UK bulk annuity insurers are more exposed to private credit than their European counterparts, although in a “severe” credit stress scenario their capital would remain “resilient”, according to S&P Global Ratings.

A new report from the ratings agency revealed that insurers have become one of the main investors in private credit since the Global Financial Crisis, with the Bank for International Settlements estimating that the global insurance industry manages nearly 10 per cent of private credit assets.

S&P Global Ratings believes that UK insurers, particularly life insurers, are “a natural fit” for private credit.

Read more: More than half of insurers set to increase private credit exposure

“Their significant holdings of non-surrenderable, long-dated liabilities make it relatively easy for life insurers to capture the illiquidity premium associated with investing in private credit,” the ratings agency stated in the report.

However, S&P acknowledged that concerns about the private credit market and the potential implications in case of a “deterioration” have increased, with “limited” secondary market liquidity, valuation frequency and complexity, difficulties ascertaining credit quality, and the “inherent opacity” of the private credit market among the key risks.

It noted that Brookfield and Athora’s recent acquisitions of large UK bulk purchase annuity (BPA) insurers Just Group and Pension Insurance Corporation have triggered concerns that private-capital-owned insurers will increase allocations to private capital – a trend that is already playing out in the US.

According to S&P Global Ratings, research by Legal & General suggests that, over the next decade, the UK BPA market will capture half of the estimated £1tn global BPA market.

Read more: Institutional investors maintain private credit exposure despite headlines

Life insurers in the UK, in particular those underwriting individual annuity and BPA portfolios, allocate more to private credit than major insurers and reinsurers in continental Europe.

“This is in line with our expectations, as investment-grade private credit offers stable, often long-dated cash flows that match the long-tail, non-surrenderable nature of UK annuity liabilities. Such liabilities are considerably less common in continental Europe,” said S&P Global Ratings.

Given UK life insurers’ “relatively high” exposure to private credit, the ratings agency assessed how market stress would affect UK BPA insurers’ capital position by creating a hypothetical portfolio.

The portfolio was tested against the credit shock from 2001 to 2002 to residential and infrastructure-related assets, the impact of a property value drop of 20 per cent on equity release mortgages and, finally, against “a more pronounced credit shock”, reflecting the effect of the financial crisis from 2007 to 2009 on the remaining private credit exposures.

The results of this test “demonstrate significant resilience”, according to S&P.

It also modelled two more “extreme” scenarios to further test capital resilience, including one where the internally-rated portfolio consisted of BBB rated assets, and a more severe case where it only included BB rated assets and found that, even though risk charges increase significantly if the ratings on assets change to BB’ from A, “the overall impact would still be manageable”.

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