On average, about 9% of UK bulk purchase annuity insurers’ annuity backing portfolios are invested in assets outside of traded credit, equity release mortgages (ERMs), and secured residential lending, according to U.K. Bulk Annuity Insurers’ Private Credit Exposure Set To Remain Manageable, a new report from S&P Global Ratings.
The report says that while UK bulk purchase annuity insurers are more exposed to illiquid credit than their European multiline or reinsurance peers, due to their asset-liability management, they are a natural fit for private credit.
“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 S&P Global Ratings Credit Analyst Laura Jimenez.
To assess how market stress would affect UK BPA insurers’ capital position under S&P Global Ratings’ methodology, the firm created a hypothetical portfolio based on the average UK BPA insurer’s MA portfolio.
Half of the hypothetical MA portfolio used in the stress test was secured against property, while the other half comprised private credit holdings. S&P Global Ratings assessed the effects of the credit shock from 2001-2002 on the property-secured portion and the effects of the financial crisis from 2007-2009 on the remaining private credit portion.
“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,” added Jimenez.
