2015 FTSE Interim Reporting and Solvency II costs - forewarned and forearmed?

Solvency II costs - impressed?

I always liked to keep an eye on the FTSE lads’ Interim and Full Year pronouncements on the Solvency II front back in the day, but given the legslative delays and sporadic cost reporting over the last couple of years, plus the internal model hokey-cokey, disclosures on the topic have been “Slim Pickens” to say the least.

For those interested, the sweep I did last year is here, and while a few of the firms featured have attempted to expand out, they have largely disclosed the same information as last year (Boiler-plate disclosures? Never!).

However, a few of the great and good have chirped up some extras about Solvency II on the home straight, none more revealing than the Canary-supporting egg-chasers at Aviva. They dished up the basics as a matter of  course;

• Solvency II costs of £46m for the half year (£39m for last half year)

• Submitted Solvency II internal model in June and expect approval in December. – must be a good one, Hannover Re-style!

• Currently operating within our expected Solvency II target range, regardless of any changes in economic capital surplus quantum and composition driven by Solvency II

The InsuranceERM lads expanded on that, having presumably dialled in to associated conference call! In a suit-and-tie version of Surprise Surprise (R.I.P Cilla), the CEO shocked listeners with the following statements;

• "[Solvency II] has taken an inordinate amount of management time and I'd really like that time back"
• "It has cost us in the region of £400m [$620m]. This figure does not impress me one little bit…” – to my shame I did do the countback on published costs, as if a CEO couldn’t count to £400m, and it does add up!

RSA, in between flirting sessions with the watchmaking fraternity, were similarly revealing, confirming;

• Solvency II costs of £14m for the half year (same as last half-year)

• “…application for Internal Model approval under Solvency II has been submitted and we target a positive outcome by year end”

• "…current Internal Model for Solvency II shows higher coverage ratios than our ECA model.”

Old Mutual does its best to treat the SAM/Solvency II imposters the same in its reporting, but in recent times has been light on our side. There was a bit more in the bag this time round though, particularly;

• "Based on the current underlying timetable and regulation of Solvency II, we estimate the total cost of completion will be up to £20 million, of which £10 million will be incurred in H2 2015, and the balance running into H1 2016".

• "The Solvency II regime will introduce a different lens through which to look at Group capital. It will use a more conservative 1 in 200 stress scenario in determining capital requirements and apply a more rules-based determination of capital fungibility and transferability"

• Given their tone on the “inherent conservatism” of Solvency II and their loving gazes at the existing FGD treatment of capital fungibility, can we read some indifference to their current treatment as a Group by the PRA, perhaps?

• "During July 2015, we completed our initial reporting to regulators under the interim arrangements of Solvency II"

I suppose the biggest surprises continue to be the (potential) absence of compulsion to internally model for entities such as Old Mutual (confirmed as “out” of IMAP on p82 here). Given the PRA’s pronouncements on Standard Formula appropriateness and capital add-ons, you might expect them to be marched down the aisle before too long.

Standard Life,perhaps betraying where their strategic priorities lie (nicely covered here), did little more than state that they will “remain strong” on the capital front – nothing on costs, nothing on implications, and nothing on modelling (though they confirm here that they are “in” apparently!). “In”, but on the naughty step perhaps, or is the topic just unworthy of comment?

L&G were happy to talk technical, rather than cry about hundreds and millions of pounds of spilt milk – their release touched on the following;

• Implementing a ‘capital-lite’ model for bulk annuity new business, by reinsuring out some of the risk (light detail here and here, more detail on p5 of the interims).

• Solvency II internal model is being reviewed by the PRA, and “…It is anticipated that our Solvency II internal model will be approved in Q4 2015, ready for use on the Solvency II go live date - 1 January 2016”

• Also have applications in for the use of transitionals, matching adjustments and using deduction and aggregation for its American business

• “We expect the final outcome of Solvency II to result in a lower Group capital surplus and solvency ratio than the Economic Capital basis. Our Economic Capital model has not been reviewed by the Prudential Regulatory Authority (PRA), nor will it be.”

• "We note recent clarification from the PRA to the effect that transitional capital will count as Tier One capital, including for assessments of dividend-paying capacity". This is particularly piquant given Sam Woods’ coverage of the “dividend” issue a few weeks ago when trying to reassure a room full of analysts that the insurance sector isn’t a busted flush from an investment perspective!

A busy reporting week for sure, with seemingly no horror stories come at the top-end of the UK Insurance Industry...Including a post-script from the Pru today.

They have revealed a miniscule spend of £17m on Solvency II costs in the year-to-date (against £28m for all of last year), as well as a few nuggets in the same vein as the competition;

• "...we submitted our Solvency II internal model applications to the Prudential Regulation Authority in June 2015"
• "We continue to seek opportunities to transfer longevity risk to reinsurers or to the capital markets and have transacted when terms are sufficiently attractive and aligned with our risk management framework."
• "We also noted at the time that certain aspects of our economic capital methodology are different to those required under Solvency II and that the outcome under Solvency II would be lower than our reported economic capital level. This remains the case." - same issue as Old Mutual, one presumes?

They even dropped a Solvency II slide into this morning's presentation pack (slide 28). Interesting that they go to the trouble of highlighting that the transitionals and risk margin "broadly offset" on the UK Life book, as well as their distinct gripes in their Asian and US businesses. 

...and another post-script from Royal London (so I have everything on one page!)

• Royal London will use the Solvency II standard formula approach initially and will consider seeking approval for its internal capital model in due course

• We expect to meet the new Capital requirements without material adverse impact on policyholders but there are significant details which remain to be clarified about the new regime. It is possible the outcome from Solvency II will require insurance companies to hold more regulatory capital than is currently required. If Royal London was required to hold significantly increased capital, then the levels of Royal London Profit Share we are able to allocate to our participating members may need to be restricted

...and two more post scripts: firstly Admiral

• "Admiral is developing an internal economic capital model which will be used to calculate regulatory capital requirements following approvals from the Group's regulators in the UK and Gibraltar. Such approval is not likely to be sought or granted before 2017."
• "The Group's regulatory capital from January 2016 will, therefore, be based on the Solvency II Standard Formula, with a capital add-on agreed by the PRA to reflect recognised limitations in the Standard Formula with regards to Admiral Group's business (predominantly in respect of profit commission arrangements in co- and reinsurance agreements and risks arising from actual and potential Periodic Payment Order (PPO) claims)."
• "The level of capital add-on and resulting Group capital requirement from January 2016 is expected to be confirmed by the PRA in the final quarter of 2015."

...and secondly Phoenix

• "...submitted its application for regulatory approval of its Internal Model in June 2015"
• "...Group capital position under Solvency II expected to be in excess [of current surplus]
• "Over 2015, clarity on Solvency II regulations has improved but uncertainties remain in relation to the Group's IMAP and other Solvency II-related applications"

FTSE Insurers and Solvency II costs - quick round up

So I'm back to work after a well earned pit stop back home. I'll start with a summary of all goings-on in the Solvency II world over the summer using the following complex schematic...

Solvency II implementation costs to insurers, having experienced feast and famine over the last 2 years, will be firmly back on the bean counters' agendas now the finish line is in sight. In the past I had mopped up the 2013 financial year end here, the 2013 interims here, and 2012's full year here, so there is plenty of numbers out there for those interested.

I've therefore taken a quick look at some of the UK interim reports out over the last couple of weeks, just to see what costs/lobbying elements are included. It has been pretty dry going, which may reflect analyst fatigue on the matter more than insurer ambivalence, but I'd flag the following;

Aviva
- Costs which are "mostly" Solvency II at £41m for the half year
- No substantive comments on current legislative position

RSA
- Costs of £14m for the half year, against £20m for all of last year
- Amusingly classify Solvency II expense as "One-off non-operating costs"!

Standard Life
- "...expect [their] capital position to remain strong following implementation"
- No reference to costs

Prudential
- Implementation costs (broken out into p10 of this IFRS supplement) of £11m for half year, versus £13m for the comparable half-year, and £29m for all of 2013
- "...preparations are well advanced"
- Backwards in coming forwards over the likelihood of model approval and valuation assumptions (p17)
- Domicile change still left dangling (p24)

Old Mutual
- "...well positioned" for Solvency II, though "...continue to experience a degree of uncertainty"
- Nothing on costs

Legal and General
- "...expect the final outcome on Solvency II to result in a lower Group Solevncy Capital ratio" than existing EC. They stress in their accompanying presentation and in Nigel Wilson's speech that their existing EC is not Solvency II capital!
- Indication on  p17 of the Analyst presentation notes where L&G and the ABI have potentially fallen out (hence their recent divorce)
- Nothing on costs

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!

Standard Life - AR&A

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)

 Cost-specific

• 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)

Legal and General - preliminaries

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)

Aviva - preliminaries

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) 

Prudential - preliminaries

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)

Cost-specific

• £29m Solvency II costs versus £48m last year (and £55m in 2011)

RSA - preliminaries

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)

Cost-specific

• £20m, versus £32m in 2012 (and £30m in 2011)

Resolution - preliminaries

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)

Cost-specific

• 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!

 



 

Deloitte on 'regulatory uncertainty in Europe' - embedding a new modus operandi (?)

In a wonderful example of predicting the present, Deloitte have released a white paper (sign-up required) giving their take on regulatory uncertainty in the European insurance industry, and how the volume of new regulations (and their inability to land on time) is driving emerging best practices in the consideration of regulatory risk at Board level.

New Modus Operandi - alloy wheels optional?

Of course, it is always best to wait for such matters to emerge before proselytising, and the current cup of omni-postponed over-elaborate regulations is running over (Sol II, IFRS 4 Phase II, FATCA, etc), naturally causing difficulties for all those responsible for preparing for them, as well as the execs who take the topics into the boardroom every quarter, only to say "it's been delayed again, can I have more money"...

From my perspective, it was particularly interesting to see that proactivity is recommended regardless of nature/scale/complexity, bearing in mind the first time I spoke to a Board of Directors at a tiny insurer regarding Solvency II preparations was in 2009 - only consultants could comfortably suggest that an new executive-level role is established, and Board agenda time is regularly set aside, only to explain the latest delays in multi-jurisdictional regulations (I certainly know what my old CEO would have said to that!)

That aside, they suggest that two major problems need to be overcome; that few insurers have a single view of regulatory risk; and that regulatory insight is poorly represented in the strategic workings of insurers, both of which are easy to agree with purely on circumstantial evidence.

Whilst this frequently reads like a paper written to justify bringing consultants in to compensate for failing in risk and compliance professionals' armoury, Deloitte make the following noteworthy assertions/recommendations in it;

Trends

• That most insurers prefer to 'wait and see' rather than be 'first mover' when it comes to regulatory preparations - after the Solvency II experience, does that surprise anyone?
• That "...Deloitte's view is that regulation can be regarded as a 'structural' driver of the insurance industry"
• That "...Deloitte's considers a regulatory dividend can and should be sought", which is not necessarily my experience of consultancies when on site, who (presumably for legal reasons) prefer to promote a gold-plated complaince approach to regulation-driven projects.
• Cost of compliance is now materially diluting return on equity in EU insurers
• That Conduct Risk is likely to become high profile across Europe over a longer period of time than its current flavour of the month feel, thanks to IMD2/PRIPS/MIFID
• National regulators are increasingly impeding on day-to-day running - examples given (all of which have a whiff of IMAP requirements about them), include documentation improvements and influencing risk appetite/capital allocation work.

Costs and volume

• Regulation prep cost the European insurance industry €4.2-€4.7bn in 2012 - they go on to expand that to €8.1-€9.2bn over the last 3 years.
• UK industry will be subject to 29 new pieces of legislation of the next 5 years (surprisingly lower than the French at 35, and the Germans at 32!)
• That the "cost of doing nothing" while waiting for regulatory clarity may be significant - as significant as consultancy spend preparing for something which never arrives perhaps?
• That compliance functions are naturally struggling to cope with the current volume of initiatives

Solvency II-specific

• They extrapolate an estimated €550m cost of Solvency II compliance preparations in 2012 into a €1.5bn-€1.8bn 'top 40 insurers' number, and a €2.4-€2.9bn figure for the whole industry - feels a bit light, bearing in mind 'UK plc' must have done the best part of £1bn on Solvency II alone in 2012.
• They quote one strategy director as saying that "Solvency II is killing European M&A..." - p10

Their recommendations (from p19) are too woolly in aggregate to help a normal practitioner - they are probably targeted more towards programme directors and managers - but the recommendation  to establish a Regulatory Assessment and Response Executive with a suitable remit is a smart idea, even if from a practical perspective this might need to either be balled in with the responsibilities of an existing executive, or only be a mid/senior management role, in smaller companies. 

These recommendations also include the marvellous suggestion to "embed a new modus operandi" - an expression normally reserved for profilers of serial killers, and perhaps the hardest sell since Isle of Man beach holidays.

PS I apparently missed the memo where the oft-ridiculed speech of Donald Rumsfeld used to support war against Iraq became de rigeur in risk management/insurance white papers. If there is one "known known" in this world, it is that I will never use that expression on the job!

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;

Aviva

• 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

Axa

• 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

Allianz

• 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

Resolution

• 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

Prudential

• £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

Generali

• 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

RSA

• 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!

FSA and cost of Solvency II in the UK - two tunnels or half a tunnel?

Andrew Bailey, incoming head of the PRA in the UK, was widely quoted yesterday as saying that the spiralling costs of Solvency II could ultimately cost "twice as much" as London's new £15bn choo-choo tunnel Crossrail. This was at a parliamentary select committee, which for non-UK readers is where second tier politicians jump on the latest bandwagons, so that fact that Solvency II is getting some air-time is telling in itself.

Not entirely certain what expenses are included in this £30bn mega-bill, but the number is surely as inconceivable as a 2014 start date unless we add FSA costs, industry costs and slap on some arbitrary figure for "additional capital the industry will probably need to hold" - which is of course what was contained in the Cost Benefit Analysis commissioned by the FSA published back in 2011. With much of that based on QIS5 standard formula results (but at least in the same ball park as £30bn), I guess we can swallow £30bn, albeit with a pint, rather than a pinch, of salt.

"But wait a second" keen readers of the FT cry, "this time last month a prominent CEO said the cost was supposed to be HALF that of Crossrail,". Has someone in the fact sheet-preparing department at the Wharf got their wires more crossed that a breakdancing electrician, and sold their boss a dud here? Has one of the journos at the Telegraph or FT misquoted someone? Either way, there's probably a salient lesson in there somewhere around looking before you leap, it just remains to be seen who's left with the proverbial, errr, mucky shoes.

Incidentally, the full text from a separate questionnaire which the UK Parliament's Treasury Select Committee asked Mr Bailey to respond to is available here - this is separate to the interrogation transcript where the "twice as much" quote was obtained from, but contains some insight into where prudential regulation is going as of next month when the PRA take the reigns, including some good news on the regulatory levy front;

"For the next year, we intend to levy just £0.1mn [for Solvency II]. The difference [from last year's £15m] reflects cut backs that we have applied to Solvency 2 preparation costs. Although it is hard to be sure of the final cost of Solvency 2 preparations given the uncertainty on timing and substance, I expect the overall cost to be considerably lower than previously estimated. This will be a saving for insurers."


However, when one reads that, in his own words, the new head of Prudential regulation in the UK is "...by comparison new to insurance, but [he takes] it very seriously", you truly hope if the £30bn faux pas is attributable to him, that it can be put right - with all the Solvency II scaremongering and doom-mongering, we could probably use a little realism-mongering...

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Preliminary full year results - Solvency II implementation costs and opinions

Now the UK preliminary full year results are starting to flow in, we can get more visibility on what was spent in last year's Solvency II phoney war. This is a topic I have covered for the last two years on this Blog (here touches on previous disclosures in particular) and bearing in mind most of the UK's Big Rigs are in the habit of disclosing the sums spent on preparation, it gives a good feel for where the implementation costs tally may finally get to.

So read on if you are interested in seeing if 2012, just like the popular 'Lovely Day' singer, was the year that the...errrr....Bill Withers (?)

Legal and General

• "Delivered the core components" of Solvency II, though there remains "much uncertainty" - go figure!
• £50m spent on Sol II and "other strategic projects" (no further split available) - this figure was £56m last year

RSA

• Costs of £32m (£30m previous year) for Solvency II
• Expect costs to fall by "around 50%" for the next two years
• "Rephased our implementation project to minimise costs"
• EC calibrated to 1-in-1,250 (S&P 'A' rated)
• In the AR&A, they add that they "...remain at the forefront for internal model approval"

Resolution 

• £76m spent on (predominantly) Solvency II in 2012, as opposed to £56m in 2011 - 2012 was of course the year that they dropped out of IMAP, so the spend dropped in the second half of the year
• Original provision for Sol II released from MCEV this year was £34m!
• Economic Capital coverage of 182%

Aviva

• £117m spent on Sol II specifically, against £96m last year
• "Well placed" for ICAS+ review 

Standard Life

• £112m spent on Sol II, RDR and other restructuring (no further split available) - was down as £59m specifically on Solvency II in 2011

Old Mutual

• Economic capital at risk managed to 99.93%, and currently at over 160%
• "Given the delay to the Solvency II go-live date", focusing on embedding ORSA and internal model during 2013
• No coverage of project spend - same as last year

Prudential

• £48m of Solvency II implementation costs in 2012 (£55m previous year)
• "...expects to engage in the initial stage of the FSA's proposed Individual Capital Adequacy Standards Plus (ICAS+) regime"
• Solvency II "may" provide a more risk-based capital framework, but "...we now know that it will not be implemented before December 31st 2015"
• "Continue to evaluate [their] options, including consideration of the Group's domicile"
• "...remain focused on preparing for implementation" despite uncertainty

And over to continental Europe;

Allianz

• "...adoption in 2014 is no longer guaranteed"
• EC coverage of 199%, calibrated to 99.5% VaR over 1 year - was previously calibrated to 99.97%, and Solvency II is used as rationalisation for the y-o-y change
• Rated 'strong' by S&P for ERM, and have had their internal model positively rated by them
• "Will take advantage of the delay in the implementation of Solvency II" to industrialise balance sheet production and internal model processes

Munich Re

• "..some uncertainty remains" around Solvency II, and they are banking on "at least two further years" delay
• Note that "...the risk that our Life primary insurers may not meet the capital requirements cannot yet be entirely excluded"
• Confident that "new opportunities...will exceed the challenges"
• Targeting 1.75 x 99.5% VaR over 1 year as their Economic Capital Target - this is a "...conservative approach, offering a high degree of security"
• Currently hold 129% of that figure
• Perhaps more significantly from an internal model perspective, hold 225% of 99.5% VaR over 1 year - if we considered that "conservative", I wonder what we might consider "liberal"?

Generali

• Economic capital ratio (calibrated by their internal model to ultimately deliver the required SCR percentile) of 159%, unchanged y-o-y, despite a lot of positive capital management activity (p33)
• Solvency I ratio is 150% (p31), up significantly on last year's 119%

Legal and General - Counting the cost of Solvency II

Spotted by his Lordship John Walton this morning, L&G  appear to have broken the mould by dropping some substantive Solvency II comment into their Q3 IMS, notably that they have booked £129m of costs in project spend.

They also go on to plead unhappiness on the inability of the rules as they stand to encourage the provision of long-term capital to the wider economy, echoing DG Faull's rollocking letter to Sr Bernadino the other week on longer-duration debt instrument capital costs, though are clearly only interested in UK investment opportunities as opposed to loading up on fruity Eurozone government debt (good on you!).

Of course the Solvency II preparation costs of most of the big-boys have been covered on this blog before, and £129m feels suitably light for a UK-focused business in comparison to some of its more complicated competitors. That said, with the FSA offering some hope of a transition to "ICA+" rather than dual running ICA and IM SCR for the next x years, how much leverage does this sort of investment buy a firm down at Canary Wharf when it comes to meeting the transitional criteria?

Look forward to seeing a bit more of these disclosures over the next week or so now we are in IMS season, but not counting on it!

FTSE Insurers and IMAP - Resolution are out!

Shock news announced today (unless you actually listen to the grapevine I guess) that Resolution have dropped out of the FSA's internal model application process, citing the decreasing likelihood of go-live on Jan 1st 2014.

Unlike the other big-hitter candidates who appear, despite their concerns on go-live date, to hunger for approval at outset, Resolution seem happy to take their chances (at least in year 1) with a standard formula approach.

They note the following;

• "Looking forward, the Group believes there is heightened uncertainty around the future requirements of Solvency II both as regards its structure and timing of implementation. The implementation date for Solvency II has been delayed to 1 January 2014 and the Group expects that it will be delayed further" - p48
• "In line with this it has concluded that it is in the Group’s best interests to delay its internal model application to allow time for any further changes in the Solvency II implementation timetable and to help smooth the Group’s overall change agenda. Accordingly FLG has withdrawn from FSA’s internal model pre-application process and is now targeting obtaining internal model approval in January 2015" - p56
• "If the Directive is implemented in 2014, FLG will be ready to comply with its requirements through the use of the Standard Formula. Use of the Standard Formula, pending obtaining internal model approval is not expected to lead to any significant disadvantage in terms of capital requirements" - p56

I would hasten to add that this decision cannot reverse the whopping £48m of transformation costs for the 6 months booked predominantly to Solvency II (they were less than £60m for all of 2011!).

Whose next for dropping out...

FTSE Insurers and Solvency II at interim-time - 'Oops I spent it again'

While the politicians and eurocrats are having a well earned soak in the August sun before they pick up their Omnibus II cudgels again, the rest of the Solvency II world has to continue with the more mundane tasks of counting beans and predicting the future.

On that basis, the great and good of UK Insurance plc have been comparing abs this week on both cost and go-live date, with the following revelations;

Legal and General

• "...expect implementation [of Solvency II] could be later than 2014"
• On track to submit IMAP by end 2012 - guessing this means a large amount of tedious rolling forward of balance sheets, SCR etc for the guys in 2013 in order to meet FSA application requirements
• £23m spent on "Investment Projects" for the half year, predominantly related to Solvency II - pro-rated, this is down slightly on 2011's total spend of £56m.

Old Mutual

• Bermuda's new capital regime (fishing for equivalence of course) has obliged the Group to send capital to Bermuda itself, reducing their FGD surplus.
• Seem confident that the overhanging Omnibus arguments (equivalence, discount rate methodology, contract boundaries) will affect its SCR surplus
• "...increasing risk of delay in the Solvency II timetable beyond January 2014"
• "...currently on track to deliver all requirements for Solvency II compliance"
• No word on project costs as such

Aviva

• Costs associated with preparing the businesses for Solvency II for the half year of (eeeekk!) £72m (as opposed to just under £100m for all of 2011)
• Note that a draft of the Level 2 implementing measures were "published in 2011" - I wouldn't call unofficial circulation via national trade organisations "publication" as such!
• Implementation date "...continues to be discussed"

RSA

• Content that go-live is still scheduled for 2014
• Interesting, calibrating their EC model to 1-in-1,250, which doesn't copy the vogue of 1-in-2,000 which appears to have landed with larger firms, I guess to save the ratings agencies having to work a bit harder!
• £16m of Solvency II costs for the half year 

Prudential

• "...currently anticipated to be implemented from 1 January 2014"
• "...continue to evaluate actions, including continuing consideration of the group's domicile"
• Total of £27m spent on Solvency II implementation costs in the half year

Resolution

• £48m at half year - their bigger news on exiting IMAP until 2015 is covered on this blog post.

Standard Life

• £42m at half year for Solvency II and RDR "restructuring programmes" - RDR is a beast in itself, so may be difficult to attribute a portion of that cost, though the guys were in the £50m+ bracket for all of 2011.
• Little in the way of additional Solvency II comment

Royal London

• £9m in "corporate costs", which includes Solvency II, but doesn't cover all by any stretch
• No additional comment

Some big money getting laid down right now, which was no doubt budgeted as tapering-off by now in previous budgets, alongside (no doubt well briefed) messages of uncertainty on go-live date - let's hope we get it right kids!

Bank of England and Solvency II - Tucker's Luck

Joining in with the rather boorish cacophony of UK-sponsored protectionist racket on Solvency II, one of the Bank of England's big hitters put his two-penneth worth in this week in a speech to the ABI.

Whilst his observations on the general train of thought being that insurers are not a threat to financial stability and that AIG was a "complete aberration" certainly ring true with the Geneva Association/IAIS lobbying line on SIFIs, and that all and sundry are "dismayed" with the costs to-date, I was a little less enamoured with his problems with "microregulators 'approving' specific models".

If his issue is one of staffing it at the FSA, and the likelihood of those best placed to assess being priced out of the market, fair enough, but the issue of "regulators drowning in data" could be quite easily solved by not asking for so much in the Self-Assessment Templates!

UK Treasury - Consultation on Solvency II

I have had a look through the UK Treasury's transposition of Solvency II consultation paper today (the purpose of this is to ultimately confirm which UK law and statute changes will need to be made to accommodate it, rather than the FSA's consultation, which was focused on replacing the existing handbooks with SOLPRU).

Strangely, at 100 pages, it is a pretty good read, and you should not be shy in purloining some of their idiot's guide material at the start for board presentations and staff briefings. However, the really meaty stuff comes in around halfway through, where they get to cost/benefit analyses (much of which leans heavily of the E&Y research referenced by the FSA numerous times already).

A few things jumped out, namely;

• £1.53bn as ongoing cost to UK industry (NPV over 10 years) - that's to go alongside the £1.9bn of transition costs!
• Sat alongside £3.52bn of "key monetised benefits", NPVd over 10 years - I'm no mathematician, but I guess that means it's a winner for the industry!
• Between 550 and 600 UK firms expected to be covered (Lloyds syndicates included) - this seems much lighter than the CEA figures from the other week, which had over 1,000 UK insurance entities. Are there relly that many below the de minimus level?
• No "gold plating" of Solvency II - bare minimum "copy-out" approach confirmed.
• Table included which shows the scale of the changes for firms with comparable data between Solvency I, ICAS and Solvency II.
• Still includes an estimate of 100 model candidates who will "ultimately" use an internal model, though it states that only a third of these will look for day-one approval. I'm struggling to reconcile this [100 in IMAP at outset, now down to 77, but only 33 will be approved on day 1!]
• Shows all the detail of how the FSA came to £110m as the cost between 09/10 and 13/14 (based on timesheets!) and the ongoing costs post-2014, broken down by FSA business area. Important note here is that half of the ongoing costs from 2014-2016 are for actuarial resource to assess internal models. Nice to know the logic behind the special project levies for those years

Plenty of flannel towards the back, which you are probably familiar with, but if not, knock yourself out!

FTSE Insurers - last interim result (I think!) and Solvency II progress

Resolution/Friends Life, the darlings of the disclosure world, released their half year results today (there is a location check on the way through on this URL, but don't be put off, it's a Guernsey thing!). This of course compliments the other FTSE Insurers' releases which I have blogged on previously.

As ever, Resolution are very forthright on most aspects of their raison d'etre, including Solvency II preparations - they note the following;

• "The implementation of the EU Solvency II Directive continues to be a key focus of attention for the Group...Friends Life group is closely involved with the industry in lobbying on key areas where uncertainty remains"
• £24 million of cost booked in respect of Solvency II and finance system developments, complimented by "overall [Solvency II] implementation programme is on track against its plans and budget" 
• "the Group believes that [Solvency II] will have a favourable capital impact on the Friends Life group relative to current Pillar 1 solvency requirements"
• "Disappointingly, there is a lack of clarity on the final position with respect to Solvency II, and the implementation date looks likely to be delayed" - no commitment on date, unlike some of the others
• “participated in the EIOPA stress test exercise” and are “closely engaged in the development of the tax proposals including any changes arising as a result of Solvency II”.
• "The Group has been accepted into the FSA’s pre-application process"
• "Providers, in anticipation of the higher capital requirements under Solvency II, have been adjusting their pricing which is leading to increasing margins." reinforced later specifically on annuities
• Solvency II considerations down as a "key driver" in the context of the cash generation result - presumably in the context of how much they can pay away and how much must be retained, though I could be wrong
• German product range directly affected by "the impact of Solvency II [which] is expected to limit market participants' ability to provide traditional with-profits product offerings."

The comment that "The Group assesses strategic developments and opportunities on a Solvency II basis" was perhaps the most fascinating part - how you do this without clarity on the suite of transitional measures, Omnibus II elements etc is beyond me.

As a post script, Phoenix also posted interims, albeit a little later than the others - again, a lot of disclosure on Solvency II, quotes as below;

The Group remains actively engaged in supporting the development of Solvency II through industry consultation and participation in FSA and ABI industry forums. 

Both the European Council and the European Parliament have proposals to amend the timescales for the implementation of Solvency II and there appears to be growing political momentum towards delaying full implementation until 1 January 2014. At the present time however, there is no certainty that this will happen and the Group continues to plan for implementation on 1 January 2013.

The Group remains on track to deliver an approved partial Group internal model and has been accepted into the FSA internal model pre-application process following the submission of the pre-application process qualifying criteria template in 2010. In respect of the resources the FSA will devote to the pre-application process it has stated that it will concentrate on a small population of firms representing a significant market share and which it regards as having the highest potential impact on its objectives. The Group is included in this category and remains in continuous and constructive dialogue with the FSA.

The Group's actuarial IT systems transformation project will deliver a single actuarial modelling platform across the business, transforming modelling capability and efficiency and underpinning development of the Solvency II internal model and Own Risk and Solvency Assessment.

"We continue to target full Solvency II readiness by the end of 2012.Our Internal Model Self Assessment Template has been approved by the FSA and we are on track to meet the Internal Model Application Process date of 1 April 2012."

On 23 March 2011, HMRC issued a technical note on 'Solvency II and the Taxation of Insurance Companies' outlining changes to the taxation of UK insurance companies with effect from 2013. The Group has been actively involved in consulting with HMRC and HM Treasury on the detail of the new rules, with the aim of ensuring that the Group's policyholders and shareholders are as far as possible not adversely affected by the changes.

The consultation process is still on-going in relation to certain aspects of the new rules, and as a consequence of this and the complexity of the proposed changes it has not been possible to estimate their potential future impact on the deferred tax balances shown in these interim financial statements. Draft legislation is expected in the second half of the year and its estimated impact on the deferred tax balances will be considered and disclosed in the year end financial statements.