UK equity managers are reassessing the investment case for life insurance companies following chancellor George Osborne’s “revolutionary” changes to the annuity market announced in the Budget.
The chancellor pledged that “no one will have to buy an annuity” and introduced significant flexibility for pensions, allowing those with defined contribution pensions to access “as much or as little of their pension pots as they want, anytime they want” after they retire.
Following the announcement, more than £3bn was wiped off the value of insurance companies – a major part of many UK equity portfolios – as traders panicked that the sales of annuities would collapse.
Specialist annuity companies Just Retirement and Partnership Assurance were badly hit, losing more than half of their market value in the space of a few hours. Other insurance companies, including Legal & General (L&G), Aviva, Prudential and Resolution, also lost value.
Simon Gergel, manager of the Allianz UK Equity Income fund and the Merchants investment trust, said the changes were “very significant” for life insurers as annuities were a “profitable” and “cash generative” business.
“It is a complicated picture,” Mr Gergel said. “The clearest impact is on pure annuity providers – for example, Partnership or Just Retirement – [but] it is complicated by the balance of new business flows versus the back book.”
The manager has a top-10 position in Resolution, which built its recent reputation as a consolidator of legacy life insurance businesses. Mr Gergel said most of the company’s value comes from this legacy annuity business, which will not be affected by the rule changes.
Fidelity’s Toby Gibb, investment director for UK equities, added that while “the environment has changed” for specialist annuity providers, “there was more to think about” for more diversified insurers.
“It’s quite negative [but] L&G and Aviva have big asset management divisions that could benefit from these changes,” he said.
Leigh Harrison, head of equities at Threadneedle Investments, argued that life insurance companies “were not as negatively affected as the early moves in their share prices suggest”.
The manager holds L&G in the top 10 of the three equity income products he co-manages with Richard Colwell, while Aviva is also in the top 10 of the Threadneedle UK Equity Alpha Income fund. The companies saw their share prices slide 8.6 per cent and 5.2 per cent respectively on March 19.
Mr Harrison added: “Annuity regulation has been progressively relaxed during the past few years, and the leading life companies have well-diversified business models in which the new business from individual annuities represents a relatively small part of their overall cash flow.”
George Godber, co-manager of the CF Miton UK Value Opportunities fund, said: “It’s not a total destruction of the annuities market but I can see why the stockmarket has reacted like this. We will see some trimmings off revenue figures [for big insurers] but only 1-2 per cent, not massive cuts.