Prudential has begun a review of its £45 billion pension liabilities business in a move that could lead to the sale of the division and a potential restructuring of the entire company.
The review is being led by Clare Bousfield, who was hired last month from Aegon where she orchestrated a £9 billion divestment of its retirement annuities business over the spring.
The transaction was the largest of its kind but would be dwarfed by the break-up and sale of Prudential’s annuities business, which is responsible for hundreds of thousands of customers’ pensions.
This in turn could lead to the button being pressed on a break-up into separate British, American and Asian operations — an idea that the Pru has considered for years.
“The question is whether they will sell the annuities business or the whole UK insurance operation,” one source said. That could leave Prudential with only its M&G asset management business in Britain and its focus on its fast-growing Asian division.
While observers believe that prospects for radical action by Prudential have increased, the company is at a very early stage of considering how to deal with its annuities business.
At an investor day last month the insurer said that it was examining ways to improve asset allocation to match its annuity commitment and the management of longevity risk — people living longer and so needing their pension pots to stretch further.
The insurer has already reduced its exposure to annuities. It withdrew from offering them on the open market in June and has stopped writing new bulk business corporate pension schemes, saying that Solvency II rules make the capital requirements too heavy.
Some insurers are moving away from annuities because of the challenges of low interest rates, pension reforms and regulatory pressure to improve transparency, but others have chosen to expand on the ground that the business remains attractive.
If Ms Bousfield, who has been hired into a new role of chief executive of insurance, decides to pursue a divestment plan there would be plenty of interested buyers.
Addy Loudiadis, chief executive of the specialist buyout firm Rothesay Life, told analysts recently that her business could take on a large portfolio of assets from Prudential or another insurer to increase its size to a point where it could float.
Rothesay needs to increase its assets from £24 billion to about £45 billion to become a viable public company that was able to pay dividends to shareholders and generate a return to invest in the business.
Pension Insurance Corporation, one of Rothesay’s rivals, is also expected to float once it is big enough. For both companies a key question would be whether their owners would be prepared to invest significantly in a deal with Prudential to achieve a quick IPO, or whether they would prefer steadier growth.
Prudential could find other buyers for its annuities, including potentially Admin Re, part of Swiss Re, and private equity firms.
The company, whose roots date back to helping working families protect their finances in Victorian Britain, could seek to divest its entire £45 billion of annuity assets, or only the £30 billion that sits directly on its balance sheet. It has a further £15 billion in its with-profits fund that it would have to buy out in order to be given access.
Other insurers have bought their annuities business from their with-profits funds, including Legal & General and Friends Life, but the process would require extra work which Prudential may want to avoid.
A Prudential spokesman said: “We don’t comment on market speculation.”
Source: The Times