The UK regulator covering banks and insurers may move to tighten capital requirements for UK life companies following its latest 'Funded Re' roundtable.
And UBS says Phoenix Group Holdings PLC (LSE:PHNX), followed by Legal & General Group PLC (LSE:LGEN) are most exposed.
Talks at the roundtable highlighted inconsistencies in how such transactions are treated under solvency rules, the Swiss bank told clients.
The Prudential Regulation Authority (PRA) discussions suggest that arrangements for funded reinsurance, a form of reinsurance where the reinsurer provides upfront collateral or assets to cover future liabilities, can produce both economic and capital mismatches, UBS noted.
This includes an unusual outcome where higher-risk counterparties result in higher day-one profits.
The PRA’s analysis also showed that capital held against funded re may be 9-11% lower than if the same risks were held under an alternative structure.
UBS said potential reforms could include unbundling funded re into separate investment and risk transfer components, or increasing the Counterparty Default Adjustment (CDA) to better reflect inherent risks.
Either option, the bank said, could increase capital requirements relative to current levels.
The broker believes Phoenix has the highest exposure to any potential rule changes, followed by L&G, while Aviva PLC (LSE:AV.) is the least exposed among the large annuity writers.
UBS does not expect the upcoming Life Insurance Stress Test (LIST) results on 17 November to act as a catalyst for the sector, noting that they will be published on a subsidiary-level regulatory basis rather than a group-wide shareholder view.
The bank maintained that group-wide stress tests provide a more meaningful picture of capital resilience across the UK life insurance sector.