Thursday, 13 March 2014

FTSE Insurer results for YE 2013 - Solvency II costs and capital commentary

Don't you just love financial year-end? Accountants and Actuaries piddling and moaning about turning numbers around while the Risk profession change some colours around in some spreadsheets? Ah, the good old days...

Figures - ropey
It wouldn't be fair to say the full year results releases for UK plc's insurers has sneaked in under my radar during a fortnight of incessant Omnibus II crowing - they all announced relatively close last year, so I have been waiting patiently for them to arrive en masse - but it's been a week since the first ones reared their heads, so I figured I would post what I have now and update it later.

We know that to-date, Solvency II preparation has been a pricey job - Deloitte and a couple of blokes who should know better have already thrown around more ropey figures than Thursday night at Zumba - so it's always nice to do a bit of regional backtesting (which you will find below), which totals almost £700m pounds just for the four who have definitively broken their Solvency II costs out!

Generic Solvency II

  • We continue to closely monitor the development of Solvency 2 and our business is well placed to implement the necessary changes expected to be required before 2016. (p10)
  • We welcome the positive steps in the development of the Solvency 2 regime during 2013 and expect our capital position to remain strong following implementation. (p16)

  • Total restructuring costs incurred during the year were £75m (2012: £114m) which includes £11m related to the acquisition of the private client division of Newton Management Limited...The remaining costs relate to a number of business unit restructuring programmes and Solvency 2. (p145)
  • For info, the last broken-out cost Solvency II cost was £59m in 2011

Standard Life - Executive transcript

  • "In ICA+ we are the pilot firm" (p23)

Generic Solvency II (nothing on costs yet)
  • During the second half of 2013 there was encouraging progress on the development of the proposed Solvency II regulatory regime. We now believe that the worst case scenarios have been avoided to the benefit of customers and the wider economy. While full clarity on Solvency II capital will not emerge for at least another 18 months, we currently anticipate that our Solvency II capital surplus will be no lower than our Solvency I IGD capital surplus. (p5)
  • We will provide dividend guidance for subsequent years when Solvency II clarity has emerged. (p5)
  • Solvency II is targeted for implementation in early 2016. Revised capital calibrations for long term business provide sufficient flexibility to address many of the adverse capital impacts for UK insurance firms. Challenges remain, however, in ensuring that final implementation is proportionate and cost effective for the insurance sector. (p19)
Legal and General presentation

  • We believe that the worst case Solvency II scenarios have been avoided. (p5)

Economic capital and costs
  • Strengthening our financial position has been a focus in 2013. Our economic capital surplus has increased to £8.3 billion, which represents a 182% coverage ratio and includes our defined benefit pension on a more conservative fully-funded basis. We welcome the progress made by our regulators on Solvency II and the level playing field that this is likely to create. (p5)
  • Solvency II implementation costs reduced to £79 million (FY12: £117 million). (p18)

Aviva presentation slides
  • Confirms last 3 year's worth of Solvency II costs as £89m, £117m and £79m (p10) 

Generic Solvency II 

  • We do not expect to submit our Solvency II internal model to the Prudential Regulation Authority for approval until 2015 (p6)
  • With greater visibility on the potential outcome of Solvency II, we are reporting an economic capital surplus of £11.3 billion (2012: £8.8 billion), which is equivalent to an economic solvency ratio of 257 per cent (2012: ratio of 215 per cent). This result is based on an assumption of US equivalence, with no restrictions being placed on the economic value of overseas surplus, and using our internal model, which has not yet been reviewed or approved by the Prudential Regulation Authority. (p12)
  • We regularly review our range of options to maximise the strategic flexibility of the Group. This includes consideration of optimising our domicile as a possible response to an adverse outcome on Solvency II. (p30)
  • Over the coming months we will remain in regular contact with the Prudential Regulation Authority as we continue to engage in the 'pre-application' stage of the approval process for the internal model. In addition, we are engaged in the Prudential Regulation Authority’s 'Individual Capital Adequacy Standards Plus (ICAS+)' regime, which is enabling our UK insurance entities to leverage the developments made in relation to the Solvency II internal model for the purpose of meeting the existing ICAS regime. (p30)
  • £29m Solvency II costs versus £48m last year (and £55m in 2011)

Generic Solvency II and economic capital
  • ...across the various ratings, internal and regulatory measures, we simply do not have enough tangible equity to properly support our business. This is partly due to 2013 setbacks and partly to rising regulatory standards. (p4)
  • The Group is actively involved in shaping the outcome [of Solvency II]...The directors are confident that the Group will continue to meet all future regulatory capital requirements. (p35)
  • The economic capital surplus was £0.7bn (31 December 2012: £0.7bn) (on a 1 in 1,250 year calibration) giving coverage over the economic capital requirement of 1.3 times (p9)
  • £20m, versus £32m in 2012 (and £30m in 2011)

Generic Solvency II

  • We are currently discussing our approach to implementation of Solvency II with the PRA (i.e. standard formula or internal model) and expect to enter the process for PRA approval of our internal model (“IMAP”) such that approval is granted before the end of 2016.
Although the final guidelines for calibration of the standard formula approach have not yet been released, our current expectation is that this would not give the most appropriate assessment of our solvency position. We do not currently expect to gain any capital benefit from IMAP, but continue to monitor this closely as further guidance emerges and our discussions with the PRA continue. (p19)

  • "Increased non-recurring costs reflecting increase in Solvency II spend" is down as a negative on Free Surplus performance (p9)
  • There remains considerable further work to transition the Group across to a Solvency II basis…In the absence of final regulation, we will continue to adapt our plans as specific requirements are confirmed. Nonetheless, as we transition, there will be an impact in terms of the way in which the Group needs to hold capital against a Solvency II balance sheet and we will consider how best to do this in the manner that best serves our customers and shareholders. (p54)


  • Finance transformation costs of £49 million largely relating to Solvency II (p24). This stands up alongside £76m for 2012, and £56m for 2011, remembering that they dropped out of IMAP during 2012, but appear to have been told to get back in!


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