Underwritten bulk annuity providers merge to dominate UK market

The two providers of medically-underwritten bulk annuities are to merge with suggestions the new entity could move into the traditional bulk annuity space.

Just Retirement and Partnership Assurance dominated the UK market after entering in 2013 on the back of offerings in individual medically-underwritten annuities.

The pair wrote £892m (€1.2bn) of the £900m market since 2013 – with Aviva Investors the only other provider in the market, writing a single, £8m deal in 2014, according to Hymans Robertson.

Both firms’ share prices were badly hit after the UK government’s 2014 announcement that individual annuities would no longer be compulsory.

The companies built a significant presence in the individual medical space, but a predicted fall in overall sales saw investors take flight in light of future profits.

The merger comes as little surprise given both firms’ profit outlook, and their similar operating models that see them using historical medical data to accurately price risk.

The new entity, JRP Group, has committed to building up capacity in the medical bulk annuity market and potentially pursuing transactions in the traditional bulk space.

Consultants raised the alarm due to the short-term impact on pricing for medical bulk annuities.

John Baines, principal consultant in Aon Hewitt’s risk-settlement division, said immediately after the merger that the market would lose competitive tension.

“The lack of competition is a negative for pension schemes, however, the potential larger and stronger covenant, if it proves to be so, is a very big positive.

“One of the things that has held back schemes from the market is the perceived [weakness] of the two firms as standalone entities,” Baines said.

Barnett Waddingham’s head of bulk annuity consulting, Gavin Markham, said removing competition would not beneficial for schemes, but could trigger new entrants.

“There has been beneficial pricing for schemes generated by this competition, and if the merger goes through you would assume some impact,” Markham said.

“Once merged, they will reassess where their [pricing] position is but at that point they may have competition from new areas,” Markham added.

There is a potential for new entrants, particularly transfers from the individual medical annuity space where market share more evenly split.

This includes LV=, Aviva and Legal & General with the latter two significant players in the traditional bulk annuity market.

IPE previously reported that LV= was holding discussions with consultants over entering the bulk annuity market.

Despite the merger, Baines believes the medically-underwritten space would still offer better pricing over traditional bulk annuities.

“The business models of the merged business will only hold up if they retain a decent margin [of at least 5%] over traditional pricing, otherwise schemes would go for the easier option,” Baines said.

Deals can be around 10% cheaper than traditional products down to risk pricing and competition.

This would allow the merged business some scope to take advantage of their dominant position.

The merger will see Just Retirement shareholders own 60% of the new firm and Partnership the remaining 40%.

It will face regulatory scrutiny with the insurers set to argue against any impact on competition by citing market shares in relation to the individual and bulk annuity markets as a whole, compared to a singular focus on the medical space.

Medically-underwritten deals accounted for 5% of new business in the total bulk annuity space, with expectations it will reach 10% this year.