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Delta hedge

30 November 2015 By George Hay

Delta Lloyd has waved the white flag on its capital position. The Dutch insurer on Nov. 30 said it was raising 1 billion euros – over half its market value before the announcement – to prepare for new Solvency II capital rules. Although done from a position of weakness, an accompanying shift in the way it proposes to calculate its capital position may in time be seen as a strength.

It’s no great surprise that Delta is raising new funds. Over the last year, its shares have fallen by 62 percent, compared to 9 percent for the wider insurance sector. The real damage came in August, when investors started to fret that Delta’s position under Solvency II – a new EU-wide capital regime intended to better reflect each insurer’s underlying risks – would look ugly. The new capital will push the solvency position from 136 percent of requirements to over 175 percent, in line with that of most large peers.

What is unusual is that Delta has chosen to ditch its own version of the way most big insurers are choosing to calculate Solvency II. Instead of getting the regulator to sign off on its own assumptions of potential losses, it will use ones supplied by regulators themselves – the so-called standardised approach. Most peers generally prefer their own inputs, because they can more accurately risk-weight their exposures, and thus hold less capital.

Delta may seem like a turkey voting for Christmas in opting for an approach that requires more capital, especially given shareholders will already be annoyed by the suspension of their final 2015 dividend. But companies’ internal models can create volatile results, which means capital levels spike up and down and unnerve investors. Using standard inputs should give investors more confidence that Delta’s new solvency is sound.

Most European peers are starting from a better capitalised place, and will soon have their models approved. But Delta’s move is worth watching. In the banking sector, risk-weighted models have become so discredited that the European Central Bank and other supervisors are looking at making them more standardised. If investors develop the same skepticism for insurers, more may follow Delta’s lead.


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