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U.S. insurers 'less exposed' by Brexit than other sectors

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WASHINGTON — A sustained period of lower interest rates, with all its negative implications for insurers, is the most likely effect on the American insurance industry as a result of Britain’s unexpected decision to exit the European Union, according to a consensus of rating agencies, insurers and consultants.

“Insurers have been resigned to ‘lower for longer’ interest rates, and the early indications post-Brexit are that that was a wise assessment,” said a top official at a large U.S. insurer who asked not to be named.

That is not to say that the decision was not a shocker.

Daniel Bruce, a director at Crowe Horwath LLP in London, said many people in that city, which is the country’s financial epicenter, “widely expected the United Kingdom to remain, and have been stunned by the vote.”

In addition to the anticipated resignation of British Prime Minister David Cameron, Horwath foresees Jeremy Corbyn, the country’s Labour Party leader, stepping down as well. He noted that the reinsurance market has a “strong presence” in London. Bruce said the United Kingdom’s exit from the EU is likely to affect the reinsurance industry, especially in regard to pricing. He specifically noted that a large number of Lloyd’s syndicates are based in London.

He said there are not many U.S. insurers doing business in the United Kingdom. But, as a result of the vote, they will have to negotiate a separate trade deal with the United States.

Currently, they are part of a EU trade deal, Bruce said.

One international insurer with a large business both in the United States and the United Kingdom is Aegon, which is based in the Hague, the Netherlands. It will now have to negotiate a separate trade deal with the United Kingdom, likely within two years, Bruce said.

At the same time, officials of MetLife and American International Group, both of which are among a limited group of U.S. life insurers participating in the European market, said they would continue to do business there.

Early indications supported that conclusion. Early in the day after the “Brexit” vote, prices of U.S. insurers were starkly lower. For example, MetLife was down 8.8 percent; Prudential 7.7 percent; Lincoln National 9.9 percent; and Voya, 7 percent. Seeking Alpha interpreted the decline as indicating that the implication of even lower interest rates [through Brexit] as putting even more pressure on the business models of U.S. life insurers.”

In a statement, Standard & Poor’s Global Ratings said that the United Kingdom insurance sector is “less exposed” to the leave vote than the rest of the financial sector, and that S&P did not expect any rate action on U.K. insurers as a result of the exit vote.

“While representing about one-third of the U.K.’s very substantial financial services net export surplus, the insurance sector is far more reliant on trade with non-EU countries — especially the U.S.,” S&P said.

However, Bruce said the stock prices of U.K. insurers did decline an average of 15 to 20 percent Friday as the U.K. markets plunged in the wake of the unexpected vote.

And, there was turmoil worldwide in equity markets.

See also:

U.K. insurers reel as Brexit threatens $2.6 trillion of assets

Clash looms on Brexit as EU leaders spurn Cameron’s go-slow

‘Market volatility could prevail for a while’

Mary Jo White, chairman of the U.S. Securities and Exchange Commission, said, “The U.S. equity markets opened normally for trading this morning.”

She added: “We are continuing to closely monitor the markets and have been in regular communication with financial institutions, exchanges, and market utilities, as well as our financial regulatory counterparts.”

And Tim Pawlenty, CEO of the Financial Services Roundtable, said in a statement that, “Brexit is a significant development that takes the U.K. and markets into uncharted waters.”

Pawlenty added that, since markets don’t like uncertainty, “market volatility could prevail for a while but the U.S. financial system has taken major steps to prepare for and navigate through new challenges and it is well-positioned to continue to serve and help customers.”

Chris Stern, a spokesman for MetLife in Washington, D.C., said, ”Now that the outcome of the EU referendum is known, MetLife will continue to focus on providing the best outcomes to all our existing and new customers.”

He said MetLife, “is committed to the U.K. as it is a long term strategic growth market and has achieved significant success in recent years.

“As the environment becomes clearer,” he added “MetLife will continue to evolve its business model to build for success in the years ahead.”

Jon Diat, a spokesman for AIG, said that AIG Europe Ltd.’s network of international offices means that “we are well positioned to deliver our products and services to customers across Europe.”

Diat said AIG, “will continue to focus on our employees, clients, brokers and policyholders as the U.K. transitions to a new relationship with the EU.”

Diat said that AIG’s European unit has been actively planning for any contingency in the referendum outcome.

“We will closely monitor the progress of the U.K.’s negotiations with the EU, and participate in the debate with the government and trade bodies as appropriate,” Diat said. “We will continue to evaluate our options as the shape of the future relationship between the U.K. and EU becomes clearer.”

Looking to the future, both Bruce and S&P Ratings said that the nature of any future trading relationship between the U.K. and the EU is yet to be established.”

S&P said that, even in the absence of any trade agreements or passporting rights, the agency believes that U.K. insurers operating in the EU could, through appropriate planning, continue their businesses largely uninterrupted, and that the same would apply for EU insurers who currently trade in the United Kingdom through branches.

Bruce said the U.K. exit from the EU will require renegotiation of trade agreement, for example, for U.S. insurers doing business in the United Kingdom.

Fitch Ratings, consistent with S&P, said it did not see any need to downgrade U.K. life insurers.

“We do not expect to downgrade any insurers in the near term as a direct result of the referendum outcome. In the longer term, a weaker economic operating environment could lead us to review highly rated U.K. life insurers,” Fitch said.

It sees U.K. life insurers as in a strong capital position, but that,  “sustained economic weakness leading to intensified competition and material deterioration in the market values of assets could place life insurers at risk of downgrades.”   

In a special report, “U.K. Chooses Brexit,” Marsh & McLennan Cos. spun a cautionary tone

“Let’s not forget that the U.K. is the first nation-state ever to leave the EU,” the report said.

It said the lack of historical precedent, along with the significant arguments to remain advanced by expert bodies, suggest that U.K. markets will see significant volatility over the rest of 2016 as the shock is absorbed and sentiment fluctuates in response to political and economic announcements.

The Marsh report said the “U.K. currency may come under severe pressure, the stock market may sag, and U.K. property prices may tumble as domestic and foreign investors fear a significant shock to the U.K. economy.”


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