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Solvency II Needs to Reflect European Bond Risks, Pimco Says

New rules for insurers in Europe need to better reflect risks of holding European government bonds, according to Pacific Investment Management Co., which manages the world’s largest bond fund.

“We expect that the Solvency II rule, under which all government bonds within the European Economic Area are regarded as risk-free, will be adjusted before the end of this year,” Matthieu Louanges, head of European insurance asset management at Pimco in Munich, said in an interview. “We would expect a differentiation using country ratings, for example.”

European regulators plan to impose common capital standards for insurers in Europe through rules known as Solvency II from next year, with full application coming in 2014. The rules require insurers not to set aside any capital for holdings of sovereign debt from countries within the European Economic Area, which includes the 27 members of the European Union as well as Iceland, Liechtenstein and Norway.

“The haircut on Greek bonds was the final evidence that this zero-capital rule has to be adjusted,” Louanges said. Pimco expects Solvency II to be modified to take account of conditions in individual countries, so that Italian insurers could hold Italian bonds at lower capital requirements than their German counterparts, he said.


“A re-localization of insurers’ government bond investments is happening already, and local government bonds have always been the preferred benchmark for insurers,” Louanges said. He helps manage more than 200 billion euros ($252 billion) in assets for European insurers at Newport Beach, California-based Pimco.

Pimco, a unit of Munich-based Allianz SE, Europe’s biggest insurer, has seen “tremendous growth” in mandates to manage assets on behalf of other insurers, especially in Switzerland, France, Italy and the U.K., Louanges said. While the majority of funds at Pimco’s insurance asset-management unit in Europe still come from Allianz, the third-party business is growing at a rate of around 20 percent, he said.

“European insurers in general are under increasing pressure because of the low interest-rate environment, and as their book reserves on fixed-income securities and equities are much lower than in the past,” Louanges said. “After a period of redistribution of the investment risks out of the periphery into the core of Europe, we have seen a trend to diversify the investments outside the euro zone, in global corporate bonds or emerging markets.”

‘Clear Picture’

Louanges said he expects to get “a clear picture of how Solvency II will look” by the end of the year. The Solvency II rules are being developed by the European Commission and the Frankfurt-based European Insurance and Occupational Pensions Authority, or Eiopa, along with local regulators.

One point of discussion within the EU is a phasing in of the new capital rules for life insurers over seven years under a proposal made by Burkhard Balz, a German member of the European Parliament who is steering the legislation.

“This would be extremely difficult to implement, as insurers would have to separate old contracts from new ones in their portfolios,” Louanges said.

Solvency capital ratios of European insurers “started to slightly decrease” this year because of the low interest rates, Frankfurt-based insurance watchdog Eiopa said in its Financial Stability Report published on June 11.

Increasing pressure on insurers in Europe may also lead to more consolidation as some companies boost their capital ratios by selling some non-core businesses, Louanges said.

Allianz agreed on June 8 to acquire the property and casualty assets belonging to Groupama SA’s Gan Eurocourtage industrial insurance unit for slightly more than 100 million euros. The Paris-based insurer is scaling back some businesses after it swung to a loss last year on Greek debt writedowns.

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