Sliding rates crimp Allianz’s Solvency II ratio

Allianz ended 2019 with its core solvency ratio 17 percentage points down on a year prior, as low interest rates pumped up its Solvency Capital Requirement.

The German insurer’s SCR – the denominator used to calculate its Solvency II capital ratio – surged €6 billion (+18%) over the year to €39.5 billion. Sinking interest rates contributed €4.4 billion to the increase. Business growth added a further €1.2 billion.

Allianz’s own funds, the Solvency II ratio’s numerator, climbed €7.2 billion (+9%), failing to keep pace with the rise in the SCR. This pushed the firm’s Solvency II ratio to 212%, from 229% at end-2018.

 

Earnings added a net €11.7 billion to own funds and investment portfolio valuation gains a further €4.3 billion. Own funds were depleted, though, by payouts to shareholders and changes to regulatory models.

What is it?

The Solvency II ratio is found by dividing an insurer’s own funds by its SCR, which is calculated either by a firm’s internal model or a regulator-set standard formula. Own funds constitute excess assets over liabilities, and are divided into three tiers based on their loss absorbency.   

The SCR is calibrated to ensure a firm could withstand a one-in-200-year shock. Insurers must maintain a Solvency II ratio above 100% at all times. 

Why it matters 

Allianz has a chunky capital buffer above its regulatory minimum requirement, meaning it can handle the upward drift of its SCR – for now. Last year’s +18% climb dwarfed the less than 1% increase disclosed for 2018. If SCR growth continues to outpace that of own funds, the firm will see meaningful degradation of its Solvency II ratio.

Regulatory tweaks could accelerate this process. Changes to the ultimate forward rate (UFR) for discounting long-term liabilities cut two percentage points off its ratio in Q1 2019, and the insurer expects a further two will be lost when this rate is lowered again in Q1 of this year. The European insurance watchdog is also contemplating more far-reaching changes to the UFR formula, which executives say could lop 20 percentage points off its ratio if enacted in full. 

But Allianz managers have a number of levers they can pull to offset such increases. For one, they can refine the firm’s internal models to better capture its risks, potentially leading to a decrease in the SCR. For another, they can invest in higher-yielding assets, which could help bolster own funds.

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