Considering, • Recital 30 of the Commission Delegated Regulation 2015/35 (DR), that provides that where the economic effect of a transaction, or a group of connected transactions, is equivalent to the holding by a (re)insurance undertaking of its own shares, the excess of assets over liabilities should be reduced to reflect the existence of an encumbrance on that part of own-funds; • Articles 71 (1) (o), 73 (1) (i), 77 (1) (h) of the DR, and • Guideline 13 of the Guidelines on classification of own funds (EIOPA-BoS-14/168)

This Answer is specific to the case and specifications described and does not prejudge other cases.
As stated in the EIOPA Guidelines on classification of own funds (EIOPA-BoS-14/168) (Guidelines 13), undertakings should consider an encumbrance arising from a transaction or group of transactions, which is equivalent to the holding of own shares, as including the case where the undertaking holds its own Tier 1, Tier 2 or Tier 3 own-fund items.
It should be considered as equivalent to the holding of own shares the case, as applicable to the current example, when an insurer invests in the equity of a company that has invested directly or through some intermediate party/parties (i.e. indirectly) in own funds items of the insurer.
The amount to be deducted in the case presented should be determined as described in the explanatory text of Guideline 14 in the EIOPA Final Report on Public Consultation No. 14/036 on Guidelines on classification of own funds (EIOPA-BoS-14/168) i.e. the reconciliation reserve of the insurers should be reduced by the amount of the encumbered item, as clearly stated in the Guidelines.
Based on the information provided, the own funds of the insurer B includes in its assets 6mo representing its participation in the holding company A which holds 36mo of the share capital of insurer B (without prejudice of the holding of other own funds items such as subordinated liabilities that if applicable should also be considered). As such, the part of the assets generated by the reciprocal cross holding (i.e. 6mo based on the information provided) shall be deducted from B’s own funds (i.e. from its reconciliation reserve). The amount to be deducted is the lower amount of the reciprocal financing that closes the circularity (i.e. the item participation or the holding of share capital plus holding of other own funds if applicable) as the circularity may impair the loss absorption capacity of the share capital of the insurer B.
Likewise, the insurer C’s reconciliation reserve shall be deducted by the amount of the encumbered item, i.e. 8mo as it is the lower amount that closes the circularity based on the information provided, i.e. considering the participation of insurer C in the holding company A and the direct and indirect investment of the holding company A in insurer C. To be noted that, if applicable, the holding of other own funds items such as subordinated liabilities shall also be considered.
The impact of the adjustment of the reconciliation reserve of insurer C on the SII BS of insurer B, which is not valued by using quoted market prices in active markets, shall be further considered. E.g. if the SII BS of insurer B reflects 15mo from its participation in insurer C valued by the adjusted equity method, when calculating the excess of assets over liabilities of insurer C the adjustment performed in C to ensure the elimination of any artificial creation of capital shall be considered.