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Fitch: Dutch Life Firms Most Exposed to UFR, But Cut Manageable
April 7, 2017 / 9:24 AM / 8 months ago

Fitch: Dutch Life Firms Most Exposed to UFR, But Cut Manageable

(The following statement was released by the rating agency) LONDON, April 07 (Fitch) Dutch life insurers' Solvency II ratios are likely to feel the biggest impact from the proposed cut to the ultimate forward rate (UFR), but the plan to gradually reduce the rate over several years will give firms time to bolster capital and offset the impact, Fitch Ratings says. We do not expect the UFR reduction to lead to any of the large Dutch insurance groups' Solvency II ratios falling below around 140%, the likely lower boundary of their desired operating range. The UFR, currently 4.2%, is used to extrapolate the discount curve for valuing liabilities that have a long duration (over 20 years for euro business and over 50 years for sterling). The European Insurance and Occupational Pensions Authority (EIOPA) said on Wednesday that the rate will ultimately be cut to 3.65% under its new methodology, but that the reduction will be phased at a maximum of 15bp a year from January 2018. This will increase the amount of capital firms need to hold against long-term liabilities and therefore reduce insurers' solvency ratios under the Solvency II regime. The new rate is marginally below the 3.7% EIOPA had previously proposed, but the reduction will be slower, meaning it will take an extra year to be phased in. Dutch life insurers are exposed because of their relatively large portfolio of long-term guaranteed products and because the Dutch regulator has not allowed transitional measures to gradually phase in the impact of higher reserving requirements under Solvency II. Two factors could help limit the impact. The phased reduction, which does not begin for another nine months, means firms should be able to offset some of the impact via capital generation, assuming they maintain profitability. Sensitivity to the UFR will fall relatively quickly for firms with closed back books, such as NN Group, as the average duration of in-force liabilities reduces. Delta Lloyd's large annuity business means it would be one of the most affected. On a standalone basis, we estimate its Solvency II ratio might fall to below 140% in early 2018 due to the 15bp cut in the UFR. Immediately implementing the full 55bp reduction could have reduced its ratio to around 130%. But the group's acquisition by NN Group is likely to be concluded shortly. NN Group's Solvency II ratio may be even more sensitive to the UFR than Delta Lloyd's, but we estimate that its much higher starting point (241% at end-2016) means the new combined group's ratio is likely to remain above 170% after a 15bp UFR reduction. Any changes to solvency ratios from a change to the UFR will not directly affect ratings, as we will continue to assess insurers' capital primarily using our Prism Factor-Based Capital Model. This model differentiates between insurers based on their exposure to low long-term interest rates, and we believe it offers better comparability between firms than Solvency II metrics. Contact: Willem Loots Senior Director Insurance +44 20 3530 1808 Fitch Ratings Limited 30 North Colonnade London E14 5GN Harish Gohil Managing Director Insurance +44 20 3530 1257 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT <a href="">WWW.FITCHRATINGS.COM.. 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