10 October 2007

Life run-off market undergoes significant restructuring, according to survey

• Over £100 billion of closed fund policyholder liabilities reorganised in last 2 years;
• Overall total policyholder liabilities in UK life run-off have decreased to £132 billion;
• Capital tied up in UK life run-off has increased to £16.2 billion;
• Over 3,300 pension schemes in run-off with over £200 billion of aggregate liabilities.

London, October 10, 2007: The UK life run-off market in 2006 saw considerable reorganisation and consolidation, according to the findings of the KPMG/ARC Run-Off Survey – Life Assurance. This is the fifth edition of the report which is produced annually by KPMG LLP (UK) and commissioned by the Association of Run-Off Companies Ltd (‘ARC’).

Although total policyholder liabilities decreased by over £4 billion overall to £132 billion in 2006, this masks significant movements in the industry in the last 2 years, including the transfer of over £40 billion(1) of policyholder liabilities from closed life assurers to active companies and £100 billion(2) in internal reorganisations. There appears to be a real appetite for acquiring new funds because of the attractions of huge investment portfolios and the returns in the form of efficiency savings that can be achieved from greater scale and focus.

The survey also found that while the anticipated substantial growth in bulk annuity business has yet to occur, evidence of recent activity suggests this will feed through into the findings of next year’s survey. If maintained, the current environment of increased competition and lower pension deficits will further underpin this trend.

Mike Walker, partner in the KPMG Restructuring Insurance Solutions practice commented:

“We are seeing elements of rationalisation as portfolios of business have been transferred out by consolidators where the risk profile does not fit with their business model. The survey also identified over £100 billion of liabilities transferred in the last 2 years within groups through internal restructuring using Part VII transfers. Additionally, 2006 saw the first transfer of life business from a Lloyd’s syndicate to an assurer outside the Lloyd’s market, demonstrating the willingness of Lloyds to consider such mechanisms.”

Darryl Ashbourne, Director in the KPMG Restructuring Insurance Solutions practice said: “We have also observed significant activity in the bulk annuity market as a direct result of favourable market conditions. An increase in competition has put downwards pressure on prices while deficits of pension funds have reduced due to the rising equity markets and higher bond yields. Our survey reveals that the closed defined benefits pensions market is huge; the survey highlights over 3,300 pension schemes in run-off with a staggering £200 billion aggregate liabilities.”

Philip Grant, Chairman of ARC concludes:

“As the Survey points out, the socially important life run-off sector seems to be stabilising, in the sense that it seems unlikely that there will be major new entrants. However, it also seems likely that the current participants will continue to seek opportunities for profit through acquisitions across the spectrum of life and pensions business. Pressure on rates and commissions and the ever-increasing burden of compliance have both encouraged the concentration of the live market and fostered the development of a life run-off sector. There seems, for the moment at least, to be little prospect of either of these trends being reversed.”

Other findings

Life assurers in run-off accounted for approximately 11 percent of the policyholder liabilities of the UK life market as a whole. Administration costs - a key driver for the sector - reduced by 14 per cent year on year to £730 million. This was due to greater focus on cost efficiencies and economies of scale using a number of routes, including outsourcing.

You can access the survey by clicking here