Societe Generale analysts have claimed Legal & General could face greater struggles than its peers in the wake of the post-Budget shake-up of retirement options as a push for more bulk annuity business could make the company “inherently riskier”.
Concerns have been raised about Legal & General’s “medium-terms prospects” after it opted to replace lost individual annuity income through writing more bulk annuities.
In a two-page note produced by Soc Gen Cross Asset Research, analysts raise concerns that bulk annuities are “inherently riskier” than individual annuities and volumes are difficult to control due to the lumpy nature of the business.
In addition, Soc Gen states the business comes through professional intermediaries who can negotiate on behalf of the trustees and the corporate sponsoring the final salary scheme. Margins are likely to be less lucrative than the individual annuity business.
Soc Gen stated: “We are concerned that over the medium term, recent annuity reforms will lead to lower new business volumes or else lead to it taking on greater risk by writing an increased amount of bulk annuities - which is lumpy in nature and requires a greater number of assumptions in pricing the business.”
A spokesman for Legal & General responded: “Annuities will remain right for many people: and with the continued secular expansion of the bulks market, we are extremely confident that we will write more annuity business in 2014 than in 2013… possibly substantially more.”
The report, seen by FTAdviser, also revealed that Soc Gen analysts feel the market over-reacted on Friday to a leaked announcement from the FCA that initially suggested far-reaching reforms could be on the agenda in a summer review on legacy products.
The FCA has now confirmed the review will not seek to remove exit charges on the vast majority of legacy products. In fact, it will focus on service levels and charges levied on closed books to ensure that this group of policyholders is treated fairly.
Soc Gen’s analysis shows that Phoenix and Resolution are the most exposed to this type of business, with around 32 per cent and 24 per cent of IFRS earnings arising from legacy products respectively.
Aviva and Legal & General both have low exposure, according to Soc Gen, at 8 per cent and 7 per cent of total earnings.
Soc Gen’s analysts suggested Friday’s price reaction (closed down 3 per cent) represents a good entry point into Aviva and Prudential.
