Fitch downgrades European life outlook as insurers face coronavirus uncertainty

Fitch Ratings has revised the rating outlooks for the life insurance sectors in France, Germany, the Netherlands, and the UK to negative from stable, citing "significantly increased uncertainty" due to the coronavirus (COVID-19) pandemic.

The rating outlook for the Italian life insurance sector, the European epicenter of the outbreak, remains negative.

The change is due to increased risks stemming from the coronavirus pandemic and related impact on the credit quality of life insurers, it said.

"The outlook revision reflects significantly increased uncertainties facing life insurers associated with material disruption in financial markets, which may last for an extended period of time," according to Fitch. "The industry is also exposed to a spike in mortality risk, the severity of which at this point is highly uncertain."

Over the near term, Fitch expects that deterioration in the equity market and decline in interest rates will add pressure to life insurers' earnings, reserves and capital. Longer-term, Fitch expects potential sustained disruption in the broader economy to cause deterioration in credit markets, which would lead to increased bond and loan defaults and put further pressure on regulatory solvency and capital levels.

Fitch believes that financial market disruptions will affect the insurance sector's reported financials in a number of ways, including increased pressure on investment yields and interest margins, and reduced fee income due to lower asset balances. The significant constraints currently, or expected to be, in place on day-to-day life in many European countries will have a material negative effect on new business development in the affected markets, at least over the near term.

The agency stated that ratings in the European life insurance industry continues to benefit from strong balance- sheet metrics, including very strong Solvency II ratios, healthy asset quality and very strong liquidity positions. However, even before the pressures from coronavirus, the fundamentals of some of the European life sectors had weakened due to the sharp unexpected decline in interest rates over the past year and our expectation that interest rates would remain ultra-low for an extended period of time.

Fitch expects to conduct a comprehensive review of all ratings of European life insurers. Additionally, it expects the ratings on a number of life insurers currently with stable outlooks will be revised to Negative. Those currently on negative outlook may be most exposed to a near-term downgrade.