Listed Insurers and capital adequacy - Generali

Onto the home straight with these now, as most of the UK Tier 1's and the larger mainland European have already presented their preliminaries for 2011, but Generali kindly pushed their disclosures out yesterday, which made for interesting reading on the capital adequacy/transition to Solvency II front. I had blogged last summer that these guys may be stretching it on the capital front on the basis of some numbers touted by the FT, so I have been looking forward to these!

In the main report, they draw out the following;

• Solvency I coverage down to 117% at 2011 year end (from 132% at end 2010) - similar to Aviva, they throw together a pro-forma estimate for end-February to show that the year-end number was something of an "exceptional volatility" fluke, and suggest it is back around 130% again (p76).

In their analyst presentation, they are a lot more forthcoming on both regulatory and economic capital, and cover the following;

• "Restoring capital adequacy" slide on p5 shows the need for the pro-forma capital recovery mentioned above.
• Same slide shows economic capital was as low as 124% before the post-year end recovery (not disastrous bearing in mind they are calibrated to 1 year VaR at 99.95%, the same as Aviva and Zurich, and the same ballpark as Old Mutual).
• Analysis of change in the Solvency 1 Margin (p33) shows how both the ratio and the amount have been decimated y-o-y - relatily small dividend element, so that should be safe I guess.
• Economic Capital ratio change (p35) sees them also reference a more generous area of the PDF in order to give context to the level of coverage (only 124% covered at year end using AA rating as the calibration, but 159% covered using BBB rating). I'm guessing things look rosier at 99.5% for everyone else as well though fellas!
• A slide covering the Solvency I change between 2010 year end and the improved pro-forma number at the end of February 2012. They gain €1.1bn from "Italian anti-crisis legislation", which I'm guessing is bond-related, and amplifies why the economic issues in that area of the Eurozone have to be catered for.
• Some stress tests on the Solvency I ratio on p74 - useful for consideration

You might also get some use out of their EEV report if you are knee deep in sensitivity/scenario testing, and they go to the trouble of defining some of the terminologies we know and love in their methodology section (particularly nice effort on internal capital on p30)

Listed Insurers - Solvency sweep on full year results announcements

Having already touched on Axa and St James's Place, I thought it handy to get a few of the others in one place with regards to Solvency detail at 2011 year end, more for my own benefit than anything! Appreciating that the Swiss lads below have  different yet Solvency II-complimentary regulation to worry about on this front.

Zurich
As ever, acres of disclosure (which you can serve yourself at here) but the salient points on Solvency are hard to identify, partly as a by-product of the volume of material, and also due to the Swiss Solvency Test (SST) transitional reporting. Couldn't be too confident of getting any real message other than the analyst presentation drawing out a rise in capital adequacy y-o-y on the Solvency I measure (and SST differences) in page 23, and pages 32-40 touching on a number of elements of economic capital. More text description on capitalisation on p25 of the Operating and Financial report.

Swiss Re
Corking set of results (helped of course by reserve releases!). Main Solvency II point is that they comment on page 15 that the delay in implementation is actually driving demand for Solvency I-style products (always a silver lining...)

Allianz
No detailed disclosure yet, just this, but the Solvency I measure has crept up to 179% y-o-y. Nothing of substance to say on Solvency II.

AEGON
Fair amount of disclosure in both the report and the slides, and Solvency I measure up around 195% at group level. More soberingly on the UK side, their Solvency I surplus was at approx 150% (p6 of report), with the other regions floating the number up.

Should be more to follow, though the meaty disclosure on capital adequacy will no doubt be saved for the Annual Report and Accounts rather than the results releases.

ERM Speciality papers - Harvard Business Review and Zurich

As with the previous post, another document which may make Insurance industry readers feel like the proverbial grandmother being taught to suck eggs was pushed out by Zurich, in conjunction with the Harvard Business Review. Heavily themed around ERM programs and CRO tactics used in deployment.

This contains some generic examples of current CRO risk management practices, obtained from the horses' mouths. I hasten to add that these are not all "best practice", and indeed some might not even be considered "good", but they are across all industries, which does help benchmark any progress you might be making on infant ERM programmes forced by Solvency II or Corporate Governance code changes.

In its entirety it feels 10 pages longer than it ought to be, purely due to the number of quotations and practice examples it includes. It does however include a decent sample size (1,419), so the response percentages are a better representation than a lot of benchmarking/best practice materials.

I took from it the following;

• Huge growth in number of CROs at large companies since 2008 (11% to 42%)
• Two-thirds felt they were not doing well at the 6 risk management capabilities cited in the report as critical to organisational performance - all of these capaibilities are very much embedded in the ORSA world for insurers
• Only 1-in-10 felt they had a "Strong risk-aware culture" - I know this is a topic for debate on the IRM's LinkedIn page, so worth a look if you feel you are lacking in this area
• Note a "broad agreement on the increased importance of ERM" - the PwC paper referenced in the last post argues the opposite!
• "Big risks" flagged as currently being the zeitgeist were; Nat Cat, Economic Crisis, Talent Retention and Reputation - this definitely shows how the CRO can pull themselves away from operational activity to focus attention on less visceral matters.
• Reference to "sequential risks" which to all intents and purposes is describing scenario analysis - is there a case for trying to enforce a common risk language on this matter as a profession?
• Reference to "proactively managing risk, rather than simply mitigating it in a reactive way" - is it not possible to proactively mitigate risk?
• Half of companies surveyed have a single identifiable individual reponsible for ERM, "a key factor in driving success in this area" - can't make up my mind if this is a good or a bad thing, but I guess it is dependent on how vigorously the three lines of defence are established.
• Aggregation of risk types and proactively identifying current/emerging risks were deemed by the sample to be less important than "embedding a risk-aware culture at all levels" - this seems very odd, and perhaps borrows on the vagaries of the term to enhance its importance to CROs
• Piece quoting from COSO on page 11 which contradicts the view mentioned above that individual ownership of ERM is something to aspire to.
• Some strange numbers on the relationship between Risk and Internal Audit - over a quarter of respondents said they either didn't work closely with IA at all, or didn't know. Goes on to describe an example of IA using ERM-identified risks as the basis of the Audit plan, which in my view is ideal, and a great example of knowledge and intelligence sharing.
• Strangely for something with heavy US input, no references to ratings agencies as a driver for ERM
• Primary barriers to implementing ERM all seem logical, though the failure of key staff to acquire new skills features around halfway down the list, and in my experience this would probably be top.
• Finally, one CRO talks of his "small, lean staff" - no need for a punchline there... 

Overall good benchmarking questions, but perhaps too much in the way of "at one firm..." examples.

Solvency II - Outsourcing Policy test

A pretty monumental announcement from Zurich and Capita today about outsourcing pretty much all back office for the next 10 years. Not sure exactly where the Zurich lads are with equivalence etc, but this contract is a mighty test of the quality of their outsourcing policy wording, Solvency II aside!

In addition, as I had blogged earlier, there is an interesting angle on VAT-able services for Insurance administration which may make claims administration etc more expensive for companies who "in-source", so these kinds of deals could circumnavigate that possibility.