Moody’s has decided to change its outlook on the UK life insurance sector to stable from negative, one year after the coronavirus pandemic resulted in a shift to negative
The rating agency notes that the sector’s operating profit and capitalisation were resilient in 2020, and are expected to remain robust over the next 12-18 months, supported by a recovering UK economy and a buoyant bulk annuity market.
Analysts believe this offsets the elevated risk of investment losses from corporate defaults, as well as increased pressure on investment income from low-for-longer interest rates.
However, life insurers also face margin headwinds as a result of higher competition due to regulatory changes, and could see a slowdown in sales if the unemployment rate continues to rise.
“In 2020, multiple lockdowns and a contracting economy reduced life insurance sales, although the decline was more moderate than anticipated,” said Helena Kingsley-Tomkins, a Vice President and Senior Analyst at Moody’s. “We expect demand for life insurance products to improve in 2021 as an easing of pandemic-related restrictions fuels an economic recovery.”
The deterioration in the UK life sector’s solvency during 2020 was milder than anticipated, with capital remaining at comfortable levels at year-end.
UK life insurers’ ability to generate capital internally, together with dividend suspensions and debt issuance, were considered to largely offset the negative impact of falling interest rates and widening credit spreads.
What’s more, Moody’s views that UK bulk purchase annuity (BPA) market, where corporates transfer pension liabilities to insurers in return for a premium, as offering one of the best long-term opportunities across the European insurance sector.
UK insurers wrote £32 billion of BPA deals in 2020 despite the pandemic, limiting the decline in their operating profit due to lower sales and investment income.
“Sustained BPA activity will support life insurers’ profitability over the outlook period, counterbalancing low-for-longer interest rates and rising technology costs,” Moody’s stated. “While BPA margins remain attractive, Brexit-related regulatory changes could put them under competitive pressure.”