UK premium insurers are more exposed to private debt than their European counterparts, although in a “severe” scenario of credit stress their premiums will remain “strong”, according to S&P Global Ratings.
A new report from the rating agency revealed that insurers have become the biggest investors in sovereign debt since the Global Financial Crisis, with the Bank for International Settlements estimating that the global insurance industry holds about 10 percent of sovereign debt assets.
S&P Global Ratings believes that UK insurers, particularly life insurers, are “naturally it’s worth it” to get a private loan.
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“Their significant non-refundable, long-term debt funds make it easy for health insurance companies to take an illegal payment associated with investing in private debt,” the rating agency said in a report.
However, S&P acknowledged that concerns about the private debt market and the potential implications in the event of a “collapse” have increased, with “limited” secondary market liquidity, the frequency and complexity of ratings, the difficulty of obtaining credit quality, and the “transparency” of the private debt market among key risks.
It noted that Brookfield and Athora’s recent acquisitions of UK bulk buy annuity (BPA) insurers Just Group and Pension Insurance Corporation have fueled concerns that privately-owned insurers will raise stakes in private equity – a trend already playing out in the US.
According to S&P Global Ratings, research by Legal & General suggests that, over the next ten years, the UK BPA market will account for an estimated £1tn share of the global BPA market.
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UK life insurers, particularly those who underwrite annuity and BPA portfolios, offer independent credit to the major insurers and reinsurers in continental Europe.
“This is in line with our expectations, as investment-grade private credit offers stable, often long-term cash flows similar to the long, non-repaying nature of UK annuity loans. Such loans are very rare in continental Europe,” S&P Global Ratings said.
Given UK life insurers’ “relatively high” exposure to private debt, the rating agency assessed how market pressures would affect UK insurer BPA’s capital position by constructing a hypothetical portfolio.
The portfolio was tested against the credit shock from 2001 to 2002 to residential and infrastructure-related assets, the impact of a 20 percent devaluation of the property on equity release loans and, finally, against the “highly visible credit shock”, which reflects the effect of the financial crisis from 2007 to 2009 on the exposure of outstanding private debt.
The results of this test “show considerable resilience”, according to S&P.
It also modeled two other “extreme” scenarios to further assess financial stability, including one where the internally-rated portfolio included BBB-rated assets, and a more extreme case where it included only BB-rated assets and found that, although the cost of risk increases significantly when asset ratings change to BB’ from A, the “manageable impact” can still be controlled.
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