SRLEV’s capital management is aimed to obtain again a solid A rating at the rating agencies, as well as on permanent compliance with regulatory requirements. Through active capital management, SRLEV aims for optimum capital allocation among the various business units to achieve maximum returns on its activities.
19.1.9.1 Objectives and standards framework
SNS REAAL’s capitalisation policy focuses on the optimisation of the capital structure in such a manner that it
contributes to the realisation of SNS REAAL’s strategic objectives. At the same time, SNS REAAL also seeks to maintain a healthy balance between the amount of capital and the risks it runs.
The restrictions set by the Dutch Central Bank, European regulations, rating agencies and internal requirements regarding capital adequacy are taken into account in determining the capital structure.
The double leverage ceiling is 115%. This target limits the degree to which debt raised by the Group can be reallocated to subsidiaries as shareholders’ equity. This double leverage fell from 115.0% at year-end 2010 to 114.2% at year-end 2011. SNS REAAL aims for a further reduction of double leverage in the years ahead. The double leverage decreased amongst others by an upstream € 80 million capital from SRLEV.
Solvency standards
SRLEV strives for solvency standards as outlined in the table below.
Solvency standards SRLEV
Standard Target Realisation
in percentages 2011 2010
Regulatory solvency > 175% 223% 206%
Regarding SRLEV, the solvency ratio exceeds the internal standards. After consolidation, the solvency ratio amounted to 223% year-end. The available solvency includes (part of) the available excess value of the technical provisions in the life Insurance activities. This excess value is determined in the adequacy test performed in accordance with DNB guidelines.
19.1.9.2 Capital management framework
In assessing capital adequacy, SNS REAAL takes into account the economic risks of the underlying activities. These risks are assessed using stress tests, regulatory capital calculations as prescribed in the Solvency I regulatory
framework, and economic capital calculations. SNS REAAL’s capitalisation is aimed at holding and maintaining a single A rating. SNS REAAL’s capital management comprises the following main activities: determining the minimum level of required capital, performing stress tests on the capital adequacy and a qualitative capital adequacy assessment and ,maintaining the available capital at the required level.
19.1.9.3 Required economic capital
SNS REAAL uses economic capital to support the management of the Company and the business units in long-term value creation. To this end, the economic capital must first be calculated as precisely as possible, without incorporating a margin of conservatism in the estimate of the economic capital formula components and the economic capital
calculations themselves. The economic capital thus calculated provides a basis for value creation and performance management. In assessing capital adequacy, SNS REAAL takes into account possible uncertainties in the economic capital models. These uncertainties are translated into separate surcharges and added to the unadjusted economic capital.
A confidence level of 99.96% is used in determining the economic capital. This confidence level is calibrated to the default probability of a company with an AA rating. SNS REAAL deliberately chooses this higher confidence level over the level related to the rating ambition in order to be more confident that it will achieve the single A rating. In the economic capital calculation, diversification effects between risk categories are taken into account. These diversification effects occur because not all risks manifest themselves simultaneously. In the calculation of the economic capital of both the Insurance activities, diversification effects between the Banking and Insurance activities are not taken into account. The capital adequacy of the Insurance activities is assessed separately.
The economic capital for SNS REAAL as a whole, as well as for the Insurance activities, is calculated on a quarterly basis. After these figures have been analysed, the conclusions are discussed in the various allocation committees and with the Supervisory Board. Finally, the risk appetite was further fleshed out in 2011, in which process economic capital plays a substantial role.
19.1.9.4 Results of European and Dutch stress tests
EIOPA stress test
On 23 March 2011, the European Insurance and Occupational Pensions Authority (EIOPA) launched a stress test for the European insurance industry in cooperation with the national supervisory authorities. SNS REAAL was not asked to participate in this stress test, but decided to voluntarily participate. The stress test is aimed at the Insurance activities of SNS REAAL and based on Solvency II principles. The purpose of the stress test is to gain insight into the resilience of individual organisations and the insurance industry as a whole. The calculations were based on the figures as at
year-end 2010. With a view to this stress test, EIOPA set out three core scenarios (baseline, adverse and inflation) and a satellite scenario aimed at sovereign exposure. The effects of these scenarios are instantaneously deducted from the starting position (no projections made). The results of this stress test show that the Insurance activities of SRLEV remain well above the solvency standard following stress.
ORSA stress test on Insurance activities
In the first half of 2011, SNS REAAL performed its Own Risk & Solvency Assessment (ORSA). An important part of an ORSA is the performance of an internal stress test. For this purpose, REAAL used the calculations for the EIOPA stress test. The calculations were based on the balance sheet as at year-end 2010. The results of the stress test show that SRLEV is adequately capitalised to absorb stress scenarios.
19.1.9.5 Going concern capital management
SRLEV prepares operational plans each year with a three-year horizon. At the same time it prepares the Capitalisation and Funding plan with the same horizon, in which the capital and funding requirements and their fulfilment are set such that SRLEV and SNS REAAL as a whole can satisfy the internal and external standards. Instruments to lower the risks and to increase the available capital are used for control. The capital of the Insurance activities is a combination of various types of capital, with the emphasis on shareholders’ equity. Different bandwidths are applied within SNS REAAL per entity for the other classes of capital. SNS REAAL capitalises its business units and subsidiaries in accordance with the internal and external solvency standards that apply to the Banking activities, the Insurance activities and the Group. This allows the Group to manage any capital surplus, if necessary.
SNS REAAL’s Group ALCO assesses the results of the economic capital calculations, the requirements of supervisory authorities and rating agencies, the outcomes of stress tests and capital planning. Based on these assessments, it is decided whether additional measures are needed. In terms of the abovementioned standards, SNS REAAL is adequately capitalised.
Capital adequacy assessment
The assessment of capital adequacy comprises the following elements:
A solvency sensitivity analysis is performed for SRLEV on a monthly basis, with close involvement of senior
management to determine the capital adequacy; Every year, the Insurance activities are also subjected to an ORSA. As part of ORSA, the capital requirements ensuing from stress testing are compared to the existing qualifying capital. The results of the stress tests are annually compared with the economic capital required. The economic capital is calculated and reported to the Group ALCO on a quarterly basis. Every month, sensitivity analyses are performed and forecasts of capital development are made.
19.1.9.6 Value creation
Long-term value creation requires activities that generate sufficient return in view of the corresponding risk and required capital. The current new regulations result in more capital being required for the same activities. This leads to tighter decisions regarding the business activities to be performed. For example, every business unit has budgets with a three-year horizon. These budgets also comprise targets with regard to return and required capital.
19.1.9.7 Preparations for Solvency II
In 2011, a Risk Based Metric was developed for the Insurance activities. An important difference with the current method of measuring value creation is that there is a much more sophisticated and more explicit connection with the risks involved with activities. The new metric is also based on current-value bases and meets the requirements and
expectations set out in Solvency II. Next few years, the Key Performance Indicators will be more systematically linked to the Risk Based Metric.