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ABN fears bulk annuity burden at Pru and L&G

Investment analysts ABN Amro have expressed serious concerns over

Prudential&#39s and Legal & General&#39s bulk annuity business,

claiming that the liabilities taken on may be too great.

Bulk annuities are created when defined-benefit schemes close and

trustees sell off future liabilities to insurance companies.

ABN has recommended reducing shareholdings in Prudential after

looking at its bulk annuity business.

A report from the firm, which covered all aspects of Pru&#39s business,

says: “There are substantial risks attached to writing large volumes

of bulk annuity business” and says Pru may have had “an optimistic

view about future assumptions” on its liabilities.

The company applies the same concerns to L&G, which also has

considerable bulk annuity exposure. It wrote £741m of bulk

annuities in 2001 compared with £575m by Pru.

Despite estimates that the market will grow, other insurers are

shying away from the sector over concerns on longevity and poor

invest-ment yields.

Standard Life is not keen to increase its exposure, claiming the

market is not attractive and that it is not prepared to write

business on the terms that Pru and L&G offer.

Axa is considering entering the market but is hesitant about taking

on such large-scale risks, with life expectancy continuing to rise.

The report says: “We do not share Prudential&#39s confidence in the bulk

annannuity purchase sector.Handle Legal & General with care – our

concerns regarding Pru also apply in part to L&G.

Prudential Annuities head of marketing Trevor Mitchell says: “We run

our annuities business very prudently. We have the mortality,

investment and systems&#39 expertiseto operate profitably.”

Legal & General director (corporate annuities) Dennis Canham

says: “We can never be absolutely sure but if we thought that we were

getting it wrong we would be out of it like a shot.”

Axa head of pensions marketing Steve Folkard says: “We are looking to

see if there is a profitable way forward. You need to look very

carefully at the way that liabilities are secured and future

mortality assumptions.”

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