Reconciliation reserve (Solvency II)

A European insurer publishes, among its own funds, a line of several billion euros that matches no accounting entry: the reconciliation reserve. It comes from Article 70(1)(f) of Delegated Regulation (EU) 2015/35. The prudential balance sheet is drawn up at economic value, assets at market and provisions at best estimate plus risk margin, and its excess of assets over liabilities looks nothing like the statutory balance sheet. To go from one to the other, items with own-funds quality of their own are removed from the excess: share capital and share premium, own shares held, foreseeable dividends and distributions, and surplus funds, which are counted separately. What is left is the reconciliation reserve, and it is unrestricted Tier 1, the best quality. Many insurers draw most of their own funds from it: that is where unrealized gains, the effect of discounting provisions and the other valuation differences with the statutory balance sheet end up. It therefore moves with markets and rates. Because foreseeable dividends are deducted from it, announcing a higher dividend in February mechanically lowers the solvency ratio for the year, which finance teams anticipate.