The UK life insurance sector has underperformed the FTSE 350 since the second half of last year, with the sector falling 18 per cent during the past six months, against an 11 per cent decline in the wider market. This heavy selling activity has pushed up the prospective dividend yields of some of the UK-listed players to north of 7 per cent for 2019, but how well founded are fears around the security of those dividends?
The Bank of England may have raised interest rates by a meagre 25 basis points last year, but low rates look likely to continue, particularly if a disorderly Brexit hampers economic growth and inflation. But low rates are bad news for life insurers, increasing the value of long-term liabilities and reducing investment income. However, Solvency II ratios are well ahead of 100 per cent.
In the event of a 'no-deal Brexit', analysts at RBC Capital forecast a 50 basis point reduction in interest rates, a 75 basis point widening of credit spreads, and a 10 per cent fall in property prices in the first year, which it predicts would still leave UK Solvency II ratios comfortably above regulatory minimums, with Aviva (AV.) likely to suffer the largest reduction at 23 percentage points. However, that would still leave it with a ratio of 164 per cent, RBC Capital forecasts.