Insurer of the year: Rothesay Life

Risk Awards 2019: Bulk annuity deal unlocks £1 billion of capital in Prudential’s strategic split

Sammy Cooper-Smith, Rothesay Life

The news on March 14 this year that UK insurer Prudential was suspending its shares ahead of an important announcement came as a surprise to the market in general, but particularly to Sammy Cooper-Smith. The team at Rothesay Life had spent the previous four weeks working feverishly on completing a £12 billion transfer of annuities from the Prudential, and while this was a record deal in terms of the sector, Cooper-Smith didn’t think it was important enough to merit a share suspension.

“We signed the deal with Prudential in the early hours of the morning of the 14^th. Given the impact it would have on their capital position, we expected the transaction to feature in Prudential’s annual results announcement.”

Instead, when the team went back to the office to wait for Prudential’s results to appear, they were shocked by a 6.45am news report on Bloomberg, announcing the insurer’s stock in Asia (the firm has a secondary listing in Hong Kong) had been suspended.

“Little did we know, but the annuity transaction was part of a bigger strategic restructuring by Prudential,” says Cooper-Smith.

How large a strategic restructuring was revealed 15 minutes later, when the insurer announced to the market that it was splitting the company into two parts: M&G Prudential, which will contain the mature UK and European part of the business; and Prudential itself, which would hold the faster-growing Asia, Africa and US arms.

And while the deal with Rothesay may have not been enough to merit a share suspension on its own, a statement released on March 14 by Prudential underlined the importance of the annuity transfer to the strategy of the newly created UK and European business.

“M&G Prudential will be an independent, capital-efficient UK & Europe savings and investment provider…In line with this strategy to transition towards a more capital efficient, de-risked business model, M&G Prudential also announces the sale of £12.0 billion of its shareholder annuity portfolio to Rothesay Life…The capital benefit of this transaction will be retained within the Group to support the demerger process,” said Prudential in the statement.

According to Cooper-Smith these capital savings are huge. Despite Prudential making a loss of future profits of around £500 million by offloading the annuities to Rothesay, doing so also releases £1.1 billion worth of capital. Some of this cash can now be used to reconfigure the M&G Prudential business.

The deal occurred during a record year for the sector. In August, consultants Aon released a report that said total buyouts in the UK for 2018 would hit £30 billion. Cooper-Smith says this figure includes the Prudential deal, and he expects pension deals alone to be in the low £20 billions by the end of the year, with the total figure, including insurance risk-transfers, to be well above Aon’s estimate.

Not only is the Prudential-Rothesay deal the largest ever annuity risk transfer to take place in the UK, it is also significant that it was executed with one counterparty. As pricing in the bulk purchase annuity sector tends to be keenest around the £1.5 billion to £2 billion mark – doing the deal in one tranche would almost certainly have been more expensive.

According to Cooper-Smith, the key to Rothesay’s success in winning the deal despite this issue was its track record in successfully managing insurance risk transfers. In 2015, it completed a £1.1 billion deal with Zurich, which it followed up in 2016 with a £6.4 billion annuity transfer from Dutch insurer Aegon, meaning the UK outfit simply has more experience than its peers in handling big deals. 

A chief executive from a reinsurer active in the longevity risk transfer sector, singled out Rothesay in 2018 as being “ahead of all the rest, even in such an active market”.

“Our reputation for executing deals in the manner in which we say, is as good as anyone’s in the market,” says Cooper-Smith. “We also have the governance in place to make decisions more quickly and the feedback that we have received is that in terms of bigger, trickier, transactions, we can deliver on our promises.”