Thursday, 15 August 2013

FTSE and European Insurers - Economic Capital and Solvency II trends - money pit filled?

Interim Results season - without question, the most exciting time of the summer for me (although to qualify that, I do live on the Isle of Man and blog in my spare time). As good an opportunity as any to peer review where the big boys are at in the UK and Europe, both on Solvency II preparations/costs and economic captial positions.

Solvency II project costs - on the wane?
As I had mentioned in an earlier post, the FTSE-listed insurers have gone noticeably quiet on both Solvency II and, in the UK's case, the havoc it was inevitably going to wreak in its 2012 form - while the 2013 silence "speaks volumes" as to the priority of the dossier, it is a smart idea to see what impact the threat of a 2014 start has had to EC positions of major insurers over the last 12 months (i.e. after last year's whingeing, did any of them actually do substantive capital-related activity!)

A few notes for each below;


  • Solvency II project costs of £44m - well down on £77m in 2012 year-to-June
  • "...there is still significant uncertainty over the detailed requirements [of Solvency II]"
  • Pro-forma economic capital surplus of 175%, up from 172% in December
  • IGD coverage 1.8 times, up from 1.7 times in December


  • Nothing on Solvency II at all or project costs
  • Solvency ratio down to 218% (from 233%) since December - interest rated attributed
  • Economic solvency ratio (calibrated to 1-in-200 VaR) down to 204% (from 206%) since December - dividend and market risk elements attributed


  • Nothing on project costs
  • Solvency ratio (based on FCD) of 177%, down from 197% this time last year - change in accounting standards attributed
  • "...Allianz continues to be exposed to two external forces that adversely affect our risk profile and would not normally be associated with our core operating activities: the European sovereign debt crisis and regulatory developments – especially the European solvency directive, Solvency II"
  • No reference to economic capital or modelling

Legal and General

  • "Investment projects and expenses" (which covered Solvency II last year) were £20m - £23m in 2012 year-to-June
  • "...remains uncertainty both to the implementation timescales of Solvency II and the final calibrations that will be used for long term business"
  • IGD surplus unchanged at £4.1bn, coverage ratio down to 226%

Old Mutual

  • No mention of Solvency II project costs, same as last year
  • EC coverage of "over 160%", calibrated to VaR 99.93%
  • FGD surplus of 160%
  • Dividend outweighed operational cash flows in the 6 month period, though this was due to the special dividend paid last year after a massive disposal


  • Solvency II project costs of £10m for the half year - well down on the £48m for 2012 comparable!
  • "Proposals for Solvency II continue to be the subject of debate"
  • EC Coverage of 192% - (194% in Dec - quantum increased by £200m though)
  • IGCA coverage of 221% (222% in Dec) - sold a business unit, which helped cover dividend


  • £13m Solvency II project costs for the half year - £27m in 2012 year-to-June
  • "...deferral until 1 January 2016 or beyond appears likely"
  • "...we now know that it will not be implemented before 1 January 2016" - my emphasis
  • "[potential for] optimising the Group’s domicile as a possible response to an adverse outcome on Solvency II" remains on the table, a copy/paste threat left in from last year.
  • IGD coverage of 230% - quantum lower by over a billion since Dec, due to a change in requirements in their US business

Standard Life

  • £36m Solvency II "and other programmes" costs for the half year - £42m in 2012 year-to-June
  • Solvency II project "...continues to respond to changes in requirements"
  • IGD down £500m since half year after accounting for a special dividend, and surplus generation down year-on-year (attributed to new business strain)
  • IGD surplus of 185%, down from over 200% at YE2012, but up 11% from this time last year
  • Not a single reference to "economic capital" in the document


  • No mention of Solvency II
  • Solvency I coverage at 139% - up from 130% this time last year
  • Economic capital coverage of 167% - up from 159% this time last year
  • Solvency II project costs down to £10m (was £16m  in 2012 year-to-June)
  • "There remains continued uncertainty as delays in agreeing the rules have caused the planned implementation date of 2014 to be delayed."
  • IGD covered 1.7 times - down from 1.9 times since December - dividends again cited in explaining the dip.
  • Economic capital (calibrated to 1-in-200 VaR) £1.3bn, up from £1.2bn in December.

So a trend of steady Solvency I ratios, and no sign of any war chests being created by holding excess cash back - quite the opposite in some cases, with dividends (special or otherwise) on the high side. With project costs diminishing and barely a passing comment on the Omnibus II impasse, it looks very much like Solvency II is yesterday's news in the boardrooms of major insurers. 

That said, in just those insurers covered above there has been over £100m confirmed spend in the last 6 months on Solvency II preparations, during which time the implementation date has (informally) moved at least two years, IMAP has been elongated, and the LTGA panacea has turned out to be anything but. That's hardly chickenfeed, and the rest of this year can only get busier for the UK with ICAS+ and EIOPA Interim Guidelines to contend with.

I hope Finance Directors don't get too excited by the dwindling project spend though - we haven't started Pillar 3 yet, apparently!

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