Capital impact of COVID-19

HOW HAVE INDIVIDUAL FIRMS' CAPITAL POSITIONS BEEN IMPACTED BY COVID-19?

Despite the COVID-19 pandemic, financial strength has remained broadly stable across our sample of insurers between 2019 year end and 2020 year end. However, different insurers were impacted in very different ways and many firms disclosed the impacts of COVID-19 on their solvency within their SFCRs.

IMPACT OF COVID-19 ON CAPITAL

In addition to firms mentioned previously such as Vitality Health and Wren, a number of other firms quantified the impact of COVID-19 on their capital:

Ageas disclosed that its solvency ratio was initially impacted by c. 5% as a result of COVID-19, but that this has since reduced to zero at the end of 2020.
Allianz Ireland noted its SCR increased from c. €209m at 2019 year-end to c. €218m at 2020 year end. The key drivers of this movement included an increase in the level of non-life insurance risk capital due to uncertainty in respect of the COVID-19 reserves and an increase in forecasted exposure, and a reduction in the level of tax relief owing to a decrease in taxable profits arising largely from COVID-19 impacts.
Euro Insurances disclosed there has been an increase of €57.3m in its amount of Own Funds, partially driven by lower claims incurred as a result of COVID-19 related lockdowns.
RSA Ireland disclosed that its 2020 year end SCR of €115.3m had increased by approximately €3.5m, primarily driven by non-life underwriting risk capital which increased by €3.4m as a result of larger reserves driven by the impact of COVID-19.
Despite noting that its earnings dropped by €143m due to COVID-19 claims, XL Insurance reported that its eligible own funds ratio remained resilient at 141%, supporting its management’s view that the COVID-19 crisis was an earnings event rather than a capital event.

Many firms relied on support from their parent companies or shareholders over the past year in order to protect their solvency positions.

Several of these firms disclosed that direct COVID-19 losses and/or the economic impacts of the pandemic were the reasons for receiving additional capital over the year, but some other firms did not disclose the reasons for requiring additional support.

CAPITAL INJECTIONS

The following firms disclosed receiving capital injections during 2020:

TIERING OF OWN FUNDS

Whilst the proportion of firms holding Tier 2 and Tier 3 capital has not materially changed over time, the amount held has fluctuated from year to year. The value of Tier 2 and Tier 3 own funds eligible to meet the SCR decreased year on year from 2016 to 2019. However, this trend has reversed in 2020, most notably for Tier 3 own funds.

Tier 2 own funds

Total amount in Tier 2 own funds eligible to meet the SCR

Ancillary own funds (AOF) are a form of Tier 2 capital under Solvency II regulations. They are effectively unconditional capital commitments, but that are not paid up or called up when issued. These funds must be callable on demand, and create Tier 1 basic own funds (BOF) capital when paid-up or called-up at a future point in time. They also must be approved by the relevant supervisory authority to be classified as Tier 2 capital on the Solvency II balance sheet.

The number of firms with ancillary own funds has increased in recent years. For the 2016, 2017 and 2018 year ends, only 5 firms of our sample of 100 disclosed having ancillary own funds. During 2019, this increased by 2 firms, with Aspen and XL Insurance newly disclosing ancillary own funds over the year. An additional 3 firms (QBE UK, Soteria and Zurich) were also holding ancillary own funds by the 2020 year end.

Number of firms with ancillary own funds

QBE UK’s solvency position benefited from its parent providing solvency qualifying ancillary own funds of £160m during 2020.
Soteria entered into an agreement on 2 December 2020 with Soteria AOF Solutions Limited to provide access on request to funding of £25m, which is recognised as Tier 2 ancillary own funds.
Zurich received commitments from its shareholders to provide €228m cash contributions on demand (as mentioned in the table above).

In addition to firms increasing their holdings of ancillary own funds, two other firms have seen notable increases in their Tier 2 own funds over 2020:

Arch received a loan of £7.5m as discussed here. This loan meets the required PRA guidelines to classify as a subordinated loan and is included in its Tier 2 capital.
CACI Non-Life acquired a subordinated loan of €35m during the last year (repayable in April 2030 and classified as Tier 2 Own Funds), to support its business and solvency needs.

Tier 3 own funds

Total amount in Tier 3 own funds eligible to meet the SCR

The increase in Tier 3 own funds is primarily driven by recent accounting losses increasing deferred tax assets on the Solvency II balance sheet. The aggregate deferred tax assets recognised across the 100 firms we reviewed was £1.2bn at 2020 year end, an increase of £248m from 2019 year end. This increase was mainly driven by firms that reported losses in 2020, such as Lloyd’s and NFU Mutual.