Fitch: UK Rating Watch Negative Does Not Threaten Insurer Ratings

Fitch Ratings said that its Brexit-driven rating watch negative (RWN) on the United Kingdom does not imply an immediate threat to UK insurance company ratings. However, the rating agency revealed that some of the highest insurer ratings could come under pressure if an adverse Brexit scenario leads to widespread downgrades of the corporate debt that insurance companies hold to back their liabilities, as this would weaken their capital adequacy.

Fitch said the RWN reflects the heightened uncertainty over the outcome of the Brexit process and an increased risk of a disruptive "no-deal" Brexit where the United Kingdom would leave the European Union without a withdrawal agreement in place. The highest-rated UK insurers are Aviva, Legal & General, Lloyd's of London, M&G Prudential, and Scottish Widows, all with insurer financial strength ratings of AA-. The outlooks are stable with the exception of Lloyd's, whose negative outlook reflects pressure on underwriting profits due to market dynamics unrelated to Brexit.

Fitch explained that UK insurers' capital positions are relatively resilient to declines in credit and equity markets that could arise if investor sentiment deteriorates because of Brexit developments. However, widespread corporate downgrades due to a weaker operating environment or sustained economic turmoil would weaken capital.

Fitch believes the impact of a no-deal Brexit on UK insurers' operations in the European Union would be limited, despite the loss of passporting arrangements. Insurers are obtaining new business licenses where required and transferring cross-border portfolios to EU subsidiaries or disposing of them. Lloyd's of London has set up a Brussels subsidiary to handle all EU business after Brexit.

The amount of cross-border insurance business still at risk of disruption is minimal, given the industry's preparation. However, if a UK insurer systematically fails to meet obligations to EU policyholders on a timely basis because it has not taken reasonable steps to prepare for Brexit, Fitch said it would treat such systematic nonpayment as a "restricted default."