through Tuesday lunchtime.
Wilson welcomed the pledge by the two remaining candidates in the Conservative Party leadership race to push for a “Brexit dividend” by revising Solvency II rules inherited from the EU.
“We started this project in 2016, now it’s 2022,” he added, referencing the original to press by UK industry and regulators to change the rules. “Six years have passed without any measurable progress.”
Rising interest rates helped push L&G’s Solvency II ratio – the amount of capital relative to regulatory requirements – to 212 percent from 187 percent at year-end, but this was below the expected 215 percent.
Wilson said the board would “not hesitate” to buy back shares if it made more appeal, but advocated investing capital in the group, which posted a 21 percent return on equity in Tuesday’s results.
https://www.ft.com/content/97114ca5-ee35-4297-9935-7b5b7f6ca44d L&G rose as companies rushed to divest pension schemes