UK life insurers writing bulk purchase annuities (BPAs) continue to benefit from a strong demand that will likely result in 2019 surpassing 2018’s £24 billion in bulk annuity transactions, according to Fitch Ratings’ report on UK life insurance.
Indeed, Willis Towers Watson recently expected 2019 to show further strong growth in this area, anticipating deals to top £30 billion over the course of the year.
Fitch adds that strong demand for de-risking solutions and high barriers to entry, including onerous Solvency II (S2) regulatory capital requirements, are credit positive for incumbents.
Bulk annuity market sales growth could reduce, however, if competition from alternative offerings such as pension superfunds intensifies.
Meanwhile, savings lines enjoined steady inflows in 2018; underpinned by structurally strong demand from workplace pension propositions and pension freedom.
Competition for the inflows remains strong, however, with platforms generating nearly half of new retail gross inflows.
Fitch adds that strong surplus generation supported UK life insurers’ S2 capital positions despite a weaker investment market.
The one-off impact of assumption reviews and high earnings from in-force business, driven in part by a higher allocation to illiquid assets, contributed to capital generation, resulting in higher dividends from publicly traded UK life insurers.
Elsewhere, insurers reported large contributions to annuity profit in 2018 from reserve releases linked to expectations that life expectancy will increase less than previously assumed. Fitch expects a similar effect this year following a further review of mortality data.
Analysts regard these as one-off adjustments to align reserves with the latest information on mortality trends. The reserve releases do not lessen their view of the degree of prudence in insurers’ balance sheets.
Lastly, Fitch analysts believe the impact of a no-deal Brexit on UK life insurers’ key credit metrics is likely to be limited.
However, some life insurer ratings could come under pressure if an adverse Brexit scenario leads to widespread downgrades of the corporate debt that insurance companies hold to back their liabilities, as this would weaken their capital adequacy.