Register to get unlimited access to all of Citywire’s Fund Manager database. Registration is free and only takes a minute.

Budget bombshell: which insurers will be hit hardest?

Which insurers will be hit hardest by the Budget's new annuities regime, and which have been unfairly sold off?

Yesterday’s Budget ‘dropped a bombshell’ on the life insurance sector, according to Edward Houghton, senior analyst at Bernstein.

Specialist players such as Partnership Assurance saw 60% wiped off their share price, while Just Retirement plunged by 46%.

Houghton noted that there had been earlier warnings for the industry, with the FCA reviewing the annuity market for example. ‘But this looked set to encourage a more competitive annuity market, not to put a sizeable hole in it, as the chancellor has,’ said Houghton.

Under the new regime no retiree will be obliged to annuitise their pension pot, as three quarters of them currently do.

Bernstein now expects roughly half of retirees to draw down on their pensions rather than annuitise them, and estimates that this will reduce insurers’ UK individual annuity earnings by between a third and a half.

However, Bernstein believes that will hit some insurers far harder than others.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Who depends most on annuities at the moment?

Bernstein’s analysis shows that, among the big life insurers, Standard Life gains the highest proportion of its revenues from annuities.

However, Standard Life could also benefit from a higher take-up of drawdown. Houghton observed that the predicted drop in annuitisation does not take into account the government’s decision to provide face-to-face advice to all retirees at the point of retirement.

‘We think these consultations could result in a greater proportion of retirees choosing drawdown over annuitisation. Why? In our view, many retirees who currently buy annuities may not be fully aware of their option to draw down. On this basis, we estimate that the total reduction in the individual annuity market could be as much as a 50%, although the impact of face-to-face advice is at this stage difficult to predict.’

(Source: Company reports, Bernstein analysis. Note: Standard Life annuity earnings benefited in FY13 from significant management actions, which Bernstein discounted from its analysis.)

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Who’s buying annuities anyway?

Under the present system, income drawdown is available only to those with very small pension pots (less than £18,000) or relatively large ones (more than £310,000).

‘This means that nearly half (46%) of consumers are effectively obliged currently to annuitise as they have pension pots larger than £18,000 but smaller than £310,000,’ said Houghton.

‘Of those who are not obliged to annuitise, a little more than half (29%) do in fact choose to buy an annuity. This means that 75% of retirees (46% + 29%) currently annuitise, as highlighted in yesterday’s Budget consultation paper.’

(Source: ABI, Bernstein analysis)

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

What about the Open Market Option?

‘Within the annuity market, face-to-face advice will accelerate take-up of the Open Market Option,’ argued Houghton.

‘Whilst we expect the overall annuity market to decline as a result of this legislation, we also believe that the introduction of face-to-face impartial advice will accelerate take-up of the Open Market Option where an annuity is purchased.

‘We expect those providers who currently obtain the majority of their annuities from internally vesting pensions (and who consequently earn higher new business margins) to be impacted the most, specifically Resolution, Standard Life and Prudential.’

(Source: Budget Report, ABI, Bernstein analysis)

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Whose earnings will suffer the most?

While the impact of the reforms will be substantial, Houghton reckoned that investor flight from life insurers may have been excessive.

‘The market sold UK annuity providers on yesterday’s news. Partnership, which earns the vast majority of its earnings from individual (enhanced) annuities, closed down 55% on the day. This suggests that the market expects its earnings to reduce by that percentage. Our own initial assessment suggests individual annuity volumes at the market level may reduce by between a third and a half.

‘The Legal & General and Resolution sell-offs yesterday look a little overdone on the basis of our initial impact estimates. The (perhaps surprising) negative EPS impact from a declining annuity market at Standard Life should be somewhat offset by the likely benefit to its income drawdown business.’

(Source: Bloomberg and Bernstein estimates. Note: these declines do not include the potential impact on margin compression from the OMO. Bernstein expects Resolution, Standard Life and Prudential to be hit hardest in this respect.)

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Houghton believes that while the annuity market will shrink as a result of the reforms, the income drawdown market will grow.

‘Flows into annuities are currently more than 10 times larger than flows into income drawdown: £14 billion versus £1.2 billion in 2012. This legislation will inevitably drive larger flows into income drawdown, although at much lower margins, as drawdown does not offer protection against longevity.

‘Standard Life is a leading player in the drawdown market, with over 40% market share.’

(Source: Synthesys, Bernstein analysis. Note: black bars represent companies covered by Bernstein)

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
Citywire TV
Play Volatility is back, Europe's future & Ethical's key moment

Volatility is back, Europe's future & Ethical's key moment

This week’s episode of Investment Pulse takes a look at European prospects, FTSE volatility and whether public pressure is about to provide a push for ethical investment

Play Volatility spike: How ETFs can soften the blow

Volatility spike: How ETFs can soften the blow

ETFGI’s Deborah Fuhr discusses the role of ETFs in client portfolios during volatile market conditions

Play Winter market warmers, the post QE world and timing the Fed

Winter market warmers, the post QE world and timing the Fed

This week’s episode of Investment Pulse looks at the winding down of quantitative easing, whether to try and time a US Federal Reserve rate rise and if strong seasonal performers can reverse recent market slumps

Wealth Manager on Twitter