As part of their recent results announcements, the specialist medically underwritten bulk annuity providers, Partnership Assurance and Just Retirement, confirmed that they had received regulatory approval for their proposed merger - the anticipated timing for completion now being early April.
"The total volume of medically underwritten deals completed during 2015 was around £1.5 billion, representing over 10% of the total bulk annuity market for the year."
The new merged entity will be called JRP Group, with the use of their combined medical underwriting expertise underpinning the business proposition of the new company going forward.
The rapid development of the medically underwritten bulk annuity market over the last three years was emphasised by the positive results of both insurers in this area. The total volume of medically underwritten deals completed during 2015 was around £1.5 billion, representing over 10% of the total bulk annuity market for the year. Whilst Partnership and Just Retirement have dominated the medically underwritten market, Legal & General also announced their first underwritten deal in December 2015, a £230 million pensioner buy-in transaction.
For both Partnership and Just Retirement, the strong growth of their bulk annuity sales, together with the dramatic impact of the new pension flexibilities on the retail annuity market, means that defined benefit schemes now represent a very significant element of their business. During 2015, for Just Retirement, bulk annuities represented over 50% of their new business sales across all their product lines while for Partnership the corresponding figure was around 40%.
How could the merger affect the medically underwritten market?
Given their major share of the medically underwritten market to date, the merger of the two leading providers is likely to have at least some dampening effect on pricing over the shorter term, especially when compared to the very attractive pricing (e.g. implied returns in excess of gilts plus 0.5% p.a.) which could be achieved during 2015. Whilst Legal & General and Aviva are also engaged in this market, their participation has tended to be on a more selective basis, and so from a trustee or corporate sponsor perspective, it may not always be possible to generate the preferred level of competition.
In terms of new providers, the position remains uncertain. LV=, who had previously been expected to enter, have now decided not to enter the market at this time.
So where does this leave schemes?
In practice, the merged entity will wish to continue the successful growth of their defined benefit business and seek to maintain a sufficient pricing justification for schemes to adopt a medically underwritten rather than traditional approach.
Therefore, despite a reduced level of market competition, we expect medical underwriting to continue to provide an attractive consideration for schemes, especially for certain transaction profiles and deal sizes. This includes 'top-slicing' where the highest pensioner liabilities are secured through a partial buy-in and any concentration of longevity risk associated with these members can be removed.
Adopting differing transaction structures can also be used to help manage any concerns over limited provider competition or pricing uncertainty. For example, some cases have been completed through the use of post-deal underwriting where any pricing reduction from the underwriting process can be shared between the scheme and the insurer but without any price increase for the scheme if members are shown to be healthier than expected.
In summary, we therefore believe the medically underwritten bulk annuity market will continue to grow and develop, providing a valuable de-risking option for schemes.