Fitch Downgrades Outlook For UK Life Insurers Over Virus

Law360, London (March 18, 2020, 12:59 PM GMT) -- Credit rating agency Fitch has downgraded the U.K. life insurance sector’s outlook to negative in light of the “significant uncertainty” created by the coronavirus pandemic.

Fitch Ratings Ltd. said Tuesday that it dropped the sector’s outlook from stable because of the high levels of volatility in capital markets since the outbreak of the COVID-19 disease, which first appeared late last year in Wuhan, China,

The Bank of England announced it was dropping interest rates last week in response to the pandemic, and there have been fluctuations in stock prices and credit spreads. The combination of the economic consequences of the virus will create pressure on earnings and capital levels, Fitch said.

“Fitch believes the totality of these conditions no longer supports a stable sector outlook,” the rating agency said Tuesday. “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.”

Fitch said that it will review its ratings of specific life insurers that may become more sensitive to the outbreak. The agency said it will prioritize looking at insurance firms that currently have a positive rating.

Fitch said that a rise in mortality rates will also lead to customers claiming on life insurance policies. But U.K. insurers are unlikely to be severely hit because of this as they reinsure a substantial portion of this risk, especially during pandemics.

And British life insurers hold enough money to buffer them from immediate market shocks, Fitch said.

Nevertheless, a downgrade in corporate bonds could hit U.K. annuity writers’ profits and solvency positions, Fitch warned.

“We believe that downgrades of lower-rated investment-grade corporate debt would lead to a rebalancing of assets by insurers, which results in loss recognition,” the agency said.

Life insurers are also exposed to the credit risk that the portfolios they invest in may become illiquid, Fitch said. And insurers with an asset-management division may lose money from lower fee income and operating margins.

The warnings come after another credit rating agency, Moody’s, said on Tuesday that investment losses could erode the capital buffer that European insurers are required to keep under the European Union's Solvency II laws on the insurance industry.

"Recent significant financial market fluctuation driven by the coronavirus outbreak will erode insurers' capital in the short-term," Helena Kingsley-Tomkins, an analyst at Moody's Investors Service, said Tuesday. "Low interest rates, with bond yields dropping to record lows in March, will further pressure European insurers' profitability and economic solvency over the coming quarters."

--Additional reporting by Martin Croucher. Editing by Tom Mudd.

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