Insurance: Big SFCR data

The first publication of Solvency & Financial Conditions Reports (SFCRs) across the insurance industry has provided a treasure trove of new information for the market to absorb. But has it enriched understanding of insurers’ capital positions and quality? Michael Benyaya, DCM solutions, Crédit Agricole CIB (left), looks at the content and impact of the reports, with reflections from Julien de Saussure, fund manager at Edmond de Rothschild Asset Management (France).

Michael Benyaya Julien de Saussure

SFCR… another acronym in the financial institutions sector. This one was well anticipated in the insurance space, since the publication of the Solvency & Financial Conditions Reports (SFCRs) was a long-awaited event in the Solvency II timeline — the volume of information and details on the Solvency II balance sheet was expected to provide a fresh light on insurers’ solvency.

And indeed, as the bulk of SCFRs were published from May onwards, there is now a full set data to be digested.

“After having required more and more information after the implementation of Solvency II, I realized that the workload to process all the information provided by the publication of SFCR was huge,” comments de Saussure. “So I guess it is fair to say that the reports have been meeting expectations.

“Overall, the harmonization of datasets is very useful.”

But so far the impact on the market and analysts’ and investors’ perception has been muted.

Still, there are some valuable findings on the capital positions of large insurance companies.

Solvency 2 Capital Structure Tiering (% of Total Own Funds)click charts to enlarge


Transitional Measures on Technical Provisions, Volatility and Matching Adjustment Benefit (% of Solvency II margin)


Financial Flexibility – Hybrid Headroom


The insurance sector seems well capitalized

Across the large insurance companies, capital positions are comfortable, with no urgent need to raise additional capital. SFCR also provides a complete view on the capital tiering:

  • Financial flexibility is supported by hybrid headroom across capital tiers. Medium term, Restricted Tier 1 could become an option as the Tier 2 bucket will run out of capacity.
  • The Tier 3 bucket remains largely unused and generally includes only Deferred Tax Assets (DTAs), with the exception of CNP Assurances and Aviva, who have issued Tier 3 bonds. It is expected that the Tier 3 bucket will be managed with the aim of hosting potential DTAs rather than issuing Tier 3 bond instruments. Hence the supply of Tier 3 bond instruments is expected to remain limited.
  • Ancillary own funds (AOF) have been viewed as a tool that could be used to design instruments to manage the volatility of the solvency ratio. For now, AOF seems to be used as part of internal financing arrangements as a few solo entities have AOF (e.g. Hannover Re (Ireland)) in their capital structure.

“We focus mainly on Group SFCR,” says de Saussure, “unless we are aware of specific local solvency constraints.

“A key issue is financial flexibility,” he adds. “i.e. the headroom to issue in ever tier versus leverage/coverage constraints and the impact on sustainable profitability.”

All eyes on transitional measures

The solvency capital position is supported by the use of measures implemented via the Long Term Guarantee (LTG) Package, notably the Transitional Measure on Technical Provisions (TMTP), Matching Adjustment (MA), and Volatility Adjuster (VA). One should differentiate among them as VA and MA are permanent while TMTP will amortize over 16 years. Yet a few insurers benefit massively from LTG and the Solvency II capital position can look really light when stripping out all LTG measures. For now, stakeholders (rating agencies, investors) seem relatively indifferent to this as the market impact has been relatively muted. Could this change? In terms of reliance on TMTP, investors’ perception could evolve as a function of the ability of insurance companies to adapt their business models.

“Both ratios — fully-loaded and transitional — must be taken into account,” says de Saussure. “Transitional ratios are important for supervisory intervention and/or coupon risks — cynically speaking, the fact that some supervisors may be more lenient than others reduces credit event risk.

“But the fully-loaded ratios are probably a better estimate of the long term solvency of the issuer. So the credibility of the capital plans to increase the fully-loaded figures and compensate for the natural amortization of the transitional measures is key.”

He adds that, with some elements of SCR still apparently having different meanings in different jurisdictions — such as the Loss Absorbing Capacity of Deferred Taxes (LAC DT) — any toughening of the rules must be taken into account, especially for weaker players.

Group MSCR: another potential trigger for subordinated debt?

SFCR sheds some light on the concept of Group Minimum SCR (Group MSCR). The Group MSCR is the simple sum of MCRs of the insurance or reinsurance undertakings, and it uses different tiering limits. Group MSCR was discussed by RSA in the context of its RT1 transaction because it could be the binding constraint in terms of coupon cancellation and loss absorption triggers (in contrast with what is generally expected, i.e. SCR is the focus). Some other insurers are in the same situation and the communication on the role of Group MSCR may need to become more specific going forward.

Grandfathering: what will be the regulatory treatment beyond 2026?

The grandfathering treatment of subordinated instruments issued before the implementation of Solvency II remains a key focal point for investors. In particular, investors continue to question the potential regulatory treatment after the end of the grandfathering period, i.e. could the bonds become fully eligible Tier 2? There has been no public statement from regulators so far and the quality of disclosures is uneven.

“We look at grandfathering arrangements and the impact they can have on extension risk for the asset class,” says de Saussure.

More supervisory scrutiny ahead?

SFCR provides some qualitative information on the assumptions behind the standard formula for companies using internal models, but obviously a pro forma Solvency II ratio under the standard formula is not disclosed. In some other areas, notably the diversification and the loss absorbing benefits of deferred taxes, the differences are difficult to explain for external stakeholders. One may argue that internal models have just been reviewed and approved by supervisors and hence any new review will not happen in the short term. But, medium term — also looking at the banking experience — the harmonization of assumptions could become a supervisory target.

“More harmonization in the stress tests for SCR would be appreciated,” suggests de Saussure. “Elements relating to ORSA (Own Risk & Solvency Assessment) would be interesting: are modeling of lapse ratios in a rising rate environment homogenous from one issuer to another? The IRRBB (Interest Rate Risk in the Banking Book) stress test performed on banks has already shown an important sensitivity to behavioral models.

“And clarity on the intervention ladder (as presented by ASR during their RT1 roadshow) would be interesting.”