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 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!

 



 

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!

FTSE and European Interim Reporting - Solvency II off radar

So it's Interim Reporting time again for Europe's beleaguered insurers and as far as internal models go, another one has apparently bitten the dust - Old Mutual formally withdrew from the PRA's Internal Model Application Process in early 2013 "...as a result of delays in Solvency II implementation" (p14), joining Resolution on the sidelines.

Solvency II - 'Time of your life'?

This time around there appears to be a conspicuous absence of comment on Solvency II and indeed Omnibus II, unlike this time last year, when every firm had an opinion about Solvency II's legislative progress and its financial cost.

This is not so unusual for the mainland Europeans such as Allianz, Axa and Munich Re (all of whom had nothing new to say at the half year), but the UK firms have normally used the Interim Report as an opportunity to sound off. With Old Mutual (above) and  Legal and General so far only offering minor comments on "delays" and "uncertainty", have both the industry and the legislators given up forecasting the end game, and put the Solvency II "baby in the corner"?

Hopefully the remaining big hitters such as Pru, Aviva and Standard Life will have something to say over the next couple of weeks.

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 results and spare capital - Legal and General

We must be entering the final straight in terms of UK disclosures (I think I've got most of them already) - L&G entered the fray today with their preliminaries, and had the following Solvency II-relevant items to disclose:

• IGD coverage of 220% - touch down on last year, but up in absolute terms from £3.7bn to £3.8bn - interesting that they declare it post dividend, unlike Prudential yesterday (the focus on how cash generative the L&G model is in their report might explain this relative flashiness!)
• Spend on Solvency II  (and other investment projects) up to £56m from £39m in the previous year
• "Countercyclical dampeners" highlighted as a key area in which L&G are engaged in the debate at EU level 

I may try and round these disclosures up into a nice table once the last few put their heads above the parapet.