The transition to International Financial Reporting Standards (IFRS) 17 on Jan. 1, 2023, was a significant milestone for many of the insurance entities rated by S&P Global Ratings. However, as expected, there were no material effects on their credit quality. In a few cases, our analysis was aided by additional transparency around insurance reserve redundancies and future profits from the provision of the contractual service margin (CSM) and risk adjustment (RA), especially where there had been a lack of transparency under IFRS 4. We also note that the first full year of results under IFRS 17 brought a variety of approaches under the principles-based standard, and varying levels of prudence and aggressiveness in accounting.

In this FAQ, we explain how IFRS 17 financial statements are incorporated in our analysis of insurers' creditworthiness through the application of our Insurers Rating Methodology (see "Criteria: Insurers Rating Methodology," July 1, 2019).

Frequently Asked Questions

Where do we define the ratios that are applied in our Insurers Rating Methodology? Is there appropriate flexibility to address IFRS 17 reporting?

We define selected ratios and terms in the glossary section of our Insurers Rating Methodology. As noted in that glossary, our ratios may reflect analytical adjustments for nonrecurring items or to otherwise take into consideration issuer-specific reporting conventions. Thus, when appropriate, we may modify our defined ratios to incorporate IFRS 17 reporting, which may include adjustments to reflect differences in terminology under the various accounting standards employed in the industry, and to support consistency in our forward-looking analysis.

How do we analyze property and casualty insurers' profitability under IFRS 17, while using the combined ratio as the base?

Consistent with our criteria we may make adjustments to accommodate different reporting conventions. With the introduction of IFRS 17, some traditional insurance accounting items are no longer reported, including premiums, insurance claims, and acquisition and administration costs all of which were used in calculating the combined ratio, which is an important performance indicator for non-life insurers and re-insurers. Additionally, insurers have calculated combined ratios using a range of approaches. We maintain our focus on calculating the combined ratio net of reinsurance, consistent with our glossary definition. This means that we compare net insurance service expense to net insurance revenue.

For example, Hannover Re and SCOR use the net-net approach in calculating their combined ratio under IFRS 17. Munich Re uses a net-net combined ratio for primary insurance, and re-insurance. Allianz, AXA, and Zurich, in line with many primary insurers, use a net-gross combined ratio calculation, where insurance service expenses, net of reinsurance, is the numerator and gross insurance revenue is the denominator. Given the issuer-specific reporting conventions for these insurers, we calculated the net combined ratio for their IFRS 17 accounts as insurance service expenses net of reinsurance revenues divided by insurance revenues net of reinsurance expenses. To facilitate peer comparisons with insurers reporting under different accounting conventions, such as generally accepted accounting principles (GAAP), we may adjust for the effect of discounting and operating expenses, which are not directly allocated to insurance service expenses.

Given that insurance revenue has replaced insurance premiums in IFRS financial statements, how do we calculate reinsurance utilization?

Some insurers reporting under IFRS 17 still disclose gross and net premiums in supplementary disclosures, but many do not and only publish insurance revenues. When this occurs, we may calculate the reinsurance utilization ratio as allocated reinsurance premiums divided by insurance revenue.

With new IFRS 17 accounting items, like the CSM and RA, now included in capital, when might we apply an adjustment to our capital and earnings assessment?

We include other equity-like reserves, including IFRS 17 CSM and RA in our measure of total adjusted capital. That is in line with our Insurers Risk-Based Capital Adequacy--Methodology And Assumptions (see "Insurer Risk-Based Capital Adequacy--Methodology And Assumptions," Nov. 15, 2023), which is an input into our assessment of capital and earnings, as set out in our Insurers Rating Methodology. The Insurers Rating Methodology notes that we may adjust the capital and earnings assessment for a given insurer if we determine that the capital and earnings assessment for a given insurer is materially understated or overstated. The methodology highlights our typical considerations in making this determination, which include situations where we consider the composition of capital to be overly reliant on weaker forms of capital to support the capital and earnings assessment.

Examples of issuers with capital and earnings adjustments:

• AVIVA (see "Research Update: U.K.-Based Aviva 'AA-' Ratings Affirmed Following Updated Capital Model Criteria; Outlook Stable," June 25, 2024): Key components of our total adjusted capital (TAC) calculation include shareholders' equity, the full amount of tax-adjusted CSM, and RA. Together, these comprised about £6 billion at year-end 2023. Intermediate equity content (IEC) hybrids and debt-funded capital (DFC) contributed an additional £5.2 billion to TAC, based on our criteria for tolerance limits on such debt components. Overall, CSM, RA, IEC hybrids, and debt-funded capital (DFC) represented around 70% of our TAC calculation for year-end 2023. We assess Aviva's capital and earnings as very strong, rather than excellent, because the quality of these components is weaker than that of shareholders' equity, which we consider more fungible across the group.

• Legal & General (see "Research Update: Legal & General Group PLC Core Entities 'AA-' Ratings Affirmed As Capital Position Improves Further; Outlook Stable," Sept. 25, 2024): While under our capital model, L&G's indicative capital position sits comfortably above the extreme stress requirement, we adjust the group's capital and earnings score negatively by one notch. This reflects L&G's reliance on forms of capital such as other equity like reserves (the contractual service margin and risk adjustment) and hybrids that we consider less strong than shareholder equity. Altogether, these types of capital make up over 80% of our calculation of the group's total adjusted capital, which is significantly higher than most of its Europe, Middle East, and Africa-based peers.

Examples of issuers with a sizable amount of CSM that did not result in a capital and earnings adjustment:

• Allianz (see "Research Update: Allianz 'AA' Ratings Affirmed Following Revised Capital Model Criteria; Outlook Stable," June 20, 2024): We observed an increase in total adjusted capital under IFRS 17 that increases visibility on future profits for the insurance sector through the CSM. Under our revised capital model, we no longer apply haircuts or capital charges to equity-like reserves, such as the CSM and RA. The CSM for a combined after-tax amount was €40.7 billion at year-end 2023.

• Swiss Re (see "Research Update: Swiss Re Ratings Affirmed At 'AA-' Despite Reserve Strengthening As Capital Position Improves; Outlook Stable," Nov. 6, 2024): At half-year 2024, Swiss Re's capital was comfortably in excess of our 99.99% confidence level. The improved excess at the highest level is partially due to the group's implementation of IFRS in 2024. We allow full credit to the group's equity-like reserves (contractual service margin and risk adjustment under IFRS 17) net of tax and do not risk-charge these reserves, unlike our previous approach to the group's future profits under U.S. generally accepted accounting principles. While over 60% of the group's TAC comprises equity-like reserves and hybrid debt instruments, we do not adjust our assessment of capital and earnings.

How do you consider CSM and RA in your financial leverage analysis?

Although we regard CSM and RA as having loss absorbing features in our risk-based capital analysis, they are not included in shareholder equity under IFRS 17 reporting, which is applied in our financial leverage calculation. That said, in our rating analysis, we consider whether the financial leverage calculation is understated or overstated due to material distortions in reported balances. As stated in our Insurers Ratings Methodology, if we determine that reported equity is understated, we may consider it a mitigant to the risk from leverage when financial leverage is overstated due to material distortions in reported balances. For example, we may determine that reported equity is understated and therefore conclude that the financial leverage ratio is overstated, when we consider that significant redundancies exist in reported liabilities (for example, where the value of in-force life business, contingency, or other equity-like reserves are not included in reported equity).

How do you recognize potential distortions in the fixed-charge coverage ratio under IFRS 17?

Our typical calculation of fixed-charge coverage is defined in the Insurers Rating Methodology glossary as: EBITDA/fixed charges, where EBITDA (which is separately defined in the glossary) is earnings before interest (other than interest on nonrecourse or operational leverage), taxes, depreciation, and amortization. We recognize that due to mark-to-market asset valuations flowing through the IFRS 17 income statement, EBITDA might be distorted by market changes that create volatility in this key metric. Our methodology recognizes this by enabling us to adjust for non-recurring items, reflecting our focus on assessing prospective fixed-charge coverage.

Related Criteria

• Insurer Risk-Based Capital Adequacy--Methodology And Assumptions, Nov. 15, 2023
• Insurers Rating Methodology, July 1, 2019

Related Research

• Korean Insurers And IFRS 17: Falling Rates May Squeeze Capital, Sept. 25, 2024
• Assessing Europe's Global Reinsurers Under IFRS 17, July 2, 2024
• IFRS 17 Adoption Will Test GCC Islamic Insurers, Aug. 7, 2023
• Credit FAQ: How We Treat Insurers' Leverage Amid Accounting Changes And Bond Market Fluctuations, July 14, 2023