GFSC Guidance Note on Solvency 2 Own Funds

www.gfsc.gi GFSC Guidance Note Solvency 2: Own funds 1 Month 2017 Version: 1 Publication Date: 13 June 2025

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Own funds 2 Contents

1. Introduction....................................................................................................... 3
2. Ancillary own funds....................................................................................................... 4
3. The right to cancel (or defer) dividends or other distributions ........................................ 4
4. Pre-issuance notification................................................................................................ 6

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Own funds 3

1. Introduction 1.1. This Guidance Note is addressed to insurance undertakings1 and reinsurance undertakings2 , whether they are assessing the quality of their existing own funds and/or intending to issue new own fund items under the Insurance Companies Regulations 3 and the Solvency 2 Technical Standards4 . Insurance undertakings and reinsurance undertakings are collectively referred to as “insurers” or “firms” within this Guidance Note. 1.2. This Guidance Note sets out the GFSC’s expectations of firms in relation to own funds on the following topics in particular: a) ancillary own funds; b) the right to cancel (or defer) dividends or other distributions; and c) pre-issuance notification. 1.3. Firms should read this Guidance Note alongside the relevant provisions of the Financial Services Act 2019, the Insurance Companies Regulations, the Solvency 2 Technical Standards and related policy material. In particular, among other relevant provisions: a) Chapter 3 of the GFSC’s Guidance Note on Solvency 2: Own funds approvals sets out the GFSC’s approach to applications for ancillary own funds approvals; b) Article 81 of the Solvency 2 Technical Standards which sets out the adjustments that must be made to own funds to reflect the lack of transferability of ring-fenced funds that can only be used to cover losses arising from a particular segment of liabilities or from particular risks; c) Articles 69 to 78 of the Solvency 2 Technical Standards which set out a list of own funds items and the criteria for classifying them as Tier 1 own funds, Tier 2 own funds or Tier 3 own funds; d) For the purposes of regulation 89 of the Insurance Companies Regulations, Article 82 of the Solvency 2 Technical Standards which sets out the applicable limits regarding the proportion of Tier 1 own funds, Tier 2 own funds and Tier 3 own funds which can be included in a firm’s eligible own funds to cover the firm’s Solvency Capital Requirement5 (“SCR”) and Minimum Capital Requirement6 (“MCR”); and 1 Financial Services (Insurance Companies) Regulations 2020 (Insurance Companies Regulations 2020), reg 3 2 ibid. 3 Insurance Companies Regulations 2020 4 Financial Services (Solvency 2) (Technical Standards) Regulations 2025 5 Insurance Companies Regulations 2020, reg 3 6 ibid.

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Own funds 4 e) For the purposes of regulation 86 of the Insurance Companies Regulations, in connection with the classification of an item as ordinary share capital in Tier 1 own funds, a firm must assess whether that item of basic own funds satisfies the conditions in Articles 69 and 71(1) to (11) of the Solvency 2 Technical Standards. For example, a firm must assess whether the item ranks after all other claims including other classes of share capital in the event the firm is wound up. 2. Ancillary own funds 2.1. The GFSC does not envisage approving an amount under regulation 84(1)(a) of the Insurance Companies Regulations or a method under regulation 84(1)(b) of the Insurance Companies Regulations unless it is satisfied that the amount approved or determined using the approved method reflects the loss absorbency of the item of ancillary own funds and is based on prudent and realistic assumptions. Therefore, where an item of ancillary own funds has a fixed nominal value, the amount of that item that can be included in a firm’s own funds will only be equal to its nominal value where that value appropriately reflects its loss absorbency (see regulation 84(2) of the Insurance Companies Regulations). 2.2. An item of ancillary own funds must be callable on demand. When firms apply to the GFSC for approval to recognise ancillary own funds when determining own funds, they will need to demonstrate that there is no trigger event or restrictions affecting when the item of ancillary own funds can be called. 2.3. The GFSC does not expect firms to treat ancillary own funds as emergency capital to be applied for when a firm is in danger of breaching its Solvency Capital Requirement. In such a situation, raising basic own funds is likely to be a more appropriate action. 3. The right to cancel (or defer) dividends or other distributions 3.1. This section is relevant to all firms assessing the quality of their own-fund items by reference to the features determining classification as Tier 1. 3.2. The same considerations can also apply where own-fund items are classified in Tier 2 and the Solvency 2 Technical Standards require deferral as opposed to cancellation of distributions (see Articles 71 and 73 of the Solvency 2 Technical Standards). 3.3. All items of basic own funds must meet the criteria and the features determining classification in regulations 85 to 87 of the Insurance Companies Regulations and Articles 69 to 78 of the Solvency 2 Technical Standards. In relation to paid-in ordinary share capital, matters such as the absence of mandatory fixed charges or encumbrances will be a characteristic until such time as a dividend is declared but the shares would cease to meet this criterion unless there is the ability to cancel a dividend after this point but prior to payment.

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Own funds 5 3.4. The GFSC considers that where a firm’s articles of association do not prohibit the cancellation of a dividend at any time, including after declaration, then they may be said to allow such cancellation so that the firm may be able to declare a dividend on a conditional basis, allowing cancellation of the dividend at any time prior to payment, if the applicable conditions are not met. Firms should ensure that they review their own articles to establish the absence of any such prohibition. Firms should also consider whether it is appropriate to amend their articles to include a specific power for the firm to declare dividends subject to conditions or even for all declarations of dividend to be conditional upon fulfilment of the requirements in the Insurance Companies Regulations and, the Solvency 2 Technical Standards and related policy materials. Firms should give consideration to amending their articles so that all declarations of dividends are conditional, particularly if they have concerns that otherwise they may inadvertently declare an unconditional dividend. 3.5. Article 71 of the Solvency 2 Technical Standards sets out in more detail the nature of the conditionality that firms will need to apply to their declaration of dividends for these purposes. In order to link this provision within the Insurance Companies Regulations and the Solvency 2 Technical Standards, regulation 85(3) of the Insurance Companies Regulations requires firms to include in their classification of Tier 1 own funds only ordinary share capital in respect of which a dividend or other distribution is capable of being cancelled and withheld at any time prior to payment and where the firm exercises its rights to do so, where necessary. Where firms whose articles so permit adopt the practice of declaring all dividends conditionally (or amend their articles to provide that all dividends are conditional) and the conditions applied satisfy the requirements of Article 71 of the Solvency 2 Technical Standards, they would be in a position to satisfy regulation 85(3) of the Insurance Companies Regulations. 3.6. There may be additional considerations for any firms with publicly traded shares for which an ‘ex dividend’ date may apply. Such firms may also have disclosure or other obligations arising from their listing arrangements in relation to possible non-payment of a declared dividend. The GFSC expects firms to continue to monitor their solvency positions carefully during this time and to engage with supervisors at an early stage to be assured that the need to cancel dividends is unlikely to arise. 3.7. The same considerations as to cancellation (or, in the case of Tier 2 own funds, deferral) of distributions apply to relevant Tier 1 own-fund items of mutuals. These comprise paid-in initial fund, members’ contributions and any other equivalent items. While for many mutuals, distributions in relation to these items may not be relevant or common, reference to the firm’s constitution or governing statute should be made to confirm that there are no provisions in relation to distributions which would disqualify the item as Tier 1 own funds. 3.8. The GFSC is adopting this approach in order to provide clarity as to the manner in which relevant firms can demonstrate when classifying items as own funds that ordinary share capital can qualify as Tier 1 (or Tier 2) own funds. While firms may incur some administrative and legal costs in order to achieve compliance with this approach, the benefits of retaining compliant own funds will outweigh these.

Gibraltar Financial Services Commission Guidance Note - Solvency 2: Own funds 6 3.9. Articles 71 and 73 of the Solvency 2 Technical Standards envisage exceptional circumstances in which respectively the cancellation (or deferral in the case of a Tier 2 item) may be waived. In the event of a firm applying for prior approval to waive cancellation or deferral (as applicable) of distributions when not in compliance with the Solvency Capital Requirement, the GFSC would consider those circumstances carefully and approach the application as set out in section 7 of the GFSC’s Guidance Note on Solvency 2: Own funds approvals. 4. Pre-issuance notification 4.1. Regulation 89A(2) and (3) of the Insurance Companies Regulations provides that, in exceptional circumstances, a firm may provide less than one month’s notice of the intended issue of own fund items. The GFSC is unlikely to consider circumstances to be exceptional unless they are such that there is a risk of a firm not complying with its SCR or, as the case may be, MCR if a one-month notification period is observed. In such circumstances, a firm should notify the GFSC as soon as it has resolved to issue further items it intends to include as basic own funds, and provide details of its circumstances and why it is not possible to provide one month’s notice of the intended issue. 4.2. Details of the notification to be provided by a firm in relation to items of basic own funds issued by another undertaking in its group for inclusion in its own funds are set out in regulation 198A of the Insurance Companies Regulations.

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