UK life insurance fundamentals for 2022 resilient despite volatile markets: Fitch

Fitch Ratings’ new report on UK life insurers’ fundamentals for 2022 indicates the market has remained strong, despite financial market volatility and elevated inflation.

“Insurers’ new business volumes and underlying operating performance were resilient, while the rising interest rates benefitted companies’ Solvency II (S2) ratios,” commented Fedor Smolyakov, Director of Fitch.

Fitch reports that insurers’ direct exposure to the recent stress in the banking sector is limited. Insurers’ banking exposures are mostly diversified in investments such as investment-grade bank debt, derivative counterparty exposures and as a source of short- to medium-term liquidity. However, these exposures are generally highly diversified.

UK life insurers reported all-time high S2 ratios at end-2022. The contributing factors are rising interest rates and resilient capital generation from the in-force businesses. Higher ratios also prompted some insurers to taper down interest rate hedging.

“Fitch Ratings expects these insurers to maintain strong buffers above their risk appetites to absorb potentially greater interest rate volatility,” commented Rishikesh Sivakumar, Associate Director.

Fitch has also reported that most UK life insurers have seen resilient bulk annuity new business volumes in 2022. This has been supported by strong structural demand from corporates de-risking their balance sheets. The demand for pension risk transfer from corporates is expected to stay stable and grow further in 2023.

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Fitch states in this report that the UK life insurers’ underlying performance has remained strong benefitting from high bulk annuity volumes that have been partly offset by a slowdown in asset management revenue growth. Some insurers have reported lower adjusted operating profits, mainly reflecting various experience variances, assumption changes and one-offs according to the data provided by them.

The report mentioned that the fee income of insurance savings companies has been put under pressure as overall assets under administration were lowered due to negative returns. This, according to the report, was only partially offset by positive, but declining net flows in 2022. Fitch expects retail net flows to remain pressured due to a reduction in consumers’ disposable income and elevated aversion of savers. Although, workplace savings performance has been noted to be benefitting from resilient inflows that track salary inflation, fiscal incentives and the UK’s auto-enrolment regime.

“The scenario of a substantial rise in defaults and downgrades in insurers’ investment portfolios remains a key risk, in our view. However, insurers’ asset portfolios are well diversified and corporate defaults experience have remained favourable in 2022,” said Fedor Smolyakov in the conclusion of the report

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