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S&P revises criteria for insurers' capital adequacy ratings

Date: Fri, 25 Apr 03 Analysis

LONDON, UK - Standard & Poor's Ratings Services yesterday announced that the criteria governing the capital adequacy ratings of European insurance companies and groups has been updated.

'As a result of the most recent changes to the capital adequacy model, the capital adequacy ratio (CAR) will be lower for many companies, especially for insurers writing with-profits life insurance business and those companies with substantial amounts of goodwill derived from recent acquisitions,' credit analyst, Rob Jones, explained.

Nevertheless, S&P analysts will continue to take into account long-term considerations of a company's capital adequacy, focusing not just on the amount of capital, but also on the quality of capital.

S&P stated that it does not expect any rating changes as a result of the new rules.

To determine the quality of capital, S&P has also announced the introduction of an additional 'hard' capital adequacy ratio (hardCAR), which removes the soft capital components, such as deferred acquisition costs, loss reserve discount, and hybrid equity, from the existing CAR.

'It should be noted that the CAR, and now the hardCAR, are important, although not the sole, elements in assessing overall capitalization; other quantitative and qualitative measures are also used,' Mr. Jones stated.

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Endsleigh Insurance Services Limited. Company No: 856706 registered in England at Shurdington Road, Cheltenham Spa, Gloucestershire GL51 4UE.