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No-Deal Brexit Risks Could Cloud the Broadly Stable Outlook for U.K. Insurers

Highlights

A no-deal Brexit could be a key risk for ratings on U.K. insurers because it may have important short- and long-term implications for the country's economy, financial markets, and insurance industry.

Other than the risks from a no-deal Brexit, we see broadly stable trends for the U.K. insurance industry. Most U.K. insurers have ratings in the 'A' category and stable outlooks. In addition, their 2018 year-end results were largely in line with our forecasts.

Other than the risks from a no-deal Brexit, we see broadly stable trends for the U.K. insurance industry. Most U.K. insurers have ratings in the 'A' category and stable outlooks. In addition, their 2018 year-end results were largely in line with our forecasts.

Jun. 28 2019 — S&P Global Ratings considers the creditworthiness of the U.K. insurance market to be stable, based on the characteristics of the 15 U.K.-based groups we rate. Most are in the 'A' category and have stable outlooks. We assign a negative outlook to just one group, while one group has a positive outlook.

Our base-case remains that the U.K. will not leave the EU without a deal. In our view, U.K. insurers are well-positioned to weather short-term Brexit-related uncertainties in 2019.

That said, a no-deal Brexit outcome would have important long- and short-term implications for the U.K. economy, through its impact on income levels and growth prospects, government finances, external financing prospects, and financial markets.

A no-deal Brexit would also weigh on our view of the U.K. insurance industry and country risk, which could affect our view of U.K. insurers' business risk profiles. It could also have a negative impact on our view of U.K. insurers' financial risk profile. For example, it could heighten sovereign risk, by dampening the economy's near- and medium-term growth prospects. We could also impose additional capital requirements in our capital model because of the potential lower credit quality of insurers' bond portfolios. Other effects could include more equity volatility, increased collateral requirements, or reduced liquidity.

We anticipate that outlook revisions, rather than widespread downgrades, would be more likely to occur within the U.K. insurance sector in the event of a no-deal Brexit. Specifically, we see a no-deal Brexit potentially affecting ratings on insurers in three key ways:

  • First, if we lowered the long-term U.K. sovereign rating then we would review whether the ratings on Prudential PLC and Legal & General Group PLC were resilient to our sovereign stress scenario.
  • Second, we estimate that the adverse macroeconomic and financial market impact of a no-deal Brexit could put downward pressure on the ratings of four U.K. insurance groups, absent any mitigating actions, although this could take some time to play out. We continue to engage with our rated insurers to ascertain the level of mitigating management actions they could take in such a scenario. This includes, but is not limited to, actions such as asset derisking, additional reinsurance purchases, etc.
  • Third, the financial implications of operational challenges could have negative implications for ratings on U.K. and EU insurers. These would include additional costs for U.K. insurers setting up operating subsidiaries in the EU, or vice versa for EU insurers operating in the U.K.
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