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%

FTSE Insurers, Solvency II and Capital Adequacy - Resolution

There's enough disclosure in Resolution's releases today to choke a donkey, with preliminaries and slides full of the usual treats - this is probably the last of the major moheicans, so I'll probably do a round up post for my own benefit, though you can click through on the links on this post to get to the earlier ones.

On the Solvency II front they disclose £55m of project spend avec finance transformational costs, which is the same ball park as most competitors (L&G, Standard Life and Pru all within a couple of million). Their comment on p7 that "The current legislative draft looks less favourable for the UK industry with the treatment of matching premium and contract boundaries, in particular, being more onerous than the last quantitative impact study (QIS5) undertaken by the industry", feels like it pre-dates the ECON vote from last week, and they have comment scattered throughout on impact of Solvency II on capital management strategy, with-profits distribution and annuities. Some more substantial comment on project progress is on p63.

On the capital front, their disclosures are a little muddier than in their excellent analyst day presentation from last year which helps identify something approaching their "economic capital" measure (although this is not your conventional insurance business of course, and like Zurich, has an interesting major outsourcing angle). On p24 of that slideshow they look at Solvency II aggressively in the context of potential for cash returns, but no sign of that aggression today.

They also disclose in today's slides that they have already generated substantial capital savings through an optimisation programme (dividend-inspired rather that Solvency II-driven I dare say!)

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.

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.