The UK vote to withdraw from the European Union (EU) is a negative credit development for US life insurers, as it will increase economic uncertainty and likely affect monetary policy in the US, according to Fitch Ratings.
The near-term impact on interest rates and financial market volatility exacerbates an already challenging operating environment for US life insurers, although Fitch doesn’t anticipate immediate implications for US life insurer ratings. Uncertainty following the Brexit vote will negatively affect GDP growth in the UK and more broadly, which will likely prompt central banks globally to pursue further monetary easing policies.
For US life insurers, expected delays in further Fed rate increases and flight-to-safety buying of US government bonds has pushed Treasury yields to near-record lows.
The macroeconomic volatility likely will force the Fed to delay further rate hikes and increases the likelihood of a “lower for longer” interest rate scenario, Fitch says. Over the near term, the impact of sustained low interest rates will limit US life insurers’ earnings growth but not have a meaningful impact on statutory capital.
The increase in financial market volatility will also negatively affect life insurers that have exposure to equity markets through general account equity investments and/or large variable annuity and asset management businesses, Fitch says. While existing ratings consider the inherent volatility associated with these equity exposures, a significant unexpected decline in the equity markets could affect ratings.
Positively, most US life insurers do not have material direct exposure to the insurance markets in the UK and the EU, Fitch notes. For those with direct exposure to those markets, those operations represent a relatively small proportion of the group’s overall business.
As a result, unexpected deterioration in the financial performance of US life insurers’ UK and EU subsidiaries would not be expected to have a ratings impact. The ratings on US life insurers that are wholly owned by European insurers, most of which have a stable rating outlook, are more vulnerable to a downgrade in an adverse Brexit vote scenario.