Analysts at Moody’s Investors Service anticipate robust growth in the UK bulk purchase annuities (BPAs) market, projecting strong profits and capital gains for life insurers throughout 2024.
Despite the influx of new capital, Moody’s predicts that the balance between supply and demand will remain favourable for current participants, resulting in a projected record high in transfer volumes this year.
However, BPA growth might slow if interest rates were to unexpectedly drop sharply, while market volatility and a shortage of available assets to support annuity portfolios could reduce profits and increase risks.
The increase in interest rates during 2022-23 bolstered pension scheme funding levels, driving up demand for BPAs. Although sharper-than-anticipated interest rate cuts could partially reverse these gains, the underlying demand is expected to remain stable over the next decade.
Moreover, high demand for BPAs is attracting additional capacity, with existing players becoming more active and nonparticipating life insurers like M&G and Royal London entering or reentering the market. Additionally, an influx of capital from overseas reinsurers through funded reinsurance transactions has been observed.
Despite intensifying competition, profit margins are anticipated to stay robust throughout 2024, underscoring BPAs’ significance as a key contributor to active insurers’ earnings in the coming years.
Moody’s analysts express concerns about intensifying competition for high-quality illiquid assets, like commercial real estate loans and private credit, which could diminish their yield and compromise portfolio quality. Consequently, some insurers might consider lower quality alternatives or increase reliance on reinsurance.
While BPA insurers currently maintain robust levels of regulatory capital, their solvency is sensitive to fluctuations in credit spreads. A sudden sharp drop in rates could significantly impact their solvency, despite their strong standing.
