Fitch Issues Report on Impact of EU’s Solvency 2; Teleconference Today

March 10, 2008

Fitch Ratings has compiled a report on the potential impact on credit ratings of the European Union’s adoption of the Solvency 2 risk-based capital regime in 20012. The rating agency indicated that it “does not expect significant immediate impact on the credit ratings of European insurers from the introduction, mainly because the “capitalization levels of most of the insurers rated by Fitch are already significantly above the regulatory minimum.”

In the special report – “Solvency II Moves Up A Gear” – Fitch said it “strongly supports the development by European Parliament of the new risk-based capital regime.”

Essentially Fitch doesn’t expect “to see materially higher required capital overall across the EU market.” However, it foresees some “re-distribution of capital across companies, with some having surplus and some needing to raise additional capital.” The latter would be most likely to occur in “EU states where risk-based capital assessment is not currently the norm,” said Fitch. “This would create a favorable climate for an increase in merger and acquisition activity in these countries, as companies look for more efficient ways to allocate their capital.”

The announcement added that Fitch considers itself to be “well prepared for the transition to the new Solvency 2 regime, as the agency’s own capital assessment methodology, in particular its new stochastic model, Prism, already includes similar risk-based approaches proposed for inclusion in Solvency 2, enhancing Fitch’s understanding of the true economic risks facing insurers.”

The special report discusses the draft Framework Directive, the first piece of legislation on the proposed Solvency 2 regime, published by the European Commission in July 2007. The report provides an overview of the 3-Pillar structure of the regime, and analyses the results of the latest round of Quantative Impact Study 3 (QIS3), which gave insurers an opportunity to test the implication of the proposed calibrations on their solvency margins.

The results of QIS3 show that, while the vast majority (98 percent) of the 1027 participants across the EU had enough available capital to cover the Minimum Capital Requirement (MCR) as calculated under the QIS3 calibrations, around 16 percent of participants would need to raise additional capital to cover the Solvency Capital Requirements (SCR).

A number of issues that raised concern amongst the QIS3 participants are discussed in the report, including the options for calculating the MCR, the calculation and classification of own funds into capital eligible for covering the solvency requirements, and some of the specific calibrations of risk modules within the SCR calculation. The main changes to calibrations proposed in the forthcoming QIS4 are also highlighted. The report discusses the role of the Solvency 2 regime in its capital assessment methodology and presents its view on the impact of the proposed regime on the European insurers and reinsurers. Some of the key issues arising from the introduction of the new regime are discussed in detail, in particular developments relating to internal models, diversification assessment and impact on hybrid capital and other instruments.

Fitch will hold a conference call to discuss the report at 3:00 p.m. UK time [4:00 in Europe; 10:00 a.m. EST].

Dial-in for the call is +44 207 138 0839 (UK toll), with the access code 2754603. A replay will be available on +44 207 806 1970, access code 2754603#.

The special report is available on Fitch’s web site at: www.fitchratings.com.

Source: Fitch Ratings

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