UK’s pension buyout boom leaves insurance investors wanting more

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Built for comfort, not speed is a good slogan for annuities — an insurance product offering retirees steady, long-term income.

But UK business has been brisk: rising interest rates have transformed funding levels in defined benefit pension schemes and enabled companies to consider offloading future liabilities. Bulk annuity sales, as these deals are known, should pick up from around £28bn in 2022 to £80bn by 2027 say pension consultants LCP — good news, you’d think, for insurance companies that specialise in annuities.

Indeed, Just Group’s full-year earnings topped expectations on Friday. While rivals like Legal & General or privately held PIC chase after the multibillion deals, Just focuses on smaller, sub £100mn transactions, with nearly a third of the market. It is taking market share, too, in deals up to £1bn. Demand for deals from corporates outstrips current capacity, suggesting insurers should be in a strong negotiating position.

Yet Just Group’s shares haven’t been buoyed along with the buyout market. Its share price and that of bigger rival L&G have snaked sideways for more than a year. Just trades at a 60 per cent discount to book value. Its life insurance peers are closer to parity.

One investor concern is the capital-hungry nature of bulk annuity business. Regulators demand capital be set aside for each transaction, even if the purchase can add profits almost immediately. Though that capital is released into the income statement over time, this process mutes earnings growth from new business, points out RBC Capital Markets.

Another question is whether current trends are sustainable. Just Group’s second half had some strong new business inflows, with little strain on its capital. It managed to find profitable investments — often multi-decade, illiquid ones — to pay for the annuity guarantees made to DB schemes. It has diversified its investments away from equity-release mortgages to a broader range of infrastructure and real estate projects.

Finding enough of these could get harder, especially as competition and scrutiny mount. Royal London, another UK life insurer, said Friday it would enter the bulk annuities market in earnest. The Bank of England has also warned groups to more tightly manage the reinsurance deals they are doing to increase their capacity for bulk annuity transactions.

Just Group’s low valuation has, in part, reflected unambitious targets for return on equity. Handily beating its new, over-12 per cent goal on Friday sent the shares up 13 per cent. But earning the trust of the market will require sustainable earnings growth. Just Group will need to work hard to find sufficient investment returns to match the ample supply of bulk deals on offer.

alan.livsey@ft.com