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UK life insurers could withstand a severe economic downturn, according to Bank of England stress tests, even as an influx of private capital money into the sector raises concerns over its resilience to shocks and ability to meet policy commitments.
The Bank of England found that the 11 insurers tested came through a crisis scenario with sufficient capital to meet regulatory requirements, based on analysis of their balance sheets at the end of December 31 last year.
There has been a flurry of dealmaking by private capital groups in the UK life insurance sector in recent months. In July, Apollo-backed insurer Athora announced a £5.7bn takeover of Pension Insurance Corporation. Weeks later, Canadian investment group Brookfield said it had struck a £2.4bn deal for Just Group.
The deals have added to concerns that life insurers supporting British retirees could become more vulnerable to a crisis, because of the more aggressive investment and reinsurance strategies of North American private capital groups.
Analysts cautioned that the results did not show a complete picture, in part because they focused on life insurers rather than analysing the group entity that each one sits within.
“The test is done at the siloed insurance entity level, and [companies] wouldn’t hold all their capital in that entity,” said Abid Hussain, an analyst at Panmure Liberum.
The Prudential Regulation Authority said that all companies survived the exercise with more than 100 per cent of their required regulatory capital, “underscoring the sector’s robust starting position and ability to absorb significant shocks”.
The PRA’s analysis showed that Just Group’s Partnership Life Assurance Company, M&G’s Prudential Assurance and Phoenix Group’s Phoenix Life had the lowest capital positions after the bank’s “core” stress tests.
Rothesay, PIC and Aviva subsidiary Aviva International Insurance showed the strongest performance.
Lizzie Hawkins, a due diligence specialist at Aon, said that the broker would “warn against drawing quick conclusions” from the results because of variations in the larger businesses backing the life insurers.
In a stock exchange filing on Monday, Phoenix said, “whilst not required, the Group would also have further management actions available” in a severe stress scenario.
The PRA also carried out its first-ever test of whether UK life insurers could cope if offshore reinsurers — to which they have been transferring a growing share of British pension portfolios — were to fail.
In these “funded reinsurance” deals, both insurance liabilities and the assets backing them are ceded to a reinsurer, often in a foreign jurisdiction such as Bermuda.
The regulator found that UK insurers’ capital levels would remain resilient even if they had to “recapture” £12.3bn of pension assets — about half of the amount transferred to offshore reinsurers.