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L U X A C T U A R I E S & C O N S U L T A N T S
B A H R A I N | C Y P R U S | I N D I A | U A E
Portfolio Transfer IA Report
American Life Insurance Company (CY) LTD
12 June 2015
1 Introduction 1
2 Executive Summary 3
3 Overview of MetLife Europe Limited 7
4 Overview of American Life Insurance Company (CY) Ltd 11
5 Outline of the Transfer 16
6 Financial Impact 18
7 Risk Profile Changes 21
8 Impact Assessment on Policyholders 23
9 Policyholder Communication 27
Appendices
Appendix A: Marios Schizas CV i
Appendix B: Sources of Data ii
Appendix C: Corporate Structure iv
Table of Contents
MetLife Portfolio Transfer IA | Page 1
1 Introduction
1.1 Purpose of the Report
I have prepared this report as an Independent Actuary (“IA”) on the Transfer of American Life
Insurance Company (CY) Ltd (“MetLife CY”) portfolio to MetLife Europe Limited (“MEL”) for the
purpose agreed under our engagement letter dated 08 January 2015. The transfer covers both life
and non-life portfolios of MetLife CY. This report has been prepared in accordance with the Cyprus
Law on Insurance Services and other related issues, 2002-2013 (“Insurance Law”), and the provision
of Article 115, Articles 102-106 for life business, and 107-111 for non-life business and we understand
the reliance that may be placed on it by policyholders and other related parties such as the Cyprus
Superintendent of Insurance in understanding the impact of the proposed transfer on the affected
policyholders.
In compiling this report Lux Actuaries & Consultants Cyprus Ltd (“Lux”, “we”) have held regular
meetings/calls with the management of both MetLife CY and MEL to obtain detailed information
around the transfer and understand the impact on policyholder protection and security, along with
reasonable expectations both before and after the transfer.
1.2 Reliance & Limitations
This report has been prepared particularly for the use of the bodies or persons listed below:
The Courts of the Republic of Cyprus
The Cyprus Superintendent of Insurance (“Regulator” or “SoI”)
The Central Bank of Ireland (“CBI”)
The directors and senior management of MetLife Cy and MEL
The policyholders and insured lives of MetLife CY
The report must be considered in its entirety, as reading individual sections in isolation could be
misleading.
In compiling this report several sources of information have been considered which have been
received exclusively from the management of MetLife CY and MEL, which are listed in Appendix B. I
have placed reliance on the accuracy of all information received and should not be held liable for any
conclusions drawn as a result of considering inaccurate data or information. Any tax implications have
been taken directly from the tax experts of MEL.
No liability will be accepted by Lux, or me, for any application of this Report for the purpose for which
it was not intended, nor for the results of any misunderstandings by any user of any aspect of the
report. If other persons choose to rely in any way on the contents of this Report then they do so
entirely at their own risk.
1.3 Independent Actuary
With regards to the definition for Independent Actuary included in the insurance Law I hereby confirm
that I am a Fellow of the institute of Actuaries, having qualified in 2004, and an Executive Director of
Lux. I am also a Fellow of the Cyprus Association of Actuaries and acting as Appointed Actuary for a
number of Life Insurance and Reinsurance companies. I am aware of the fact that my duty to the
Court overrides any obligations to those that appointed me in this position and accept this
responsibility. The Regulator has approved my appointment as an Independent Actuary for this
transfer.
MetLife Portfolio Transfer IA | Page 2
1.4 Independence
Lux has performed actuarial review work for MetLife CY between 2010 and 2012. This work stream
ended in 2012 and since then Lux has not performed any audit or advisory work for either MetLife CY
or MEL.
I have no insurance policies with either MetLife CY or MEL and neither I nor my immediate family
have any financial interest in either of them.
1.5 Peer Review Process
Dimitris Dimitriou, an executive director of the Lux team of similar seniority and experience has acted
as peer reviewer on this engagement and is responsible for quality assurance.
1.6 Disclosures
This report may not be published or made available without my written consent, apart for the parties
mentioned in the Reliance & Limitation section and making the report available for inspection by or
circulation to policyholders as required by legislation or in order to meet any other specified legal
requirements. A summary of this report may not be made and distributed to any party without my
written consent.
1.7 Technical Actuarial Standards
This report has been prepared in accordance with the relevant UK Technical Standards (TASs)
including the Technical Actuarial Standards on Reporting Actuarial Information (TAS R), Modelling
(TAS M), Data (TAS D) and the Insurance TAS. Additionally, a specific TAS on Transformations (TAS
T) has been adhered to in the production of the report.
This report constitutes an aggregate report as defined by the Financial Reporting Council of the UK in
its Technical Actuarial Standard on reporting actuarial information, ‘TAS R’. A number of data sources
have been used, exclusively provided by MetLife CY and MEL, to support the efforts of the
Independent Actuary assessment. A full list of the material used in this assessment is provided in
Appendix B.
To the extent possible, all material matters have been considered in the preparation of this report.
Where material uncertainty exists, I have tried to indicate the extent that the existence of such
uncertainty may influence the final results.
MetLife Portfolio Transfer IA | Page 3
2 Executive Summary
2.1 Overview
This report sets out my findings, considerations and conclusions of my review in relation to the
proposed transfer of MetLife CY portfolio to MEL. The main area of my consideration relates to the
impact of the proposed transfer on the policyholder and beneficiaries expectations and security of the
existing policyholders and beneficiaries of MetLife CY and MEL. Throughout this report any reference
to policyholders applies equally to the corresponding beneficiaries and insureds. My review does not
take into account any future potential transfers to MEL or any new business written following the date
of the proposed transfer. The transfer is expected to be completed on 01 January 2016 when the
statutory basis for reporting liabilities will be Solvency II and hence, in my review and findings for
forming my opinion, I have concentrated on figures provided under that basis.
The table below provides Solvency II figures for MetLife CY and MEL pre and post transfer as at 31
December 2014:
Table 2.1 Solvency II Comparisons
ALL FIGURES ARE IN €M
31-DEC-14
MEL EXCL CY
METLIFE CYPRUS
METLIFE CYPRUS TO
MEL
MEL INCL. CY
Total Assets 9369.3 387.6 266.7 9636.0
Technical Provisions 7577.3 261.6 261.6 7838.8
Other Liabilities 597.2 5.1 5.13 602.3
Total Liabilities 8174.5 266.7 266.7 8441.2
Available Assets 1194.9 120.9 0 1194.9
Solvency Capital Requirement
Regulatory Minimum 493.6 43.6 522.9
Risk Appetite Target 617.0 54.4 653.7
Solvency Ratio 242% 278% 228%
2.2 Key Findings
In my review of the information received and from the discussions I had with the management of MEL
and MetLife CY, I have noted the following key findings:
Only a portion of MetLife CY assets equal to the Total Liabilities as at 31 December
2015 are being transferred to MEL. Total Liabilities refer to the MetLife CY liabilities
calculated under Solvency II basis and include the Best-Estimate Liability (BEL), the
Risk Margin (RM) and other Solvency II liabilities. As per the Business Transfer
Agreement the remaining of the assets which will include the joint venture with
Hellenic Bank, will remain at MetLife CY. At the time of writing this report no further
information on the particular assets to be transferred has been available - A work
stream for defining these is currently in progress and is expected to complete prior to
the transfer date. Note that the terms of the Business Transfer Agreement would
allow for the transferred assets to further include an amount equivalent to the
Transfer Consideration, of a de minimis amount, which I have ignored for the
purposes of this report.
A large proportion of the in-force portfolio carries reversionary and/or terminal bonus
additions – this business represents around 70% in terms of MetLife’s Solvency I
MetLife Portfolio Transfer IA | Page 4
liabilities. This does not include products that carry only Excess Interest Benefit
additions. I refer to this as participating business in the rest of this report to
distinguish it from those other products historically reported by MetLife CY as with-
profits business as described in section 4.2. These products do not have the usual
features of UK ‘with-profit’ products however there is a significant element of
discretion in the determination of bonus rates and hence pay-outs for these policies.
The current bonus methodology for participating contracts is complex and is linked to
a prospective surplus calculation under a number of scenarios. Additionally, there is
an element of discretion within the bonus determination. MetLife CY and MEL have
commissioned consultants to propose clarifications in the bonus declaration
methodology. The proposed methodology which has been endorsed by both MEL
and MetLife CY is a formulaic approach for setting bonus rates based structured in
such a way as to be similar to, although not the same as, the Excess Interest Benefit
described in Section 4.1. I have been informed by MetLife CY that under the
proposed methodology there will be no changes in the terms and conditions of the
policies. The parameterisation of this approach has not been finalised at the time of
writing this report however I have been informed by MetLife CY that the parameters
will be set in a way to:
- Preserve the Policyholder Reasonable Expectations (PRE)
- Reduce discretion where applicable and hence enhance transparency and
ease of communication to policyholders
In relation to the participating business reference assets, the management of MetLife
CY has provided evidence that there is no requirement for ring-fencing those assets
under Solvency II. Allowance however will have to be made for the investment mix of
the assets to be used for the determination of the asset earned rate in the
determination of reversionary and terminal bonuses to preserve PRE for participating
business. At the time of writing this report, the actual assets on which the earned rate
will be made under the proposed bonus methodology has not been finalised. The
management commissioned a project to define those assets and make sure that they
will not materially affect PRE.
At the proposed transfer date 01 January 2016 Solvency II will have been
implemented by both jurisdictions, by MetLife CY in Cyprus and MEL in Ireland.
Based on the transaction design only market value of assets equal to the Total
Liabilities of MetLife CY will be transferred to MEL based on the Business Transfer
Agreement. It is therefore of significant importance that the transfer does not happen
prior to that date. Completion of the transfer prior to that date will potentially create a
gap of an estimated €186.6million due to Irish Solvency I being more onerous than
Solvency II. This funding gap will have to be considered in case the transfer moves
forward, however management confirmed that the transfer will not take place prior to
Solvency II implementation.
I have reviewed the Solvency II valuation basis used to generate the MetLife CY best-
estimate liability and can confirm that assumptions are in line with the latest
experience investigations. Some assumptions have been based on out-of-date
experience investigations and management confirmed that these will be updated in
the last quarter of 2015 prior to the generated final best-estimate liability figures.
Updated assumption parameters and relevant backing evidence will be provided
closer to the transfer date when up-to-date figures will become available. I am
however comfortable that the methodology followed for the derivation of the Solvency
II best-estimate liabilities as described in the various documentation received is
compliant with the latest EIOPA guidelines issued in respect to that.
MetLife Portfolio Transfer IA | Page 5
2.3 Conditions Prior to Transfer
In forming my opinion, I have relied on a number of conditions that should be fulfilled prior to the
implementation of the proposed transfer. These are:
The Solvency II balance sheet for both MEL and MetLife CY should be updated and
based on data and assumptions as at 30 September 2015 and submitted to the
Independent Actuary in the fourth quarter of 2015. All assumptions used should be
backed by experience investigation where applicable or relevant market experience
where company experience is not statistically significant.
The formulaic approach for defining the bonus determination of all participating
policies should be fully defined and parameterised and submitted to the Independent
Actuary in the fourth quarter of 2015. Testing should be carried-out and presented to
demonstrate that the proposed approach meets PRE and is equitable between
policyholders. This work stream is currently in progress and is expected to be
completed and approved by the MEL Appointed Actuary prior to the transfer date and
go through any additional governance required by MEL and MetLife CY.
The work stream in relation to the assets transferred to MEL should be completed
and the proposal of which should be approved by the relevant bodies prior to the
transfer date.
Regulatory approval is granted from both the Cypriot and Irish regulators.
The Boards of MetLife CY and MEL approve the proposed transfer as outlined in this
report.
2.4 Opinion
Based on my review of all documentation provided by the management of both MEL and MetLife CY
and regular discussions held with key team members of both Companies to understand the impact on
policyholders of the proposed transfer, I note the following:
Only assets sufficient to cover Total Liabilities of MetLife CY will be transferred to
MEL. The expected incremental SCR for MEL to cover risks of the transferred
portfolio is €23.7million and this will be covered by excess assets within MEL. Based
on an implied target capital requirement of 125% of SCR there is €662million of
projected surplus assets within MEL as at 31 December 2016 hence I do not expect
that this will have any material impact on MEL’s Solvency Position and coverage
ratio.
MEL is anticipating significant business volumes through its various branches in the
future. Any comments and conclusions expressed in this report do not take into
account this business plan. This however will enhance the strategic importance of
MEL to the overall MetLife Inc. (“MetLife”) restructure and consolidation.
Policyholder reasonable expectations and service quality is unlikely to be impacted by
the transfer since no changes to existing third party agreements, reinsurance and/or
other internal and external operational arrangements are directly linked to the
transfer.
Given that MEL & MetLife CY share the same ultimate shareholders there is no
difference in terms of the route down which equity contributions can potentially be
made if and when required. MEL has an A+ rating from S&P which is partly
predicated on S&P’s view of the strategic importance of MEL to MetLife Inc. while
MetLife CY has no rating. MetLife CY’s portfolio post-transfer will be part of an entity
of higher strategic importance to MetLife hence it is not expected to enjoy less
support from the parent company than it currently does.
MetLife Portfolio Transfer IA | Page 6
Having considered the impact of the transfer on policyholders, and assuming that all conditions
required prior to the transfer as listed above are met, it is my opinion that the proposed transfer:
will not have a material adverse impact on the security of existing MEL’s
policyholders
will not have a material impact on the security of MetLife CY’s transferring
policyholders
will not affect the contractual obligations of with and without profit and unit-linked
policyholders
will not materially affect the policyholder reasonable expectations of with-profit
policyholders
will not be materially disadvantageous to any of the with-profit policyholders, groups
of policyholders and/or to policyholders as compared with shareholders
will not adversely affect the service quality of MEL’s and MetLife CY’s transferring
policyholders
MetLife Portfolio Transfer IA | Page 7
3 Overview of MetLife Europe Limited
3.1 Background
MEL was incorporated on 8 February 2006. It was authorised by the CBI on 11 July 2006 and began
writing long-term insurance business in January 2007. The company initially wrote business in the UK
and has expanded to write business in numerous jurisdictions throughout Europe. As at 1 April 2015
MEL operates through a branch establishment in the UK, Portugal, Spain, France, Italy, Bulgaria,
Czech Republic and Slovakia and on a “freedom to provide services” basis in several countries
throughout Eastern and Western Europe, where is does not have an establishment.
MEL was incorporated as a wholly-owned Irish subsidiary of MetLife European Holdings LLC (‘MEH’).
During 2012 MEL underwent a change of control as part of the integration of American Life Insurance
Company (“Alico”) into the MetLife group, and is now majority owned by MetLife EU Holding Company
Limited (‘MEUHC’) with a minority shareholding held by Alico. A full corporate structure organization
chart following all proposed transfers until 01 January 2016 is included in Appendix D, however an
abridged version mainly in relation to MetLife CY is shown below for information.
As at 1 April 2015 MEL is owned by MEUHC (3,794,999 ordinary shares) and Alico as a minority
shareholder (175,023 ordinary shares). MetLife Europe Insurance Limited (MEIL) is currently owned
by MEUHC (1,905,001 ordinary shares) and Alico (143,387 ordinary shares).
Management’s business plan is for MEL to be its life insurance hub writing a diversified range of
products across several European territories. As such, MEL is of strategic importance to the overall
MetLife restructure and consolidation approach.
MetLife Portfolio Transfer IA | Page 8
3.2 Nature of Business
MEL is authorised by the CBI to undertake life assurance business in the following classes:
Class I: life assurance and contracts to pay annuities on human life; (Occupational
Pension policies are reported under Class I as per Irish Regulations)
Class III: life assurance and contracts to pay annuities, linked to investment funds;
Class IV: individual and group permanent health insurance.
During September 2012 MEL received permission following a Variation of Permissions (‘VoP’)
process with the CBI to extend its authorization and is now eligible to write the following business:
Class VI: capital redemption operations based on actuarial calculations whereby, in
return for single or periodic payments agreed in advance, commitments of specified
duration and amount are undertaken. This business is written in Italy.
Classes 1 and 2: non-life supplementary insurance, in particular insurance against
personal injury including incapacity for employment, insurance against death resulting
from an accident and insurance against disability resulting from an accident or
sickness.
Historically MEL’s primary focus has been to write predominantly unit-linked business with investment
performance guarantees. However, more recently MEL has begun to write non-linked investment and
protection business.
From late 2010 onwards MetLife commenced a global restructuring project to integrate the Alico
businesses with its own existing businesses. In Europe the project also focussed on preparing
MetLife’s EEA operations for Solvency II.
In 2012 MetLife completed its first cross border mergers and portfolio transfers into MEL and where
appropriate its non-life sister company MEIL. As of 1 April 2015 the following transfers have been
completed.
2012 portfolio transfers Spain and Portugal
2012 three way cross border merger from an Italian and Irish company into MEL
2013 cross border merger from France to MEL and portfolio transfer to MEIL
2013 UK portfolio transfers to MEL and MEIL
2014 cross border merger from Bulgaria into MEL
2015 cross border mergers from Czech Republic and Slovakia to MEL with portfolio
transfers to MEIL.
The European Participating Business (‘EPB’) includes benefits with participation dependent on
investment performance (and for certain Portuguese products, on other items of technical profit). The
participation is formulaic rather than discretionary, with a defined bonus calculation and reference
investment portfolios of fixed income assets to support the participation. The benefits on these
products also offer guaranteed minimum annual increases.
A detailed breakdown of the Long-Term Business by country is provided in the tales below:
MetLife Portfolio Transfer IA | Page 9
Table 3.1 MEL Lines of Business
(FIGURES AS AT 31/12/2014 IN €000)
TERRITORY POLICY COUNT Irish Solvency I
Liabilities
Regular Annualised
Premium Single Premium
UK * 212,176 7,124,737 97,278 731,479
Spain 1,355,909 406,802 58,099 15,766
Italy 1,285,388 260,253 37,908 33,356
Portugal 297,842 424,821 35,214 17,761
France 1,022,609 246,994 133,839 -
Total 4,173,924 8,463,607 362,337 798,362
*This includes the FOS, ML and MIL business
MEL has a range of reinsurance treaties in place both with a number of third parties, with credit rating
of A and above, and also with some intra-group counterparties. The key reinsurance treaties currently
in place are summarised as follows:
Conventional risk transfer treaties on Risk & Projection (‘R&P’) business – quota-
share, individual surplus, catastrophe excess of loss;
Multinational captive treaty on R&P business – MetLife via MEL acts an intermediary
between a multinational client’s subsidiary company in Europe and the captive insurer
of said multinational client. MEL’s role is to act as the direct writer ceding risks into
Alico for retrocession to the client captive;
Distribution driven treaties on R&P business – some of the commercial partners who
reinsurance entity, with minimal retention of risk by MEL; and
Intra-group reinsurance treaties with MetLife entities – for UK unit-linked products
with investment guarantees (“VA”), UK fixed term annuities, French term life
business, UK group life and lapse swaps on whole of life and endowment contracts in
various territories.
3.3 Investment & Capital Management
Investment management of MEL’s linked policyholder funds is provided by external fund managers.
MEL’s other assets are managed through an agreement with MetLife Investments Limited.
Non-linked assets are managed by MetLife Investments Limited subject to asset-liability matching
(“ALM”) guidelines set by the MEL Investment Committee. The non-linked invested assets of
portfolios are classed as either interest sensitive or otherwise. Each investment portfolio is then
subject to ALM Guidelines, covering asset type, currency, quality, target mix, concentration limits, and
duration targets (of particular importance for interest sensitive portfolios).
The Board of MEL has set a range of constraints on the target solvency positions to facilitate the risk
management of the business. These capital constraints are detailed below:
Sufficient capital must be held to ensure the financial implications associated with any crystallisations
of risks to which it is exposed can be met in full.
Following Solvency II implementation, the target capital will be based in relation to Solvency II ratios.
As stated in the MEL Risk Strategy and Appetite documentation, MEL's current target solvency capital
ratio is 125% of the Solvency Capital Requirement ('SCR')
Dividend Policy Considerations – Proposed dividends will be considered by the Board of MEL on a
case by case basis, taking into account the expected capital position over a 12 month time horizon
and the risks to that capital position, but in any case will not result in the Company going below the
target ongoing solvency level.
MetLife Portfolio Transfer IA | Page 10
3.4 Administration & Governance
MEL operates using a mixed administration business model with a number of key services being
provided by third parties. Whilst several key in-house functions are being supported by outsourced
services, significant in-house resources in the areas of Operations, Product Development, IT and
Finance, Risk Management and Actuarial are spread across MEL’s head office in Dublin and the
branch offices spread out through-out Europe. Any outsourced service to key functions is provided by
group-internal outsourcers.
MEL operates a management framework designed to actively control and facilitate the ongoing
management of the risks and opportunities to which it is exposed. The objective of the framework is to
ensure that effective risk management is integrated into the business practices and systems at all
levels within the business. To ensure this is adhered to, all branch businesses are required to report
back to the MEL Chief Risk Officer on at least a weekly basis and to the MEL Executive Risk
Committee every month. The results of the branch risk assessments are consolidated by the Risk
Function in Dublin. The Board ensures that the risk management and internal controls reflect the risk
appetite and that there are adequate arrangements in place to ensure that there is regular reporting to
the Board on compliance with the risk appetite.
MetLife Portfolio Transfer IA | Page 11
4 Overview of American Life Insurance Company (CY) Ltd
4.1 Background & History
Alico Cyprus was established in 1955 and operated as a branch of the American Life Insurance
Company (“Alico US” or “Alico”) in the Cypriot life insurance market for more than 50 years. After
Alico’s acquisition by MetLife in November 2010, the Alico Cyprus branch became part of MetLife, and
the trademark was changed to MetLife Alico. The Branch’s ultimate controlling party is MetLife.
MetLife is a global insurance group, US domiciled, founded in 1868 and operating through
subsidiaries and affiliates in over 50 countries. After the acquisition of Alico in 2010, MetLife became
a global insurance provider servicing around 90 million customers all over the world. The Alico Cyprus
branch was part of the Alico acquired business.
MetLife has undergone a global restructuring project and as part of this global restructuring project,
the insurance portfolio, assets, liabilities and business relationships were transferred from the Branch
of American Life Insurance Company to the company MetLife CY in 2013. The remainder of this
section outlines background information around MetLife CY’s structure, business, financial position
and operations. MetLife CY currently operates in Cyprus as a subsidiary of Alico US. It is required to
satisfy reporting and reserving requirements in line with the local Cypriot insurance regulations.
4.2 Nature of the Business
MetLife CY’s insurance portfolio includes traditional policies where the policyholder is entitled to
participate in the company profits (“with-profit” policies) such as whole of life, endowment, deferred
annuity products, non-profit individual life products (whole of life, endowment and term assurance
products) and rider (supplementary) policies, as well as unit-linked, personal accidents, group
annuities, group life and group medical products.
The in-force portfolio as at 31 December 2014 included 69,661 individual and group life, and accident
and health policies corresponding to €37 million of annual premiums including rider premiums.
The following table shows a breakdown of the Branch’s statutory reserves gross of reinsurance as at
31 December 2014 including provision in respect of outstanding insurance claims.
MetLife Portfolio Transfer IA | Page 12
Table 4.1 MetLife CY Cypriot SI Statutory Reserve
PRODUCT
STATUTORY RESERVE GROSS OF REINSURANCE –
Q4 2014
€million
With-profit - Business with reversionary and terminal bonuses 119.1
With-profit - Deferred annuities with Excess Interest Benefit and terminal bonus 70.8
With-profit - Business with Excess Interest Benefit Only 36.7
Non-profit business 10.0
Riders 1.7
Unit linked 26.8
Individual personal accident 3.1
Group life 2.6
Group Annuities 8.6
Group medical and personal accident 1.8
Group Personal Accident 1.0
Resilience reserve 27.4
Total 309.6
The with-profit portfolio consists of a mixture of whole of life and endowment (including pure
endowment) type products and deferred annuities. This group can be sub-divided into three
categories, namely:
- endowment/whole of life with reversionary (regular) and terminal bonuses (issued
prior to 2001)
- deferred annuities with Excess Interest Benefit and terminal bonus (closed to new
business in 2002), and
- endowment/whole of life/deferred annuity with Excess Interest Benefit only
For ease of reference in this report I have labelled the first two as participating business. Participating
business makes up the largest part of the life business and a large portion of these policies have
relatively high guaranteed rates of return varying for 4.25% to 6.0%.
The Excess Interest Benefit is essentially an additional benefit equal to the part of the return earned
on the underlying assets backing the portfolio over and above the technical interest rate after allowing
for expenses. This is defined in a formulaic way on policy documentation. The level of the announced
earned yield rate is determined each year by the Board of MetLife CY based on the investment
performance and on the advice of the Appointed Actuary. All declared benefits are guaranteed.
The older contracts offer a combination of reversionary and terminal bonuses without a minimum
guaranteed amount similar to UK with-profit contracts. Bonuses are expressed as a percentage of the
initial sum assured. There is also a block of deferred annuity contracts issued prior to 2002 that have
the Interest Benefit and Terminal Bonus features. The methodology applied by the MetLife CY to
calculate the amount of these additional benefits tends to be consistent from year to year. The
reversionary and terminal bonuses are declared on the entire participating business portfolio, as
opposed to on a per product basis. The reversionary bonuses are treated as additional paid up
benefits increasing the sum assured of the policy. Once declared, these are guaranteed for the
lifetime of the policy. In addition terminal bonuses may also be declared and are payable upon death,
surrender after the 10th policy anniversary or maturity. Terminal Bonuses are not included in the
surrender value of the Deferred Annuity contracts.
MetLife Portfolio Transfer IA | Page 13
The amount of annual discretionary benefits declared is determined by the Board of MetLife CY
based on the advice of the Appointed Actuary following an ALM study that takes into account the
projections of assets and liabilities to test the sustainability of bonus rates under specific scenarios, in
order to comply with the relevant Delaware regulations. This methodology is approved by the Board of
Directors of MetLife CY.
The following table outlines the reversionary bonus rates declared since 2002. As shown the declared
bonus rate reduced materially in past 10 years. Terminal Bonus rate was set at a flat rate of 15% for
2012, and 7.5% for 2013 and 2014.
Table 4.2 MetLife CY Reversionary Bonus Declared
YEAR 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
BONUS RATE
4.00% 3.50% 3.25% 3.00% 2.75% 2.50% 2.50% 2.50% 2.50% 2.00% 2.00% 0.00% 0.00%
MetLife CY has a range of reinsurance treaties in place, with a number of both intra-group and third
part counterparties. The key reinsurance treaties currently in place are summarized as follows:
Conventional risk transfer treaties for the in-force life portfolio – individual surplus;
Conventional risk transfer treaties for the in-force Permanent Total Disability portfolio
– quota - share;
Conventional risk transfer treaties for the in-force Dread Disease Riders and Group
Life business – quota- share;
4.3 Investment & Capital Management
MetLife CY’s assets are grouped into general account and separate account portfolios. The general
account portfolios include technical reserves, outstanding insurance claims and free assets and the
separate account portfolio includes the assets backing the unit-linked products. Each portfolio has its
own investment objective in line with the documented investment policy of MetLife CY constructed
and signed-off by the investment committee which includes the country manager. The investments
backing the liabilities consist of a mixture of investments such as Cyprus and other EU government
bonds, corporate bonds, mutual funds, Cyprus listed shares, property and short term deposits. The
investment portfolio includes no derivatives. Investment guidelines are in full compliance with
investment orders specified by the regulator. There are currently no ring-fenced funds in the
investment portfolio in relation to the with-profit business. The company’s management has
sponsored a project in relation to the general management of the participating policies in order to
enhance transparency and administrative ease of these contracts.
MetLife CY has been well capitalized in the recent years. The table below shows a comparison of the
company’s capitalisation ratio as at 31 December 2013 and the capitalisation ratio as at 31 December
2014.
Table 4.3 MetLife CY Capitalisation Ratio (Solvency I basis)
Q4 2013 Q4 2014
Total Assets 330.1 358.6
Total Liabilities 244.6 307.7
Excess capital 85.4 49.0
Required minimum solvency margin (RMSM) 13.9 16.1
Excess of Capital over and above RMSM 71.6 34.8
Capitalisation ratio (excess capital/RMSM) 616% 317%
MetLife Portfolio Transfer IA | Page 14
In terms of capital management, the MetLife CY’s strategy consists of targeting a higher level of
capital compared to the required solvency capital (200% of the regulatory solvency capital). Given the
change in regulatory condition across Europe and the adoption of Solvency II both assets and
liabilities will be based on a more realistic basis and the target solvency ratio will be defined at a pan-
European level for all subsidiaries throughout all European jurisdictions. The target level of solvency
under Solvency II basis is set to 125%. This figure would have probably been the same for the stand
alone MetLife CY Company following Solvency II implementation if the proposed transfer was not in
executed.
4.4 Administration & Governance
Similarly to MEL, MetLife CY administers business internally with some reliance on group internal
outsourcers for the key functions within the operation. This is likely to remain largely the same
following the implementation of the proposed transfer unless efficiencies will be identified that will
require diversion from the existing model. In such cases it is expected that the company will benefit
from economies of scale and ultimately this will be reflected on customer support hence it is not
expected to compromising existing client servicing and support.
MetLife CY operates a management framework which is designed to effectively assist decision
making in order to control and assess the risks and opportunities within the business. This ensures
that risk management is integrated within all the business processes. MetLife has a number of
Executive Committees, which meet on a regular basis to ensure compliance with the management
framework. The following table lists the committees including the Board of Directors that are currently
in place with their key roles:
MetLife Portfolio Transfer IA | Page 15
Table 4.3 MetLife CY Committees
COMMITTEES FOR SII
COMPLIANCE FUNCTIONALITY / ROLE
CORPORATE GOVERNANCE
Board of Directors
Oversight of the business on behalf of the shareholders. Adopts key business decisions.
Appoints executive directors, adopts business activities changes, structural/organizational changes, divided distributions capital increases etc.
Approves key transactions.
Presents the financial reports to the shareholder.
Investment Committee
Strategic direction and regular monitoring of asset allocation
Authorize or approve specific investments
Optimize investment returns within the limits of the Board approved risk appetite
Set the company’s annual investment plan
Finance and Risk Committee
Establish, approve and communicate risk appetite and tolerance
Review MetLife’s risk exposures
Review and discuss the results from risk management assessments
Audit Committee
Oversees the accuracy, completeness and timeliness of accounting and other documents and reports
The adequacy of the Company’s internal controls
Management systems and the methods for risk assessment
Management Committee
Oversee the Company’s operational and compliance risk management
Roll out enterprise risk self-assessment (ERSA)
Identify manage emerging risk, legislative and regulatory initiatives, sales practice and ethics and compliance programs.
Set policies and parameters related to underwriting, product, insurance and reinsurance risks.
It should be noted that there are certain proposed changes in relation to the risk committees in order
to meet the risk, audit and compliance reporting requirements of MEL’s Executive Risk Committee.
Following the proposed transfer, the local committees and management framework will integrate into
MEL’s risk management framework. The local Risk Officer and other key function holders will undergo
specific training to ensure compliance with MEL’s risk governance and reporting standards.
MetLife Portfolio Transfer IA | Page 16
5 Outline of the Transfer
5.1 Background
The proposed portfolio transfer of MetLife CY forms a step in a wider reorganisation of the MetLife
Group’s businesses in Europe in preparation for Solvency II, which comes into effect in 2016, arising
from which ultimately, MEL will be the principal MetLife Company in Europe authorized to carry on life
assurance business and class 1 and 2 non-life business. Also arising from this project, MEIL will be
the principal MetLife Company in Europe authorised to carry on non-life insurance business apart
from Class 1 and class 2.
MetLife has undergone a global restructuring project and as part of this global restructuring project,
the insurance portfolio, assets, liabilities and business relationships have been transferred into MEL
over the last few years. The intended group restructure of MetLife CY will be to transfer its insurance
portfolio, assets, liabilities and business relationships to a Cypriot branch of MEL. Only assets equal
to Total Liabilities will be transferred to MEL from MetLife CY.
5.2 Policies Transferred & Associated Liabilities
All the insurance liabilities of MetLife CY, including any outstanding liabilities relating to risks that have
already crystalised such as pending claims, will transfer to the Cypriot branch of MEL via a court
approved legal process. MEL will need to issue 1 share of nominal value of €1 each at a premium, to
MetLife Cyprus Hold Co as consideration for the transfer. The premium will be based on the fair value
of the receiving business immediately following the transfer determined by a methodology that will be
agreed between MEL and MetLife CY. The following table summarises the characteristics of the
transferring policies.
Table 5.1 MetLife CY in-force portfolio
PRODUCT TYPE CYP SI GROSS
RESERVES
NO. OF CONTRACTS*
PREMIUM SIZE (€)
With-profit - Business with reversionary (regular) and terminal bonuses 119.1 4983 3.2
With-profit - Deferred annuities with Excess Interest Benefit and terminal bonus 70.8 2521 2.3
With-profit - Business with Excess Interest Benefit Only 36.7 5484 6.4
Non-profit business 10.0 6224 2.5
Riders 1.7 0 0.9
Unit linked 26.8 4084 5.6
Individual personal accident 3.1 44233 5.8
Group life 2.6 277 1.7
Group Medical 1.8 278 6.8
Group Annuities 8.6 9 0.6
Group Personal accident 1.0 1568 1.2
5.3 Assets Transferred
The portfolio transfer assumes to transfer only insurance assets and liabilities of MetLife CY. Under
the Business Transfer Agreement (BTA) sufficient assets to cover transferring Total Liabilities will be
transferred to MEL. Only assets equal to the Total Liabilities will be transferred to MEL. Following the
transfer MetLife CY is expected to pay a dividend in 2016. This dividend does not affect the
transfer as it will be based on the residual assets of the company following the transfer to
MEL. The dividend will be payable to MetLife EU Holding Company Limited (Ireland) (“MEUHC”). The
dividend payment is not yet finalised.
MetLife Portfolio Transfer IA | Page 17
5.4 Transfer Costs
The costs in relation to the transfer will not be directly or indirectly transferred to policyholders of MEL
or MetLife CY. The costs will be borne entirely by the shareholders of both companies.
5.5 Tax Impact of Transfer
I have received confirmation form MEL’s tax department that the business transferred from MetLife
CY to the MEL Cypriot branch will continue to be subject to Cypriot tax as is currently applicable to
MetLife Cyprus. The expectation is that emerging profit will not change from being subject to Cyprus
tax and that no additional Irish tax will be applicable.
In relation to policyholder tax exemption on premiums payable, it is not expected that the treatment of
policyholder premium will be subject to change from Cypriot tax authorities.
MetLife Portfolio Transfer IA | Page 18
6 Financial Impact
6.1 Solvency II Comparisons
The proposed transfer will be carried-out based on Solvency II compliant calculations. Following the
proposed transfer date (01 January 2016), Solvency II will be in full implementation throughout
Europe hence all financial impacts have been considered under Solvency II. The following tables
summarise the projected Solvency position of MEL pre and post transfer as at proposed transaction
date and based on the latest YE2013 ORSA report that has been submitted to the local regulator:
Table 6.1 MEL Solvency II Balance Sheet
MEL BALANCE SHEET (€M) MEL* MEL* + CZK, +
HUN
MEL* + ON-
SHORING
WITHOUT
EVOLUTION(1)
MEL* + ON-
SHORING, +CZK
+ HUN +CYP, +
ROM
31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-16
Assets
Non Linked 2,415.3 3,360.7 3,096.0 3,840.8
Linked 6,270.3 7,541.2 7,721.2 8,374.2
Reinsurance Asset & Other 309.8 197.0 69.0 105.8
Total Assets 8,995.5 11,099.0 10,886.2 12,320.8
Liabilities
Technical Provisions 7,008.0 8,793.7 8,209.8 9,472.3
Corporate Reserves 373.6 387.4 387.4 387.4
Deferred Tax Liabilities 154.2 195.4 312.1 312.1
Other (OH Expense Allowance) 83.3 84.0 85.6 85.6
Total Liabilities 7,619.0 9,460.6 8,994.9 10,257.4
Own Funds (Available Net Assets)
Opening Own Funds 1,151.7 1,376.4 1,601.2 1,638.5
Project Evolution Transfer in 0.0 365.2 0.0 126.0
Net Income in period (after tax) 224.7 -103.2 290.1 298.9
Capital injections / (Dividends) 0.0 0.0 0.0 0.0
Closing Own Funds 1,376.4 1,638.5 1,891.3 2,063.4
Solvency
SCR 539.8 688.0 984.1 1,121.2
Solvency ratio 255% 238% 192% 184%
Excess / (shortfall) over SCR 836.7 950.5 907.2 942.2
(1) Evolution refers to the project of restructuring MetLife’s businesses in the EU; On-shoring refers to the option of
replacing the current reinsurance arrangement with MetLife Reinsurance of Bermuda through an appropriate
derivatives programme executed by MEL
(2) MEL* above includes the transfer of MetLife Bulgaria which occurred on 31 December 2014 and MetLife
Slovakia, which at time of the ORSA production was also expected to transfer on the 31 December 2014. The
actual transfer of MetLife Slovakia occurred on 1 April 2015
The above table is based on the YE2013 ORSA report hence the figures appearing are projected
based on data and assumptions as at YE2013 and assuming all planned transfers to MEL are
successfully implemented, including the transfer of MetLife CY to MEL. For this reason the figures for
2014 cannot be matched with the respective figures in table 2.1. It should be noted that the Transfer
in relation to Bulgaria, Slovakia and the Czech Republic have already been executed and that even if
the transfers for Hungary and Romania are not executed for any reason, the capitalisation of MEL will
still be higher than the target limit following the potential transfer of MetLife CY. Proceeding with the
on-shoring option referred to above basically changes the MetLife entity where the hedge is held. The
better hedged MEL is the less capital it will need to hold. There is operational risk around any hedging
programme which MEL is well aware of and which in the first instance will be mitigated by strong
controls.
MetLife Portfolio Transfer IA | Page 19
Table 6.2 MetLife CY Projected Solvency II Coverage Ratio
€M 2014 2015 2016
Own Funds 113.2 125.3 143.2
SCR 32.3 32.0 32.1
Coverage Ratio 350% 392% 446%
Similarly to the MEL table, the above figures are based on projections as at YE2013 and therefore the
2014 figures cannot be matched with the respective figures in table 2.1. The projected Solvency II
coverage ratio for MetLife CY starts at 350% and escalates to 446% which is materially higher than
the projected coverage at MEL level. It should however be noted that although the projected figures
take into account new business and the run-off of the capital intensive with-profit business, it does not
factor in the dividend that MetLife CY is expected to pay to the MetLife Holding Company post the
MEL transfer. Additionally management have confirmed that if MetLife CY were to remain a
standalone entity and not form part of MEL, the Solvency position would not have been as in the
financial projections presented in the above table. Dividends would be paid out to reduce the
coverage to a target most likely similar to MEL's. It is worth noting that even though, post transfer, the
coverage ratio is at a lower level as part of MEL (184%), the absolute amount of excess own funds
over SCR is much greater in MEL. Additionally, MEL is a much bigger and more secure entity than the
stand alone MetLife CY Company, due to the large diversification of risks it enjoys. This would act in
favour to policyholder security.
6.2 Valuation Basis
In forming my opinion in relation to the proposed transfer I have mainly taken into account figures
derived under Solvency II basis as this will be the new regulatory basis in both jurisdictions at and
following the transfer date. MEL and MetLife CY management has also provided figures under both
Cypriot and Irish Solvency I basis, which I have took into account but not relied on them.
Table 6.3 Solvency Impact of MetLife Cyprus to MEL
Estimated Solvency Impact - MetLife Cyprus Cypriot Solvency I
Cypriot Solvency I
transferring to MEL
Cypriot Solvency I Remaining
Solvency II transferring
to MEL
all amounts in €m 31-Dec-14 31-Dec-14
Total assets 358.6 266.7 91.9 266.7
Total liabilities 307.7 307.7 0.0 266.7
Closing available assets 50.9 -41.0 91.9 0.0
Solvency capital requirement (RMSM / SCR) 16.1 16.1 n/a 43.6
Solvency ratio 317% -255% n/a 0%
Minimum solvency margin (100%/150%/100%)
16.1 16.1 n/a 43.6
Target solvency margin (200%/165%/125%) 18.5 18.5 n/a 54.4
Excess / (shortfall) over minimum 34.8 -57.1 n/a -43.6
Excess / (shortfall) over target 32.4 -59.5 n/a -54.4
The above table shows the shortfall of the transferring business of MetLife CY to MEL under Cypriot
and Solvency II. The shortfall mainly arises due to the fact that only assets equal to the Solvency II
liabilities are being transferred to MEL. Under Irish Solvency I the shortfall is material (€186.6m) due
to the more prudent regulatory requirements and this would have caused issues for MEL as existing
capital resources of MEL would be severely depleted, however I do not consider this an issue as
management confirmed that the transfer is not going to happen prior to Solvency II implementation.
The transfer is expected to happen on 1 January 2016 when Solvency II will be the only regulatory
requirement for MEL hence the only relevant shortfall is the one under Solvency II which stands at
MetLife Portfolio Transfer IA | Page 20
€54.4 million which can be comfortably covered by the available capital resources of MEL under
Solvency II basis without affecting MEL’s target Solvency II coverage ratio of 125%.
6.3 Conclusion
The proposed transfer of Total Liabilities of MetLife CY to MEL will be based on a Solvency II
compliant basis. Assuming that the conditions as listed in the Section 2.3 are fully met I do not expect
that the financial impact on MEL from the proposed transfer will be material. Even though the
coverage ratio following the proposed transfer will be at a lower level compared to the pre transfer
figure for MetLife CY, the absolute amount of excess own funds will be much higher.
MetLife Portfolio Transfer IA | Page 21
7 Risk Profile Changes
7.1 New Risks to MEL
MetLife CY is relatively small compared to the overall risk exposure of MEL. As at YE2014 the SCR
stated in respect of MEL is EUR493.6m while the corresponding figure for MetLife CY stands at
EUR43.6m, i.e. around 7% of the total MEL SCR as shown in table 7.1 below. Given the small size of
the Cyprus market compared to the combined MEL markets, the impact is expected to remain low
in the foreseeable future. There are however a number of areas which could potentially add
additional risk and should be considered and addressed at the MEL level in the short to medium term:
Negative GDP growth in 2014 combined with high unemployment rates could
materially affect projected new business levels, surrenders and lapses
If at any point with-profit fund segregation is considered, it could increase operation
costs and risks
Impact of bail-out and austerity measures will impact surrenders, lapses and new
business levels
Additional credit risk due to investments in Cyprus Government Bonds
Political risks due to the long-term situation with Turkey as well as the Troika
conditions and local market exposure to Greece
Lowering of interest rates in Cyprus and the Eurozone
7.2 Risk Profile Comparisons
For the purpose of this report we have considered that SCR and its components accurately reflect the
risk profile of the MEL and MetLife CY. The basis of these comparisons is taken out of the ORSA
report prepared by MEL for YE2013 which also includes the MetLife CY stand-alone solvency capital
requirements.
The following table summarises the SCR contributors of MEL and MetLife CY as at YE2014:
Table 7.1 SCR components (Amounts)
All figures are in €m MEL excl.
Cyprus MetLife Cyprus
MEL incl.
Cyprus
Market risk 256.8 30.7 276.4
Counterparty default risk 46.4 8.0 54.4
Life underwriting risk 279.1 14.9 289.5
Health underwriting risk 19.3 4.5 22.2
Non-Life underwriting risk - - -
Diversification Benefits - 154.1 - 15.9 - 167.2
Basic Solvency Capital Requirements 447.6 42.2 475.3
Operational risk 46.1 1.4 47.5
Loss absorbing capacity of deferred taxes (LACDT) - - -
Solvency Capital Requirements 493.6 43.6 522.8
MetLife Portfolio Transfer IA | Page 22
Table 7.2 SCR components (Percentages)
Percentage of undiversified BSCR for each module – as at 31st
December 2014
MEL. Excl
Cyprus
MetLife
Cyprus
MEL incl.
Cyprus
Market Risk 39.7% 51.6% 40.1%
Health Risk 3.0% 7.5% 3.2%
Counterparty Default Risk 7.2% 13.4% 7.9%
Insurance Risk 43.1% 25.1% 42.0%
Operational Risk 7.1% 2.3% 6.9%
Loss Absorbing Capacity of Deferred Taxes (LACDT) 0.0% 0.0% 0.0%
The above tables demonstrate that MEL has a more diversified risk basis resulting from a more
balanced assets and liability portfolio. MetLife CY’s stand-alone SCR is much more heavily geared
towards market risk while the after transfer SCR has a more balanced composition in relation to
underwriting, market and counterparty default risks. The picture for MEL pre and post MetLife CY
transfer is pretty similar as the notional components of MetLife are relatively immaterially causing
minor changes to the over composition of MEL risk characteristics.
7.3 Conclusions
There will be no material changes in the risk profile as derived from the SCR components of MEL pre
and post transfer due to the relatively small size of MetLife CY compared to the pre-transfer balance
sheet of MEL. The risk exposure of MetLife CY will change materially following the proposed transfer
as derived from the changes in the SCR components of the stand-alone MetLife CY entity and post-
transfer MEL. The resulting risk profile appears to be much more diversified and this I believe
contributes towards reducing the volatility in the MetLife’s balance sheet which enhances
policyholder security.
MetLife Portfolio Transfer IA | Page 23
8 Impact Assessment on Policyholders
8.1 Policyholders Affected
In my assessment of the impact of the proposed transfer of the MetLife CY portfolio to MEL I have
considered all the policyholders of the in-force portfolio of MetLife CY. This includes non-profit and
with-profit policyholders. The relative size in terms of in-force portfolio and related risks of the MetLife
CY portfolio compared to the existing and prospective business of MEL is not substantial hence any
impact on MEL existing and prospective policyholders is unlikely to be material.
Prospective benefits (future and outstanding) are clearly defined for both unit-linked and conventional
non-profit policyholders hence both pending and future benefits, for this group of policyholders are
unlikely to be affected from the proposed transfer. In relation to with-profit policyholders and given the
discretionary element in some future benefits, there could potentially be a higher probability of some
impact on future discretionary benefits for this group of policyholders. I have received confirmation
from management though that the legal terms of the scheme do not differentiate between with-profit
and other MetLife CY’s policyholders.
In my investigations to understand the potential impact I had various discussions and received
numerous documents around the mechanics and the process of bonus declarations. The
management of MEL sponsored a project the scope of which is to investigate the management of the
participating policies and propose a more transparent, with less discretion methodology for the bonus
declaration going forward. The first phase of the project is complete, under which a proposed formula
driven methodology has been adopted by the management. Phase two of the project is now under
way with the main scope to define and parameterise the formula to ensure that policyholders continue
to be equitably treated, policyholder reasonable expectations are met and no policyholders are
materially disadvantaged compared to the existing bonus methodology. It should however be noted
that the full process to be followed and in particular the assets to be under consideration for future
declarations is key in forming an opinion as to the fair treatment of the participating policyholders,
which will be formalised following the completion of phase two. Management has indicated that there
is no plan to communicate the change in bonus methodology to policyholders.
Management has indicated that there will be no change in the terms and conditions of all existing
policies following the transfer hence all contractual rights of existing policyholders will remain
unchanged. I have reviewed the terms of the draft legal transfer document and I consider that the
interests of the policyholder are appropriately protected. In particular in relation to with-profit
policyholders, any reasonable expectations of this group of policyholders are not expected to be
affected following the transfer as a result of the transfer itself. The results of phase two of the
participating business project and subsequent implementation of the recommendations/improvements
suggested will enhance clarity, security and fairness of future bonus declarations. This is not a direct
consequence of the transfer but a result of a work stream that was going to be implemented
irrespective of the proposed transfer. The transfer itself however could have potentially magnified any
issues that could have resulted from the lack of ring-fencing of the with-profit reference assets. This is
expected to be rectified following the completion of phase two of the participating business project.
Under Solvency II requirements the Company is not obliged to formally ring-fence the reference
assets of the with-profit policies with the MetLife CY’s characteristics as benefits under these
contracts are not defined in the same manner as the UK with-profit funds and the element of the with-
profit fund Estate does not exist. There will continue to be a regular internal hypothecation of assets to
the with-profits business in order to determine the corresponding investment returns, and hence
facilitate the relevant bonus declarations.
8.2 Security of Benefits
A key consideration in determining the appropriateness of any such transfer is whether the security of
any group of policyholder benefits is affected following approval of the proposed transfer. Policyholder
security could be adversely affected by the transfer if benefits post transfer become less secure as a
direct consequence of the transfer itself. However I have not carried out a quantitative assessment of
whether the security is affected based on any one specific quantifiable measure as it is not possible to
MetLife Portfolio Transfer IA | Page 24
quantify all the aspects of policyholder security. Instead I have applied reasoned judgment based on
the interplay of factors involved to consider whether policyholders should be any more concerned for
the security of their benefits after the transfer. The main factors taken into consideration were:
Best-estimate liabilities and respective assets to be transferred and any changes in
the methodology and assumptions used for their valuation under MetLife CY
compared to MEL
The target solvency coverage under Solvency II and any potential difference between
MetLife CY and MEL
The Total Liabilities and respective assets as at Q4 2015 will be transferred from MetLife CY to MEL
at the proposed transfer date. These figures will not be available until after December 2015 hence any
conclusions have been drawn on the Total Liabilities information of the latest ORSA report which is
Q4 2013. The transfer will initially be based on the Q3 2015 Total Liability figure; however a final run
will be done based on Q4 2015 data to determine the value of assets to be transferred over to MEL.
MetLife CY have shared their detailed Solvency II model validation approach with me and I feel that
this will provide a comprehensive and appropriate validation of the valuation of Total Liabilities and
respective assets using methodology and assumptions in line with the appropriate regulation and
guidelines.
Table 8.1 Solvency II Transfer Impact to MEL (Based on YE2014 Figures)
YEAR 2014
ALL FIGURES ARE IN €M
MEL EXCL. CYPRUS
METLIFE CYPRUS
METLIFE CYPRUS TO
MEL
MEL INCL. CYPRUS
Investments (excluding unit-linked) 2,025.9 326.3 205.4 2,231.3
Investments (unit-linked, including variable annuities) 6,635.6 26.0 26.0 6,661.7
Other non-invested assets 447.7 31.7 31.7 479.4
Deferred Tax Assets 5.1 0.0 0.0 5.1
Reinsurance Assets 254.9 3.6 3.6 258.6
Total Assets 9,369.3 387.6 266.7 9,636.0
BEL 7,438.7 250.4 250.4 7,689.1
Risk Margin 138.5 11.2 11.2 149.7
Technical Provisions 7,577.3 261.6 261.6 7,838.8
Other Liabilities 485.2 5.1 5.1 490.3
Subordinated Debt Liabilities 0.0 0.0 0.0 0.0
Deferred Tax Liabilities 112.0 0.0 0.0 112.0
Total Liabilities 8,174.5 266.7 266.7 8,441.2
Available Assets 1,194.9 120.9 0.0 1,194.9
Recognition of Subordinated Debt as Eligible Assets 0.0 0.0 0.0 0.0
Net Deferred Tax Asset Limitation 0.0 0.0 0.0 0.0
Eligible Assets 1,194.9 120.9 0.0 1,194.9
Solvency Capital Requirement
Regulatory Minimum 493.6 43.6 43.6 522.9
Risk Appetite Target 617.0 54.4 54.4 653.7
Solvency Ratio 242.1% 277.6% 0.0% 228.5%
MetLife Portfolio Transfer IA | Page 25
Only assets equal to Total Liabilities will be transferred to MEL in relation to MetLife CY business
hence the SCR calculation at MetLife level is not relevant to the transfer. The solvency level of MEL
after transfer will be covered from existing resources at MEL level without support from the existing
Own Funds of MetLife CY. The target Solvency Ratio of MEL is 125% which would have most likely
been the target ratio of MetLife CY assuming the proposed transfer was not put forward. I understand
that the projected solvency coverage ratio for MetLife CY in 2016 would have been materially higher
than the corresponding coverage ratio of MEL following the proposed transfer as shown Table 6.2.
However, the projected solvency coverage ratio for MetLife CY is more theoretical as it ignores the
intended transfer through a dividend form to the parent company which will materially reduce the
projected solvency coverage ratio of MetLife CY to levels closer to the target solvency coverage ratio
defined at group level (125% of SCR). In addition to that, the amount of free capital on top of the
regulatory requirement at MEL level is materially higher and the risks are more diversified at multiple
levels which potentially reduces insolvency risk, warranting higher policyholder benefit security. I
therefore believe that MetLife CY existing policyholders are not materially disadvantaged from
the lower projected Solvency II coverage ratio at MEL following the proposed transfer.
8.3 Policyholder Reasonable Expectations
Policyholders tend to form expectations of benefits that will be received in the future. Part of these
expectations relate to the actual receipt of benefits upon claim and part relate to the actual amounts to
be received, especially for policies where the insurance provider’s discretion is involved e.g. in with-
profit policies. Policyholder expectations can be formed from the very outset of a policy based on the
initial policyholder documentation and communication. However, significant expectations can be
formed during the life time of with-profit policy based on the company practice of regular bonus
declarations and/or interest rate additions.
For non-profit policies where the benefit is normally largely fixed from the outset of the policy, the
policyholder expectations relate to a known benefit. For with-profit policies however the final benefit is
not fixed from the outset of the policy, and the with-profit policyholders form bonus expectations for
the future which are based on the past company practice of declaring bonuses.
Management indicated that the methodology and procedure of the bonus declarations and the
general management of the participating policies will not be altered as a direct result of the
transfer (i.e. the participating business review currently underway would have been required even in
the absence of the transfer). Future bonus rates will be declared based on similar principles as
prior to the transfer. The formulaic approach to be introduced will be parameterised in such a way
so that no group of participating policyholders will be materially disadvantaged hence reasonable
expectations are not expected to change as a result of the transfer.
For linked policies the main expectations of the future benefits are based on the underlying fund
management and fees this incurs, the investment policies, the unit pricing methodology and the
management fees charged by MetLife CY. My understanding from discussions with the management
is that none of these factors will change as a result of the proposed transfer.
MetLife CY’s portfolio will be part of a much larger operation with significantly higher significance to
the Group compared to the stand alone Cyprus operation. This development will increase capital
fungibility if required and will receive higher attention and reputational considerations for the
ultimate parent company and indirectly enhance the level of security enjoyed by MetLife CY’s
policyholders under the status quo scenario.
8.4 Operational Considerations
MEL and MetLife CY have various service agreements in place in order to administer and service
clients on a regular basis. Management has confirmed that the current agreements will not be
changed in any way to adversely affect customer satisfaction. In fact, enhanced efficiencies of
the resulting post-transfer operation could potentially enhance customer satisfaction. There may be
some minor changes to claims thresholds, reporting lines and some additional reports, but otherwise
MetLife Portfolio Transfer IA | Page 26
processes and procedures for claims handling and customer services are expected to remain to a
large extent as they currently are at MetLife CY level. This is in line with experience from previous
transfers across Europe into MEL.
8.5 Treating Customers Fairly
The treatment of policyholders will not be impacted in any way from the implementation of the
proposed transfer and I am satisfied following discussions with the management at both ends the
current fair treatment of policyholders will continue following the completion of the transfer.
8.6 Tax Implications
I have relied completely on tax specialist of MEL and MetLife CY to understand the implications of the
transfer on tax on policyholder benefits. My understanding is that there will be no impact on the rates
or structure in taxation of any future benefits received in relation to current in-force policies resulting
from the transfer.
8.7 Conclusions
Considering the impact of the proposed transfer on policyholders of MetLife CY and MEL, it is my
opinion that:
There will be no material adverse impact on the security of MetLife CY’s policyholders
transferring to MEL
There will be no material impact on in-force policyholders of MEL as these are listed
in various parts of this report
The policyholder reasonable expectations, contractual obligations and tax treatment
of transferring policyholders will not be affected as a result of the transfer
The proposed formulaic approach for setting bonus rates can be structured in a way
not to materially disadvantage any of the participating policyholders of MetLife CY
Service quality of MetLife CY’s policyholders will not be adversely affected as a result
of the proposed transfer
MetLife Portfolio Transfer IA | Page 27
9 Policyholder Communication Management have informed me that approval will be sought from the Regulator so that they will not
be required to inform existing MEL policyholders of the proposed transfer of MetLife CY. Given the
relative size of MetLife CY and that the poet transfer situation will not affect the risk profile and
capitalisation level of MEL I have no objection to this.
At the time of writing the report, the letters to be sent to existing MetLife CY’s policyholders were still
not finalised. I have reviewed the draft English version of the letters describing the proposal for the
transfer. Management has indicated that the content and structure will not change materially and I
have no issues with that.
Appendices
Appendix A | Page i
Appendix A: Marios Schizas CV
9.1 Background
Marios joined Lux in 2010 as the leader of the life insurance sector covering insurance and reinsurance
clients in Cyprus, Malta, UK and the Middle East. Previously to joining Lux, Marios worked in the UK for
Tillinghast Towers-Perrin, Ernst & Young and Bank of America. He has experience in mergers &
acquisitions mainly in the UK and is registered as an Appointed Actuary to a number of jurisdictions
including Cyprus. Marios is a Fellow of the Institute of Actuaries UK, having qualified in 2004 and he is also
a Fellow of the Cyprus Association of Actuaries. He also holds a BSc in actuarial Science from the London
School of Economics.
9.2 Experience
Marios is an experienced life actuary with exposure in a lot of European and Middle East markets. He
participated in M&A transactions in the UK and Europe and is the Appointed Actuary of a number of life
insurers and reinsurers. The following summarise the main experience items:
Appointed Actuary Roles in a number of jurisdictions
Actuarial reserve review responsibility for a number of insurance and Takaful companies
Modelling and Financial reporting work for local and international insurance and
reinsurance companies
Embedded Value reporting responsibility for listed and unlisted insurance companies
Solvency II assistance in all three pillars for EU registered insurance companies
Involved in the modelling of a number of M&A transactions and inherited estate projects in
the UK market
Product design and profit testing of investment and protection products
Appendix B | Page ii
Appendix B: Sources of Data
9.3 Sources of Data
The following list summarises the main information used in the analysis and conclusions presented
throughout this report. Reliance has also been placed on other documents, correspondence and
discussions between Lux, MetLife CY and MEL management.
NUMBER FILENAME DESCRIPTION
1 MetLife France Transfer - MEL Actuarial & Risk Transaction Report v2.2
Actuarial risk and transaction report for MetLife France
2 Project LESS - Bulgaria ARTR - Final v1.4 Actuarial risk and transaction report for MetLife Bulgaria
3 Project LESS - Czech Republic ARTR - Final v1.0 Actuarial risk and transaction report for Czech Republic
4 Project LESS - Slovakia ARTR - Final v1.5 Actuarial risk and transaction report for Slovakia
5 MEL ORSA_31 12 13_Refresh v1 5 clean MEL ORSA report as at 01 January 2014
6 IE Report Independent Expert Report for ML
7 EA 7 - 1st page MetLife CY 2014 Form EA7
8 EA 7 - 2nd page MetLife CY 2014 Form EA7
9 Facultative Cover EAE7 2014 MetLife CY 2014 Form EA7
10 MEL Asset and Liability Management Strategy October 2014 MetLife CY ALM strategy document
11 ALICO Cyprus Branch Form AR6 2013 English v11 MetLife CY AR6 for YE2013
12 MetLife Europe Limited 2013 Appointed Actuary Board Report v1 1 FINAL
MEL Appointed Actuary Report for YE2013
13 Asset Segregation Response by MEL's AA Response from MEL Appointed Actuary on asset segregation
14 MetLife Europe Limited - AA External Report - ML MIL to MEL Part VII v2 0
MEL Appointed Actuary Part VII transfer report of ML and MIL into MEL
15 MetLife Alico (Cy Ltd) - Signed Financial Statements Period Ended 31.12.2013
MetLife CY Financial Statements for YE2013
16 MetLife Europe Limited signed Financial Statements 31.12.13.pdf MEL Financial Statements for YE2013
17 0204_RP_Client_Brochure_12 MetLife CY policy documentation
18 0217_RP_Key_Features_15 MetLife CY policy documentation
19 0224_RP_TC_8 MetLife CY policy documentation
20 MEL - Schedule 4 Report - 31 Dec 2013 FINAL MEL Abstract of the valuation report prepared by the Appointed Actuary for YE2013
21 Product List Summary_SC_1212214 MetLife CY product list
22 AR FORMS 2013 final MetLife CY AR6 forms as at YE2013
23 AR Supplementary Notes 2013 draft v3 actuarial (29052014) - no track of changes
MetLife CY AR6 forms supplementary notes as at YE2013
24 MEL CBI Returns Final Forms Q3 2014 MEL forms for Q32014 submitted
25 MetLife Europe Limited signed CBI return 31 12 13 MEL CBI returns submitted for YE2013
26 2012 Annual Statutory Returns Additional Replies to GAD_No 3 Q&A between Cypriot Regulator and MetLife CY on WP policyholders
27 2012 Annual Statutory Returns Additional Reply to GAD_No 2 Q&A between Cypriot Regulator and MetLife CY on WP policyholders
Appendix B | Page iii
28 2012 Annual Statutory Returns Replies to GAD_No 1 Q&A between Cypriot Regulator and MetLife CY on WP policyholders
29 2012 Returns - Additional Comments by ICCS Q&A between Cypriot Regulator and MetLife CY on WP policyholders
30 2013 Annual Statutory Returns Replies to GAD_No 1 Q&A between Cypriot Regulator and MetLife CY on WP policyholders
31 2013 Annual Statutory Returns Replies to GAD_No 2 Q&A between Cypriot Regulator and MetLife CY on WP policyholders
32 Current Bonus Declaration Process_V4 Description of current bonus declaration method
33 ICCS Comments on the 2013 Returns Q&A between Cypriot Regulator and MetLife CY on WP policyholders
34 SoI - Comments on 2012 Stat Returns Q&A between Cypriot Regulator and MetLife CY on WP policyholders
35 2015 MEL General Accounts ALM Guidelines MEL Investment Guidelines
36 Investment Guidelines Cyprus 2014 Final MetLife CY Investment Guidelines
37 - MetLife European Group Reorganisation Overview - 19 01 2015 MetLife European re-organisation structures
38 Cyprus Transaction Design v1.0 Transaction design charts for transferring MetLife CY into MEL
39 Product List Summary_v4 Updated Product list summary for MetLife CY
40 objections - replies Objections and response to WP fund policyholders in the previous transfer from branch to company
41 objections - replies.pdf 3 Objections and responses to WP fund policyholders in the previous transfer from branch to company
42 Project Less - Objections Objections and responses to WP fund policyholders in the previous transfer from branch to company
43 Committees Localisation Cyprus SII proposed committees for MetLife CY for efficient system of Governance
44 MetLife Cyprus -participating business transfer options - 17 3 2015
Report on potential options for transferring participating business into MEL
45 Project Evolution - Cyprus ARTR - v1.0 Actuarial Risk and Transaction Report prepared by MEL AA for the proposed transfer
46 MetLife Europe Limited - Twin Peaks Solvency Report 2014 Q4 V3.0
MEL Twin Peaks Solvency Position
47 Cyprus Phase B2 - letter to policyholders ENG - v3 1 (EDPD) 2 Draft Policyholder Documentation
48 SII QA Master Template v0.15 (COUNTRY SPECIFIC - shared) SII QA Checklist Master Template
Appendix D | Page iv
Appendix C: Corporate Structure
9.4 Corporate Structure of MetLife CY Pre and Post Transfer
Starting Structure Proposed End Structure
Appendix D | Page v
Simplified Expected European Group Structure (as at 1 January 2016)
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