Own Funds

1.1

Unless otherwise stated, this Part applies to:

1. (1) a UK Solvency II firm; and
2. (2) in accordance with Insurance General Application 3, the Society.

1.2

In this Part, the following definition shall apply:

delegated act

means Commission Delegated Regulation (EU) 2015/35 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

2.1

A firm’s own funds comprise the sum of its basic own funds and ancillary own funds.

[Note: Art. 87 of the Solvency II Directive]

2.2

The firm’s basic own funds consist of the following items:

1. (1) the excess of assets over liabilities, less the amount of own shares held by the firm; and
2. (2) subordinated liabilities.

[Note: Art. 88 of the Solvency II Directive]

2.3

Subject to 2.5, the firm’s ancillary own funds consist of items (other than items of basic own funds) which can be called up to absorb losses, including the following (to the extent that they are not items of basic own funds):

1. (1) unpaid share capital or initial fund that has not been called up;
2. (2) letters of credit and guarantees;
3. (3) any other legally binding commitments received by the firm; and
4. (4) for a mutual, any future claims which it may have against its members by way of a call for supplementary contribution within the next 12 months.

[Note: Art. 89(1) of the Solvency II Directive]

2.4

Where an item of ancillary own funds becomes paid in or called up, the proceeds paid in or the amount due in respect of the call must be treated as an asset and the item must cease to be treated as an item of ancillary own funds.

[Note: Art. 89(2) of the Solvency II Directive]

2.5

When determining its own funds, a firm must not take into account any item of ancillary own funds unless, subject to 2.6, it has received the PRA’s approval of either:

1. (1) a monetary amount for the relevant item of ancillary own funds; or
2. (2) the method by which to determine the amount of the relevant item of ancillary own funds, together with the amount determined in accordance with that method for a specified time period.

[Note: Art. 90(1) and (3) of the Solvency II Directive]

2.6

Where a firm has received approval:

1. (1) under 2.5(1), it may only include in its own funds the item of ancillary own funds for an amount up to the amount approved; or
2. (2) under 2.5(2), it may only include in its own funds the item of ancillary own funds up to the amount determined using the method approved, and only for the time period for which approval is granted.

[Note: Art. 90(3) of the Solvency II Directive]

2.7

A firm may only attribute an amount to an item of ancillary own funds to the extent that it:

1. (1) reflects the loss-absorbency of the item; and
2. (2) is based upon prudent and realistic assumptions.

[Note: Art. 90(2) of the Solvency II Directive]

3.1

A firm may only include an own funds item in its Tier 1 own funds if:

1. (1) it is an item of basic own funds; and
2. (2) it substantially possesses the characteristics set out in 3.5(1) and 3.5(2), taking into consideration the features set out in 3.6.

[Note: Art. 94(1) of the Solvency II Directive]

3.2

A firm may only include an own funds item in its Tier 2 own funds if:

1. (1) where it is an item of basic own funds, it substantially possesses the characteristics set out in 3.5(2), taking into consideration the features set out in 3.6; or
2. (2) where it is an item of ancillary own funds, it substantially possesses the characteristics set out in 3.5(1) and 3.5(2), taking into consideration the features set out in 3.6.

[Note: Art. 94(2) of the Solvency II Directive]

3.3

A firm may only include in its Tier 3 own funds an item of:

1. (1) basic own funds that does not fall within 3.1 or 3.2(1); and
2. (2) ancillary own funds that does not fall within 3.2(2).

[Note: Art. 94(3) of the Solvency II Directive]

3.4

1. (1) In classifying its own funds items, a firm must refer to the lists of own funds items set out in the Solvency II Regulations.
2. (2) A firm must not include an own funds item in its Tier 1 own funds, Tier 2 own funds or Tier 3 own funds if that own funds item is not covered by the lists referred to in (1), unless it has received the PRA’ s approval.
3. (3) When seeking approval to classify an own funds item referred to in (2) in its Tier 1 own funds, Tier 2 own funds or Tier 3 own funds, a firm must demonstrate that the own funds item satisfies the criteria laid down in 3.1 to 3.3 for that classification.

[Note: Art. 95 of the Solvency II Directive]

3.5

The characteristics referred to in 3.1(2) and 3.2 are:

1. (1) the item is available, or can be called up on demand, to fully absorb losses on a going-concern basis as well as in the case of winding up (permanent availability); and
2. (2) in the case of winding up, the total amount of the item is available to absorb losses and the repayment of the item is refused to its holder until all other obligations, including insurance and reinsurance obligations to policyholders, have been met (subordination).

[Note: Art. 93(1) of the Solvency II Directive]

3.6

When assessing the extent to which own funds items possess the characteristics set out in 3.5, currently and in the future, a firm must consider:

1. (1) the duration of the item, in particular whether the item is dated or not and, where an own funds item is dated, the relative duration of the item as compared to the duration of the insurance and reinsurance obligations of the firm (sufficient duration);
2. (2) whether the item is free from requirements or incentives to redeem the nominal sum (absence of incentives to redeem);
3. (3) whether the item is free from mandatory fixed charges (absence of mandatory servicing costs); and
4. (4) whether the item is clear of encumbrances (absence of encumbrances).

[Note: Art. 93(2) of the Solvency II Directive]

3.7

1. (1) A firm must not classify as Tier 1 own funds:
1. (a) paid-in ordinary share capital and related share premium account; or
2. (b) paid-in initial fund, member’s contribution or the equivalent basic own funds for a mutual
2. unless the firm has the right to cancel and withhold dividends or other distributions in respect of those items at any time prior to payment (and exercises that right) in the circumstances specified in the Solvency II Regulations.
3. (2) A firm must not classify as Tier 2 basic own funds:
1. (a) ordinary share capital and related share premium account; or
2. (b) initial fund, member’s contribution or the equivalent basic own funds for a mutual
4. unless the firm has the right to defer dividends or other distributions in respect of those items at any time prior to payment (and exercises that right) in the circumstances specified in the Solvency II Regulations.

[Note: Art. 93 and Art. 94 of the Solvency II Directive]

4.1

As far as compliance with its SCR is concerned at least the following conditions must be met:

1. (1) more than one-third of the total amount of the firm’s eligible own funds is accounted for by Tier 1 own funds; and
2. (2) less than one-third of the firm’s eligible own funds is accounted for by Tier 3 own funds.

[Note: Art. 98(1) of the Solvency II Directive]

4.2

As far as compliance with its MCR is concerned, as a minimum more than 50% of the firm’s eligible own funds must be accounted for by Tier 1 own funds.

[Note: Art. 98(2) of the Solvency II Directive]

5.1

This Chapter does not apply in respect of the following:

1. (1) any item which a firm intends to include within its basic own funds that is not covered by the lists of own funds items set out in the Solvency II Regulations, but which may be included in its basic own funds only if the firm has received the PRA’s approval; and
2. (2) any item which a firm intends to include within its ancillary own funds.

5.2

1. (1) Subject to 5.5, a firm must notify the PRA in writing of its intention to issue an item which it intends to include within its basic own funds at least one month before the intended date of issue, unless there are exceptional circumstances which make it impracticable to give such a period of notice. In such circumstances, the firm must give the PRA as much notice as is practicable in those circumstances and explain to the PRA why the circumstances are considered exceptional.
2. (2) When giving notice, a firm must:
1. (a) provide details of the amount of basic own funds the firm is seeking to raise through the intended issue and whether the item is intended to be issued to external investors or within its group;
2. (b) identify the classification of basic own funds the item is intended to fall within;
3. (c) provide a copy of the draft terms and conditions;
4. (d) provide a draft of a properly reasoned independent legal opinion from an appropriately qualified individual confirming that the item complies with the rules applicable to items of basic own funds included in the classification of the item identified in (b);
5. (e) for any item referred to in Article 82(3) of the delegated act, provide a draft of a properly reasoned independent accounting opinion from an appropriately qualified individual as to the item’s treatment in the firm’s financial statements;
6. (f) include confirmation from the governing body of the firm that the item complies with the rules applicable to items of basic own funds included in the classification of the item identified in (b); and
7. (g) state whether the item is encumbered or whether there are any connected transactions in respect of the item and, if so, provide details.

5.3

If after an initial notification under 5.2, but prior to an item’s issuance, a firm proposes to change the information previously submitted, it must provide a further written notification of that change without delay.

5.4

If a firm proposes to establish or amend a debt securities programme for the issue of an item for inclusion within its basic own funds, it must:

1. (1) notify the PRA of the establishment of the programme or of the proposed amendment to the programme; and
2. (2) provide the information required by 5.2(2)

at least one month before any proposed drawdown. The PRA must be notified of any changes in accordance with 5.3.

5.5

5.2 does not apply to:

1. (1) ordinary shares which:
1. (a) meet the classification criteria for ordinary share capital in Tier 1 own funds; and
2. (b) are the same as ordinary shares previously issued by the firm;
2. (2) debt instruments issued from a debt securities programme, provided that:
3. 1. (a) the establishment of (and any subsequent amendment to) the programme was notified to the PRA in accordance with 5.4 and the last such notification was given to the PRA no more than twelve months prior to the date of the proposed drawdown;
   2. (b) the programme complies with, and the information previously notified to the PRA in accordance with 5.4 in relation to the programme is unaffected by, any changes in law or regulation, or the interpretation or application of either, coming into effect since the last notification in accordance with 5.4; and
   3. (c) any instrument issued pursuant to the programme must, under the terms of the programme, constitute basic own funds; and
4. (3) any item which is to be issued on identical terms to one or more items included in basic own funds issued by the firm within the previous twelve months and notified to the PRA in accordance with 5.2, excluding (1) the issue date, (2) the maturity date, (3) the amount of the issuance, (4) the currency of the issuance, and (5) the rate of interest payable by the issuer.

5.6

A firm must notify the PRA in writing, no later than the date of issue, of its intention to issue an item listed in 5.5 which it intends to include within its basic own funds. When giving notice, a firm must:

1. (1) provide the information set out in 5.2 other than 5.2(2)(c) (draft terms and conditions), 5.2(2)(d) (draft legal opinion) and 5.2(2)(e) (draft accounting opinion); and
2. (2) for issuance of an item pursuant to 5.5(1) or 5.5(3), confirm that the terms of the item have not changed since the previous issue by the firm of that type of item of basic own funds.

5.7

A firm must notify the PRA in writing of its intention to amend or otherwise vary the terms of any item included within its basic own funds at least one month before the intended date of such amendment or other variation.

5.8

A firm must provide to the PRA as soon as practicable after the issuance of an item of basic own funds to which 5.2, 5.4, 5.5(2) or 5.5(3) applies:

1. (1) a finalised copy of the draft legal opinion referred to in 5.2(2)(d);
2. (2) a finalised copy of the draft accounting opinion referred to in 5.2(2)(e) if applicable;
3. (3) a copy of the instrument’s final terms and conditions; and
4. (4) a reasoned basis for the choice of coupon structure and any other provision that might suggest an incentive to redeem.

6.1

This Chapter applies to the Society.

6.2

For the purposes of complying with the SCR Rules, the Society must categorise own funds at Lloyd’s as between:

1. (1) own funds attributable to the Society; and
2. (2) own funds attributable to members which are available to support members’ insurance business at Lloyd’s, including funds at Lloyd’s.

6.3

The Society must notify the PRA in writing, within 14 days, in the event the Council makes a determination pursuant to paragraph 8(1A) or varies a determination pursuant to paragraph 8(1B)(a) of the New Central Fund Byelaw (No 23 of 1996) as amended, that the Central Fund or a part of the Central Fund is to constitute own funds attributable to the Society for the purposes of covering the SCR for Lloyd’s.

6.4

In determining own funds at Lloyd’s in accordance with 2, the Society shall have regard to:

1. (1) the Society’s central assets and central liabilities; and
2. (2) the assets and liabilities of members, including assets which are available to support members’ insurance business at Lloyd’s, such assets including a members’ funds at Lloyd’s.