Fitch Ratings-London-07 October 2022: The recent revision of the UK’s Outlook to Negative has no immediate impact on UK life insurers’ ratings, Fitch Ratings says.
Fitch expects the sector’s strong business profile and capital headroom to continue to underpin ratings in the hypothetical scenario of the UK sovereign rating being downgraded by one notch to ‘A+’. We also expect insurers’ investment concentration exposure to UK gilts to remain within rating tolerances.
Fitch’s insurance criteria do not apply any mechanical sovereign rating cap to UK-based insurers’ ratings. Instead, under Fitch’s criteria, sovereign rating changes can affect both the scoring of investment risks, as well as an insurer’s industry profile and operating environment (IPOE).
UK insurers are directly exposed to sovereign risk through their investments in gilts. However, we assess Insurers’ exposure, as measured through the agency’s sovereign investments/capital ratio, as manageable under a scenario where the UK’s rating is downgraded by one notch. At end-June 2022, this ratio was below 100% for most UK life insurers, with none exceeding 210%.
Fitch also does not expect a decline in our scoring of the UK insurance sector’s IPOE of ‘aa+ to a-’ under a one-notch downgrade scenario. Under our criteria, the midpoint of the IPOE range cannot exceed the sovereign rating, and a sovereign rating of ‘A+’ would remain within the mid-point, albeit at the lower end. However, we consider regulatory oversight in the UK as very strong with very well-developed regulation and supervision. The pending UK government review of Solvency II (S2) regulations is unlikely to lead to a material reduction in capital requirements, and therefore will not prompt life insurers to significantly increase their risk appetites.
A two-notch sovereign downgrade scenario would result in a movement of the IPOE range to ‘aa’ to ‘bbb+’, and would also result in downward scoring of some insurers’ company profiles, which are tethered to the IPOE. Accordingly, under this scenario, some UK insurer rating outlooks and ratings would come under pressure.
The recent rapid drop in gilt prices, combined with downward movements in sterling relative to the dollar, triggered substantial collateral calls for some UK insurers on hedge positions. However, insurers hold strong liquidity buffers, which are stress-tested for various scenarios, including recent market events. Fitch expects insurers’ liquidity positions to have comfortably withstood the recent market volatility.
Most UK life insurers reported a rise in S2 ratios in 1H22, supported by resilient capital generation from in-force business and rising interest rates. This more than offset the impact of wider credit spreads and negative equity markets. We expect S2 ratios to have improved further over the past three months as a result of further rising long-term interest rates, which raise S2 ratios through a reduction in risk margins and lower solvency capital requirements.
Source: https://www.fitchratings.com/research/insurance/no-ratings-impact-on-uk-life-insurers-following-uk-outlook-revision-07-10-2022