Click here for a Quote
Our Closed Life Fund Strategy - Market Oppertunity - The UK life and pensions sector is undergoing considerable change, driven primarily by regulatory pressure but also by changing customer demands and the delayed affects of the 3 year bear market. With profit products in particular are becoming a much smaller proportion of new business sales and this is expected to continue. There are currently approximately £150 billion of assets sitting in closed life funds, more than half of which are with profit. This amount is expected to double over the next couple of years as other funds close, meaning that approximately 35% of total life fund assets will be within closed funds.
Closed funds have been around for some time but nothing on this scale. We are seeing the development of a new sub-sector which is quite distinct from open funds. These funds will exist for the next 20 to 30 years and must be run-off as efficiently and professionally as possible. With significant scale benefits in this sub-sector there is considerable pressure for consolidation. Britannic is well positioned to benefit from that consolidation.
Our Vision - We aim to become the best owner and administrator of closed life funds from a policyholder and shareholder perspective. This will involve maintaining the right balance between policyholders and shareholders and ensuring policyholders are always treated fairly. We will offer a solution to owners completely rather than just outsourcing administration or asset management. Our model will be to acquire closed books and to administer them in-house on our own systems. Through this we will seek to build asset value and enhance dividend prospects. With increasing scale it will deliver a highly efficient administration platform which may become a business in its own right. We believe we have the requisite skills to be competitive in this market place because:
- Our cost per policy for administration compares favourably with rates in a highly competitive outsourcing market.
- We have a very flexible administration system, which comprises an integration framework, called the hub, which links together our two main platforms giving a single view of all our customers. Business processes are fully automated through the use of workflow and imaging applications, resulting in a highly automated single front end system. This provides us with the ability to link any number of other platforms into this hub and to have the same front end processing system, thereby attaining immediate stability and savings. Over time we can then consider migration from any one of the active platforms.
- Operationally we have the experience, having closed Britannic Assurance and Britannic Retirement Solutions to new business and migrated Britannic Retirement Solutions and the vast majority of Alba Life’s operations to Wythall.
- We have the actuarial skills in-house, the understanding of with profits and experience with complex restructuring. This provides us with the skills and experience necessary to value properly any books of business and the attendant risks.
- Having in-house asset management capability allows us to manage funds acquired and earn an additional revenue stream.
When we appraise opportunities we will analyse three distinct activities and their associated margins: administration, asset management and capital invested in in-force. Appraisal criteria - Our appraisal of opportunities will be rigorous and disciplined.
- We will take a risk based approach and ensure all risks are properly priced or mitigated. We will not dilute the amount or quality of our net asset value and will have strict return criteria. Any acquisition will have to deliver at least 12% post-tax return on risk based capital. This risk based approach will ensure the risk profile of any opportunity feeds into the return assessment.
- Any acquisition will have to enhance dividend paying capacity and any deferral of short term dividend growth will have to be more than compensated for by better medium term growth.
- The ability to purchase our own shares will always be a minimum benchmark. Purchasing our own shares today would produce a return of approximately 8% post-tax on risk based capital. Consequently we will target 12% as a very adequate additional margin to cover risk of execution and integration.
- We will always be transparent and provide enough information to judge our performance against our criteria.
We plan to approach this strategy in a controlled low risk way and have already looked at a couple of opportunities to enhance our knowledge and process. The first acquisition will be an important demonstration of our skills.
Looking further ahead, we will be conscious of building a balanced book to ensure we have the right mix of policy types, cash flow and risks. To help in this we will consider partners for risk transfer or alternative sources of risk based capital.
It is possible that vendor price expectations do not coincide with our strict financial criteria and as such we may not acquire anything this year. If this is the case then the circumstances will be reviewed and if it is considered that there is not a reasonable prospect of things changing, any excess capital will be returned to shareholders at the appropriate time. In the meantime, our continued focus on costs and capital should continue to enhance dividend prospects.
This article was taken from Britannic Website 1/6/2004
To contact Britannic - Telephone - 01564 828888
