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Life-changing times

Five months on from the decision to scrap compulsory annuity purchases, a divide among life assurers is emerging - between those able to shrug off the blow and those still reeling
August 22, 2014

Almost without exception, the unexpected Budget day decision - scrapping the compulsory purchase of individual annuities - hit life assurers’ shares hard. Their misery was compounded by news less than two weeks later that regulators at the FCA were to probe the fair treatment of customers in closed-life books. Five months on, and with the life assurers’ half-year reporting season now largely over, a divide is emerging between those able to shrug-off the shock and those still reeling from the blow.

Companies with only modest exposure to individual annuities were always going to cope best. At the time of the announcement, analysts also believed that big players in the bulk annuity market - which the reforms didn't affect - should escape relatively unscathed. Moreover, Barclays believed lost annuity premiums would transform into demand for drawdown or Sipp products. By and large, these predictions are proving correct.

One beneficiary is Old Mutual (OML). The South Africa and UK-focused group doesn’t sell individual annuities in the UK, and its other offerings could become attractive alternatives. Chief executive Julian Roberts says Old Mutual is a “big player in the income drawdown market”, for instance, and that the group has seen pension transfer enquiries double since the Chancellor's announcement. St James's Place (STJ) looks well placed, too. Chief executive David Bellamy thinks “giving power to clients” should benefit a group focused on offering advice.

The sector's biggest operators also appear to be taking change in their stride. Standard Life (SL.) saw its profit margin from UK annuity new business slump 59 per cent during the first half, but that was offset by robust demand for drawdown, Sipp and autoenrolment products. Aviva (AV.), meanwhile, is being protected by a diverse product offering, which includes equity release products, and higher bulk annuity sales. So a 41 per cent first-half slump in the value of its new individual annuity business delivered an impact of “less than 4 per cent of operating profit”, said chief executive Mark Wilson. Prudential (PRU) is coping better still. Its core markets are in Asia and US, where growth remains robust. That, along with a strong showing in bulk annuity sales, more than offset the £29m profit hit at the half-year stage from a 43 per cent slide in UK retail annuity sales. Bulk annuities bolstered Legal & General (LGEN), too, despite a 49 per cent fall in individual annuity sales.

Inevitably, the specialists have been hit much harder. Over 80 per cent of Partnership Assurance's (PA.) total new business premiums are generated from individual retirement annuities. It saw new business premiums for retirement annuities slide 43 per cent at the half-year stage, and its shares have lost more than three fifths of their value since Budget day. Another victim is Friends Life (FLG). The value of its new business sales dropped 24 per cent at the half-year stage, and management is braced for more pressure.

But writing off the specialists for the long term could prove premature. Partnership’s chief executive Steve Groves has reasonably pointed out that the Budget's pension-related reforms won’t be fully implemented until April, and that the accompanying regulations remain unclear. Rather than reject annuities outright, therefore, he says such uncertainty has encouraged customers “to do absolutely nothing”. While that could mean annuity sales collapse further in the short term, it raises the possibility of a revival once the fog lifts. So it’s still far from clear that predictions of the near-disappearance of the annuity market - after the Budget, Barclays estimated the market could contract by two-thirds in 18 months - will prove correct.

Moreover, those companies at most risk have hardly been idle. Once there is more clarity, Mr Groves says Partnership can “move pretty quickly” to launch new products. The group has also been eying overseas opportunities and wants to enter the US care annuity segment - which helps customers insure against the cost of retirement homes. Friends Life has also confirmed it is looking to develop a range of new products. Innovation and diversification could yet provide such companies with decent long-term futures.