The planned acquisition of life insurer Just Group by Canadian investment company Brookfield, announced in the summer, underlines growing interest in the UK’s pension-risk transfer market by North American investors.
The £2.4bn takeover followed on the heels of Apollo-backed Athora’s announcement that it would acquire Pension Insurance Corporation (PIC) for £5.7bn earlier in July and, while not an acquisition, Legal & General has agreed a multi-billion-pound partnership with private capital giant Blackstone to support its annuity business.
With an addressable market of about 5,000 defined benefit schemes and £500bn of liabilities estimated to be secured in the next decade, the prospects of more North American involvement are high given the maturity of the companies’ domestic markets, their expertise and capital clout.
“I don’t think this is going to stop in any way soon,” said Arik Rashkes, Partner and Head of Financial Institutions at US investment advisory firm Solomon Partners.
While it’s difficult to accurately estimate the value of deals struck by trustees and North American companies or their subsidiaries, Rashkes and other observers characterise their involvement as considerable and growing.
The UK PRT market is seen as hot among overseas investors, thanks in large part to defined benefit (DB) schemes’ improved funding positions, which has made buy-ins/buy-outs more affordable. Annual transaction values have been nudging towards $50bn for the past couple of years and while legislative proposals surrounding access to surpluses may have slowed that growth this year, experts still expect business to remain strong.
North American investors have been particularly active because of their large global investment platforms, from which they can source and originate assets, and because they have a deep well of expertise drawn from a longer track record of pensions de-risking activity, said Marc Storan, Head of Insurance Investment Strategy, Insurance and Financial Services at Hymans Robertson.
“These USPs, combined with the expected steady state of a £40bn-£50bn per annum UK PRT market over the next decade, provide these investors with a level of vertical integration of their business models and give them a business predicated on making long-term investments,” he said.
“Leveraging these synergies helps to improve the internal rate of return on their equity and capital commitments over and above the base investment case. Regardless, the base case gives these investors an exposure to the insurance sector that typically provides uncorrelated returns to other, strategic, investments they hold.”
The UK market holds other attractions. As a unified market with a single regulator, the country’s pension industry is absent of the complexities of North America, especially the US. There, each state’s slightly different rules of governance can make the insurance industry tricky to navigate, especially for larger capital providers who seek economies of scale. Rashkes believes that the UK regulator has become more receptive to foreign investment in recent times.
“They have become more and more open to big names. There is a lot of credibility behind Blackstone, KKR, Legal & General, MetLife, Prudential, Carlyle…” he said.
Rashkes expects North American investors to focus on the larger deals. So far, the biggest transactions struck in the UK – those at or above £2bn – have all involved Legal & General, PIC and Rothesay.
“These major organisations and asset managers are trying to get as big as they can in terms of the deal sizes,” he said.
“It takes the same amount of time to structure a small deal as it does to structure a big deal.”
North American investors seem unconcerned by recent regulatory and legislative announcements that could have an impact on UK PRT transactions.
Chancellor of the Exchequer Rachel Reeves has proposed granting scheme sponsors greater access to fund surpluses so that they can invest in their companies and the wider economy. This has raised concern that schemes may increasingly prefer to run on than de-risk.
As well, the regulator has taken a cautious view of funded reinsurance, a small but significant component of PRT transactions, fearing that such strategies increase risks to the market.
These aren’t seen as sizeable threats to further investment from overseas and obviously were no deterrent to the recently announced mergers and acquisitions.
“The rationale for these firms buying into the UK PRT market corresponds to one of the use cases for funded reinsurance in the first place – asset origination capacity and capability,” said Storan.
“Overall, we might expect a reduction in the total amount of reinsurance that takes place over the next decade than would otherwise be the case without the proposed M&A and strategic partnership activities recently announced. But we do also expect funded reinsurance to continue to play a key role for the capital and risk management of UK BPA providers’ portfolios.”
It has also been suggested that another recent government initiative, the proposed loosening of the matching adjustment capital regime to give life insurers greater investment flexibility, may even boost business. Storan isn’t convinced, however.
“Yes, the reforms will help the UK firms invest with a little more flexibility, with infrastructure being one of those areas, but they have not materially shifted the goalposts,” he said.
For the immediate future, few see a slowdown in the de-risking market, and that is likely to equate to continued interest from foreign investors.
“As private equity and alternative asset managers have become more credible, more mainstream, less threatening… the feeling is that this trend should continue,” said Rashkes.
“You’re transferring risk, but you also are transferring the asset management capabilities and the long-term planning of asset allocation to the hands of probably the best of the best.”