OREANDA-NEWS. Delta Lloyd's results highlight the significant impact that a change in the ultimate forward rate (UFR) could have on the solvency ratios of European insurers under the new Solvency II regime, Fitch Ratings says. While we see Delta Lloyd as an outlier in terms of the impact of SII, due to its business mix, capital management strategy and the relatively tough stance of the Dutch regulator, we believe other Dutch and German insurers would be among those most exposed to a change in the UFR.

The UFR, which is currently set at 4.2%, is used to extrapolate the forward curve for valuing liabilities that have a long duration (over 20 years for euro business, over 50 years for sterling). Although there is a rationale for this figure, it looks high relative to current long-term yields, potentially leading to an overstatement of the economic capital position. The European Insurance and Occupational Pensions Authority is reviewing the methodology used to derive the UFR, although it has said the rate will not change until at least the end of 2016.

Delta Lloyd's results include an analysis of capital sensitivity to various scenarios, including a one percentage point reduction in the UFR, which the insurer said would have reduced its 4Q15 SII capital ratio from 131% to 98%. Including the impact of its planned equity raising, the ratio would have fallen from 156% to 123%, which the market would probably view as low.

Delta Lloyd's annuity business means it is heavily exposed to longevity risk, which is hit hard under SII and should make it more sensitive to a change in the UFR than other insurers. But some other Dutch and German insurers commonly sell annuities or other long-term contracts with guaranteed returns; this suggests they would also face a significant impact from a change in the way long-term liabilities related to these products are calculated.

If the UFR were reduced, we believe some regulators might introduce transitional measures to enable insurers to gradually adjust, although the approach could vary between countries. The German regulator has already allowed transitional measures in other areas, while the Dutch regulator has taken a tougher stance. Delta Lloyd's results show that the regulator restricted the capital relief Delta Lloyd was getting for its hedging of longevity risk, knocking 14 percentage points of its SII capital ratio.

Given the different regulatory approaches, varying transitional measures and the use of internal models by some insurers, we will continue to assess insurers' capital primarily using our Prism Factor-Based Capital Model, as we believe it offers greater comparability between firms than SII metrics.