UK BPA demand ‘remains one of the best long-term opportunities for European insurers’

Written by Adam Cadle

03/02/2022

Growing demand for UK bulk purchase annuities (BPAs) remains one of the best long-term opportunities across the European insurance sector, Moody’s has said.

“Persistently strong BPA demand as more UK corporates de-risk their defined benefit (DB) pension schemes will ensure attractive profit margins on BPA transactions,” it said. “This will support the profitability of all participating life insurers.”

BPA activity slowed in 2021, but market fundamentals remain strong. Moody’s added: “Better DB pension scheme funding has made BPA deals cheaper, and UK corporates remain keen to off-load their pension risk. Market participants expect strong annual liability transfers of about £40bn until the end of the decade. Emerging alternative pensions risk transfer solutions, such as superfunds, or a reduction in available reinsurance capacity, could slow BPA growth in the future.”

Despite UK BPA writers having allocated close to a quarter of their investment portfolios to higher yielding illiquid assets which carry illiquidity and relative opacity risks, Moody’s said it sees BPA writers’ growing illiquid investments as credit positive overall, as they are a good match for their illiquid annuity liabilities, and also reduce investment risk, as they are generally long-dated, and deliver relatively high returns.

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