A recent report from S&P Global Ratings, U.K. Bulk Annuity Insurers’ Private Credit Exposure Set To Remain Manageable, suggests that British life insurance company balance sheets “demonstrate significant resilience” when stress-tested against historical market shocks.
In an analytical exercise, the firm created a hypothetical portfolio based on the ‘average’ UK bulk purchase annuity (BPA) insurer’s matching adjustment (MA) portfolio and stress-tested this portfolio against three scenarios: the 2001–2002 credit shock, which was applied to residential and infrastructure assets; a 20% property valuation drop affecting equity release mortgages (ERMs); and the 2007–2009 Global Financial Crisis shock applied to the remaining private credit holdings.
The results were solid. A 200% coverage ratio is S&P’s baseline starting point for a strong, well-capitalised insurer under their risk model, and a 4% default rate of the private credit portfolio — which is one year’s experience of the Global Financial Crisis — sees the coverage ratio fall to around 180%, and even an 11% default rate (the full 3-year Global Financial Crisis experience over 2007-2009) still results in the coverage ratio sitting above 150%.
“The results of the stress test demonstrate significant resilience. UK life insurers with a coverage ratio of 200% as per our model could easily withstand an extreme scenario that assumes a default rate of about 11% in the illiquid portion of the portfolio,” said Laura Jimenez, Credit Analyst at S&P Global Ratings.
The data and exercise add to the current conversation pertaining to private credit risk in life insurance. What began in the US – with critics suggesting that BPA insurers are/were backing pension promises with ‘risky’ private credit assets – has now made its way to the UK, particularly as North American firms with private credit origination capabilities have recently bought into the UK PRT market.
But even before this recent effort from S&P Global, the UK BPA market already had a ‘proof of concept’ in the Prudential Regulation Authority’s Life Insurance Stress Test, the results of which showed that none of the 11 firms tested stood too close to the risk precipice.
Still, despite there now being two pieces of evidence suggesting that the balance sheets of the collective UK life carrier cohort are solid, what also matters – for both insurers and millions of UK pensioners who now depend on their solvency – is the view of the defined benefit pension trustees who are tasked with selecting an insurer to take on their scheme member liabilities.
And the investment strategy, while important, comprises only one leg of the decision stool.
“In practice, trustees will usually consider an insurer’s investment strategy as one part of a broader assessment of covenant strength and insurer suitability, rather than as a standalone deciding factor,” said Payam Kazemian, Head of Risk Transfer at ZEDRA Governance.
“It sits alongside price, financial strength, ESG approach, operational capability, member administration, transition planning and overall execution risk. For most trustee boards, the key question is not simply whether an insurer invests in private credit, but whether the insurer’s overall asset strategy is well governed, resilient and appropriate for the liabilities being insured.”
While trustees view private credit through a wider governance lens, the asset class remains important as the yield on these assets can affect pricing for BPA buy-ins or buy-outs. Whilst insurers could rely primarily on lower-risk, highly liquid alternatives like UK gilts or corporate bonds of public companies, in an increasingly competitive market, pricing often determines which carrier wins a transaction, so defaulting exclusively to liquid, lower-yielding assets could see fewer wins.
Still, balancing the yield pickup that private assets can deliver against credit risk is far from a one-size-fits-all exercise, nor is every insurer’s balance sheet constructed the same way.
“The reality is that each insurer will have its own asset-liability modelling framework, investment appetite and internal model, so it is difficult to generalise across the whole market or say that there is a single ‘right’ level of private credit exposure. Insurers are investing against long-dated, predictable annuity liabilities, so some allocation to private credit can make sense where the assets provide appropriate cash-flow matching and an illiquidity premium. However, each insurer’s approach will depend on its own balance sheet, liability profile, matching adjustment portfolio and risk governance,” said Kazemian.
“That said, insurers cannot realistically go too far on private credit investment. Regulatory capital requirements, PRA oversight, matching adjustment eligibility rules, internal risk limits, rating agency scrutiny and commercial considerations all constrain how far insurers can move into less liquid or more complex assets. If an insurer became materially over-concentrated or under-diversified, that would likely attract regulatory and adviser scrutiny and could also damage its competitiveness in the bulk annuity market. So, while private credit can create headline risk, the practical limits imposed by regulation, capital requirements and potential business risk should prevent unmanaged over-exposure,” he added.
These guardrails reinforce the argument made by those that don’t necessarily agree with the headlines. They say that the supervisory framework enforced by the Prudential Regulation Authority, coupled with the Solvency UK Matching Adjustment criteria and dynamic stress-testing requirements create a disciplined risk management function.
Because annuity liabilities are illiquid by nature, stretching across decades with low risk of policy surrenders or sudden capital runs, industry experts say that life insurers therefore provide a logical home for private credit, supporting life insurers and pension liabilities, and not hindering them.
“UK insurers, particularly life insurers, and private credit are a natural fit because their liability profiles often contain a significant amount of non-surrenderable, long-dated liabilities. As a result, they benefit more than most investors from the illiquidity premium associated with investing in private credit,” said Jimenez.
