(6,09 EUR, -3,44%) will record a 4Q11 € 0.9-1.1bn charge on its US Closed Block VA to cover for the impact of assumption changes and restore the reserve adequacy to the 50% confidence level.
The assumptions for the US Closed Block VA were updated for lapses, mortality, annuitisation, and utilisation rates, with the most significant revision coming from the adjustments of lapse assumptions. The revisions bring the assumptions more in line with US policyholder experience and reflect to a much greater degree the market volatility of recent years. In conjunction, Insurance US is adjusting hedging to reflect the revised assumptions. The review shows current US policyholder behaviour for Closed Block VA policies sold predominantly between 2003 and 2009 diverges from earlier assumptions made by , particularly given the ongoing volatility and challenging market circumstances.
decided in early 2009 to terminate the sale of these VA policies. Since then, has taken decisive action to reduce risk, leverage and expenses. These actions include reducing DAC, strengthening reserves, expanding the hedging programs and increasing transparency by reporting the US Closed Block VA as a separate business alongside the ongoing Insurance US businesses.
As a result of the developments announced today, the Insurance Group Directive (IGD) ratio for Insurance is expected to decrease by an estimated 12 percentage-points, but will remain strong at approximately 230%. Likewise, the estimated consolidated risk-based capital (RBC) ratio for the Insurance US operating subsidiaries is expected to decline from 492% as of 30 September 2011, but to remain comfortably above our 425% target following these assumptions changes.
plans to provide a contingent funding facility of approximately EUR 1.1 billion to its US insurance business to ensure ongoing compliance with US regulatory requirements.
Last year did already sizeable write-downs on DAC to allign its US accounting to that of peers to allow an IPO of the business. This assumption update charge comes as a negative surprise, but our EUR 9 target price leaves a margin to cover for such negative surprises.
We maintain our Accumulate rating and € 9 target price.