Aegon has sold the final third of its UK annuity portfolio to Legal & General (L&G) as part of its strategy to free up capital from non-core business.
The purchase consists of £3bn of Aegon's annuity book including around 27,000 policyholders, after it sold £6bn of the portfolio to Rothesay Life in April.
Under the terms of the agreement Aegon will initially reinsure £3bn of liabilities to L&G followed by a Part VII transfer. After this transfer has been completed the policyholders will become L&G customers. L&G has chosen not to reinsure the longevity risk in relation to this transaction.
The Solvency II ratio of Aegon's UK operations is expected to increase by an estimated 15% following the reinsurance transaction with L&G, and another 5% following the Part VII transfer. In contrast, the transaction has decreased L&G's Solvency II surplus by £50m and coverage ratio by 3%.
Aegon also expects its annual capital generation from its UK operations to fall by approximately £30m while underlying earnings before tax are expected to be reduced by some £16m per annum.
Aegon now has around £1bn annuity liabilities remaining through an inward reinsurance transaction.
The life insurance company has not been an active player in the UK annuity market since 2010. The divestment of the annuity portfolio significantly reduces Aegon's exposure to both longevity and credit risk. It will now focus on further accelerating the growth of its platform and protection business.
L&G retirement managing director Kerrigan Procter said: "We are delighted Aegon has chosen us to secure its policyholders' annuities. Back book annuity risk transfer deals can be executed efficiently under our post-Solvency II model. In the UK there is an estimated £100bn of individual annuities in back books and we expect further consolidation of these back books."
L&G recently completed a landmark £230m medically underwritten buy-in with Kingfisher Pension Scheme and £300m buy-in with ICI.
Aon Hewitt partner Paul Belok said: "Insurers such as L&G and Rothesay Life who are picking up these back book deals are the same ones that are also bidding for pension scheme buy-ins and buy-outs. The question therefore is whether these back book deals will affect the insurers' level of appetite for bulk annuities.
"It is possible there will be a slight hiatus whilst they digest large scale back books before re-focussing on bulk annuities, but we would not expect this to be for an extended period.
"In the meantime, at this stage there are sufficient other participants to ensure the bulk annuity market remains competitive, and our experience is that pension schemes with appetite to transact are able to obtain attractive terms," he added.
Hymans Robertson partner James Mullins said: "Post Solvency II, we're seeing a divide in the insurance market between those who no longer see annuities as a key business line, and those keen to build their business in this area. This is leading to a series of back book transactions as insurers refocus on other types of business free up capital in order to do so."
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