Prudential has sold £12bn in annuity assets to reinsurance business Rothesay Life as part of its M&G demerger announced today.
The sale, which covers about 400,000 policies, comes as the provider announced it would be splitting operations from its asset management arm M&G.
It said the £12bn annuity sale was part of its transition towards a more "capital efficient, de-risked business model". It said the transfer of the portfolio should be complete by the end of 2019.
The capital benefit from the transition, it said, would be retained within the group to support the demerger process.
Prudential said on an accounting basis its liabilities relating to its total annuity portfolio were £32.6bn at the end of 2017. The UK annuity business being sold contributed about £140m towards life insurance operating profit which totalled £597m before tax in 2017.
It added the transaction is likely to result in a pre-tax loss of about £500m in the first half of 2018 alongside the de-risking being achieved.
Rothesay Life said the deal was a "landmark" for both itself and the industry.
The transaction makes Rothesay Life the UK's largest specialist annuity insurer with more than £37bn of assets under management and some 750,000 lives insured.
In response to the announcement, Aon partner John Baines said: "This market development is the culmination of a long process and during that period it's pleasing that appetite for pension scheme transactions remained undiminished and pricing remained very attractive, even in the context of a mega deal in the market.
"There will also have been other insurers in the market with an eye on this. In fact, we expect their appetite has only increased as a result of this deal. So while it is a clearly very significant deal we don't believe there will be any fundamental change to the way the bulk annuity market acts during 2018 - we think it remains on target for at least £30bn, as we predicted in late 2017."
Also commenting on the announcement, Hymans Robertson partner and head of risk transfer solutions James Mullins said: "These highly material annuity back book transactions are significant for the bulk annuity market and for pension schemes looking to complete buy-ins and buyouts because they effectively use up insurance company capacity.
When an insurer takes on an existing annuity portfolio from another insurer, it is common for a certain amount of transitioning of the underlying assets, which will frequently target the very same illiquid assets that could otherwise be used to provide attractive bulk annuity pricing to a pension scheme."
This means that in 2018, pension schemes will need to plan carefully how they approach the insurance companies for buy-in and buyout quotations, "more than ever" said Mullins.
Last year, DB pension schemes in the UK totalled £12.4bn of buy-ins and buy-outs with seven insurance companies. But with £12bn of Prudential's existing annuity portfolio to transfer to Rothesay Life, combined with the recent news that Phoenix is taking on Standard Life's annuity portfolio, the total value of annuity liabilities taken on by the eight insurers currently active in the market is expected to hit £40bn in 2018.
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