The pensions buyout insurance market could hit £10 billion this year and may see the first £1 billion deal, according to Legal & General, one of the market’s leaders.
The rapid pace of dealmaking in the market in the last quarter of 2007 and the first quarter of this year shows no real sign of slowing, despite the volatile investment markets, Simon Gadd, L&G’s managing director for annuities business, said.
“In Q1 we saw £2.5 billion-£3 billion of deals closed in the market. Q2 will see about the same.’’ Gadd said.
While fewer transactions tend to be signed in the third quarter, the fourth quarter will see a pick-up driven by the impetus to close deals before the end of many firms’ financial year, Gadd predicted.
“All the indications are that there could be £10 billion worth of deals done this year. From a market that saw about a billion pounds’ worth of deals done a year, that is a very material increase in a short space of time.’’
Many firms are looking now to transfer or “buy out” their final-salary pension liabilities with insurers, offloading an increasing financial headache due to rising life expectancy of workers, turbulent investment markets and tougher regulations.
A vibrant market, including established insurers like L&G, Aviva and Aegon, specialist start-ups such as Paternoster and Pension Corporation and investment banks like Citigroup have quoted on pension schemes with a combined value of tens of billions of pounds.
L&G has quotes outstanding on schemes worth a total of £20 billion, said Gadd, and he predicted that the first £1 billion deal is just around the corner.
“There’s a pretty good chance it will happen this year. At least half-a-dozen firms with schemes this size are exploring these options and have been doing so for some months.’’
L&G has been able to take advantage of the credit crunch, acquiring some high-yielding assets at cheap prices, which have allowed it to lower its prices on some deals, said Gadd.
The life insurer has been able to “realise a liquidity premium” to snap up bonds investment banks and hedge funds have been forced to dump to meet redemption calls from nervous investors.
L&G has no such worries, as it measures its liabilities in the decades and plans its asset strategy to pay steady returns to annuitants until their death. As a result, Gadd expects the firm to acquire more bonds at distressed prices.
Buyout pricing has fallen, partly as a result of competition in the £1 trillion market but also because of high yields available on corporate bonds.
The payout rate on these assets is a major determinant of the price of doing buyout deals.Prices have inched up in the second quarter, but they have not deterred buyers, which has persuaded L&G to commit more capital to this sector.
Gadd now has the capacity to underwrite £3 billion of annuity business and could win more if the flow of good deals continues.