Aegon sells £3bn annuity book

Legal & General has bought a £3bn annuity portfolio from Aegon.

Initially, the transaction has been structured as a reinsurance contract, covering about 27,000 in-payment policyholders, who will remain customers of Aegon until the transfer gains regulatory and court approval.

L&G has chosen not to reinsure the longevity risk in relation to this transaction.

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As a result of the deal, Aegon stated annual capital generation from its UK operations will be reduced by about £30m, while underlying earnings before tax are expected to be reduced by about £16m a year.

The reinsurance transaction is expected to result in a loss of about £215m for Aegon, which will be reported as part of ‘other charges’ in the second quarter of 2016.

Adrian Grace, chief executive, said: “Having not been an active player in the annuity market since 2010, it made perfect sense to sell a non-core element of the business and allow us to further accelerate the growth of our platform and protection businesses.”

Last month, Aegon’s Dutch parent sold two-thirds of its UK annuity portfolio – worth £6bn – to Rothesay Life, which it expects to cut annual operational free cash flows from the UK business by around £35m, with an impact on 2016 underlying earnings before tax of about £20m.

Aegon now has about £1bn worth annuity liabilities remaining through an inward reinsurance transaction.

L&G was touted as being the buyer of Aegon’s annuity book back in January, with Legal & General Retirement having written about £550m of total annuities year to date, with a further £150m in lifetime mortgage lending.

As at 31 March 2016, Legal & General manages an annuity book of £45.5bn, and provides annuity benefits to over a million customers.

Kerrigan Procter, managing director of Legal & General Retirement, said: “Back book annuity risk transfer deals can be executed efficiently under our post Solvency II model,” adding the transaction is consistent with the firm’s cost of capital hurdle rate.

“In the UK there is an estimated £100bn of individual annuities in back books and we expect further consolidation of these back books,” he stated.

Adviser view:

Stuart Read, director at Kingsbridge-based Sabre Financial said: “Obviously Legal & General’s servicing standards are superior to Aegon. However, once an annuity is being paid out a customer probably would not notice the difference.

“My only concern is that they’ve chosen not to reinsure it but with the size of their annuity book and L&G generally there’s no need to insure it.”