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Fitch revises UK life insurance sector outlook to negative from stable

18th March 2020 - Author: Luke Gallin

The rapidly evolving coronavirus outbreak has led Fitch Ratings to revise its UK life insurance sector outlook to negative from stable.

coronavirusThe move comes a day after the global financial services ratings agency turned negative on the US life insurance industry. Both revisions are a result of the widespread uncertainty created by the global coronavirus outbreak, which has driven high levels of volatility in capital markets.

The volatility has led to a steep decline in interest rates and also significant variability in stock prices and credit spreads, explains Fitch. The ratings agency adds that UK life insurers are exposed to rises in mortality but notes that this is largely reinsured, which suggests potentially increased exposure for certain global reinsurers.

“The combination will likely create some pressure on earnings and variability in capital levels, the severity and duration of which is impossible at this time to predict. Fitch believes the totality of these conditions no longer supports a Stable sector outlook,” says Fitch.

Specifically, warns Fitch, widespread downgrades in corporate bonds has the potential to significantly impact UK annuity writers’ profitability and solvency position. In Fitch’s view, downgrades of lower-rated investment-grade corporate debt ultimately result in a rebalancing of assets by carriers, which leads to loss recognition.

Furthermore, UK annuity writers also have credit risk exposure through illiquid investment portfolios, but Fitch states that market risks as a result of the virus outbreak are “somewhat offset by duration matching of long-term liabilities and favourable experience variance of life expectancies relative to their long-term longevity assumptions.”

Generally, Fitch views UK life insurance companies as strongly capitalised, but stresses that the unprecedented nature of the COVID-19 outbreak is beyond any traditional or event stressed business cycle.

“The extraordinary nature of the outbreak, the magnitude of the responses and the speed at which the events are unfolding make it likely that we will see risks that have never before been observed,” says Fitch.

In light of the coronavirus pandemic, Fitch expects to complete a review of ratings assigned to life insurers in the UK that either are, or have the potential to become more sensitive to the outbreak. The ratings agency expects the ratings on numerous life insurers with stable outlooks to be revised to negative, while those already on a negative outlook might be exposed to a near-term downgrade.

Despite high levels of capitalisation and risk management tools such as reinsurance protection, clearly, sectors and individual companies within the risk transfer sector are going to experience some additional pressures from the COVID-19 outbreak.

Earlier this morning, Fitch revised its rating outlook for The Allstate Corporation and its core insurance subsidiaries to stable from positive, again as a result of the virus outbreak.

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