Moody’s outlook for the UK life insurance sector remains strong, with a strong bulk annuity market and robust pension inflows supporting profitability, the credit rating agency has stated.
This, according to analysts, will largely offset a decline in assets under management and a slowdown in retail life sales as inflation erodes disposable income.
“Robust bulk annuity and pension flows will support life earnings. Life insurers will benefit from record demand for bulk purchase annuities (BPAs), which allow corporates to transfer their pension liabilities,” said Moody’s.
Adding: “Low unemployment, rising wages and the automatic enrolment of UK workers into retirement plans will also support pension inflows. However, insurers’ asset management margins will contract amid competitive pressure on fees, subdued inflows and a diminished asset base on the back of interest rate rises.”
Analysts also noted that capital and liquidity are sound, but investment risks are rising. Rising rates and regulatory reforms will support insurers’ solvency, especially in the life sector.
According to Moody’s report on the UK life insurance sector, the stable outlook reflects strong demand for BPAs, which allow companies to transfer their defined benefit (DB) pension liabilities to insurers in return for a premium.
Additionally, life insurers are also benefiting from good growth in workplace pensions, helped by low unemployment. These factors, Moody’s noted, should offset subdued earnings from individual savings and asset management operations.
BPA demand is robust because market volatility and increased scrutiny from the pension regulator are encouraging companies to offload their DB risks, analysts explain. At the same time, rapidly rising interest rates have improved many pension schemes’ funding to the point where a BPA is viable.
Moody’s noted that pension consultants Lane Clark & Peacock expect transfers of pension liabilities via BPAs to exceed £200bn over the next three years, up from their previous £150 billion estimate, supported by some very large deals of £10bn or more. This implies an annual total in excess of the 2019 record of £44 bn.
Another factor that reflects the demand on BPAs, as well as the considerable underwriting and investment risks involved, is the fact that these products typically carry higher margins than other UK life products.
Moody’s predicts that UK life insurers’ earnings will also benefit from good growth in individual annuity sales, which provide the policyholder with a guaranteed income for life in return for a lump sum.
Data from the Association of British Insurers (ABI) indicate a 22% increase in individual annuity sales to £1.2bn during the first three months of 2023. This is the highest total since reforms giving individuals greater flexibility over how they access their retirement savings were introduced in 2015.
Finally, Moody’s expects workplace pension contributions to remain resilient. Analysts explained: “Market volatility and rising interest rates significantly diminished the value of pension assets under management during 2022, reducing insurers’ fee income and squeezing profit margins.
“However, despite the strain of inflation on disposable income, pension contributions have remained relatively stable.”
Moody’s concluded: “We expect pension contributions to remain healthy thanks to the UK’s still low unemployment rate and rising wages together with scheduled increases in the tax free amount individuals can save into their pensions each year.”
