Norway Spooking Investors on Solvency Phase In, Storebrand Saysby
Investors uncertain about Norway's phasing in of Solvency II
Low interest rates impacting amount of capital needed
Norway is unnerving investors by failing to give clear signals on the implementation of the next step in insurance industry regulations, according to Storebrand ASA, Norway’s largest listed life insurer said.
Authorities have surprised the market several times, making investors uncertain about how authorities will implement the Solvency II transitional rules, according to Chief Financial Officer Lars Aa Loeddesoel.
“The market is, as I have perceived it, also worried about a solvency situation without transitional rules at 100 percent or under 100 percent that would reduce the possibility to extract dividend from the business,” he said in an interview Wednesday.
The government wrong-footed insurers in August with regulations allowing a more lenient transition to Solvency II even as it introduced a lower limit that prevents obligations dropping below what’s currently allowed. That eroded the effect of the transitional rules, industry group Finance Norway said at the time.
That prompted concerns that other measures that are yet to be decided may have adverse outcomes, including new tax rules for technical provisions based on Solvency II principles that were postponed by the Finance Ministry in August after input from the insurance industry.
Nordea Bank AB’s Norwegian life-insurance unit is considering moving parts of its operations to Sweden, where regulators have less stringent rules, Dagens Naeringsliv reported on Friday, citing unit head Joerund Vandvik. Norwegian authorities have also faced criticism from DNB ASA, the country’s largest bank, for not harmonizing capital requirements with neighboring Sweden.
European insurance companies are adjusting to regulations that set out new capital requirements for insurers to take effect Jan. 1. Investors fear that Storebrand’s profits may be impacted as low interest rates reduce its Solvency II ratio and increase the need to build capital. Its shares have dropped more than 20 percent from a high in July as rates continued to fall.
“We have a very clear goal that we’re going to enter the Solvency II regime with a satisfying capital situation so that we don’t have to raise new equity,” he said. “That has been the primary goal while the secondary goal has been to return to a situation where we pay dividend.”
As the life insurer cuts costs to improve margins, it will continue to work with restructuring, efficiency, automation and use its operations in Lithuania. The company announced internally this week that it will restructure its distribution unit where costs have to come down, according to Loeddesoel.
The Oslo-based life insurer had a Solvency II-ratio of 114 percent without transitional rules and 154 percent with them, according to its second-quarter report. It targets a Solvency II ratio of at least 130 percent based on transitional rules and an after-tax dividend payout ratio of more than 35 percent. It hasn’t paid a dividend since 2011.
“Solvency II is very complex and demanding -- but also a much better regulation than Solvency I -- that much more reflects the real risks in this type of business,” the CFO said. “That’s good -- it will sort out the high-quality organizations from those who don’t have the same quality.”