UK life insurers writing annuities allocate almost a quarter of investment portfolios to illiquids

Written by Adam Cadle

25/10/2021

UK life insurers that write annuities have allocated close to a quarter of their investment portfolios to illiquid assets, using them to fund financial obligations to annuity customers, Moody’s Investors Service has highlighted.

Illiquid assets account for over 20% of Moody’s rated annuity writers’ portfolios. Property-related assets make up the majority of the sector’s illiquid investments, including real estate and commercial and residential mortgage loans. These each account for around 5% of the sector’s total invested assets. Insurers are also diversifying into private corprate debt, equity release mortgage, and infrastructure loans.

Moody’s said it expects their illiquid holdings to grow further, fuelled by strong demand in the UK for bulk annuities, and by government initiatives to increase investment in infrastructure.

It also added that the credit implications for these investments are skewed to the positive.

“Illiquid assets can be difficult to value and sell, and their more complex nature makes assessing their credit risk more difficult, it said. “However, they counterbalance UK annuity writers’ illiquid liabilities, reduce their investment risk, and carry a profit-enhancing illiquidity premium. Insurers' strong overall liquidity, the diversity of their illiquid portfolios, and their good understanding of the asset class offset the increased credit risk that such investments entail.”

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