report of the independent actuary - harcourt life ... · 2 1.8 the proposed scheme, which is the...

Report of the Independent Actuary

December 1 2017

Table of Contents

Section 1 : Introduction ................................................................................................................1 Background .............................................................................................................................1 The role of the Independent Actuary ..........................................................................................3 Scope of my report ...................................................................................................................3 Terms of reference ...................................................................................................................4 Reliances and Limitations .........................................................................................................4

Section 2 : Information on which this report is based ..................................................................5 Scheme of Transfer ..................................................................................................................5 HLI key documents ...................................................................................................................6 ALI key documents ...................................................................................................................6 HLA key documents .................................................................................................................7 UHL key documents .................................................................................................................7 Reliances.................................................................................................................................7

Section 3 : Background to the Participant Companies.................................................................9 HLI history ............................................................................................................................. 10 The business of HLI................................................................................................................ 10 HLA history ............................................................................................................................ 18 The business of HLA .............................................................................................................. 18 ALI history.............................................................................................................................. 21 The business of ALI ................................................................................................................ 21 UHL history ............................................................................................................................ 24 The business of UHL .............................................................................................................. 24

Section 4 : Main features of the Scheme .................................................................................... 27 Scope of transfer .................................................................................................................... 27 Effective Time ........................................................................................................................ 28 Conditions for Scheme to become operative ............................................................................ 28 Contractual rights ................................................................................................................... 28 With-Profits funds ................................................................................................................... 29 Non-Profits funds ................................................................................................................... 29 Unit-linked funds .................................................................................................................... 29 Unit-linked charges ................................................................................................................. 30 New business ........................................................................................................................ 31

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Tax 31 Further assurance clause........................................................................................................ 31 Continuity of Proceedings ....................................................................................................... 31 Costs of the Scheme .............................................................................................................. 31 Policyholder communications .................................................................................................. 31

Section 5 : Pre-Scheme Solvency Positions .............................................................................. 33 Introduction ............................................................................................................................ 33 Opening Solvency Position ..................................................................................................... 35 Reported Basis ...................................................................................................................... 35 Adjusted Basis ....................................................................................................................... 36 Economic Basis...................................................................................................................... 38 HLI – Pre Transfer Solvency Position....................................................................................... 39 Reconciliation between Reported and Adjusted figures ............................................................. 39 Reconciliation between Adjusted and Economic Basis .............................................................. 40 HLI SCR ................................................................................................................................ 40 HLA – Pre Transfer Solvency Position ..................................................................................... 42 Reconciliation between Reported and Adjusted figures ............................................................. 42 Reconciliation between Adjusted and Economic Basis .............................................................. 43 HLA SCR ............................................................................................................................... 43 ALI – Pre Transfer Solvency Position ....................................................................................... 46 Reconciliation between Reported and Adjusted figures ............................................................. 46 Reconciliation between Adjusted basis and Economic Basis ..................................................... 47 ALI SCR ................................................................................................................................ 47 UHL – Pre Transfer Solvency Position ..................................................................................... 49 *or Solvency I equivalent......................................................................................................... 49 Reconciliation between Reported and Adjusted figures ............................................................. 49 Reconciliation between Adjusted figures and Economic Basis ................................................... 50 UHL SCR............................................................................................................................... 50

Section 6 : Effects of the Scheme on HLI Policyholders ............................................................ 53 General Considerations .......................................................................................................... 53 Security of HLI policyholders’ benefits ...................................................................................... 54 i) Opening Solvency position ............................................................................................ 54 ii) Risk Profile ................................................................................................................... 56 iii) Projected Solvency position ........................................................................................... 60 Summary - Security ................................................................................................................ 63 Reasonable Expectations of HLI policyholders ......................................................................... 63 i) Funds .......................................................................................................................... 63 ii) Reinsurance arrangements............................................................................................ 64 iii) Pricing basis for unit-linked funds ................................................................................... 64

iv) Charges ....................................................................................................................... 64 v) Service......................................................................................................................... 64 vi) Options ........................................................................................................................ 65 vii) Tax .............................................................................................................................. 65 Conclusion ............................................................................................................................. 65

Section 7 : Effects of the Scheme on HLA Policyholders ........................................................... 67 Introduction ............................................................................................................................ 67 Security of HLA policyholders’ benefits .................................................................................... 67 i) Solvency position .......................................................................................................... 67 iv) Risk Profile ................................................................................................................... 69 v) Projected solvency ........................................................................................................ 71 Summary - Security ................................................................................................................ 72 Reasonable Expectations of HLA policyholders ........................................................................ 72 i) Funds .......................................................................................................................... 72 ii) Reinsurance arrangements............................................................................................ 72 iii) Pricing basis for unit-linked funds ................................................................................... 72 iv) Charges ....................................................................................................................... 73 v) Service......................................................................................................................... 73 vi) Options ........................................................................................................................ 73 vii) Tax .............................................................................................................................. 73 Conclusion ............................................................................................................................. 74

Section 8 : Effects of the Scheme on ALI Policyholders ............................................................ 75 Introduction ............................................................................................................................ 75 Security of ALI policyholders’ benefits ...................................................................................... 75 i) Solvency position .......................................................................................................... 75 ii) Risk Profile ................................................................................................................... 77 ii) Projected Solvency position ........................................................................................... 78 Summary - Security ................................................................................................................ 78 Reasonable Expectations of ALI policyholders ......................................................................... 78 i) Funds .......................................................................................................................... 78 ii) Reinsurance arrangements............................................................................................ 79 iii) Pricing basis for unit-linked funds ................................................................................... 79 iv) Charges ....................................................................................................................... 79 v) Service......................................................................................................................... 79 vi) Options ........................................................................................................................ 80 vii) Tax .............................................................................................................................. 80 Conclusion ............................................................................................................................. 80

Section 9 : Effects of the Scheme on UHL Policyholders ........................................................... 81 Introduction ............................................................................................................................ 81

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Security of UHL policyholders’ benefits .................................................................................... 81 i) Solvency position .......................................................................................................... 81 iii) Risk Profile ................................................................................................................... 82 iv) Projected Solvency position ........................................................................................... 83 Summary - Security ................................................................................................................ 84 Reasonable Expectations of UHL policyholders ........................................................................ 84 i) Contractual rights.......................................................................................................... 84 ii) Funds .......................................................................................................................... 84 iii) Reinsurance arrangements............................................................................................ 84 iv) Pricing basis for unit-linked funds ................................................................................... 84 v) Charges ....................................................................................................................... 84 vi) Service......................................................................................................................... 85 vii) Options ........................................................................................................................ 85 viii) Tax .............................................................................................................................. 85 Conclusion ............................................................................................................................. 85

Section 10 : Policyholder Communications ............................................................................... 87 Policyholder Communication regarding the proposed transfer ................................................... 87

Section 11 : Summary and overall conclusions ......................................................................... 89 Appendix A : Reliances and limitations......................................................................................... 91

Reliances............................................................................................................................... 91 Limitations ............................................................................................................................. 91 Legal jurisdiction .................................................................................................................... 92

Appendix B : Definitions ............................................................................................................ 93 Appendix C : Glossary ............................................................................................................... 93

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Section 1: Introduction Background

1.1 Life Company Consolidation Group (“LCCG”) is a Guernsey based financial services group that through its Irish subsidiary LCCG Ireland Limited (“LCCGI”) has acquired a number of life insurance companies.

1.2 In March 2015, LCCGI acquired IBRC Assurance Company (“IBRC”). Following the change in ownership IBRC was renamed as Harcourt Life Assurance Company Limited. On 3 May 2016 Harcourt Life Assurance Company Limited changed its name to Harcourt Life Assurance Designated Assurance Company1 (“HLA”). The principal activity of HLA was the provision of investment oriented life assurance and pension products to individuals in Ireland. HLA closed to new business in 2011 and continues to run off its existing book.

1.3 On 1 December 2015, all employment contracts of serving employees of HLA were transferred to a subsidiary of LCCGI, Harcourt Life Services Limited (“HLSL”). HLSL, as a services company, provides policy administration and other administration and management services to HLA and other life assurance entities within the LCCGI Group (both those open to new business and those closed to new business).

1.4 On 2 December 2015, HLA acquired Scottish Mutual International Limited from Phoenix Life Limited (“PLL”). Scottish Mutual International Limited was renamed Scottish Mutual International dac in 2016 and on 3 November 2017 was renamed Harcourt Life Ireland dac (“HLI”). HLI is a life assurance company in run-off that has been closed to new business since 2003 and whose policy administration and management services are outsourced to third party providers.

1.5 On 26 July 2016, HLA acquired Aviva Life International Limited from Aviva International Holdings Limited. Aviva Life International Limited was subsequently renamed Harcourt Life International dac. At the end of June 2017, Harcourt Life International dac acquired the overseas bond business of AXA Life Europe dac, re-opened to the writing of new business and was renamed Utmost Ireland dac (“Utmost”). Utmost is the designated assurance company within LCCGI that is open to new business. In June 2017, LCCGI restructured the companies within the group by transferring ownership of Utmost from HLA to LCCGI by means of an in-specie dividend.

1.6 On 30 November 2016, HLA acquired Augura Life Ireland dac (“ALI”) and Altraplan Bermuda Limited (“Altraplan”) from the OneLife Group. ALI was originally established in 1984 selling traditional non-profit whole of life assurance, unit-linked life and pension business to customers in Ireland. From 2004, it ceased writing new policies until 2011, when, under new ownership, it commenced writing new business, selling unit-linked bonds in Sweden and Norway. Altraplan is a unit-linked business, authorised in Bermuda, whose objective is to sell unit-linked life assurance policies to high net worth investors. Altraplan is closed to new business and is in the process of running off its book of business.

1.7 On 9 March 2017, Union Heritage Life Assurance Company dac (“UHL”) was acquired by HLA from American Income Life Insurance Company which is part of the Torchmark Corporation Group in the United States of America. UHL commenced writing policies in August 2012, primarily writing protection or risk business policies in Ireland. In February 2015, UHL discontinued activities to market and sell insurance policies and ceased writing new business towards the end of 2015.

1 Designated Assurance Company or “dac”

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1.8 The proposed Scheme, which is the subject of this report, aims to bring together the various life assurance companies within the LCCGI Group that are closed to new business and in run off into a single life assurance entity. The proposed Scheme will transfer the ALI, HLA and UHL business into HLI. Following the Scheme, HLI will become the closed book consolidator within the Group, i.e. the life assurance entity within LCCGI into which any future acquisitions of closed books of life assurance business will be transferred.

1.9 The structure of LCCGI before the proposed Scheme is set out in Table 1.1 below and the planned structure post the proposed Scheme is show in Table 1.2 below.

Table 1.1 – LCCGI structure before transfer

Table 1.2 – LCCGI structure after transfer

1.10 The LCCGI strategy in Ireland is to create a consolidated closed book business, (i.e. HLI after the Scheme is complete), together with an open book business specialising in writing overseas life assurance bond business (i.e. Utmost).

LCCGI

HLA HLSL Utmost

HLI Altraplan ALI UHL

LCCGI

HLA

UHL

(Empty Shell)

ALI

(Empty Shell)

Utmost

Altraplan

HLSL

HLI

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1.11 It has been agreed by the Boards of Directors of HLI, UHL, ALI and HLA to approve the draft Scheme, subject to the requirements of the Central Bank of Ireland (“the CBI”) and the sanction of the Irish High Court.

The role of the Independent Actuary

1.12 Under Section 13 of the Assurance Companies Act 1909 (the “Act"), any Scheme which provides for the whole or part of the life assurance business carried on by an insurance company to be transferred to another body (including within the same Group), requires the prior sanction of the Irish High Court.

1.13 The Irish High Court will consider the Scheme on the basis of a petition by one, or more, of the parties. The petition must be accompanied by a report on the terms of the Scheme by an Independent Actuary.

1.14 For the purposes of Section 13 of the Act, and subject to the provisions of Section 36 of the Insurance Act 1989, Article 41 of the European Union (Insurance and Reinsurance) Regulations 2015 provides the following:

“An insurance undertaking whose head office is in the State may, after consultation with the Bank, transfer all or part of its portfolios of contracts, including those concluded either under the right of establishment or the freedom to provide services, to an accepting undertaking whose head office is in the State or another Member State. A transfer shall not be effected unless -

(a) The supervisory authority of the home Member State of the accepting undertaking certifies that, after taking the transfer into account, the accepting undertaking possesses the necessary eligible own funds to cover the Solvency Capital Requirement referred to in Regulation 113, and

(b) The supervisory authorities of every Member State where the contracts were concluded, either under the right of establishment or the freedom to provide services, and (in a case within paragraph (2)) the supervisory authority of the Member State in the branch is situated, have consented.

1.15 The Actuarial Standard of Practice LA-6 (“ASP LA-6”), “Transfer of long-term business of an authorised insurance company – role of the independent actuary”, issued by the Society of Actuaries in Ireland, sets out the statutory and professional responsibilities of the Independent Actuary.

1.16 I have been jointly appointed by ALI, HLA, HLI and UHL to act as the Independent Actuary in connection with the Scheme pursuant to Section 13 of the Act. The policies that are proposed to be transferred under the Scheme are referred to in the report as the Transferring Policies.

1.17 I am a Fellow of the Society of Actuaries in Ireland. I am a Consulting Actuary at Towers Watson (Ireland) Limited (“Willis Towers Watson”) of 10/11 Leinster Street South, Dublin 2, Ireland. I have no personal connection with any of ALI, HLA, HLI or UHL. I have previously acted as Independent Actuary for the LCCGI in 2017 in relation to a transfer of a book of business from AXA Life Europe dac to Utmost. Other consultants in Willis Towers Watson have carried out consultancy work for HLI under its previous ownership, although none of these projects were related in any way to the proposed transfer discussed in this report.

Scope of my report

1.18 This report has been prepared in respect of the Scheme to be presented to the Irish High Court for the transfer of the Transferring Contracts from ALI, HLA and UHL into HLI of the Transferring Policies in compliance with the requirement for an independent actuary’s report in Ireland. As Independent Actuary, I am required to examine the consequences and potential

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consequences of the proposed transfer. In particular, I must consider the implications of the Scheme on the security of policyholders' benefits and the impact on the benefits ultimately payable to policyholders.

1.19 This report considers the consequences of the Scheme for the policyholders of ALI, HLA and UHL (being those policyholders whose policies shall transfer to HLI pursuant to the Scheme) and for the policyholders of the transferee company (HLI). I have only considered the Scheme proposed and I have not considered any alternative Scheme. However, this report compares the position of the life assurance policyholders of the participant companies after implementation of the Scheme with the position if the Scheme was not to proceed.

1.20 In particular, I have considered in this report:

■ the likely effects of the Scheme on life assurance policyholders including, but not limited to, the security of their benefits and their reasonable expectations; and

■ the adequacy of any safeguards in the Scheme to protect the interests of transferring policyholders in the transferee life company.

Terms of reference

1.21 Terms of reference for my review of the Scheme and my performance of the role of Independent Actuary have been agreed with ALI, HLA, HLI and UHL and have been discussed with the CBI. These terms are set out above under the headings "The role of the Independent Actuary" and "Scope of my report".

1.22 In preparing this report I have taken account of the professional standards of practice set out in ASL LA-6 issued by the Society of Actuaries in Ireland.

1.23 This report should be read in conjunction with the following documents:

■ The Scheme;

■ The report by the Head of Actuarial Function (“HoAF”) of HLI on the Scheme;

■ The report by the HoAF of HLA on the Scheme;

■ The report by the HoAF of ALI on the Scheme;

■ The report by the HoAF of UHL on the Scheme;

■ The Policyholder Circular.

Reliances and Limitations

1.24 This report is subject to the reliances and limitations as set out in Appendix A of this report.

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Section 2: Information on which this report is based 2.1 In the course of preparing this report I have been provided with a number of documents.

These may be broken down into 5 different categories; those relating specifically to the Scheme and those relating to each of the participant companies. Details of these documents are listed below.

2.2 In addition, I have participated in a number of meetings involving the management of ALI, HLA, HLI and UHL. These included meetings with the Heads of Actuarial Function for each of the participant companies.

Scheme of Transfer

2.3 The following documents relating to the proposed Scheme of transfer have been considered:

■ The proposed Scheme document

■ The report by the HoAF of HLI on the Scheme

■ The report by the HoAF of HLA on the Scheme

■ The report by the HoAF on the Scheme

■ The report by the HoAF of UHL on the Scheme

■ The Policyholder Circular

■ CBI notification document relating to the proposed transfer

■ Documentation requested by the CBI from the companies relating to the proposed transfer.

■ Post Scheme Own Risk and Solvency Assessment (“ORSA”) Report (assuming the Scheme had taken effect on 31 March 2017) which also included the following addendum papers:

˗ Paper setting out the expense assumptions post scheme

˗ Paper setting out the possible impact of Brexit

˗ Paper relating to the status of litigations within HLA

˗ Opinion regarding tax impact of the Scheme

˗ HLI capital policy

˗ Paper regarding closure of the HLI with-profit fund

˗ Paper relating to past Scheme of transfer

˗ Paper relating to post scheme servicing arrangements

˗ Paper assessing the possible impact of Brexit on HLI’s reinsurance arrangements with PLL

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■ HLSL Board paper of the 18 October 2017 stating the key terms relating to the Master Services Agreement between the participant companies and HLSL due to come into effect on 1 January 2018 which also included financial projections for HLSL

■ Proposed Risk Management Framework of HLI post Scheme

HLI key documents

2.4 The key HLI documents I have considered in preparing this report are:

■ HoAF report for HLI as at 31st December 2016

■ Actuarial Opinion on Technical Provisions for HLI as at 31st December 2016

■ HLI’s ORSA for financial year 2016

■ Directors’ report and financial statements for HLI for the financial year ended 31 December 2016.

■ Reporting Actuary Report for HLI as at 31 December 2016

■ Auditors’ Report for the 2016 statutory audit of HLI

■ Auditors’ Report for the 2016 solvency II audit of HLI

■ Regular Supervisory Report of HLI for 2016

■ Solvency and Financial Condition Report of HLA for 2016

■ Document setting out the current policy administration and customer servicing arrangements.

■ With-profit Funds Principles and Practices of Financial Management

■ Paper regarding closure of the HLI with-profit fund

■ Reinsurance treaties relating to operation of the with-profit funds.

■ Floating Charge Deed supporting the reinsurance treaty by which HLI’s UWP business is reinsured to PLL

ALI key documents

2.5 The key ALI documents I have considered in preparing this report are:

■ HoAF report for ALI as at 31st December 2016

■ Actuarial Opinion on Technical Provisions for ALI as at 31st December 2016

■ ALI’s ORSA for financial year 2016.

■ Directors’ report and financial statements for ALI for the year ended 31 December 2016.

■ Regular Supervisory Report of ALI for 2016

■ Auditors’ Report for the 2016 statutory audit of ALI

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■ Solvency and Financial Condition Report of ALI for 2016

HLA key documents

2.6 The key HLA documents I have considered in preparing this report are:

■ HoAF report for HLA as at 31st December 2016

■ Actuarial Opinion on Technical Provisions for HLA as at 31st December 2016

■ HLA’s ORSA for financial year 2016

■ Directors’ report and financial statements for HLA for the financial year ended 31 December 2016.

■ Regular Supervisory Report of HLA for 2016

■ Auditors’ Report for the 2016 statutory audit of HLA

■ Auditors’ Report for the 2016 solvency II audit of HLA

■ Solvency and Financial Condition Report of HLA for 2016

■ Paper prepared by the Head of Actuarial Function regarding status of litigations within the company


UHL key documents

2.7 The key UHL documents I have considered in preparing this report are:

■ Directors’ report and financial statements for UHL for the year ended 31 December 2016.

■ The audited annual returns of UHL to the CBI as at 31 December 2016

■ Appointed Actuary Report for UHL as at 31st December 2016

■ Reporting Actuary Report for UHL as at 31 December 2016

■ Auditors’ Letter to Board for the 2016 statutory audit of UHL

■ UHL run off plan May 2015


Reliances

2.8 In carrying out my review and producing this report I have relied without independent verification upon the accuracy and completeness of the data and information provided to me, both in written and oral form, by ALI, HLA, HLI and UHL, particularly in relation to the financial information concerning the solvency position of each company. Where possible, I have reviewed the information provided for reasonableness and consistency with my knowledge of the insurance industry.

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2.9 All information requested by me has been provided by the participant companies.

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Section 3: Background to the Participant Companies 3.1 This Section of the Report sets out some further background on each of the participant

companies;

■ HLI - The Transferee

■ HLA - Transferor

■ ALI - Transferor

■ UHL- Transferor

3.2 This Section includes an overview of each company’s history, an overview of the products sold by each company and the profile of that business as at 31 March 2017 and how that business is currently administered.

3.3 The current structure of the LCCGI Group and the planned restructuring is set out in the diagram below:

Table 3.1 – LCCGI structure before transfer

Table 3.2 – LCCGI structure after transfer

LCCGI

HLA HLSL Utmost

HLI Altraplan ALI UHL

LCCGI

HLA

UHL

(Empty Shell)

ALI

(Empty Shell)

Utmost

Altraplan

HLSL

HLI

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HLI history

3.4 HLI began trading in December 1995 and was part of the Abbey National Group. It initially sold international products geared towards international corporate, private (high net worth) individuals and trustee clients. It subsequently expanded into the Irish domestic market with a range of term assurance, pension and savings products. Both unit-linked and with-profits products were offered.

3.5 Prior to November 2017 HLI was known as Scottish Mutual International Limited.

3.6 Since it was first authorised as a life assurance company by the Irish regulator HLI has changed ownership in various transactions. The key historic events are as follows:

■ In November 2004, Banco Santander acquired Abbey National plc, including HLI.

■ In September 2006, Resolution plc acquired the ex-Abbey life companies, including HLI, from Santander.

■ In May 2008, the Pearl Group acquired Resolution plc.

■ In March 2010, Pearl Group changed its name to Phoenix Group Holdings.

■ In April 2014, HLI’s parent Scottish Mutual International Holdings transferred its holding in HLI to PLL, a subsidiary of Phoenix Group Holdings in the UK, which had been its immediate parent company since September 2009 and is a UK authorised insurance company.

■ In December 2015, PLL sold the business to HLA.

3.7 HLI closed both the international and domestic with-profits products to new business in 2003. In January 2004, this closure was extended across the whole book of business. At that time as part of the strategic decision to close to new business, the company entered into a management services agreement with Pearl Group Management Services (Ireland) Limited (“PGMSI”). PGMSI is a service provision company within the Phoenix Group and currently manages the relationships between HLI and its external suppliers on a day to day basis in accordance with the management services agreement.

3.8 A small amount of new premiums continues to be accepted by HLI. The total premiums received in 2016 were €329,000 which includes regular premium income as well as top-up premiums.

The business of HLI

3.9 HLI’s book of business consists of a range of with-profits, unit-linked and term assurance products. It holds an authorisation for the following classes of insurance business (as defined in Solvency II Directive 2009/138/EC):

■ Class VI: Capital redemption business.

■ Class III: Life assurance contracts which are linked to investment funds (i.e. Unit-linked business and unitised with profits (“UWP”) business), with connected class IV.

■ Class I: Life assurance and contracts to pay annuities on human life, but excluding those contracts that fall under Class II or Class III, with connected class IV.

3.10 For unit-linked business the performance of the contract is directly linked to the performance of the underlying funds that the policy has been invested in. The value at any point in time is by reference to the number of units allocated to the policy and the value of those units. The unit

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value is determined by direct reference to the value of the underlying investments of the unit-linked funds invested in.

3.11 In general, for UWP business some smoothing of investment returns tends to take place. This generally means that there is an indirect link between the unit price and the underlying investments. The policy terms and conditions will set out how unit prices will increase over time. This may be in line with a guaranteed annual rate of increase (which may be zero) plus an additional annual bonus determined by the company taking account of various factors including the investment performance of the UWP funds (which also could be zero). At maturity a final bonus can also apply. Market value reductions (MVRs) are a feature of UWP business. These are typically applied on surrender, other than on pre-defined non MVR dates, so as to ensure that the surrender value is reflective of the performance of the underlying UWP funds.

3.12 A capital redemption contract is an investment contract between the insurance company and the policyholder. It can be distinguished from other classes of business offered by HLI (such as a life assurance contract) by the fact that there is no life assured. A capital redemption contract is always a fixed-term contract, because there is no insurance event that otherwise would terminate the contract. It may be a unit-linked policy or a guaranteed return policy or a combination of the two alternatives. In general, a policyholder would pay a single premium at the outset which could be in the form of units in an investment fund. The benefit at the fixed maturity of the contract could be the greater of a guaranteed maturity value or the bid value of the units at maturity. The policyholder may have an option to surrender part or all of their units at any time with the surrender value determined by direct reference to the value of the underlying investments of the unit-linked funds invested in.

Reinsurance

3.13 There are three reinsurance agreements in force as follows:

■ A reinsurance agreement is in place with PLL under which some of the UWP units are reinsured into the one of the PLL sub-funds. The amount reinsured was €7.6 million as at end March 2017.

■ There is a further reinsurance agreement with PLL under which some of the unit-linked funds are reinsured into the equivalent PLL unit funds. The amount reinsured was €7.0 million as at year end March 2017.

■ There is a reinsurance agreement with Gen Re under which HLI reinsures two-thirds of its risk benefits up to a maximum amount per life. The annual premium paid in 2016 was €47.8K. At the end of March 2017, the sum reinsured was €17.0 million with associated reinsurance asset of €0.2 million.

3.14 The reinsurance arrangements for the with-profits funds and unit-linked business are supported by a floating charge on the assets of PLL. The objective of the floating charge is to rank HLI with-profits policyholders alongside other PLL with-profits policyholders in a wind up situation and therefore enhances the benefit security for HLI policyholders.

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Products

3.15 More detail on each of the products is given below:

■ Investment Bonds

˗ The Investment Bonds are whole of life assurance products. Both unit-linked and unitised with-profits versions of this product were sold. The value of the bond is determined by the number of units allocated to a policy multiplied by the unit price. For unit-linked business the unit price reflects the market value of the underlying unit-linked funds. For the unitised with-profits funds, the unit price reflects the smoothed investment experience of the With-Profits fund. The principal death benefit is the return on death of 101% of the greater of the surrender value of the plan and the original investment for ages at death lower than 75. For death at ages 75 or over, the return on death is simply 100.1% of the surrender value of the plan. The surrender value for the unitised with profit version is the value of the units increased by any terminal bonus and reduced by any MVR in force. An early surrender charge will also apply if a surrender is made within the first 5 years of the contract. A MVR is not applied when calculating the With-Profits fund portion of the surrender value for a death claim. There are special guaranteed dates which fall on the 8th (or any later anniversary chosen at the outset of the plan) anniversary and every 5 years thereafter. This guarantee allows the plan to be surrendered in full, or in part, free from any MVR factor that may be in force at that time.

■ Selexis Investment Bonds

˗ The Selexis Investment Bond is a single premium whole of life unitised with-profits policy. The benefit on death is 101% of the bid value of the units attaching to the policy. In certain circumstances, an MVR may apply to the With Profit Fund unit values. If the contract is invested in the With-Profit Fund throughout then a guarantee is given that if the policy is encashed, fully or partially, at the tenth anniversary, the amount payable will be a minimum of 110% of the premium (or part thereof). Note that these guarantees are no longer applicable as all of the policies on HLI’s books are in force for more than ten years. The value of the bond is determined by the number of units allocated to a contract multiplied by the relevant unit price. For the unitised with-profits funds, the unit price reflects the smoothed investment experience of the With-Profits fund.

■ Guaranteed With-Profit Bond

˗ The Guaranteed With-Profit Bond is a single premium, whole of life (or 80 year) unitised with-profits assurance plan, with a guaranteed maturity value on specified anniversaries. The key feature of this product is the surrender value guarantee on the 15th policy anniversary. The surrender value at this policy anniversary is the larger of the unit value and 140% of the original premium. The majority of these policies were sold in 2001 and 2002 meaning the bulk of the guaranteed dates will have been passed by end 2017. At 31 March 2017, there were 143 (€29m unit value) of these policies in force. The remainder of the guarantees will expire by end of Q2 2018.

■ Selexis Savings Plan

˗ The Selexis Savings Plan is a regular premium whole of life assurance contract. This is a unitised with-profits product. The premium term varies between 10 and 30 years. The benefit on death is 101% of the bid value of the units attaching to the policy. The surrender value is the bid value of the units attaching. For the unitised with-profits funds, the unit price reflects the smoothed investment experience of the With-Profits fund.

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■ Selexis Investment Mortgage

˗ The Selexis Investment Mortgage is a regular premium whole of life assurance contract. This is a UWP product. The premium term varies between 10 and 30 years. The benefit on death is the greater of 101% of the bid value of the units attaching to the policy and the guaranteed minimum death benefit under the policy. For the UWP funds, the unit price reflects the smoothed investment experience of the With-Profits fund.

■ Select Retirement Plans

˗ The Select Retirement Plans are deferred annuity contracts. The contract accepted regular and/or single premiums and may be a unit-linked or UWP policy. Policyholder benefits are linked to the value of internal linked funds and/or to the Pension With-Profits Funds. Under the ‘Late Values Plan’ version of this product there is a 5% maturity bonus paid on death or retirement provided at least ten years of regular contributions have been paid.

■ Flexible Investment Plan

˗ The Flexible Investment Plan is a regular premium whole of life unit-linked assurance plan. The surrender value of the plan is the value of the units attaching to the policy. The principal death benefit is the return on death of at least 101% of the surrender value of the plan. The policyholder may opt for additional protection benefits - including extra life assurance, critical illness and payment protection. If any of these options are exercised, they are charged for on a risk premium basis by monthly cancellation of units. A loyalty bonus of 0.5% of the value of units in force at that time will be added to the contract on the eleventh and subsequent policy anniversaries.

■ Guaranteed Self Assurance

˗ The Guaranteed Self Assurance is a regular premium non unit-linked contract available for terms of between 5 and 30 years that provides life assurance and critical illness cover along with optional permanent total disability, waiver of premium, hospital cash, surgical cash and accident income benefits. It is available on a single life, joint life or dual cover basis. No benefit is payable on surrender or survival to the end of the policy term.

3.16 Within its policy conditions, HLI reserves the right to modify policy charges in certain circumstances.

UWP business

3.17 The UWP fund is notionally separate from the other assets of the company. The UWP fund is split into three sub-funds depending on the currency in which the original policy was written namely euros, pounds sterling or US dollars. The UWP fund operates akin to a “smoothed” unit-linked fund; the shareholder takes a charge from the fund but the fund does not participate in any other aspects of the business; and the shareholder bears (directly) the cost of any guarantees as they arise. The UWP fund is therefore essentially a smoothed investment vehicle.

3.18 On surrender, policyholders receive the value of their units, which have been increased by the annual bonuses declared, plus any final bonus or less any MVR that may apply at that time. No MVR is applied on death claims, but the calculation is otherwise the same. In addition, no MVR applies on certain guarantee dates. The specific dates of the no MVR application depend on the product but they are typically the 8th and 15th anniversary of the product. The vast majority of products have passed these guarantee dates with the remaining guarantee dates arising before the end of the second quarter of 2018.

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3.19 The operation of the UWP funds is governed by Principles and Practices of Financial Management (“PPFM”) which is published on the HLI website. An additional customer friendly document on the management of the with profit funds is also published on the company website.

3.20 HLI’s current practice is to review annual bonuses once a year in March/April (effective May 1) and to review final bonus twice a year, with new rates effective from 1 January and 1 July. MVRs are reviewed monthly and are revised when appropriate. Scales of final and annual bonus rates are set by the HLI Board, on the advice of the Head of Actuarial Function. However, the HLI Board has delegated authority to the HoAF to revise MVR scales as necessary.

3.21 Current annual bonus rates and terminal bonus rates are available on the HLI website (www.smi.ie). At the date of this report the annual bonuses ranged from 0% to 1% and the terminal bonuses ranged from 0% to 120%.

3.22 HLI issued five different series of UWP funds, each of which had product features and guarantees. These can be grouped into three distinct blocks of UWP business;

i) The International business, known as Series 1, 2 and 5. This is denominated in EUR, GBP and USD. The unit value on this business was €65 million at 31 March 2017. This is single premium only.

ii) The Domestic business, known as Series 3 and 4. This is EUR denominated and the value of this business was approximately €22 million at 31 March 2017. This business includes both single premium and regular premium business.

iii) The International business, known as the “OLAB units”. This is reinsured with PLL which at the date of this report had an A rating from Fitch. The value of this business at 31 March 2017 was €6.5million. This is single premium only business.

3.23 HLI has the following guarantees on its UWP products:

■ A MVA free guarantee on the HLI With-Profits Investment Bond at certain dates set out in the policy terms and conditions. Almost all these liabilities are reassured to PLL.

■ Premium related guarantees on the Guaranteed With-Profits Bond policies within the international business. The guarantees on these will be fully run off by April 2018.

■ MVA free guarantees on death.

■ MVA free guarantees at maturity for the domestic pension business.

■ For capital redemption business, there is a guaranteed maturity benefit of at least twice the original investment, less withdrawals, on the 80th anniversary of the commencement of these policies.

3.24 With-profit products are generally currently “in the money” which means that the current asset share of the policies are higher than the guaranteed values.

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3.25 Table 3.1 below shows a breakdown of the assets and liabilities of the UWP fund as at 31 March 2017, before allowance for reinsurance.

Table 3.1 – UWP assets & liabilities

€000’s

Value of Guaranteed Benefits 77,406

Fund for Future Appropriations 30,424 Asset Share 107,830 Bonus Smoothing Account 356

Total value of assets 108,185

Best Estimate Liability 236

3.26 An explanation of each of the lines in the table above is set out below:

■ The Value of Guaranteed Benefits represents the value of the UWP units allocated to policies, increased to reflect annual bonuses declared to 31 March 2017.

■ The Fund for Future Appropriations and the Value of Guaranteed Benefits combined represent the pool of assets from which final bonuses will be paid.

■ The Asset Share is the sum of the Fund for Future Appropriations and the Value of Guaranteed Benefits. The asset share is calculated by accumulating the premium and actual investment returns, allowing for expenses and other outgoings. The intention is that the amount paid on surrender is, subject to any smoothing that may be operating, close to the underlying asset share.

■ The Bonus Smoothing Account is where any difference between the amount paid out to policyholders upon a claim and the underlying asset share accumulates. The aim is to reduce this bonus smoothing account to zero by adjusting up or down the MVAs and terminal bonuses in aggregate each year.

■ The Total Value of Assets represents the Asset Share plus the Bonus Smoothing Account.

■ The Best Estimate Liability (the “BEL”) is the additional reserve set aside by the company to meet the expected liabilities in respect of this business. This includes the expected cost of providing for guarantees on the Guaranteed With-Profits Investment Bond. This amount is covered by shareholder funds. The reserve also covers the expected expenses incurred in administering the business and the expected income of the company from charges.

Unit-linked funds

3.27 HLI has unit-linked policyholder liabilities of €192.8m as at 31 March 2017. The unit-linked liabilities are matched by unit-linked assets. The majority of these liabilities are denominated in sterling (64%) with 28% in Euros and 8% in US dollars. A summary of HLI’s business as at 31 March 2017 is shown in Table 3.2 below:

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Table 3.2 – HLI business as at 31 March 2017 Product Number of

Policies Funds under Management

(€m)

Best Estimate Liability(€m)

Risk Margin (€m)

Total Liabilities (€m)

Investment Bonds 11 0.7 0.6 0.0 0.6

Guaranteed With

Profit Bond 143 28.9 29.5 0.1 29.6


Total Class VI 190 31.7 30.4 0.1 30.5


Selexis Investment Bond

249 20.5 20.4 0.0 20.5

Selexis Savings Plan

6 0.2 0.2 0.0 0.2

Selexis Investment Mortgage

3 0.3 0.3 0.0 0.3

Select Retirement Plans

357 9.9 10.2 0.0 10.2

Investment Bonds

1,009 105.6 102.2 2.1 104.3

Flexible Investment Plan

64 2.5 2.5 0.0 2.6

Selexis Endowment Mortgage

1 0.0 0.0 0.0 0.0

Select Retirement Plans

204 6.1 6.2 0.0 6.2

Total Class III 2,376 192.8 189.3 2.3 191.6 Guaranteed Self Assurance

63 0.0 0.3 0.0 0.3

Total Class I 63 0.0 0.3 0.0 0.3 Total 2,629 224.6 219.9 2.5 222.4

Administration

3.28 Under the terms of the Share Purchase Agreement between HLA and PLL for the acquisition of HLI, a 12-month service transitional plan was put in place from the date of acquisition to transfer four service packages to HLSL. HLSL will provide the services currently provided to HLI by PGMSI, including but not limited to policy administration services, investment

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administration services, actuarial services, and financial and accounting services. The transfer of these services is ongoing and as at the date of this report, three of the four services have transferred and the remaining service package that is still provided by PGMSI will transfer in the coming months.

3.29 HLI also outsources many of its requirements for operational services to HLSL. Additionally, it outsources its Actuarial and Internal Audit functions to Milliman and Mazars respectively. Policy administration services are also provided through the transitional arrangements with PGMSI, by DST Systems, a third party policy administration supplier.

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HLA history

3.30 HLA, formerly IBRC, was acquired by LCCG in March 2015, at which time the name of the company was changed to Harcourt Life Assurance Company Ltd and subsequently to HLA.

3.31 HLA commenced trading as part of the Anglo Irish Bank Group in January 2001, writing wealth management business. It offered a range of unit-linked investment and pension products. Its products consisted mainly of personal and collective portfolio bond products. These portfolio bonds included investments in property, bonds, equity, and cash assets though focused extensively on acquisition and unitisation of properties and property portfolios aimed at high net worth clients. Many of these property investments contained elements of gearing. The last significant collective fund was launched in 2007.

3.32 The company was closed to new business and put into run-off in 2011. Since the company was put into run-off a number of the properties that were held within the unit-linked funds have been sold which facilitated the surrender of polices invested in these unit-linked funds. HLA expects to run off its existing business in line with the Resolution Plan submitted to the CBI in March 2014. The sale of the remaining properties is expected to complete during 2018.

3.33 The gearing within the various property funds amplified the effects of the Irish property market crash. Consequently, many of these geared property funds materially reduced in value, including reaching a zero value post the property market crash.

3.34 At the time of the acquisition of HLA by LCCG, a new strategy was introduced whereby in parallel with the run off of the existing business, HLA sought to identify, acquire and consolidate other closed life funds and businesses. As a result, HLA subsequently purchased a number of life assurance companies, all of which were closed to new business at the time of the purchase by HLA. These are described below:

■ HLA acquired the entire share capital of HLI in December 2015;

■ HLA acquired the entire share capital of Aviva Life International Limited in July 2016. Aviva Life International then changed its name to Harcourt Life International dac which subsequently changed its name to Utmost. In June 2017, ownership of Utmost was transferred from HLA to LCCGI by means of an in-specie transfer;

■ HLA acquired ALI in November 2016;

■ HLA acquired Altraplan in November 2016. Altraplan is a unit-linked business authorised in Bermuda selling to high net worth investors; and

■ In March 2017, HLA acquired the entire share capital of UHL from American Income Life Insurance Company.

The business of HLA

3.35 This section provides an overview of the business of HLA excluding the various businesses purchased by HLA subsequent to LCCGI’s acquisition of HLA. The various companies referred to above that HLA acquired subsequent to LCCGI’s acquisition of HLA and which are also participant companies in the Scheme are described separately in the following sections.

3.36 HLA’s book of business consists of a range of single premium unit-linked products sold in the Irish market. The range of products includes investments bonds and a number of pension products. These products are largely invested in a range of property funds, although there are also a number of policies invested in personalised investment funds. The sum assured of the policies sold by HLI was 100% linked to the value of the underlying fund so no mortality risk was accepted (irrespective of whether the policyholder dies when the policy is in force) and the policyholders bear investment risk with no guarantees provided by HLA.

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3.37 There were 924 policies with a value above nil in force at 31 March 2017. The policy count has reduced significantly in recent years since HLA closed to new business. HLA does not have any reinsurance arrangements in place. It holds an authorisation for the following classes of insurance business (as defined in Solvency II Directive 2009/138/EC):

■ Class I: Life assurance and contracts to pay annuities on human life, but excluding Classes II and III.

■ Class III: Life assurance contracts which are linked to investment funds (i.e. Unit-linked business).

■ Class VII: Management of Group Pension Funds

Products

3.38 Table 3.3 below provides a summary of the products that remain inforce. While there are a number of products listed below, they each operate in broadly the same way, other than having different legal structures. The main groupings of policies are:

■ Policies which are invested primarily in cash, equity or managed funds.

˗ These are generally either policies that were previously invested in property assets (see below) or products which have been invested in these assets over time. The charge to HLA is typically 0.25% of the assets per annum.

■ Policies which are invested in geared property funds.

˗ The property assets were purchased by 2008, at the latest, with an existing expected holding period at the date of purchase of 5-7 years. Due to the property crash many properties were held for longer. Over the last two years HLA has disposed of most properties and is currently in the process of disposing of the remaining properties. When properties are sold, the resulting proceeds are transferred to a cash fund and made available for policyholders to withdraw or to transfer to another policy with another insurer as appropriate. There is normally a fund based charge based on the higher of the premium paid and the current fund value.

■ Unique policies where the assets were initially directed by the policyholder.

˗ A small number of these policies remain and their charging structures are unique to each policy. These policies hold a mix of property and other assets.

3.39 HLA does not offer any options or guarantees on any of its policies. HLA does not provide additional benefits payable on death.

3.40 HLA has no reinsurance arrangements.

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3.41 The following table summarises the HLA business as at 31 March 2017.

Table 3.3 – HLA business as at 31 March 2017 Product Number of


(€m)


Risk Margin (€m)


Additional Voluntary Contribution Plan

1 0.0 0.0 0.0 0.0

Approved Minimum Retirement Fund

16 0.7 0.8 0.0 0.8

Approved Retirement Fund

57 3.5 3.8 0.0 3.9

Investment Bond 634 42.2 46.5 0.5 47.0

Executive Retirement Plan

42 33.5 34.5 0.4 35.0

Personal Pension Plan

85 6.3 6.8 0.1 6.9

Buy-out Bond 9 0.5 0.5 0.0 0.5

Total Class III / Life Assurance

844 86.7 92.9 1.1 94.0

Investment Only Business (Trustee Investment Plan)

80 5.7 6.3 0.1 6.3

Total Class VII / Group Pension

80 5.7 6.3 0.1 6.3

Total 924 92.4 99.2 1.2 100.3

Administration

3.42 In December 2015, HLSL was established to provide management services to HLA Group companies in Ireland. All HLA, HLI and ALI staff have transferred to HLSL in order to provide services to all the life companies within the LCCGI Group

3.43 As a consequence, at the date of this report, HLA outsources its oversight requirements in Dublin to HLSL. Unit pricing, policy administration services, financial reporting and policy communication services are all provided by HLSL.

3.44 Additionally, HLA outsources its Actuarial and Internal Audit functions to Milliman and Mazars respectively.

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ALI history

3.45 ALI was originally incorporated in the Republic of Ireland in 1984 as an insurance undertaking, and authorised to write Class I and Class II insurance business. It began trading under the name Combined Life Assurance Company of Europe Limited. In September 2009, it was purchased by NPG Wealth Management Group, now the OneLife Group. LCCG acquired ALI, through its subsidiary company HLA, in November 2016.

3.46 ALI has had two periods of writing business. Up until 2004, it wrote unit-linked life and pensions business and non-linked non-profit whole of life policies, all of which were sold in Ireland. From 2004, it ceased writing new policies until later in 2011, when, under new ownership, it commenced writing new business, selling unit-linked single premium portfolio bonds in Sweden and Norway. In 2014, ALI received, by way of an insurance business transfer, a block of unit-linked and portfolio bonds from PEL Altraplan (Gibraltar) PCC Ltd, then a sister company of NPG Wealth Management Group incorporated in Gibraltar.

3.47 The company closed to new business in 2015, albeit that it still accepts topups from existing policyholders on a number of products.

The business of ALI

3.48 ALI holds an authorisation for the following classes of insurance business (as defined in Solvency II Directive 2009/138/EC):

■ Class I: Life assurance and contracts to pay annuities on human life, but excluding those contracts that fall under Class II or Class III.

■ Class III: Life assurance contracts which are linked to investment funds (i.e. Unit-linked business).

Products

3.49 ALI’s book of business consists of unit-linked and life assurance business. An overview of its products is included below:

■ Perfect Combination Plan (CLACE)

˗ Under the Perfect Combination Plan (Combined Life Assurance Company of Europe or “CLACE”) Unitised Life product, benefits are payable on surrender or death. This product was sold in modules (base, additional protection, regular savings and investment modules). On death, each module would pay a benefit. This would be the greater of the sum assured amount versus the bid value of the units for the base, additional protection and regular savings (sold pre- April 1991) modules and 101% of bid value of units for the regular savings and investment modules (both sold post April 1991). The investment module sold pre- April 1991 pays the greater of the single premium investment versus the bid value of the units. The surrender value payable is the bid value of the units.

■ Personal Portfolio Bond (“PPB”) and Privileged Structure Bond (“PSB”) products

˗ Under the PPB and PSB products, the benefit payable on death is 101% of the surrender value and 101% of the bid value of the units respectively.

■ Adiameris

˗ The Adiameris product pays 101% of the surrender value upon the death of the policyholder. This percentage reduces to 100% when the policyholder reaches age 85 and over.

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■ Little Giant Life (“LGL”)

˗ A small number of non-linked whole of life policies remain in the Little Giant Life (“LGL”) product. These policies have a guaranteed death benefit based on the premiums paid and the policyholder’s age at commencement. On accidental death, the sum assured is doubled.

3.50 None of the existing ALI policies contain investment guarantees. There is a small number of funds offered within the PSB product where there is a guarantee to return 80% of the premium to policyholders at maturity, usually 5 years. The guarantees mirror the performance of a basket of equities. These guarantees, whether whole or partial guarantees, are provided by a range of fund managers i.e. the suppliers of the PSB product, and not by ALI.

3.51 The charges on the ALI policies mainly consist of:

■ Perfect Combination Plan (CLACE)

˗ A monthly amount based service fee and a reduced premium allocation charge which is dependent on the policyholder’s age at issue or policy duration. There are also protection charges for life cover and waiver of premium, which depend on the unit fund value, as well age and gender of the policyholder.

■ Personal Portfolio Bond (“PPB”) & Privileged Structure Bond (“PSB”)

˗ A percentage of fund value monthly administration fee where the percentage applicable depends on the size of the fund or the premium size. As well as a percentage of fund value annual service charge (regular commission) applies. A mortality charge is also applied in respect of death benefits provided. On the Privilege Structured Bond, the company reserves the right to modify or increase the charges but no more than once every two years.

■ Adiameris

˗ An annual administrative management charge up to €1,200 (or currency equivalent) plus a maximum 1.5% of policy value. Asset management and custodian bank charges are also levied where applicable. Charges expressed as amount based are subject to automatic indexing based on the Gibraltar Index of Retail Prices. The company reserves the right to introduce, at any time, new charges, in response to changes to legislation or applicable rules (including tax regime) or external factors beyond its control.

■ Little Giant Life (“LGL”):

˗ There are no explicit charges levied on this product. The premiums payable under the policies include costs for all benefits, charges, and expenses.

3.52 The company has a contractual obligation to carry out policy reviews on the CLACE products. These reviews are carried out on a one, five, or ten year cycle depending on the age of the policyholder and the policy duration. After each such review the policyholder is notified of any sum assurance/premium revisions.

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Reinsurance

3.53 The level of reinsurance used by ALI is not material. The following reinsurance arrangements were in place at 31 March 2017:

■ Reinsurance treaty with Munich Re covering the PPB business. Premium paid in 2016 amounted to €4,000.

■ Reinsurance treaty with Swiss Re covering the CLACE business. Premium paid in 2016 amounted to approximately €2,000.

3.54 The remaining products are not reinsured.

3.55 A summary of the ALI business as at 31 March 2017 is shown in the table below.

Table 3.4 – ALI business as at 31 March 2017 Product Number of


(€m)


Risk Margin (€m)


Perfect Combination Plan (CLACE)

1,007 5.3 9.4 0.00 9.5

Privileged Structured Bond (PSB)

1,065 39.1 39.5 0.3 39.8

Personal Portfolio Bond (PSB) 118 8.5 8.4 0.1 8.4

Adiameris 29 13.9 13.9 0.1 14

Total Class III Business 2,219 66.7 71.2 0.4 71.6

Little Giant Life (LGL) 148 0 0.7 0 0.7

Total Class I Business 148 0 0.7 0 0.7

Total 2,367 66.7 71.90 0.4 72.30

Administration

3.56 On 2 December 2016 all ALI employees transferred to HLSL. Following the transfer of staff to HLSL, ALI entered into a management services agreement with HLSL. The management services agreement enables HLSL to provide a full suite of services to ALI including oversight of the services provided by external parties since 2 December 2016.

3.57 ALI has a servicing arrangement with One Life, which is due to end in November 2017. However, negotiations are currently underway to extend this servicing arrangement to 31 March 2018. It is intended that once the servicing agreement with OneLife expires, responsibility for policy servicing will transfer to HLSL.

3.58 ALI currently has a number of Custodians for policyholders’ assets – State Street, Trac Services AS, Banque Thaler SA, Banque de Luxembourg, UBS (Luxembourg) SA.

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UHL history

3.59 UHL was incorporated in the Republic of Ireland in 2011 and was licensed to write life assurance business. UHL was a subsidiary of the American Income Life Insurance Company which is part of the Torchmark Corporation Group in the United States of America. LCCG Group acquired UHL, through its subsidiary HLA, in March 2017.

3.60 UHL commenced writing policies in August 2012, primarily writing individual term and whole life and accident insurance. In addition, UHL issued limited individual and group accident death and dismemberment policies. In February 2015, UHL discontinued activities to market and sell insurance policies. UHL ceased writing new business towards the end of 2015.

3.61 UHL’s activities are now limited to the administration of the remaining policies in-force, which includes collecting premiums and the resolution and payment of claims until all rights and obligations under the in-force policies are extinguished or expire based on the terms of the agreements with policyholders.

3.62 Prior to acquisition by HLA, a run-off plan for UHL was submitted to the CBI. Consequently, exemption from Solvency II requirements was obtained from the CBI on the basis that the business will be run-off before the end of 2019.

3.63 Since its acquisition by HLA, the strategy has been revised and it is now planned to allow the UHL in-force policies to continue until their natural expiry, i.e. to contractual term or claim payment (rather than proceed with plan submitted by the previous owners to the CBI).

The business of UHL

3.64 UHL’s book of business consists of whole of life, term and accident insurance business. Some of the Whole Life and Term business includes an Accidental Death Benefit.

3.65 UHL holds an authorisation for the following classes of insurance business (as defined in Solvency II Directive 2009/138/EC):

■ Class I: Life assurance and contracts to pay annuities on human life, but excluding those contracts that fall under Class II or Class III.

3.66 More detail on each of these products is given below:

■ Whole of Life

The Whole of Life policy is an individual life assurance policy issued to the policyholder. Its purpose is to pay a lump sum death benefit when the policyholder dies. The contract has a cash value payable on surrender. It is possible to include Guaranteed Insurability Options, Term, Renewable and Convertible Term, Spouse, Child, Waiver of Premium, Accidental Death and Terminal Illness Accelerated Death Benefit as additional benefits. Premiums are payable monthly, quarterly, bi-annually or annually.

■ Term Assurance

The term of these contracts are either 4 or 10 years. The purpose of the contract is to pay a lump sum death benefit when the policyholder dies. Coverage may be renewed at the end of each 4 or 10-year period prior to age 65. The last renewal period will end at age 65 when the coverage expires. It is possible to include Guaranteed Insurability Options, Spouse, Child, Waiver of Premium, Accidental Death and Terminal Illness Accelerated Death Benefit as additional benefits.

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■ Accident

The Accident Only policy pays benefits only in the event of accidental bodily injury – death or dismemberment. The basis of cover is individual or family. The benefits are Accidental Death and Dismemberment, Hospital Confinement, Intensive Care Confinement and emergency Accident Treatment. There is no cash or maturity benefit. Premiums are payable monthly, quarterly, bi-annually or annually.

■ Lead Product: Individual Accidental Death & Dismemberment

This product offers €2,000 cover upon accidental death or dismemberment. The policy is provided free of charge to the policyholder but the sales agent is charged a premium for this at a rate lower than that charged on non-lead policies. The term of these policies is one year. All policies issued under this product have expired.

■ Lead Product: Group Accidental Death & Dismemberment

This product offers €3,000 cover upon accidental death or dismemberment. As for the individual lead policies, the policy is provided free of charge to the policyholder but the sales agent is charged a premium for this at a rate lower than that charged on non-lead policies. The product is offered on an individual basis to members of an affinity group. The term of these policies is two years. All policies issued under this product have expired.

3.67 All products are non-participating and there are no reinsurance arrangements in place on any of UHL’s products. Of the 112 whole life policies, the 2 largest have a sum assured of approximately €200,000 which includes Accidental Death cover.

Table 3.5 – UHL business as at 31 March 2017 Product Number of


(€m)


Risk Margin (€m)


Whole of Life 112

Term 45

Accident 89

Total Class I 246 2.11 0.82 2.93 Total 246 2.11 0.82 2.93

Administration

3.68 At the date of writing of this report, the UHL book is being fully administered in house by HLSL.

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Section 4: Main features of the Scheme 4.1 I have been provided with a copy of the proposed Scheme. The main purpose of the Scheme

is to provide for the transfer to HLI of the entire long-term insurance business of HLA, UHL and ALI so that from the effective date of the Scheme the Transferring Policies will become part of the life assurance business of HLI.

4.2 The Scheme defines each of UHL, ALI and HLA as the “Transferor” and together the “Transferors”. HLI is defined as the “Transferee”. These terms will be used in this section of the report.

4.3 The principal features of the Scheme are set out in the following paragraphs.

Scope of transfer

4.4 Under the Scheme, the life assurance business liabilities of the Transferors will be transferred to HLI at the Effective Time (the time and date when the Scheme will become operative), but excluding certain liabilities, the Excluded Liabilities. The assets that will transfer under the Scheme at the Effective Time will be the assets of the Transferors in connection with the Transferring Business held by the Transferor on or before the Effective Time, including the Altraplan shares, the Real Property and the transferring Subsidiary Companies Shares but excluding the Excluded Assets. The Scheme lists the Real Property Assets. Subsidiary company shares relate to companies which hold (or previously held) properties which were held as assets of policyholder unit-linked funds and still have a value associated with a policyholder fund.

4.5 The excluded assets are defined in the Scheme as follows:

■ UHL: Cash deposits with a value of €3.7 million.

■ ALI: Cash deposits with a value of €3.7 million.

■ HLA:

˗ The Oaktree European Senior Loan Fund (“Oaktree ESL”); and

˗ Assets which are not required by HLI to have Own Funds equal to or in excess of 150% of the Solvency Capital Requirements (“SCR”) immediately following the Effective Time, calculated in accordance with the 2015 Regulations.

4.6 There are no excluded policies.

4.7 The CBI is obliged to notify the relevant supervisory authority of the Irish Scheme in EEA Member States where the Transferring Policies were concluded. The relevant supervisory authority then has a period of 3 months from the date of notification to either agree to the transfer or object. In the absence of a response within the 3 month period from the relevant supervisory authority its agreement to the transfer shall be deemed to have been given.

4.8 The Transferring Policies are those life assurance policies written by the transferors up to and including the Effective Time.

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Effective Time

4.9 It is proposed that the Scheme will take effect at 23:59 on 31st March 2018 (“the Effective Time”) or such other date as the participant companies may agree and to which the Irish High Court consents.

Conditions for Scheme to become operative

4.10 The Scheme will not take effect on the Effective Time unless:

■ the CBI has given its consent or indicated it has no objection to the Scheme;

■ the Relevant Regulators having given their consent to the Transfer, or the Relevant Regulators having failed to object to the Scheme within three months of having been notified by the CBI of the Scheme (as the case may be) pursuant to the terms of the 1994 Regulations and 2015 Regulations;

■ the Court approves the Scheme pursuant to the 1909 Act, the 1989 Act, the 1994 Regulations and the 2015 Regulations; and

■ in the event the Court imposes a modification of or addition to this Scheme or any further conditions or provisions affecting same before the Effective Time, the Transferors and Transferees consent to such modification, addition or condition before the Effective Time.

Contractual rights

4.11 Following the transfer, HLI will assume all the obligations to the policyholders of the Transferors. The rights under contracts written by HLA, ALI and UHL will not be changed as a result of the transfer. There will be no change to the policy terms and conditions for policyholders of the Transferors as a result of the proposed Scheme.

4.12 All premiums and other amounts owing to HLA, ALI and UHL shall be payable to HLI after the Effective Time. Any further premiums or sums attributable to the Transferors after the Effective Time will be payable to HLI when they are due.

4.13 Currently some of the contract terms of the Transferring Policies permit policyholders the option of making additional ad-hoc incremental contributions to their policies. The proposed Scheme state that any rights that policyholders have under their contracts are transferred to HLI under the Scheme. As such the Scheme make no changes to this aspect of policyholder’s contract terms.

4.14 Once the relevant assets of the Transferors have been transferred, HLI will assume responsibility for the liability to discharge all claims, maturities, death benefits and other amounts arising from the liabilities transferred (including administering and managing the Transferring Policies and the associated costs thereof).

4.15 No additional payments will be made to policyholders as a result of implementing the Scheme.

4.16 All references in any Contracts of the Transferors, Boards of Directors and all other agents of the Transferors will be read as references to HLI, the Board of HLI and agents of HLI after the Effective Time. Where appropriate, agents of the Transferors will be referenced to agents of HLI to which administration has been delegated.

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4.17 All references in any guarantees, letters of credit or similar security to the Transferors defaulting in the payment of sums due in respect of Transferring policies will be referenced to HLI after the Effective Time.

With-Profits funds

4.18 HLI shall continue maintaining the HLI With-Profits Sub-Fund as though the Scheme had not taken place and on the same terms under which it had operated immediately before the Scheme.

4.19 The Scheme sets out the circumstances under which the With-Profits Sub-Fund may be closed. The Scheme provides for such a closure if the Technical Provisions (“TPs”)1 of the HLI With-Profits Sub-Fund falls below €50 million then the Board of HLI may determine that the fund is to be closed such that policies will no longer participate in profits. In the event of closure, any profits shall be distributed in accordance with advice obtained from the Head of the Actuarial Function of HLI.

4.20 The Scheme also provides that HLI shall only carry out the closure of a With-Profits Fund if the Board has received a certificate from an Independent Actuary to the effect that in the opinion of the Independent Actuary, the With-Profits Fund closure will not have a material adverse effect on the security and benefits of the holders of policies allocated to that HLI With-Profits Sub-Fund.

4.21 The Scheme requires that HLI will notify policyholders of With-Profits Funds affected by the closure in writing at least 90 days in advance of the closure.

4.22 Subject to the above the Scheme does not prevent HLI from establishing, closing, amalgamating Sub Funds; changing the name of Sub Funds or changing the charges where such changes would be in line with the policy terms and conditions. Any such changes would be made by HLI on such terms as recommended by the HoAF having regard to the reasonable benefit expectations of the policyholders and having been approved by the HLI Board.

Non-Profits funds

4.23 There is a number of non-profit funds held across ALI, HLI and UHL. Under the Scheme, the liabilities of these funds will be transferred to HLI.

4.24 Following the transfer HLI will assume all the obligations to the non-profit fund policyholders. The rights under non-profit contracts written by ALI, HLI and UHL will not be changed as a result of the transfer. There will be no change to the policy terms and conditions for policyholders of the Transferors as a result of the proposed Scheme.

Unit-linked funds

4.25 HLI will establish new internal linked investment funds for the Transferring Policies which are unit-linked. These new internal linked investment funds will correspond to the internal linked investment funds which the Transferring Policies are currently invested in, including the same rules and procedures for the calculation of unit prices and fund-related charges. The legal and beneficial ownership of the assets relating to each fund will change from the Transferors to HLI.

1 TPs are defined as the TPs calculated in accordance with the 2015 Regulations.

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4.26 Transferring policyholders will receive an identical number of units of equal value in the new “host” internal linked funds in HLI to those funds from which they have transferred.

4.27 There will be no change to the underlying assets, investment strategy or to the investment criteria as a result of the transfer.

4.28 For Transferring Policies which have externally managed portfolios, on the Effective Time HLI shall establish records corresponding to all of the records maintained, on an individual policy by policy basis, by the Transferors immediately prior to the Effective Time for such policies.

4.29 On the Effective Time HLI shall record which externally managed portfolios are designated in favour of each transferring policy and shall ensure that such designations are identical to those that were held in the records of the Transferring Polices immediately prior to the Effective Time.

4.30 The Scheme also acknowledges that certain charges are registered against HLA in the Companies Registration Office in respect of certain Transferring Assets (principally relating to property assets). The Scheme sets out the process to be followed whereby consent to the transfer of such charges has not been obtained or such charges are not so satisfied / discharged by the Effective Time.

4.31 Therefore the nature and structure of the underlying asset holdings immediately after the transfer will be unchanged relative to their position immediately prior to the transfer with the possible exception of some of the property assets. For those assets, not transferred as part of the Scheme due to the factors set out in paragraph 4.30 the Scheme states that the relevant Transferor shall hold such Transferring Business, Residual Assets and / or Residual Liabilities as trustee for the Transferee from the Effective Time and the Transferee shall perform any obligations of the Transferor thereunder as if they were the assets, contracts or liabilities of the Transferee.

4.32 The value of transferring policyholders’ unit-linked funds immediately after the transfer takes place will be equal in value to that immediately prior to the transfer taking place. The underlying unit-linked funds and associated assets immediately after the transfer will be the same as those immediately prior to the transfer.

4.33 As all contractual terms remain unchanged under the Scheme any powers contained within the transferring contracts for funds to be merged, closed or sub-divided, or for the approach to unit pricing to be changed, will be preserved under the Scheme with such powers being transferred to HLI post transfer. Nothing within the Scheme prevents any such changes on such terms and conditions as is approved by the Board of HLI having taken account of policyholders’ reasonable expectations and the advice of the HoAF in relation to the interpretation of policyholders’ reasonable expectations.

Unit-linked charges

4.34 As all contractual terms remain unchanged under the Scheme any powers contained within the transferring contracts for changes to be made to unit-linked charges will be preserved under the Scheme with such powers being transferred to HLI post transfer. Nothing within the Scheme prevents any such changes on such terms and conditions as is approved by the Board of HLI having taken account of policyholders’ reasonable expectations and the advice of the HoAF in relation to the interpretation of policyholders’ reasonable expectations.

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New business

4.35 The Scheme does not prevent HLI from writing new insurance business in the future, (albeit that this would be subject to preparation of a business plan and approval of the CBI).

Tax

4.36 The Scheme states that any tax liabilities which crystallise as a result of the transfer of policyholders’ assets will not be borne by the policyholders.

Further assurance clause

4.37 The Scheme requires parties to the Scheme to take the necessary actions as may be necessary so as to vest title in the Transferring Business in accordance with the Scheme. Should at the Effective Time such title not pass to the Transferee, the Scheme provides for such title to be held in trust by the Transferor and that the Transferor shall fulfil any obligations as if they were contracts of the Transferee, until such time as they do transfer.

Continuity of Proceedings

4.38 Any judicial, quasi-judicial, arbitration proceedings or any complaint to the ombudsman or other proceedings for the resolution of a dispute or claim which are pending by or against HLA, ALI and UHL shall be continued by or against HLI.

4.39 All actual and potential proceedings by or against HLA, ALI and UHL in connection with the assets and liabilities not being transferred shall be continued by or against HLI.

Costs of the Scheme

4.40 All costs and expenses relating to the preparation of the Scheme and application for the sanction of the Scheme, including the costs of the Independent Actuary, counsel representing the parties to the Scheme and complying with the orders made by the Irish High Court arising from the directions hearing or the substantive hearing in which the Irish High Court is petitioned to sanction the Scheme shall be borne by HLSL, a wholly owned Irish subsidiary of LCCGI and shall not be borne by policyholders.

Policyholder communications

4.41 Section 13 of the Act requires that, unless the Irish High Court otherwise directs, certain materials must be transmitted to each policyholder of HLI, HLA, ALI and UHL (the “Policyholder Circular”). It is proposed that the Policyholder Circular, which will include a statement summarising the proposed Scheme together with a summary of the Independent Actuary Report, will be transmitted to all policyholders of HLI, HLA, ALI and UHL following the Directions hearing in December 2017.

4.42 It is further proposed that the following information will be made available to any relevant parties from HLI’s offices and will also be made available on a Section 13 webpage on www.harcourtlife.ie:

■ The Petition to the Irish High Court including the Scheme;

■ The full report of the Independent Actuary Report;

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■ The Policyholder Circular;

■ The HoAF Reports for each company.

4.43 A number of press advertisements will be made as follows:

■ Ireland: A notice will be placed in Iris Oifigiuil;

■ Irish Independent; and

■ Irish Examiner.

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Section 5: Pre-Scheme Solvency Positions Introduction

5.1 In reviewing the Scheme, I must consider the implications of the proposed transfer for the security of policyholders’ contractual benefits (that is, the likelihood that their contractual benefit entitlements will be met).

5.2 My analysis of the impact of the Scheme on policyholder security depends heavily on the level of capital available to the participating companies, and their ability to satisfy their respective solvency requirements now and in the future.

5.3 Most companies are required by the CBI to determine their capital requirements under the European Union (Insurance and Reinsurance) Regulations 2015 (usually referred to as the Solvency II regulations). Under these regulations companies are required to hold sufficient assets to be able to cover the TPs associated with a portfolio of insurance contracts, where the TPs are the sum of the following 2 items:

1. BEL which is the sum of the following:

˗ the policyholder unit liabilities (for unit-linked and UWP business);

˗ the best estimate view of the value of future expenses less income (from the company’s perspective) associated with the insurance policies in question (which may have a negative value);

2. The Risk Margin (as described in Appendix B).

5.4 Under Irish insurance legislation (which is derived from European Directives) each life assurance company must then hold further additional assets at least equal to the Solvency Capital Requirement (“SCR”) associated with its life assurance business. The SCR is the amount of capital that insurance undertakings are required to hold to ensure that they can meet their obligations to policyholders over the following 12 months with a 99.5% probability. Appendix B contains a further description of the approach used to calculate the SCR.

5.5 Under Irish insurance legislation, if the SCR is no longer complied with or where there is a risk of non-compliance in the following 3 months, companies are obligated to inform the CBI with immediate effect. Companies must then submit, within 2 months of the observation of non-compliance, a recovery plan for approval by the CBI such that the SCR is covered within 6 months of the observation of the non-compliance.

5.6 Irish insurance legislation also defines the Minimum Capital requirement (“MCR”) which is a simple factor-based linear formula which is targeted at a Value at Risk measure over one year with 85% confidence. The MCR has a floor of 25% and a cap of 45% of the SCR. There is also an absolute MCR of €3.7m for life insurance companies.

5.7 If the MCR is no longer complied with or where there is a risk of non-compliance in the following 3 months, companies are obligated under Irish insurance legislation to inform the CBI with immediate effect. Companies must then submit, within 1 month of the observation of non-

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compliance, a short-term realistic finance scheme for approval by the CBI such that the MCR is covered within 3 months of the observation of non-compliance.

5.8 Therefore under Irish insurance legislation (which is derived from the EU Solvency Directive) a breach of the MCR requires more immediate action than that of the SCR.

5.9 The MCR is generally less than the SCR except in the circumstances whereby the absolute minimum capital floor of €3.7 million bites. Where this minimum capital floor bites companies tend to focus primarily on the MCR when reporting solvency coverage.

5.10 In addition to the capital requirements described above, each company is required by the CBI to set out within its risk management framework what additional assets it intends to hold over and above the SCR (or the MCR if greater). This additional capital is frequently expressed as a percentage of the SCR (or MCR if greater). The purpose of this additional capital, sometimes referred to as “buffer capital”, is to provide additional security to policyholder benefits consistent with the company’s own view of the volatility of its balance sheet (including the appropriateness of the SCR Standard Formula) and its appetite for risk management.

5.11 The solvency position of the participating companies is an important indicator in assessing whether sufficient assets have been set aside to fulfil the current and future obligations to the policyholders in respect of their insurance contracts. The principal measure used to assess the solvency of each company is the ratio of Own Funds (refer to Appendix B) to the SCR or, for companies where the MCR exceeds the SCR, the ratio of the Own Funds to the MCR. These ratios are also referred to as solvency coverage ratios.

5.12 The target solvency for each participating company will be determined according to the company’s capital policy and risk appetite in the context of the risk profile of the company. This could be in the form of a minimum target percentage of the SCR (or MCR in situations where the SCR is less than the MCR) that the firm will not want to fall below expressed as a percentage of SCR (or MCR if appropriate). Furthermore, the capital policy may determine a different target ratio (i.e. higher) in deciding whether dividends can be paid e.g. such that any dividends paid would not result in the participating company having a solvency capital ratio of less than Y% of SCR.

5.13 In the context of the proposed Scheme it should be noted that UHL has been exempted from reporting under the Solvency II regulatory framework as the business plan (prior to acquisition by HLA) had envisaged that the business would be completely run off by end 2019. As a result of this exemption, the required solvency capital is currently calculated in accordance with the European Communities (Life Assurance) Framework Regulations 1994 (“Solvency I”) which is currently subject to a Minimum Guarantee Fund (“MGF”) of €3.7 million.

5.14 Since the purchase of UHL by HLA the business plan has been revised. As a result discussions with the CBI are underway in relation to UHL moving to reporting under the Solvency II regulatory framework. UHL is expected to move to the Solvency II basis prior to the Scheme coming into effect and will remain as such if the Scheme does not come into effect. Consequently, in assessing the solvency position of UHL the focus has been on figures prepared under the Solvency II basis.

5.15 For HLI (both pre- and post-transfer) and HLA pre-transfer the SCR exceeds the MCR. Therefore in assessing the solvency position of these entities the principal solvency coverage ratio is that based on the SCR. For both ALI and UHL pre-transfer the MCR absolute floor of €3.7 million exceeds the SCR and hence the principal solvency coverage ratio is that based on the MCR.

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Opening Solvency Position

5.16 This Section of the Report sets out a summary of the solvency position of the each of the participant companies as at 31 March 2017. The numbers are presented on 3 different bases as follows:

a Reported: These are the 31 March 2017 figures which each company submitted to the CBI in respect of its solvency position at that date. For HLI, HLA and ALI the Reported figures were calculated in accordance with the Solvency II regulations whereas for UHL the Reported figures were calculated in accordance with the Solvency I regulations.

b Adjusted: For HLI, HLA and ALI these are based on the Reported figures with a number of adjustments as described in more detail below to reflect how certain aspects of the business has changed since the reporting date. For UHL the Adjusted figures are calculated in accordance with Solvency II regulations.

c Economic: Under this basis, the approach for allowing for future expenses in the TPs assumes that no further new business is written or new companies are acquired by LCCGI.

Reported Basis

5.17 The key adjustments made in moving from the Reported basis to the Adjusted basis relate to changes in the expected future expenses within the participant companies which is driven by changes as to how the various businesses will be managed and administered in the future. The approach used for defining the allowance for expected future expenses within calculation of the TPs in the Reported basis is described below.

5.18 Within the Reported Basis, the expense allowances within the TPs include two main components as follows:

■ Servicing Fees: These are fees paid to various Third Party Administrators (“TPAs”) which provide policy administration and other services to the individual companies. For the Reported figures, the Servicing Fees reflected the administration arrangements in place as at 31 March 2017.

■ Direct Costs: These are costs incurred directly by the company e.g. directors’ fees, legal fees, regulatory fees and levies etc.

5.19 The Servicing Fees and Direct Costs included in the Reporting Basis calculations are as follows:

■ HLI

The Reported Technical Provisions reflected the administration arrangement with Pearl Group Management Services (Ireland) Limited (“PGMSL”) of administration servicing fees of €89 per policy. This fee level was assumed to apply until 2020 after which it was assumed to increase to €178 per policy reflecting an expected increase in fees at that point. For direct costs, the expected projected costs up to 2020 were allowed for within the technical provisions. Direct costs after 2020 were based on a per policy

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expense derived using projected expense and policy numbers in 2020 (€93 per policy) with an allowance for expense inflation for future years of the projection.

■ HLA

The Reported Technical Provisions reflected the arrangement with HLSL which included servicing fees payable up to 2019 of €1,500 per policy per annum, a fixed annual fee of €2.72 million per annum to 2019 and a payment in 2017 of €1.5 million. No payments were due after 2019. For direct costs, the expected projected costs up to 2019 were allowed for within the calculation of the TPs. Direct costs after 2020 were based on a per policy expense derived using projected costs in 2020 and projected policy numbers up to 2020 with an allowance for expense inflation for future years of the projection.

■ ALI

The expense assumption used to calculate the Reported Technical Provisions was based on an expense analysis carried out in 2014 which projected expenses and business volumes (including new business) over the following 5 years. The expense assumption was set at product level and ranged from €210 per policy for PPB and PSB policies to €1,040 per policy for Adiameris policies.

■ UHL

The Solvency I figures reflected the expenses associated with the Run-Off plan submitted to the CBI in May 2015. Under this approach the expectation was that the book of business would be completely run off by 2020.

Adjusted Basis

5.20 The key differences between the Reported and Adjusted bases are described below.

1. Servicing Fees

5.21 At the date of writing this report the Boards of the participant companies have agreed to put in place a new Master Services Agreement (“MSA”) between the participant companies and HLSL. This MSA will replace many of the existing administration arrangements for the companies involved. This is intended to come into effect from 1 January 2018. The key features of the proposed MSA are as follows:

■ A standard cost per policy of €300 will be charged by HLSL for all policies in each of the participant companies increasing in future years in line with inflation.

■ For HLI business the existing TPA arrangements with PGMSL/DST will remain in-force but with a reduction in fees relative to those that existed as at 31 March 2017.

■ Utmost Administration Limited (“UAL”) will continue to provide services to ALI with a fixed charge per policy.

■ The fees payable to SMI/DST and UAL mentioned above are in addition to the HLSL €300 fee. These additional fees will be paid to HLSL who will then remit them to the other TPAs.

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■ Tax advice is that VAT is not applicable to the fees between HLSL and the participant companies as these companies operate within the same VAT Group. No VAT has been charged in relation to the DST fees to date and this is assumed to continue to be the case under the new MSA. It has been assumed that no VAT will be applied to the fees paid to HLSL relating to services provided by UAL to ALI. The arrangements with UAL have not yet been analysed from a VAT perspective but I understand that the intention is that the new MSA will be such that the UAL per policy charge include in the solvency calculations in this Report will be the gross charge from UAL, including any VAT if applicable.

2. Direct Costs

5.22 For 2017 calendar year the actual forecast direct costs were included in the TPs calculation in respect of each of the participant companies.

5.23 A direct cost allowance per policy is derived which is then applied for each policy in force in 2018 and this per policy allowance is then assumed to increase in line with inflation thereafter. Therefore, as the projected number of policies reduces over time with claims and maturities, the allowance within the Technical Provisions for direct expenses will also reduce over time. In deriving the allowance for direct costs from 2018 onwards included within the Technical Provisions it has been assumed that the numbers of in-force policies within each company stabilises after 2 years. The opening 2018 per policy direct cost allowance is derived by taking the projected expenses in 2019 and dividing these over the projected number of policies remaining inforce in 2019. This approach results in the following per policy direct expense allowances in 2018:

■ UHL €515

■ ALI €120

■ HLI €100

■ HLA €715

3. Capital Injections

5.24 For UHL, the Adjusted basis calculations have been carried out under the Solvency II regulations and using the approach to servicing fees and direct costs as described above.

5.25 For both ALI and UHL, the Own Funds calculated using the Adjusted basis are not sufficient to cover the MCR. Therefore it has been assumed that capital injections of €1.9 million and €3.6 million have been provided by HLA to UHL and ALI at an effective date of 31 March 2017.

4. Investment Policy

5.26 The Adjusted basis allows for a change to the investment profile of HLI and ALI and subsequent investment of €2 million by each of those companies in the Oaktree ESL1 fund in March 2017.

5. Other

1 Oaktree European Senior Loan Fund

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5.27 For HLI, some minor modelling amendments were made in order to refine the approach to valuing guarantees. Adjustments were also made to reflect changes in the reinsurance processing implemented after 31 March 2017 to reduce the amount of reinsurance recoverables which resulted in a small decrease in the SCR.

5.28 In addition, for HLA, a number of adjustments have been made to allow for the adjustment in value of subsidiary holdings as well as to allow for the removal of Utmost Ireland as a subsidiary of HLA in June 2017.

Economic Basis

5.29 In the scenario that no further new business is written or no new companies are acquired by the LCCGI Group, the number of policies can be expected to fall steadily while direct costs can be expected to stay relatively stable.

5.30 The calculations on the Economic basis allow for the expected direct costs over the next 10 years i.e. it is not assumed that these costs decrease in line with a reduction in the number of policies.

5.31 From 2027 onwards it is assumed that the projected costs reduce in line with the number of policies. At that point it is projected that less than 25% of policies will remain in-force.

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HLI – Pre Transfer Solvency Position

5.32 The solvency position of HLI pre transfer is shown in the table below.

Table 5.1 – HLI solvency position as at 31 March 2017 €m Reported Adjusted Economic Total Assets (reported figure excludes dividend paid to HLA)

241.2 241.2 241.2

Best Estimate Liability 219.9 223.0 224.4

Risk Margin 2.5 2.1 2.2

Other Liabilities (including dividend to HLA) 5.7 5.7 5.7

Total Liabilities 228.1 230.8 232.4

Own Funds (Asset less Liabilities) 13.1 10.5 8.9

Solvency Capital Requirement 8.1 7.2 7.5

Excess Assets 5.0 3.3 1.4 Solvency Coverage Ratio 163% 145% 119%

Reconciliation between Reported and Adjusted figures

5.33 The table below shows a detailed reconciliation between the Reported and Adjusted figures.

Table 5.2 – Reconciliation between Reported and Adjusted figures as at 31 March 2017 €m Assets Liabilities Own Funds Reported 241.2 228.1 13.1 Revised expense basis 3.4 (3.4)

Modelling improvement for guarantees

(0.4) 0.4

Change in Risk Margin (0.4) 0.4

Adjusted 241.2 230.8 10.5

5.34 The revised expense basis reflects the impact of the new MSA where the fee paid to HLSL has increased to €349 per policy (of which €49 is paid on from HLSL to DTS). Under the previous arrangement the servicing fee was €78 per policy increasing to €178 from 2020.

5.35 The key reasons for the reduction in SCR from €8.1 million to €7.2 million are as follows:

■ A change in the approach to modelling guarantees (€0.7 million).

■ A change in process resulted in a reduction in reinsurance recoverables from the amount reported at 31 March 2017 and as a consequence the capital charge in relation to these recoverables reduced (€0.3 million).

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Reconciliation between Adjusted and Economic Basis

5.36 The increase in the BEL reflects the increase in the allowance for future direct costs under the Economic basis.

5.37 The increase in the SCR from €7.2 million to €7.5 million reflects the increase in the expense risk component of the SCR due primarily to the increase in expenses.

HLI SCR

5.38 The table below shows a breakdown of the HLI’s SCR (pre Transfer) on the Adjusted basis.

Table 5.3 – HLI SCR as at 31 March 2017 SCR Component €m Market Risk

- Interest rates 0.0

- Property -

- Equity 2.3

- Credit Spread 0.5

- Concentration -

- Currency 1.0

- Less diversification (0.7) Total Market Risk 3.2 Life Insurance Risk

- Mortality 0.2

- Expense 1.3

- Lapse 3.2

- Catastrophe 0.0

- Less diversification (0.7)

Total Life Insurance Risk 4.0 Counterparty Default Risk 1.9

Total Before Diversification 9.1 Less Diversification (2.6)

Total Basic SCR 6.5 Operational Risk 0.7

Total SCR 7.2

5.39 The key components of HLI’s SCR are described below.

■ Equity risk: HLI’s business consists primarily of unitised policies where the income to HLI is represented by percentage charges made on the value of the unit funds. This

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means that HLI’s income is exposed to the movements in the value of these funds. Therefore, HLI is exposed to equity risk to the extent that if there is a fall in the value of the equity component of these funds this will lead to a reduction in future income for HLI.

■ Credit Spread risk: In March 2017 the HLI Board approved a shareholder asset investment proposal to invest €2 million of shareholders’ funds. This investment exposes HLI to credit spread risk.

■ Currency risk: A proportion of HLI’s business is written in the UK. As a result, any income from this business is in pounds sterling. HLI is an Irish company situated within the Eurozone, with a material portion of its expenses in addition to its capital requirements denominated in Euros. There is therefore a risk that the income falls relative to expenses and capital requirements due to currency movements. This currency risk accounts for a material proportion of the market risk capital component.

■ Expense risk: HLI incurs expenses in administering the policies through to claim. Its costs are made up of direct costs and costs related to outsourced activities. Policy administration and customer management services are currently carried out by DST. This relationship is currently managed by PGMSI but under the new MSA HLSL will assume responsibility for managing the relationship with DST. HLI is exposed to risk that future expenses will be greater than expected.

■ Lapse risk: The lapse risk captures the risk that there is an unexpected change (higher or lower) in the rate of run off of the business. For HLI, the key risk is a mass lapse event which would lead to the loss of future profits on those policies which lapse.

■ Counterparty default risk: The counterparty default risk for HLI arises from the risk of a failure of a counterparty (such as a bank or reinsurer) resulting in the loss of funds to the company. HLI’s exposure to the credit risk failure of PLL in respect of the with-profits and unit-linked business reinsured with PLL contributes to HLI’s counterparty default risk.

■ Operational risk: HLI is exposed to operational risks and losses which can arise from inadequate or failed processes, or systems or from external events.

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HLA – Pre Transfer Solvency Position

5.40 The solvency position of HLA pre transfer is shown in the table below.

Table 5.4 – HLA solvency position as at 31 March 2017 €m Reported Adjusted Economic

Total Assets 234.3 158.7 154.9



Other Liabilities 32.3 2.4 2.4




Excess Assets 70.5 40.9 34.4 Solvency Coverage Ratio 381% 371% 314%



Table 5.5 – Reconciliation between Reported and Adjusted figures at 31 March 2017 €m Assets Liabilities Own Funds Reported 234.3 138.7 95.7 Removal of subsidiaries

• Utmost (reported to CBI) (38.0) (38.0)

• ALI (reported to CBI) (6.6) (6.6)

• UHL (3.0) (3.0)

• HLI (before €8m dividend paid to HLA) (21.1) (21.1)

Capital Injections to UHL and ALI (5.5) (5.5)

Inclusion of subsidiaries (Adjusted 31\3\2017)

ALI 5.0 5.0

UHL 5.0 5.0

HLI 10.5 10.5

HLI dividend to HLA 8.0 8.0

Change in HLA TPs (6.0) 6.0

Sale of property and repayment of loan (22.7) (22.7) 0.0

Net off of unit-linked debt on assets & liabilities (7.2) (7.2) 0.0

Adjusted 158.7 102.7 56.0

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5.42 The key reasons for the changes shown in Table 5.2 above are as follows:

a Decrease in the TPs by €6 million:

■ The revised MSA leads to substantially lower costs for HLA when compared to the current arrangement.

■ There is a reduction in the assumed direct expenses per policy from €795 to €715 per policy per annum.

b Changes in the value of subsidiaries:

■ Utmost was removed as a subsidiary of HLA in June 2017.

■ ALI, UHL and HLI were included in the 31 March 2017 regulatory return as the value of Solvency II assets less Solvency II liabilities (i.e. Own Funds). The Own Funds amounts in respect of these companies have been updated to reflect the various items listed in paragraph 5.20 to 5.28 above.

5.43 Table 5.1 above shows that the SCR has reduced from €25.1 million in the reported numbers to €15.1 million in the Adjusted results. The key reasons for this reduction are as follows:

■ Utmost was treated as an equity investment in the SCR reported to the CBI as at the end of March 2017 and was therefore subject to a 22% capital charge under the equity submodule of the SCR calculation. Allowing for the removal of the €38 million in respect of this subsidiary reduces the equity component of the SCR by €8.4 million.

■ A dividend of €8 million was paid from HLI to HLA since the end of March 2017. This reduced the equity component of the SCR by €1.8m

■ The other subsidiaries are treated as equity investments and adjusting their value as described above results in a slight reduction in the equity submodule capital charge of circa €0.3 million.

Reconciliation between Adjusted and Economic Basis


5.45 The key reasons for the increase in the SCR from €15.1 million to €16.1 million are as follows:

■ The expense risk component of the SCR has increased to reflect the increase in expenses under the Economic basis.

■ The increase in expenses also impacts on the losses in the lapse stress scenario resulting in a further increase in the SCR.

HLA SCR

5.46 As HLA is holding (as at 31 March 2017) ALI, UHL and HLI as subsidiaries (i.e. part of the HLA shareholder assets) the HLA policyholders are exposed to the risks within these subsidiaries

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via fluctuations in the values of these companies or as a result of any need for HLA, as the immediate parent entity, to recapitalise these subsidiaries. This would therefore impact on solvency coverage within HLA. The SCR reported to the CBI as at the end of March reflected its holdings in these subsidiary companies where these subsidiaries were treated as an equity investment.

5.47 As I consider the SCR risks for each of the subsidiaries directly involved in the transfer separately I have therefore considered the HLA SCR on an individual basis i.e. after removing the impact of the subsidiary companies (HLI, UHL and ALI). The table below shows the SCR for HLA on the Adjusted basis with and without these subsidiaries (called the “Group” and “Individual” views respectively). Note that Altraplan which became a subsidiary of HLA at the end of 2016 is included in both views.

Table 5.6 – HLA SCR as at 31 March 2017 SCR Component Group Individual Market Risk

- Interest rates 0.0 0.0

- Property 0.2 0.2

- Equity 6.2 1.7

- Credit Spread 5.7 5.7

- Concentration 0.0 0.0

- Currency 1.7 1.7

- Less diversification (2.0) (1.5) Total Market Risk 11.8 7.8 Life Insurance Risk

- Mortality 0.0 0.0

- Expense 1.0 1.0

- Lapse 3.0 3.0

- Catastrophe 0.0 0.0

- Less diversification (0.4) (0.4)

Total Life Insurance Risk 3.6 3.6 Counterparty Default Risk 1.2 1.2

Total Before Diversification 16.6 12.6 Less Diversification (3.0) (2.8)

Total Basic SCR 13.6 9.8 Operational Risk 1.5 1.5

Total SCR 15.1 11.3

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5.48 The key components of HLA’s SCR are described below.

■ Equity risk: The Group view in Table 5.3 of HLA includes investments in the HLI, ALI and UHL subsidiaries where they are treated as an equity investment within the SCR calculation and are therefore subject to a 22% capital charge under the Solvency II Standard Formula framework. This is the most material part of the equity risk component. Once these subsidiary entities are removed from the calculation the equity risk component decreases significantly. Under the Individual view the only subsidiary company included is Altraplan.

■ Credit Spread risk: This is the risk of losses arising from changes in the value of market securities driven by changes in the credit standing of counterparties. For HLA the credit spread risk relates primarily to its holdings in the Oaktree ESL fund (€21.5 million at 31 March 2017).

■ Currency risk: HLA’s currency risk predominantly arises from non-Euro denominated subsidiary holding of Altraplan which is valued in US Dollars. There are also smaller exposures on other assets, such as shareholder bank deposits that have a UK Sterling currency exposure.

■ Expense risk: Expense risk arises from adverse variation in the expenses incurred in managing a closed book of business. HLA’s costs include expenses it incurs directly and also administration charges it is assumed to pay to HLSL under the MSA due to come into force on 1 January 2018.

■ Lapse risk: The lapse risk captures the risk that there is an unexpected change (higher or lower) in the rate of run off of the business. For HLA, the key risk is that there is a decrease in lapse rates. Operating expenses are higher than income earned from policies, so a reduction in lapses is expected to have an adverse impact on the company.

■ Counterparty default risk: The counterparty default risk for HLA arises from the risk of a failure of a counterparty (such as a bank) resulting in the loss of funds to the company. The company mitigates these risks by dividing shareholder investments, including those of its subsidiary companies, over a number of sovereign lenders, banks and collective investment funds.

■ Operational risk: HLA is exposed to operational risks and losses which can arise from inadequate or failed processes, or systems or from external events.

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ALI – Pre Transfer Solvency Position

5.49 The solvency position of ALI pre transfer is shown in the table below.

Table 5.7 – ALI solvency position as at 31 March 2017 €m Reported Adjusted Economic Total Assets 77.0 80.6 80.6



Other Liabilities 3.3 3.3 3.3




Minimum Capital Requirement 3.7 3.7 3.7

Excess Assets (over SCR) 5.3 3.1 1.8

Excess Assets (over MCR) 2.9 1.3 0.1

Solvency Coverage Ratio (SCR) 519% 266% 195% Solvency Coverage Ratio (MCR) 178% 135% 103%


5.50 The table below shows a detailed breakdown between the Reported and Adjusted figures.

Table 5.8 – Reconciliation between Reported and Adjusted figures at 31 March 2017 €m Assets Liabilities Own Funds Reported 77.0 70.4 6.6

Capital Injection from HLA 3.6 3.6

Revised expense basis 5.1 (5.1)

Adjusted 80.6 75.6 5.0

5.51 The revised expense basis reflects the impact of the moving to the new MSA and updating the methodology for projecting future direct costs as discussed in paragraphs 5.21 to 5.23 above.

5.52 The increase in future expenses also increases the expense risk component of the SCR resulting in an increase in the SCR from €1.3 million to €1.9 million.

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Reconciliation between Adjusted basis and Economic Basis

5.53 The increase in the BEL reflects the increase in the allowance for future direct costs under the Economic basis as described in paragraph 5.29 to 5.31 above.

5.54 The increase in expenses also feeds through to a slight increase in the expense risk component of the SCR.

ALI SCR

5.55 The table below shows a breakdown of ALI’s SCR on the Adjusted basis.

Table 5.9 – ALI SCR as at 31 March 2017 SCR Component €m Market Risk


- Property -

- Equity 0.3

- Credit Spread 0.6

- Concentration -

- Currency 0.3


- Mortality 0.0

- Expense 0.7

- Lapse 0.3

- Catastrophe 0.0


Total Life Insurance Risk 0.9 Counterparty Default Risk 0.3

Total Before Diversification 2.2 Less Diversification (0.6)

Total Basic SCR 1.6 Operational Risk 0.3

Total SCR 1.9

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5.56 The key components of ALI’s SCR are described below.

■ Equity risk: ALI’s business consists primarily of unit-linked policies where the income to ALI is represented by percentage charges made on the value of the unit funds. This means that ALI’s income is exposed to the movements in the value of these funds. Therefore, ALI is exposed to equity risk to the extent that if there is a fall in the value of the equity component of these funds this will lead to a reduction in future income for ALI.

■ Credit Spread risk: In March 2017, the ALI Board approved a shareholder asset investment proposal to invest €2 million of shareholders’ funds. This investment exposes ALI to credit spread risk.

■ Currency risk: Some of ALI’s business was written in territories where the Euro is not the local currency e.g. Norway and Sweden. As a result, ALI is exposed to earning fee income in non-Euro currencies which contributes to its currency risk exposure i.e. changes in the value of these currencies relative to the Euro will have an adverse impact on ALI earnings.

■ Expense risk: Expense risk relates to the risk that the expected expenses of administering the ALI business is higher than expected. Expenses in excess of those expected will have an adverse impact on ALI.

■ Lapse risk: The lapse risk captures the risk that there is an unexpected change (higher or lower) in the rate of run off of the business. For ALI, the key risk is that there is a decrease in lapse rates. Operating expenses are higher than income earned from policies, so a reduction in lapses generally leads to a negative result for ALI.

■ Counterparty default risk: The counterparty default risk for ALI arises from the risk of a failure of a counterparty (such as a bank or reinsurer) resulting in the loss of funds to ALI.

■ Operational risk: ALI is exposed to operational risks and losses which can arise from inadequate or failed processes, or systems or from external events.

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UHL – Pre Transfer Solvency Position

5.57 The solvency position of UHL pre transfer is shown in the table below.

Table 5.10 – UHL solvency position as at 31 March 2017 €m Reported

(Solvency I) Adjusted Economic

Total Assets 6.0 8.0 8.0

Best Estimate Liability/Solvency I reserves 1.4 2.1 2.9

Risk Margin - 0.8 1.1

Other Liabilities - - -



Solvency Capital Requirement (or Solvency I capital requirement)

0.1 0.8 1.0

Minimum Capital Requirement 3.7 3.7 3.7

Excess Assets (over SCR*) 4.6 4.2 3.0

Excess Assets (over MCR*) 0.9 1.3 0.3

Solvency Coverage Ratio (SCR) 7121% 645% 390% Solvency Coverage Ratio (MCR*) 125% 136% 108% *or Solvency I equivalent



Table 5.11 – Reconciliation between Reported and Adjusted figures at 31 March 2017 €m Assets Liabilities Excess

Assets/Own Funds

Reported 6.0 1.4 4.6

Capital Injection from HLA 1.9 1.9

Change from Solvency I to Solvency II reserves

0.7 (0.7)

Addition of Risk Margin 0.8 (0.8)

Adjusted 8.0 2.9 5.0

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5.59 The key reasons for the increase in the liabilities as a result of moving from Solvency I to Solvency II are as follows:

■ A change in the strategic plan post acquisition by LCCGI whereby the original plan to close the business within a 2 year period was replaced by a plan to run the business off in line with the expected expiry of the policies. This has an impact on the expected duration of the business and therefore impacts the expected level of future expenses; and

■ The planned introduction of the new MSA with HLSL from 1 January 2018 results in an increase in expected future expenses and therefore the expected liabilities for UHL.

Reconciliation between Adjusted figures and Economic Basis


5.61 The increase in expenses also feeds through to an increase in the expense risk component of the SCR and as a consequence the risk margin.

UHL SCR

5.62 Table 5.12 shows a breakdown of UHL’s SCR.

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Table 5.12 – UHL SCR as at 31 March 2017 SCR Component Market Risk


- Property 0.0

- Equity 0.0

- Credit Spread 0.0

- Concentration 0.0

- Currency 0.0


- Mortality 0.0

- Expense 0.4

- Lapse 0.2

- Catastrophe 0.0


Total Life Insurance Risk 0.5 Health Insurance Risk 0.2 Counterparty Default Risk 0.3 Total Before Diversification 1.1

Less Diversification (0.3) Total Basic SCR 0.8

Operational Risk 0.0 Total SCR 0.8

5.63 The key components of UHL SCR are described below.

■ Market risk: The market risk for UHL is negligible as the majority of the assets are invested in cash (50%) and Government bonds (48%).

■ Expense risk: Expense risk relates to the risk that the expected expenses of administering the UHL business is higher than expected. Expenses in excess of those expected will have an adverse impact on UHL.

■ Lapse risk: This is in respect of the loss of expected future income upon an adverse lapse scenario.

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■ Health risk: UHL currently has a very small amount of policies inforce that carry Accidental Dismemberment benefits that attract a capital charge under the Solvency II health risk module.

■ Operational risk: UHL is exposed to operational risks and losses which can arise from inadequate or failed processes, or systems or from external events.

■ Counterparty risk: The most material counterparty risk relates to amounts receivables.

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Section 6: Effects of the Scheme on HLI Policyholders General Considerations

6.1 In reviewing the Scheme, I must consider the implications of the proposed transfer for the security of policyholders’ contractual benefits (that is, the likelihood that contractual benefit entitlements will be met), for the level of benefits payable to policyholders (including the impact of variable charges on such benefits) and for the reasonable expectations of all policyholders in HLI, HLA, ALI and UHL. In particular, I need to consider whether any changes to discretionary charges or entitlements are consistent with policyholders' reasonable expectations. Separate consideration is required for each group of policyholders affected by the Scheme.

6.2 The factors I must consider for each company in assessing the implications of the transfer for the security of policyholder benefits include:

■ The current solvency position.

■ The risk profile of the participant companies.

■ The capital targets as set out in each company’s Risk Management Framework.

■ The expected future solvency position of each company, both before and after the transfer.

6.3 The issues I need to consider in assessing the likely impact on policyholders' reasonable expectations for the transferring policyholders include:

■ Contractual obligations to policyholders.

■ Investment criteria for the corresponding unit-linked and UWP funds in the transferee company.

■ The pricing basis for the new equivalent unit-linked and UWP funds in the transferee company.

■ The level of charges to be deducted from the new equivalent unit-linked and UWP funds in the transferee company.

■ Any changes to the Principles and Practice of Financial Management of the UWP funds in HLI as a result of the Scheme.

■ Any changes, caused by the transfer, to the taxation of policyholder benefits.

■ Application of discretion by HLI.

■ The levels of customer service to policyholders following the transfer.

■ Current strategic plans for HLI.

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6.4 The terms of reference of the role of the Independent Actuary require me to consider whether the Scheme provides sufficient protection for policyholders' interests in the changed circumstances that will apply after the implementation of the Scheme.

6.5 In this section I consider the likely impact of the Scheme on the policyholders of HLI. These are policyholders with policies held in HLI prior to the transfer.

Security of HLI policyholders’ benefits

i) Opening Solvency position

6.6 In order to assist me in forming my judgement regarding the security of policyholder benefits, I have considered the solvency position of HLI, both before and after the proposed transfer.

6.7 Table 6.1 summarises the solvency position HLI before and after the proposed transfer assuming that the effective date of the transfer had been 31 March 2017. The pre-transfer numbers are those prepared on the Adjusted basis as described in Section 5.

Table 6.1 – HLI solvency position pre and post transfer as at 31 March 2017 Pre Transfer (Adjusted Basis) Post

Transfer HLI (Pre) UHL ALI HLA (excl.

value of UHL, ALI, HLI)

Total (Pre) Assets not transferred

HLI (Post)

Assets 241.2 8.0 80.6 138.2 468.0 38.0 430.1

BEL 223.0 2.1 71.9 99.2 396.2 393.7 RM 2.1 0.8 0.4 1.2 4.5 3.7 Other Liabs. 5.7 - 3.3 2.4 11.3 11.3

Total Liabs. 230.8 2.9 75.6 102.7 412.0 408.8

Own Funds 10.5 5.0 5.0 35.5* 56.0 21.2 SCR 7.2 0.8 1.9 11.3** 21.2*** 14.0 Solvency Coverage Ratio

145% 151%

* Excludes net asset values (Own Funds) of HLI (€10.5m), UHL (€5.0m) and ALI (€5.0m) ** Note that this SCR is the SCR that would apply if HLI, UHL and ALI are excluded i.e. consistent with Own Funds figure of 35.5m. ***For presentational purposes the individual company SCR have simply been added together, i.e. diversification is not allowed for.

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6.8 The HLI post-transfer figures are based on the following assumptions:

■ A new MSA between the participant companies and HLSL which satisfies the CBI’s supervisory requirements in respect of outsourcing arrangements, comes into effect on 1 January 2018. It is proposed that this MSA will replace most of the existing administration arrangements.

■ Under the terms of this MSA a per policy fee of €300 per policy (€349 for HLI and €475 for UAL) will be charged by HLSL from 2018 onwards increasing only in line with inflation thereafter. Therefore, the BEL figures shown in the table above assume that this per policy charge will not be increased as the business runs off.

■ The financial projections for HLSL indicate that, based on the proposed level of policy administration fees and business plan projections, HLSL will require additional capital in 2021. The BEL calculation assumes that there will be no increase in in outsourcing charges to HLI beyond inflationary increases (i.e. there is an implicit assumption that HLSL will increase its net income (i.e. fees less any additional expenses) by taking on more new business, additional policies through further acquisitions or from parental support LCCGI).

■ The post-transfer BEL allows for anticipated reduction in costs such as directors’ fees and audit fees as a result of the Scheme.

■ Capital injections of €3.6 million and €1.9 million have been paid into ALI and UHL prior to any transfer respectively as described in paragraphs 5.24 and 5.25 in Section 5.

■ A capital contribution of €11 million made to UHL by its former parent Torchmark will be approved by the CBI to qualify as Tier 1 Solvency II capital.

■ The assets transferred as part of the Scheme include cash, government bonds and some property assets, the Oaktree investments in ALI and UHL but not the Oaktree investment of €21.5 million (as at 31 March) held by HLA.

6.9 The reduction in SCR from €21.2 million in the pre-transfer total above to €14.0 million is due principally to the following:

■ The capital charge associated with HLA’s investment in Oaktree ESL (€21.5 million at 31 March 2017). This contributes to a material spread risk charge in HLA pre-transfer. This asset is not being transferred to HLI resulting in a significant decrease in the credit risk component of the SCR.

■ The total pre-transfer SCR for the 4 entities combined is simply a summation of the SCRs for each entity and thus overstates the aggregate SCR as no allowance has been made for a reduction in SCR due to diversification benefits. (The SCR prescribed standard formula includes various allowances for diversification between each of the sub risk modules which result in a reduction in the SCR versus a simple summation of the results of individual entities).

6.10 Table 6.1 shows that at 31 March 2017, after taking this transaction into account and based on the assumptions described above, HLI continues to have sufficient assets to meet its legislative capital requirements and its targeted capital ratio of 133%. Also, Table 6.1 shows that the Solvency Coverage Ratio in HLI increases from 145% to 151% as a result of the proposed transfer.

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Economic basis

6.11 I have also reviewed the position of HLI post Scheme on the Economic basis (refer to Section 5 paragraphs 5.29 to 5.31). The TPs on the Economic basis reflect the expected fall off in policy numbers and the total expected expenses to fulfil these policies until 2026 after which a per policy expense assumed in the calculation. From 2027 onwards, it is assumed that the projected costs reduce in line with the number of policies. At end 2016 it is projected that less than 25% of policies will remain in-force. This calculation therefore assumes that LCCGI purchases no new books of business that ultimately would be consolidated into HLI.

6.12 On this basis, the TPs would increase by €4 million, which is much less than the current Own Funds. On this basis, HLI has adequate capital to meet its obligations to policyholders even if LCCGI does not purchase additional books of business over which to spread costs.

ii) Risk Profile

6.13 In assessing the impact on risk profile it is necessary to consider the risk profile of each of the participant companies, and in particular the points of difference, in order to understand the additional risks (if any) to which each participant group of policyholders becomes exposed as a result of the Scheme. The key features of each of the participant businesses are described below.

6.14 The SCR is a key consideration when considering risk profile. It is a risk based calculation that takes account of a predefined list of risks to which a life assurance company may be exposed. The component parts of the SCR calculation are defined within the Solvency II Regulations. The SCR consists of market risk, life insurance risk, counterparty default risk and operational risk. The market risk component reflects the exposure of a company to changes in the values of financial market instruments as a result of changes in, inter alia, interest rates, equity markets, credit spreads and exchange rates. The life insurance risk component reflects the exposure to changes in mortality, longevity, expenses and the rate at which policyholders surrender or lapse their policies.

6.15 In considering the risk profiles of the various companies, I have considered the SCR for each participant company, including its component parts, the business profile of each company, its investment strategy and current holdings of shareholder assets. These are described in Section 5 under each participant company.

6.16 HLI’s TPs (on the Adjusted Basis) at 31 March 2017 (pre transfer) are approximately €225 million. Its business consists mostly of unitised business (approximately 51% unit-linked and 49% UWP). It also contains a small amount of Term Assurance business (comprising approximately 0.1% of the TPs).

6.17 It contains various guarantees on its UWP products which are listed in paragraph 3.23 in Section 3. The cost of these guarantees makes up just less than €1 million of HLI’s BEL. HLI has three reinsurance agreements in force. These are described in paragraph 3.13 of Section 3.

6.18 Post Scheme HLI will be a bigger and somewhat more diverse business. The total BEL pre transfer is €223 million and post transfer is €394 million. The vast majority of the increase in BEL is as a result of the addition of unit-linked business from HLA (circa €99 million) and also the unit-linked business from ALI (circa €72 million). There is a small amount of risk business transferred into HLI predominately from UHL. UHL’s BEL (on the Adjusted basis) is approximately €2 million consisting of 246 whole of life, term assurance and accident cover policies.

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6.19 The nature of some of the unit-linked business being transferred from HLA is different to that within HLI pre scheme and also different to that within ALI. In particular, some of the unit-linked HLA business is largely invested in a range of property funds, although there are also a number of policies invested in personalised investment funds. Many of these property investments contained elements of gearing. The gearing within the various property funds amplified the effects of the Irish property market crash. Consequently, many of these geared property funds materially reduced in value, including reaching a zero value, post the property market crash. There is no mortality risk and no investment guarantees in relation to the HLA products.

6.20 Following the decrease in fund values arising from the financial crisis HLA was subject to a number legal actions by policyholders with allegations of mis-representation and conflicts of interest relating to the sales process as well as alleged failures with respect to the operation of the funds. To date 51 sets of legal proceedings have been initiated against HLA or as co-defendant with IBRC (or IBRC’s successor as a lender). None of the cases involving HLA as a defendant has thus far proceeded to a full trial. HLA has not paid any settlement monies to any litigating policyholders in order to have a case discontinued. There are still 7 cases in progress to which HLA has a possible financial exposure. As such HLA remains exposed to litigation risk and therefore upon transfer this risk will transfer to HLI. Litigation risk is not explicitly considered as part of the SCR calculation. However, post Scheme the operational risk capital charge within the SCR increases to €2.5 million from €0.7million. Overall, the SCR increases from €7.2 million pre Scheme to €14 million post Scheme. In addition, HLI post transfer will also hold a capital buffer of over and above the SCR (i.e. it will hold 150% of the SCR immediately after transfer). It is not possible for me to estimate the possible financial impact of this litigation risk. However, based on the information provided to me, in the event of an adverse finding in relation to these litigations there will continue to be sufficient funds within HLI so that the SCR remains covered.

6.21 HLI post transfer continues to rely on its outsourced partner HLSL. The risks associated with this outsourcing arrangement exist whether or not the Scheme proceeds. This risk and the associated mitigating factors are discussed in more detail in paragraphs 6.37 to 6.41 below.

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SCR Comparison

6.22 The SCR of HLI, pre and post transfer is set out below.

Table 6.2 – Comparison of HLI SCRs pre and post transfer SCR Component Pre-Scheme (€m) Post-Scheme (€m) Market Risk


- Property - 0.2

- Equity 2.3 4.3


- Concentration - 0.0

- Currency 1.0 3.0


- Mortality 0.2 0.3

- Expense 1.3 2.9

- Lapse 3.2 3.9



Total Life Insurance Risk 4.0 6.0 Health Insurance Risk 0.0 0.1 Counterparty Default Risk 1.9 3.2

Total Before Diversification 9.1 16.1

Less Diversification (2.5) (4.5) Total Basic SCR 6.5 11.6

Operational Risk 0.7 2.5

Loss absorbing capacity of deferred taxes

- (0.1)

Total SCR 7.2 14.0 Technical Provisions 225.0 397.5 Total Liabilities 230.8 408.8 SCR/Technical Provisions 3.2% 3.5% Own Funds 10.5 21.2 Solvency Coverage Ratio 145% 151%

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6.23 As can be seen from the table above the overall SCR as a % of the TPs pre- and post-transfer is not materially different.

6.24 Most of the SCR components have grown broadly in proportion to the increase in the size of the business with the material exceptions being:

■ Currency risk: This increases mainly due to the exposure to Altraplan as a result of the transfer of the HLA business. Altraplan is an asset of HLA which is not denominated in Euros and as such attracts a capital charge within the SCR under the currency risk module.

■ Expense risk: This increases marginally as a percentage of the total SCR. This principally reflects the higher expense base (relative to the total liability value) of ALI and UHL.

■ Lapse risk: This decreases as a percentage of the SCR. This reflects the impact of diversification benefits in the post Scheme HLI entity e.g. for HLI pre Scheme the main lapse risk is a mass lapse event whereas for HLA pre Scheme the main lapse risk is that there is a decrease in lapses.

■ Operational risk: This figure is directly related to the volumes of business and associated expense base of the company. Therefore, as the operational risk charge materially increases post Scheme to reflect the materially bigger HLI business post Scheme.

6.25 I have also considered risks that may not necessarily be captured by the SCR. Such risks could include legal risk, government bond risk, tax risk, political risk, reputational and strategic risk.

6.26 One such risk relates to litigations that have occurred and are currently still ongoing within HLA relating to various unit-linked geared property funds. LCGGI have assessed the risk associated with these litigations and based on this review and also on experience to date it is satisfied that this risk is minimal and as such the HLA Board has made no changes to the capital policy in respect of this risk. This situation remains unchanged within HLI post Scheme.

6.27 Another such risk is Brexit. HLI has assessed the risk related to Brexit, particularly as it relates to the reinsurance treaties in place with PLL, new business volumes within Utmost and also in relation to adverse currency movements. Policyholders within HLI will be exposed to each of these whether or not the Scheme goes ahead. The size of the risk exposure in relation to adverse currency movements and also the indirect risk impact on HLI (via financial pressure on HLSL) as a result of lower new business volumes in Utmost as a result of Brexit are greater in HLI post Scheme. However, the capital charge within the HLI SCR post Scheme in relation to currency risk and expense risk also increases.

6.28 Pre Scheme, the shareholder assets of HLI consisted mainly of EU Government bonds (€11 million) and cash or near cash assets (€6.7 million) at 31 March. In addition, the shareholder assets in the Adjusted basis included €2m in the Oaktree ESL fund. HLI also held a reinsurance asset of €15.3 million as at end of March 2017. The reinsurance asset was in respect of the reinsurance arrangements described in paragraphs 3.13 of Section 3.

6.29 Post Scheme, the shareholder assets are made up of Government bonds (€14.3 million), cash and near cash equivalents (€8.1 million), Oaktree ESL fund (€4 million), reinsurance asset

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(€15.3 million) and Altraplan (€6.4m). The key difference in the profile of shareholder assets in HLI post Scheme relates to Altraplan.

6.30 Altraplan is a life assurance company authorised in Bermuda (currently a subsidiary of HLA) which will become a subsidiary of HLI post Scheme. This is treated as an equity investment within the post HLI SCR calculation. As such it contributes to the equity risk and the currency risk capital charge within the SCR.

iii) Projected Solvency position

6.31 As described in paragraph 5.10 each company is required by the CBI to set out within its risk management framework what additional capital resources it intends to allocate over and above its SCR in order to provide additional security to policyholder benefits.

6.32 HLI’s capital policy (pre-transfer) is to always maintain sufficient assets to cover at least 133% of its SCR. Furthermore, the Directors adopted a policy such that any dividends paid would not result in HLI having a solvency capital ratio of less than 150%. The capital policy for HLI will not change as a result of the Scheme.

6.33 As shown in Table 6.1, the solvency coverage ratio of HLI pre- and post-transfer is above the target level of 133%. The Scheme proposes to transfer sufficient assets so that post transfer solvency coverage is at least 150%.

6.34 I have also considered the projected solvency position of HLI pre- and post-Scheme. The figures in the table below show the projected solvency position assuming that the Scheme came into effect on 31 March 2017. No dividends are included in either projection.

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Table 6.3 – HLI solvency position pre and post transfer as at 31 March 2017 €m 31/12/2017 31/12/2018 31/12/2019 31/12/2020 31/12/2021 Pre-Scheme Own Funds 10.6 10.7 10.7 10.8 10.8

SCR 6.3 5.3 4.8 4.3 3.9

Solvency Coverage Ratio

170% 200% 225% 252% 280%

Post-Scheme

Own Funds 20.5 20.7 20.8 20.9 20.9

SCR 12.1 9.8 8.8 8.1 7.5

Solvency Coverage Ratio

169% 211% 237% 258% 277%

6.35 The table above shows that the progression of solvency ratios pre- and post-Scheme are not materially different. There is a slight increase in Own Funds in both scenarios as a result of the release of the Risk Margin and returns on shareholder assets mitigated partially by increases in expense provisions to reflect the impact of direct costs being spread over a smaller number of policies as the business runs off.

6.36 Note that based on the capital policy of HLI, it is expected that surplus assets above the 150% coverage ratio will be paid as dividends regardless of whether the Scheme is implemented or not.

6.37 A key dependency within the projected solvency position of HLI post transfer is the reliance on the implementation of the new MSA arrangement from 1 January 2018. This is key in terms of what the expected expense base of the post scheme entity will be. It is therefore a key factor in determining the projected solvency position of HLI post transfer.

6.38 However, there is a risk that HLSL will not be capable of managing the proposed contract with its current financial resources. All participant companies, i.e. both Transferor and Transferee companies, are exposed to this risk whether or not the Scheme is enacted. The proposed terms of the MSA are that each entity within the LCCGI Group (including the open to new business entity Utmost) will be charged €300 per policy per year. In addition, each new business policy sold by Utmost will incur a charge. Assuming that Utmost meets its new business plans over the business projection period and that a €2 million capital injection is paid into HLSL in advance of 1 January 2018 (subject to HLSL’s forecast financial position not having improved by way of HLSL entering any further MSA agreements or similar actions prior to that date) then it is projected that HLSL will have sufficient funds until the end of 2020. If new business volumes were only to be 40% of plan over the projection period then it is projected that by increasing the per policy charge from €300 to €420 per policy then HLSL would have sufficient funds until end 2025.

6.39 This risk is considered in the HLI ORSA whereby the MSA charges are assumed to increase from €300 per policy per year to €420. The HLI ORSA shows that the impact on the projected solvency position of HLI is material with solvency coverage falling from 151% to 118%. However, under this scenario, HLI continues to have sufficient funds to meet its regulatory

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SCR over the projection period (the ORSA shows projections to end 2021). It is worth noting that HLI is exposed to the risks of increasing costs relating to the MSA whether or not the Scheme proceeds. As mentioned above, the size of the exposure increases albeit that the expense risk capital charge as a percentage of the SCR post Scheme only marginally increases.

6.40 There are a number of ways that the risk of HLSL running into financial difficulties over the short to medium term future can be reduced. These include the following:

a. Further acquisitions by LCCGI would increase the book of business that may be serviced by HLSL. To the extent that the additional costs are lower than the additional income from having an additional book of business to service, then the financial position of HLSL would be expected to improve;

b. A step growth in new business volumes being written by Utmost. To the extent that additional costs incurred by HLSL are lower than the additional income, then the financial position of HLSL would be expected to improve;

c. Cost efficiencies through ongoing rationalisation of systems and processes; and d. Financial support by way of future capital injections from its parent.

6.41 LCCGI wrote to the Directors of HLSL on 18 October 2017 to confirm that it planned an additional capital investment into HLSL of €2 million in advance of 1 January 2018 subject to HLSL’s forecast financial position not having improved by way of HLSL entering any further MSA agreements or similar actions prior to that date. In addition, the letter stated that LCCGI remains supportive to provide additional funding to HLSL as and when the need arises. The letter noted that that LCCGI has previously provided a letter of comfort to HLSL for a period of at least 12 months from 6th June 2017 onwards and that barring any unforeseen circumstances, LCCGI would anticipate providing a similar letter of comfort, on an annual basis, to HLSL in advance of HLSL approving its annual financial statements.

6.42 The HLI ORSA report showed the results of a number of stress scenarios. The list of scenarios does not consider every feasible scenario but rather the scenarios considered indicate the sensitivity of the solvency position of the business to the factors considered.

6.43 In addition to the MSA fee stress scenario as described in paragraph 6.39 there were a number of scenarios which resulted in the Solvency Coverage Ratio falling below HLI’s target capital requirement (“TCR”) of 133%. These included:

■ A fall in lapse rates of 33% reduced the Solvency Coverage Ratio to 116%. For some policies their share of the expenses are greater than income generated and so the longer these policies stay in force then there is a greater erosion of own funds.

■ A 10% increase in expenses (both direct costs and fees paid to HLSL) reduced the Solvency Coverage Ratio to 127%.

■ A counterparty default leading to a loss of 10% of cash holdings (both shareholder cash holdings as well as unit-linked cash funds) of €33 million reduced the Solvency Coverage Ratio to 128%. This sensitivity impacts the unit-linked cash funds of HLIs pre transfer business where the company has offered guarantees that the value of the cash fund will not fall. Therefore, the company incurs the costs of default on these funds.

6.44 However, for all scenarios considered the Own Funds exceeds the SCR which is the minimum amount of capital the company is required to hold under Irish insurance legislation. However, in circumstances where some of the scenarios occur simultaneously then the impact of the combined event would be more onerous and depending on the severity of the combined event

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could result in a reduction in solvency coverage below the regulatory minimum required. For example, a combination of an adverse lapse event and an adverse expense event could result in capital coverage falling below the regulatory requirements. Should this occur the current HLI capital policy would require the management to act if, in the absence of such management action, the solvency coverage was not expected to return to above 133% within 6 months of such an occurrence. Furthermore, should this target be breached then the details of the deviation and of planned action to remedy the situation must be communicated to the CBI by the Board no later than five business days following the board becoming aware of the deviation (as per the 2015 Corporate Governance Code for Insurance Undertakings).

6.45 However, all the participant companies are exposed to a combination of risks occurring at the same time whether or not the Scheme proceeds; albeit that the impacts of such events would differ before and after the proposed Scheme given the change in the risk exposure due to the greater size of the business.

6.46 In consolidating the various closed books of business into HLI the structure of LCCGI will be simplified. A simplified group structure would be expected to be more cost efficient and also more capital efficient from a group perspective. This in turn should place LCCGI in a stronger position to support its various businesses, as well as meet its strategic objective of growing its closed book portfolio of companies. This should be positive from the perspective of HLI policyholders.

6.47 Should HLI experience a stress event, a mitigating factor is that the business is in run off and therefore is expected to shrink over time. As the business shrinks over time so does the associated SCR and Risk Margin which in isolation would increase Solvency Coverage and Own Funds.

Summary - Security

6.48 Based on the information provided to me and having considered the various points set out above in relation to the solvency positions, the relative risk profiles, as well as the projected solvency coverage (all pre and post Scheme), it is my opinion that the HLI policyholders are not materially adversely impacted as a result of the proposed Scheme.

Reasonable Expectations of HLI policyholders

6.49 The Scheme does not affect the contractual obligations to the policyholders of HLI.

6.50 The Scheme has no impact on the rights and obligations of HLI policyholders. All policyholders will be entitled to the same rights as were available to them before the Scheme transfer.

i) Funds

6.51 There will be no changes to the unit-linked funds or UWP funds as a result of the proposed Scheme.

6.52 The Scheme does not prevent HLI from establishing, closing, amalgamating Sub Funds; changing the name of Sub Funds or changing the charges where such changes would be in line with the policy terms and conditions. Any such changes would be made by HLI on such terms as recommended by the HoAF having regard to the reasonable benefit expectations of the policyholders and having been approved by the HLI Board.

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6.53 HLI shall continue maintaining the HLI With-Profits Sub-Fund as though the Scheme had not taken place and on the same terms under which it had operated immediately before the Scheme.

6.54 The Scheme sets out the circumstances under which the With-Profits Sub-Fund may be closed. The Scheme also provides that HLI shall only carry out the closure of a With-Profits Fund if the Board has received a certificate from an Independent Actuary to the effect that in the opinion of the Independent Actuary, the With-Profits Fund closure will not have a material adverse effect on the security and benefits of the holders of policies allocated to that HLI With-Profits Sub-Fund. The Scheme requires that HLI will notify policyholders of With-Profits Funds affected by the closure in writing at least 90 days in advance of the closure. I consider these suitable protections to include within the Scheme in relation the possible closure of the With-Profits Fund at some future date.

6.55 In addition, this aspect of the proposed Scheme has been reviewed by the HLI HoAF from the perspective of policyholder reasonable expectations. His conclusion from his review of the policy conditions indicated that closure or merger of the UWP funds would be permissible where this in the interests of policyholders. He further concluded that the Principles of Financial Management would appear to permit closure where necessary.

ii) Reinsurance arrangements

6.56 HLI currently has Reinsurance arrangements in place with PLL for a subset of the With-Profits and Unit-Linked business, and with Gen Re for the Term assurance business.

6.57 These arrangements will be unaffected by the Scheme.

iii) Pricing basis for unit-linked funds

6.58 The Scheme states that there will be no change to the approach to unit pricing as a result of the proposed transfer. There will also be no change to the unit pricing procedures affecting policies belonging to the existing HLI customers as a result of the proposed transfer.

iv) Charges

6.59 The policy terms and conditions documents specify the charges that are levied on the policy throughout its lifetime. At present, some of these charges may be varied at the discretion of the company. It is therefore also necessary for me to consider the effect of the Scheme on such charges both immediately after the transfer and also how these charges may vary in the future.

6.60 The terms and conditions of each product sold by HLI list all the charges that apply to a policy.

6.61 The charges on the HLI policies mainly consist of percentage charges made on the value of the unit funds.

6.62 The contractual terms of HLI policyholders do not change as a result of the Scheme.

v) Service

6.63 On 18 October 2017 the respective Boards of each of the participant companies agreed in principle to the key terms of the new Master Services Agreement between each participant life company and HLSL. The proposed duration of the MSA is 5 years from 1 January 2018 with a

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12 month two way notice period. This new MSA contract, which is expected to be in place by 1 January 2018, in respect of the Transferor companies will transfer to HLI as part of the Scheme.

6.64 As such the Scheme will have no effect on the servicing arrangements for HLI policyholders. Consequently, the policyholders will continue to receive the same standard of service before and after the Scheme.

6.65 A Transitional Services Agreement (“TSA”) exists between HLI and PGMSI, with the policy administration of the HLI book outsourced by PGMSI to DST. The TSA is due to end later in 2017. PGMSI provides a Governance and Oversight role. It is intended that a new contract will be put in place between HLSL (on behalf of HLI) and DST when the existing TSA ends. HLSL will assume the direct oversight role in relation to the outsourced HLI contract with IFDS under the new contract. This arrangement will remain unchanged by the Scheme.

6.66 The underlying servicing operations for HLI will be unaffected, as the same people, processes and platforms will continue to be used for the insurance businesses.

vi) Options

6.67 The Scheme states that all policyholder rights that exist under the policyholder contracts will remain unchanged as a result of the Scheme. As such HLI policyholders are not adversely impacted as a result of the proposed transfer from the perspective of the options available to them on their policies.

vii) Tax

6.68 The Scheme will not alter policies and does not result in the cancelation or the issue of new policies to policyholders. HLI has received tax advice that the Scheme gives rise to no tax impact on policyholders. The tax authorities in Ireland have been notified of the intention to carry out the proposed transfer under the Scheme.

Conclusion

6.69 Subject to the points in paragraph 11.2 of Section 11, based on the information provided to me and the comments I have set out in this section of the report, I consider it reasonable to conclude that, for the HLI pre Scheme policyholders, the proposed transfer does not have a material adverse impact on the security of their benefits, their reasonable benefit expectations or the level of service that they currently receive.

6.70 Furthermore, the Head of Actuarial Function of HLI has prepared a report in relation to this transfer. In that report the HoAF has concluded that:

■ The Scheme will have no material adverse impact on the current and projected security of benefits of HLI policyholders; and

■ The fair treatment and reasonable benefit expectations of the HLI policyholders will not be materially adversely affected by the Scheme; and

■ The Scheme will have no material adverse impact on the servicing arrangements for HLI policyholders.

.

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Section 7: Effects of the Scheme on HLA Policyholders Introduction

7.1 In this Section of this report I consider the likely impact of the Scheme on the HLA policyholders in terms of the impact on security of policyholder benefits and on policyholders’ reasonable expectations.

7.2 As with the other participant companies, the factors I must consider in assessing the implications of the transfer for the security of policyholder benefits include:





7.3 The issues I need to consider in assessing the likely impact on policyholders' reasonable expectations for the transferring policyholders are set out below.

7.4 The terms of reference of the role of the Independent Actuary require me to consider whether the Scheme provide sufficient protection for policyholders' interests in the changed circumstances that will apply after the implementation of the Scheme.

Security of HLA policyholders’ benefits

i) Solvency position

7.5 In order to assist me in forming my judgement regarding the security of policyholder benefits, I have considered the solvency position of HLA before the proposed transfer and that of HLI post transfer.

7.6 Table 7.1 summarises the solvency position of HLA before and after the proposed transfer assuming that the effective date of the transfer had been 31 March 2017. The pre-transfer numbers are those prepared on the Adjusted basis as described in Section 5 and the post HLI position is as described in paragraphs 6.6 to 6.12 in Section 6 of this report.

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Table 7.1 – HLA solvency position pre and HLI post transfer as at 31 March 2017 HLA (Pre) HLI (Post)

Assets 158.7 430.1

BEL 99.2 393.7 RM 1.1 3.7 Other Liabilities. 2.4 11.3

Total Liabilities. 102.7 408.8

Own Funds 56.0 21.2 SCR 15.1 14.0 Solvency Coverage Ratio % of SCR 371% 151%

7.7 The pre-transfer Own Funds figures for HLA above include the value of the subsidiary companies directly involved in the transfer (HLI, ALI and UHL). The value of these on the Adjusted basis at 31 March 2017 was €20.5 million (the value being the Own Funds of these companies on the Adjusted basis at 31 March 2017 as shown in Table 5.5 in Section 5).

7.8 The amount of assets transferring from HLA to HLI as part of the Scheme has been set such that the post transfer Solvency Coverage Ratio of HLI is at least equal to 150%. As a result, approximately €30.5 million of assets will be retained in HLA post transfer. These assets include the investment in the Oaktree ESL fund (€21.5 million as at 31 March 2017) as well as cash (€4.3 million) and bonds (€4.8 million) at 31 March 2017.

7.9 Table 7.1 shows that at 31 March 2017, after taking this transaction into account and based on the assumptions described in Section 6 regarding the Adjusted basis, HLI continues to have sufficient assets to meet its legislative capital requirements and its targeted minimum capital ratio of 133%.

7.10 The capital policy of HLA is to always maintain a Solvency Coverage Ratio of at least 133%. Furthermore, the directors have adopted a policy not to pay dividends which would result in the Solvency Coverage Ratio below 150%. This capital policy in HLI is the same as that in HLA. As a result, the Scheme does not result in any change to capital policy from the perspective of HLA policyholders.

7.11 Pre Scheme HLA is holding capital in excess of its capital policy. Under its capital policy it is reasonable to expect that this excess capital would at some stage be remitted to its parent company in order to reduce the Solvency Coverage Ratio closer to 150%, especially in the context of the Group’s strategic objectives to make further acquisitions. I note that the HLA HoAF states in his report relating to the proposed Scheme that it is his expectation that dividends would be paid to bring the HLA solvency ratio down to 150%, to the extent that it would be consistent with liquidity and other constraints. I have been informed that the removal of HLA’s surplus capital would not require further approval from the CBI but rather would be a decision for the Board.

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iv) Risk Profile

7.12 In assessing the impact on the risk profile of HLA the table below compares the SCR for HLA pre-transfer (with transferring subsidiaries removed) with the HLI post transfer SCR.

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Table 7.2 – Comparison of HLA Individual SCR pre transfer and HLI SCR post transfer as at 31 March 2017 SCR Component HLA Pre-Scheme ”Individual”

view (€m) HLI Post-Scheme (€m)

Market Risk


- Property 0.2 0.2

- Equity 1.7 4.3


- Concentration 0.0 0.0

- Currency 1.7 3.0


- Mortality 0.0 0.3

- Expense 1.0 2.9

- Lapse 3.0 3.9



Total Life Insurance Risk 3.6 6.0 Health Insurance Risk 0.0 0.1 Counterparty Default Risk 1.2 3.2 Total Before Diversification 12.6 16.1

Less Diversification (2.8) (4.5) Total Basic SCR 9.8 11.6

Operational Risk 1.5 2.5

Loss absorbing capacity of deferred taxes

- (0.1)

Total SCR 11.3 14.0 Technical Provisions 100.4 397.5 Total Liabilities 102.7 408.8 SCR/Technical Provisions 11.3% 3.5% Own Funds 35.5 21.2 Solvency Coverage Ratio 314% 151%

7.13 The HLA pre-transfer view includes approximately €31 million of assets which will not transfer to HLI as part of the transfer. These include the investments of €21.5 million in the Oaktree ESL fund which contributes to most of the credit spread component of HLA’s SCR.

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7.14 Post transfer the transferring HLA policyholders will be within a much bigger organisation with a broader range of risks. However, the key risks to which HLA policyholders are currently exposed are broadly similar to the key risks to which they will exposed post transfer. Some of the risk exposures will reduce post transfer, such as the exposure to credit spread risk. Other exposures increase (as measured by the relevant capital charge) post Scheme reflecting the larger business post transfer whilst some of the risks that may be particular to HLA will be part of a broader range of risks within the large post Scheme entity and so may benefit from some diversification benefits.

v) Projected solvency

7.15 As shown in Table 6.1, the solvency coverage ratio of HLI pre- and post-transfer is above the target level of 133%. The Scheme proposes to transfer sufficient assets so that post transfer solvency coverage is at least 150%.

7.16 I have also considered the projected solvency position of HLA pre Scheme and HLI post Scheme. The figures in the table below show the projected solvency position assuming that the Scheme came into effect on 31 March 2017. For simplicity no dividends are included in either projection. However, the Capital Policy of both HLA and HLI post Scheme is such that it is expected that surplus assets above the 150% coverage ratio will be paid as dividends, regardless of whether the Scheme is implemented or not (subject to any liquidity or other constraints that may exist).

€m €m €m €m €m HLA Pre-Scheme 31/12/2017 31/12/2018 31/12/2019 31/12/2020 31/12/2021

Own Funds 55.7 56.9 57.8 58.7 59.6

Solvency Capital Requirement 14.3 13.1 13.0 13.1 13.2

Excess 41.4 43.8 44.8 45.6 46.4

Solvency Coverage Ratio 390% 433% 445% 448% 451%

HLI Post-Scheme

€m €m €m €m €m

Own Funds 20.5 20.7 20.8 20.9 20.9

Solvency Capital Requirement 12.1 9.8 8.8 8.1 7.5

Excess 8.4 10.9 12.1 12.8 13.4

Solvency Coverage Ratio 169% 211% 237% 258% 277%

7.17 The table above shows that the progression of solvency ratios pre- and post-Scheme. There is a slight increase in Own Funds in both scenarios as a result of the release of the Risk Margin and returns on shareholder assets mitigated partially by increases in expense provisions to reflect the impact of direct costs being spread over a smaller number of policies as the business runs off.

7.18 The key dependencies within the projected solvency position are discussed in Section 6. It is worth noting that these key dependencies are common between HLA and HLI (post Scheme).

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Summary - Security

7.19 Based on the information provided to me and having considered the various points set out above in relation to the solvency positions, the relative risk profiles, as well as the projected solvency coverage (all pre and post Scheme), it is my opinion that the HLA transferring policyholders are not materially adversely impacted as a result of the proposed Scheme.

Reasonable Expectations of HLA policyholders

7.20 The Scheme does not affect the contractual obligations to the policyholders of HLA.

7.21 The Scheme has no impact on the rights and obligations of HLA policyholders.

i) Funds

7.22 The Transferring Policies are all unit-linked contracts. The Scheme states that HLI will establish new internal linked funds for the Transferring Policies which will correspond to the current HLA internal linked funds. The Scheme states that the new funds will be subject to the same rules and procedures for the calculation of unit prices and fund-related charges as was the case with the corresponding HLA funds.

7.23 For Transferring Policies with investments in internal managed funds the transferring policyholders will receive an identical number of units of equal value in the new “host” internal linked funds in HLI compared to their position in the corresponding HLA fund.

7.24 Therefore the nature and structure of the underlying asset holdings immediately after the transfer will be unchanged relative to their position immediately prior to the transfer. The value of transferring policyholders’ funds immediately after the transfer takes place will be equal in value to that immediately prior to the transfer taking place. The underlying unit-linked funds and associated assets immediately after the transfer will be the same as those immediately prior to the transfer.

7.25 The investment criteria of the HLA internal linked funds and the fund management arrangements will also transfer to the new “host” internal linked funds in HLI. The external and discretionary fund managers are not parties to the Scheme and consequently the investment criteria of externally managed funds are unaffected by the Scheme.

7.26 Any powers contained within the transferring contracts for funds to be merged, closed or sub-divided will be preserved under the Scheme with such powers being transferred to HLI post transfer.


7.27 There are no reinsurance arrangements in place for HLA.


7.28 The Scheme states that there will be no change to the approach to unit pricing as a result of the proposed transfer. There will also be no change to the unit pricing procedures affecting policies belonging to the existing HLA customers as a result of the proposed transfer.

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iv) Charges


7.30 The terms and conditions of each product sold by HLA list all the charges that apply to a policy. The charges on the HLA policies mainly consist of:

■ Fund management and fund administration charges deducted from each fund on a regular basis.

■ Transaction charges where a fee for service based charging applies.

■ Contribution related charges i.e. a reduction is applied to members’ contributions prior to investment.

7.31 Fixed charges are increased every January be reference to the Consumer Price Index. Within its policy conditions, HLA reserves the right to change the fees or charges levied at any time. Policyholders are notified in advance of changes prior to being implemented.

7.32 As all contractual terms remain unchanged under the Scheme any powers contained within the HLA contracts for changes to be made to charges will be preserved under the Scheme with such powers being transferred to HLI post transfer.

v) Service

7.33 HLA will continue to outsource its oversight requirements in Dublin to HLSL post transfer. The existing MSA between HLA and HLSL will transfer under the Scheme so that it is effectively replaced from HLA to HLI.

7.34 Unit pricing, policy administration services, financial reporting and policy communication services are all provided by HLSL. The Scheme will have no effect on the servicing arrangements for HLA policyholders. Consequently, the policyholders will continue to receive the same standard of service before and after the Scheme.

vi) Options

7.35 The Scheme states that all policyholder rights that exist under the policyholder contracts will remain unchanged as a result of the Scheme. As such HLA policyholders are not adversely impacted as a result of the proposed transfer from the perspective of the options available to them on their policies.

vii) Tax


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Conclusion

7.37 Subject to the points in paragraph 11.2 of Section 11, based on the information provided to me and the comments I have set out in this section of the report, I consider it reasonable to conclude that, for the transferring HLA policyholders, the proposed transfer does not have a material adverse impact on the security of their benefits, their reasonable benefit expectations or the level of service that they currently receive.

7.38 Furthermore, the Head of Actuarial Function of HLA has prepared a report in relation to this transfer. In that report the HoAF has concluded that:

■ The Scheme will have no material adverse impact on the current and projected security of benefits of HLA policyholders; and

■ The fair treatment and reasonable benefit expectations of the HLA policyholders will not be materially adversely affected by the Scheme; and

■ The Scheme will have no material adverse impact on the servicing arrangements for HLA policyholders.

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Section 8: Effects of the Scheme on ALI Policyholders Introduction

8.1 In this Section of this report I consider the likely impact of the Scheme on the ALI policyholders in terms of the impact on security of policyholder benefits and on policyholders’ reasonable expectations.

8.2 As with the other participant companies, the factors I must consider in assessing the implications of the transfer for the security of policyholder benefits include:







Security of ALI policyholders’ benefits


8.5 In order to assist me in forming my judgement regarding the security of policyholder benefits I have considered the solvency position of ALI before the proposed transfer and that of HLI post transfer.

8.6 Table 8.1 summarises the solvency position of ALI before and after the proposed transfer assuming that the effective date of the transfer had been 31 March 2017. The pre-transfer numbers are those prepared on the Adjusted basis as described in Section 5 and the post HLI position is as described in Section 6 of this report (paragraphs 6.6 to 6.12).

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Table 8.1 – ALI solvency position pre and post transfer as at 31 March 2017 ALI HLI (Post)

Assets** 80.6 430.1



Own Funds 5.0 21.2 SCR 1.9 14.0 MCR* 3.7 3.7 Solvency Coverage Ratio % of SCR 263% 151% Solvency Coverage Ratio% of MCR 135% 574% *For ALI the calculated SCR is less than the regulatory minimum capital that ALI must hold which is the MCR and is currently set at the MCR floor of €3.7m ** Assumes capital injection had occurred as at 31 March 2017 so as to return capital coverage to 135% of MCR. The amount of the assumed capital injection was €3.6 million.

8.7 Section 5 of this Report, paragraphs 5.20 to 5.28, provides an overview of the changes that have been made to the assumptions that underlie the solvency coverage numbers submitted to the CBI for the purpose of regulatory reporting as at 31 March 2017. The key change is that the results shown in Table 8.1 above reflect the new Masters Services Agreement related costs in respect of administering the ALI book of business by HLSL. The introduction of the new Master Services Agreement resulted in a material increase in expected future expenses relating to the ALI book of business. As a result of the changes referred to above ALI requires a capital injection of €3.6 million (as at 31 March 2017). The aim of this capital injection is to ensure that the solvency coverage is set at 135% of the MCR (the capital injection is based on the MCR given it exceeds the SCR). The capital injection is due to occur prior to 31 December 2017 and will be based on the September 2017 results. The actual amount of the capital injection will be such that had the capital injection occurred as at 30 September 2017 then solvency coverage would have been 135% of the MCR.

8.8 The table above shows that had the proposed transfer taken place as at 31 March 2017, and each of the items below were in place, then ALI policyholders would be within a company whose solvency coverage exceeded the Solvency II regulatory requirements and also exceeded its current solvency coverage of 135% of the MCR.

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ii) Risk Profile

8.9 ALI has a relatively small block of business with 2,367 policies in force as at 31 March 2017 and funds under management of circa €67 million at the same date. The policies are predominately unit-linked investment policies and a very small number (148 at 31 March 2017) of whole of life non-linked protection policies. Over half of the unit-linked policies are portfolio bonds.

8.10 ALI does not provide any investment guarantees on the unit-linked business albeit there are a small number of funds associated with the PSB product that have some guarantees where such guarantees are provided by the external fund provider and not ALI. Some of the unit-linked products do provide benefits on death in excess of the face value of the policies.

8.11 The key risks to which ALI is exposed are market risks and expense risks. ALI is exposed to market risks in two ways; firstly directly through its holding of shareholder assets and secondly indirectly via the income earned from its unit-linked business. As shareholder assets rise and fall in value with market movements then so does the value of its Own Funds. The company deducts charges from its unit-linked funds under management which are a percentage of the funds under management. As a result, as the value of the unit-linked funds rise and fall with market movements so does the unit-linked income to the company. This will result in either an increase or decrease in Own Funds depending on market movements.

8.12 ALI is also exposed to a range of operational risks, including the risks associated with decoupling the current administration arrangements from OneLife and transferring policies to the HLSL administration platform. The TSA in place with OneLife is due to expire in November 2017 and it is planned that this will be extended to March 2018.

8.13 As the business reduces over time in ALI, the exposure of the company to market risks should reduce, provided a similar investment strategy is followed in respect of the shareholder assets. However, as the business shrinks it is unlikely that the expenses will fall at the same rate as there is a minimum amount of expenses that any company will incur no matter how small the book of business. This implies that overtime expense risk would become the more material risk. The capital buffer in cash terms is only €1.3 million which means that a relatively small adverse movement in any of its risk exposures could result in a material erosion of the capital buffer within the company.

8.14 Post transfer ALI’s policyholders will be part of a much bigger company with a much broader range of risk exposures. However, the predominant nature of the ALI business, i.e. unit-linked, is also the predominant business within HLI post transfer. Post transfer, ALI policyholders will continue to be exposed to various market risks via the shareholder asset holdings as well as via the shareholders exposure to variations in its expected income from unit-linked charges as a result of market movements, albeit greater in scale. They will also be exposed to expense risks and operational risks where the size of those risk exposures are greater driven by the much greater scale of the HLI post transfer relative to the size of ALI. They will also become exposed to more material lapse risk, counterparty risk as well as the litigation risks that accompany the HLA book of business. The transferring ALI policyholders will also be exposed to proportionally bigger equity and currency risks via the HLI holding of Altraplan post transfer.

8.15 However, HLI does have in place a risk management framework to manage and mitigate the various risks within HLI and will be updating this framework in advance of the proposed transfer to reflect the post Scheme risk profile of HLI. In addition, post transfer, the SCR of the combined businesses is materially greater than the SCR of ALI in isolation. This materially increased SCR is reflective of the risks within the bigger combined businesses post Transfer. Furthermore, the HLI capital policy is such that the company states that it will hold sufficient

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capital to cover 133% of the SCR and will not pay a dividend if such dividend would reduce the SCR capital coverage below 150%.

8.16 In moving to the larger entity ALI policyholders do benefit from being able to spread direct expense costs over a much larger book of policyholders which in isolation would be expected to reduce their exposure to expense risk. In addition, the ultimate objective of the Scheme is to simplify LCCGI’s structure. A simplified group structure would be expected to be more cost efficient and also more capital efficient from a group perspective. This in turn places the LCCGI in a stronger position to support its various businesses, as well as meet its strategic objective of growing its closed book portfolio of companies. This should be positive from the perspective of ALI policyholders.

ii) Projected Solvency position

8.17 ALI’s capital policy (pre-transfer) is to maintain sufficient assets to cover at least 135% of its MCR. The Capital policy of HLI post-Scheme will be to maintain sufficient assets to cover at least 133% of its SCR. Furthermore, the Directors adopted a policy such that any dividends paid would not result in HLI having a solvency capital ratio of less than 150%.

8.18 I have reviewed the solvency coverage ratio of ALI pre-transfer and also HLI post-transfer included within the ALI HOAF report in respect of the Scheme. The projections show that in the pre-transfer scenario for ALI the solvency coverage falls to 129% by the end of 2017 and then reduces over time to 127% over the projection period to the end of 2021. This is due to the fact that the MCR of €3.7m does not reduce over time as the business runs off and the fact that there is a release of TPs and risk margin over time that is slightly less than the expected expenses. Should the projected ALI expenses be greater than expected then the coverage level would then start to erode further below the projected levels.

8.19 In the post Scheme scenario the projection showed how, on the assumptions assumed, that the expectation is that the solvency coverage will increase overtime. This is because over time as the business shrinks the SCR will reduce to reflect the falling risk exposures within the company. The SCR reduces as it is currently well in excess of the capital floor of €3.7 million. In addition, as the SCR reduces over time so does the Risk Margin requirement. Under the HLI capital policy any excess capital above the 150% target may be paid out as a dividend.

Summary - Security

8.20 Having considered the various points set out above in relation to the solvency position of ALI and HLI post scheme, the relative risk profiles of ALI and HLI post scheme as well as the projected solvency coverage of both companies, it is my opinion that the ALI policyholders are not materially adversely impacted as a result of the proposed Scheme.

Reasonable Expectations of ALI policyholders

8.21 The Scheme does not affect the contractual obligations to the policyholders of ALI.

8.22 The Scheme has no impact on the rights and obligations of ALI policyholders.

i) Funds

8.23 The majority of the Transferring Policies are all unit-linked contracts. A small number of non-linked whole of life policies remain in the Little Giant Life (“LGL”) product. The Scheme states that HLI will establish new internal linked funds for the Transferring Policies which will correspond to the current ALI internal linked funds. The Scheme states that the new funds will

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be subject to the same rules and procedures for the calculation of unit prices and fund-related charges as was the case with the corresponding ALI funds.

8.24 For Transferring Policies with investments in internal managed funds the transferring policyholders will receive an identical number of units of equal value in the new “host” internal linked funds in HLI compared to their position in the corresponding ALI fund.

8.25 Therefore, the nature and structure of the underlying asset holdings immediately after the transfer will be unchanged relative to their position immediately prior to the transfer. The value of transferring policyholders’ funds immediately after the transfer takes place will be equal in value to that immediately prior to the transfer taking place. The underlying unit-linked funds and associated assets immediately after the transfer will be the same as those immediately prior to the transfer.

8.26 The investment criteria of the ALI internal linked funds and the fund management arrangements will also transfer to the new “host” internal linked funds in HLI. The external and discretionary fund managers are not parties to the Scheme and consequently the investment criteria of externally managed funds are unaffected by the Scheme.

8.27 Any powers contained within the transferring contracts for funds to be merged, closed or sub-divided will be preserved under the Scheme with such powers being transferred to HLI post transfer.


8.28 ALI currently has Reinsurance arrangements in place with Swiss Re for the Combined Life Assurance Company of Europe product and Munich Re covering the Personal Portfolio Bond product. The reinsurance premiums paid in 2016 illustrate that both arrangements are relatively small. These arrangements will be transferred by the Scheme.


8.29 The Scheme states that there will be no change to the approach to unit pricing as a result of the proposed transfer. There will also be no change to the unit pricing procedures affecting policies belonging to the existing ALI customers as a result of the proposed transfer.

iv) Charges


8.31 The terms and conditions of each product sold by ALI list all the charges that apply to a policy.

8.32 As all contractual terms remain unchanged under the Scheme, any powers contained within the ALI contracts for changes to be made to charges will be preserved under the Scheme with such powers being transferred to HLI post transfer.

v) Service

8.33 The oversight of ALI’s business is carried out in Dublin by HLSL and these arrangements will continue post Scheme transfer. The Scheme will have no effect on these arrangements.

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8.34 There is an existing MSA between ALI and HLSL. There is also a TSA in place between ALI and OneLife Company SA (“OLC”) in Luxembourg, which is to be extended until March 2018. By end 2017, it is expected that a new MSA will be in place between HLSL and Utmost Administration Limited (“UAL”) for UAL to provide use of the policy administration system on which some of the ALI policies are hosted. This new MSA with HLSL will replace the MSA with OLC. The Scheme will transfer ALI’s agreement with HLSL so that it is effectively novated from ALI to HLI.

8.35 Unit pricing, policy administration services, financial reporting and policy communication services are all provided by HLSL. The underlying servicing operations for ALI will be unaffected, as the same people, processes and platforms will continue to be used for the insurance businesses. Consequently, the policyholders will continue to receive the same standard of service before and after the Scheme.

vi) Options

8.36 The Scheme states that all policyholder rights that exist under the policyholder contracts will remain unchanged as a result of the Scheme. As such ALI policyholders are not adversely impacted as a result of the proposed transfer from the perspective of the options available to them on their policies.

vii) Tax


Conclusion

8.38 Subject to the points in paragraph 11.2 of Section 11, based on the information provided to me and the comments I have set out in this section of the report, I consider it reasonable to conclude that, for the transferring ALI policyholders, the proposed transfer does not have a material adverse impact on the security of their benefits, their reasonable benefit expectations or the level of service that they currently receive.

8.39 Furthermore, the HoAF of ALI has prepared a report in relation to this transfer. In that report the HoAF has concluded that:

■ The Scheme will have no material adverse impact on the current and projected security of benefits of ALI policyholders; and

■ The fair treatment and reasonable benefit expectations of the ALI policyholders will not be materially adversely affected by the Scheme; and

■ The Scheme will have no material adverse impact on the servicing arrangements for ALI policyholders.

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Section 9: Effects of the Scheme on UHL Policyholders Introduction

9.1 In this Section of this report I consider the likely impact of the Scheme on the UHL policyholders in terms of the impact on security of policyholder benefits and on policyholders’ reasonable expectations.

9.2 As with the other participant companies the factors I must consider in assessing the implications of the transfer for the security of policyholder benefits include:







Security of UHL policyholders’ benefits


9.5 In order to assist me in forming my judgement regarding the security of policyholder benefits I have considered the solvency position of UHL before the proposed transfer and that of HLI post transfer.

9.6 Table 9.1 summarises the solvency position UHL before and after the proposed transfer assuming that the effective date of the transfer had been 31 March 2017. The pre-transfer numbers are those prepared on the Adjusted basis as described in Section 5 and the post HLI position is as described in Section 6 of this report paragraphs 6.6 to 6.12. The Adjusted basis for UHL reflects Solvency II requirements and not its current reporting Solvency I basis.

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Table 9.1 – UHL solvency position pre and HLI post transfer as at 31 March 2017 UHL HLI (Post)

Assets** 8.0 430.1



Own Funds 5.0 21.2 SCR 0.8 14.0 MCR* 3.7 3.7 Solvency Coverage Ratio % of SCR 645% 151% Solvency Coverage Ratio% of MCR 136% 574% *For UHL the calculated SCR is less than the regulatory minimum capital that UHL must hold which is the MCR and is currently set at the MCR floor of €3.7m ** Assumes capital injection had occurred as at 31 March 2017 so as to return capital coverage to 135% of MCR. The amount of the assumed capital injection was €1.9 million.

9.7 Section 5 of this Report, paragraphs 5.20 to 5.28, provides an overview of the changes that have been made to the regulatory reporting in respect of UHL. As a result of those changes, i.e. moving to Solvency II regulatory reporting for the purpose of year end 2017 reporting, UHL requires a capital injection of €1.9 million. The aim of this capital injection is to ensure that the solvency coverage is set at 135% of the MCR (the capital injection is based on the MCR given it exceeds the SCR). The capital injection is due to occur prior to 31 December 2017 and will be based on the September 2017 results. The actual amount of the capital injection will be such that had the capital injection occurred as at 30 September 2017 then solvency coverage would have been 135% of the MCR. The actual amount of Own Funds in excess of the minimum regulatory capital pre Scheme in UHL (post assumed capital injection) as at 31 March 2017 would have been €1.3 million compared to the Own Funds in excess of the SCR in HLI post Scheme as at 31 March 2017 would have been €7.2 million.

9.8 The table above shows that had the proposed transfer taken place as at 31 March 2017, and each of the items below were in place, then UHL policyholders would be within a company whose solvency coverage exceeded the solvency II regulatory requirements and also exceeded its current solvency coverage of 136% of the MCR.

iii) Risk Profile

9.9 UHL is a small block of only 246 protection policies. The policies are a mixture of individual term, whole of life protection and accident insurance policies. Therefore, UHL is principally exposed to adverse claims experience in respect of the business it has written, albeit the SCR below indicates that this risk is not material. In addition, given the very small number of UHL policies still inforce there is a risk that there would be significant random volatility in relation to claims. Such volatility is more readily absorbed in a larger company.

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9.10 Given the nature of the shareholder assets held by UHL the exposure to market risk within UHL is negligible. The most material risk within UHL relates to expense risk. As the business reduces over time it is expected that expense risk could become more material. Given that this business is so small and that the capital buffer in cash terms is only €1.3 million, there is also a risk that a small adverse movement in any of its risk exposures could result in a material erosion of the capital buffer within the company.

9.11 Post Scheme UHL policyholders will be part of a much bigger company with a much broader range of risk exposures. They will be exposed to various market risks via the shareholder asset holdings as well as via the shareholders exposure to variations in its expected income from unit-linked charges as a result of market movements. They will also be exposed to more material expense risks and operational risks driven by the much greater scale of the HLI post transfer relative to the size of UHL. They will also become exposed to more material lapse risk, counterparty risk as well as the litigation risks that accompany the HLA book of business.

9.12 However, while there are a greater variety and size of risk exposures in the HLI post Scheme entity relative to the pre-transfer UHL entity, HLI’s post Scheme SCR (which is HLI’s minimum regulatory capital requirement) of €14.0 million is higher than UHL’s pre Scheme MCR (which is UHL’s minimum regulatory capital requirement) of €3.7 million. Therefore HLI is required to hold significantly more capital than UHL reflecting the greater size and range of risks in the post Scheme HLI entity. It also holds a higher amount of Own Funds (€21.2 million) than UHL pre Scheme (€5.0 million).

9.13 In addition, HLI has in place a risk management framework to manage and mitigate the various risks within HLI and will be updating this framework in advance of the proposed transfer to reflect the post Scheme risk profile of HLI.

9.14 In moving to the larger entity, UHL policyholders do benefit from being able to spread direct costs over a much larger book of policyholders which in isolation would be expected to reduce their exposure to expense risk. In addition, the ultimate objective of the Scheme is to simplify LCCGI’s structure. A simplified group structure would be expected to be more cost efficient and also more capital efficient from a group perspective. This in turn places the LCCG in a stronger position to support its various businesses as well as meet its strategic objective of growing its closed book portfolio of companies. This should be positive from the perspective of UHL policyholders.

iv) Projected Solvency position

9.15 As described in paragraph 5.10 each company is required by the CBI to set out within its risk management framework what additional capital resources it intends to allocate over and above its SCR in order to provide additional security to policyholder benefits.

9.16 When LCCGI purchased UHL it made a commitment to the CBI that it would maintain Own Funds of at least 135% of the MCR. This commitment represents UHL’s current capital policy.

9.17 HLI’s capital policy (pre-transfer) is to always maintain sufficient assets to cover at least 133% of its SCR. Furthermore, the Directors adopted a policy such that any dividends paid would not result in HLI having a solvency capital ratio of less than 150%. The capital policy for HLI will not change as a result of the Scheme.

9.18 I have reviewed the solvency coverage ratio of UHL pre-transfer and also HLI post-transfer included within the UHL HoAF report in respect of the Scheme. The projections show that in the pre-transfer scenario for UHL the solvency coverage is maintained just above 135% over the projection period. This is due to the fact that the MCR of €3.7m does not reduce over time

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as the business runs off and the fact that there is a release of TPs and risk margin over time that broadly equals the expected expenses. Should the projected UHL expenses be greater than expected then the coverage level would then start to erode and fall below the target of 135%.

9.19 In the post Scheme scenario the projection showed how, on the assumptions assumed, that the expectation is that the solvency coverage will increase overtime. This is because over time as the business shrinks the SCR will reduce to reflect the falling risk exposures within the company. In addition, as the SCR reduces over time so does the Risk Margin requirement. Under the HLI capital policy any excess capital above the 150% target may be paid out as a dividend.

Summary - Security

9.20 Having considered the various points set out above in relation to the solvency position of UHL and HLI post scheme, the relative risk profiles of UHL and HLI post scheme as well as the projected solvency coverage of both companies, it is my opinion that the UHL policyholders are not materially adversely impacted as a result of the proposed Scheme.

Reasonable Expectations of UHL policyholders

i) Contractual rights

9.21 The Scheme does not affect the contractual obligations to the policyholders of UHL.

9.22 All policyholders will be entitled to the same rights and obligations with HLI as were available and enforceable to them with UHL.

ii) Funds

9.23 UHL has primarily written individual term, whole life and accident insurance policies. The Scheme provides that all the UHL policies will transfer to HLI and the liabilities in respect of these policies will become liabilities of HLI. There are no unit-linked funds within UHL.

iii) Reinsurance arrangements

9.24 There are no reinsurance arrangements in place for UHL.

iv) Pricing basis for unit-linked funds

9.25 There are no unit-linked funds being held in UHL.

v) Charges


9.27 The terms and conditions of each product sold by UHL list all the charges that apply to a policy and how, if at all those changes may be amended. Current charges will not be changed as a result of the Scheme. All contractual terms are unchanged as a result of the Scheme and

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therefore any changes to charges in future will be subject to the same terms and condition as currently.

vi) Service

9.28 By end 2017, an MSA will be in place between UHL and HLSL. The Scheme will transfer this so that it is effectively replaced from UHL to HLI.

9.29 The underlying servicing operations for UHL will be unaffected, as the same people, processes and platforms will continue to be used for the insurance businesses.

vii) Options

9.30 The Scheme states that all policyholder rights that exist under the policyholder contracts will remain unchanged as a result of the Scheme. As such, UHL policyholders are not adversely impacted as a result of the proposed transfer from the perspective of the options available to them on their policies.

viii) Tax


Conclusion

9.32 Subject to the points in paragraph 11.2 of Section 11, based on the information provided to me and the comments I have set out in this section of the report, I consider it reasonable to conclude that, for the transferring ULH policyholders, the proposed transfer does not have a material adverse impact on the security of their benefits, their reasonable benefit expectations or the level of service that they currently receive.

9.33 Furthermore, the HoAF of UHL has prepared a report in relation to this transfer. In that report the HoAF has concluded that:

■ The Scheme will have no material adverse impact on the current and projected security of benefits of UHL policyholders; and

■ The fair treatment and reasonable benefit expectations of the UHL policyholders will not be materially adversely affected by the Scheme; and

■ The Scheme will have no material adverse impact on the servicing arrangements for UHL policyholders.

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Section 10: Policyholder Communications Policyholder Communication regarding the proposed transfer

10.1 The communication plan is to issue a letter to all policyholders, across the four participant life companies notifying them of the proposed Scheme. The letter will be accompanied by the Policyholder Circular.

10.2 The Policyholder Circular will include a summary of my report. I have reviewed the contents of the communications that will be made available to the transferring policyholders in relation to the proposed Scheme and in my opinion they are satisfactory.

10.3 Relevant documents related to the proposed Scheme will be made available for inspection at the offices of ALI, HLA, HLI, UHL and Matheson, Dublin office. In addition such documents will be available on a dedicated websites and also upon request. Notices will also be placed in various publications as listed in Section 4.

10.4 In my opinion, the proposed communication plan is satisfactory.

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Section 11: Summary and overall conclusions 11.1 In this report I have considered the effects of the proposed transfer on the current

policyholders of ALI, HLA, HLI and UHL.

11.2 My conclusions in paragraph 11.3 below are subject to the following:

■ Drafting and execution of the proposed new MSA between HLSL and each of the participant undertakings on the terms set out in Section 5, paragraph 5.21, of this Report whereby such MSA would come into force from 1 January 2018;

■ That the CBI does not object to the proposed MSA or its terms.

■ Implementation of the planned additional capital investment into HLSL by LCCGI of €2 million in advance of 1 January 2018 subject to HLSL’s forecast financial position not having improved by way of HLSL entering any further MSA agreements or similar actions prior to that date.

■ Implementation of the proposed capital injections from HLA to ALI and UHL so that capital coverage as at 30 September 2017 would have been 135% of the MCR.

■ Given the time period since March 2017 (which is used as the reference point for the assumed Transfer in this Report) and also taking account of the number of adjustments and the materiality of the adjustments made to the Solvency numbers reported in March 2017, my opinion documented in this Report is subject to my review of the 31 December 2017 solvency positions of the participant companies. In particular my opinion is subject to my review of the 31 December 2017 actual solvency positions in respect of HLI, HLA,ALI and UHL and the HLI post transfer position, assuming that the proposed transfer had taken place as at 31 December 2017 and that the review does not negate any of my conclusions in this Report.

■ That the CBI approves the previous capital injections into UHL as Tier 1 capital for Solvency II reporting purposes.

■ That the actual assets to be transferred to HLI are in line with those assumed in drafting this Report.

■ Approval by the CBI of the Class VII authorisation for HLI.

11.3 Subject to 11.2 and based on the information provided to me and the comments I have set out in this section of the report, I consider it reasonable to conclude the following:

■ The proposal provides appropriate protection for the interests of transferring policyholders. I do not consider it necessary to put in place any additional protections in addition to those in the Scheme.

■ There is no material adverse impact on the security of benefits for any group of policyholders as a result of the proposed Scheme; and

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■ No group of policyholders will suffer any reduction in reasonable benefit expectations as a result of the proposed Scheme.

Rosemary Commons FSAI Consulting Actuary Towers Watson (Ireland) Limited 1 December 2017

Towers Watson (Ireland) Limited Elmpark Merrion Road Dublin 4 Ireland

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Appendix A: Reliances and limitations Reliances

1. The purpose of the report is to set out my assessment of the likely effects of the proposed Scheme on the long-term policyholders of HLI, HLA, ALI and UHL and it should not be used for any other purpose or in any other context.

2. In carrying out our review and producing this report I have relied without independent verification upon the accuracy and completeness of the data and information provided to me, both in written and oral form, by HLI, HLA, ALI and UHL. In particular, I have relied upon the accuracy and completeness of the contents of the documents listed in paragraphs 2.3 to 7, including all calculations contained therein. Where possible, I have reviewed the information provided for reasonableness and consistency with my knowledge of the insurance industry.

Limitations

3. This report has been produced for use by the various parties involved with this proposed Transfer which include:

■ The Irish High Court having jurisdiction over the proposed transfer

■ The Directors and the HoAF of HLI

■ The Directors and the HoAF of HLA

■ The Directors and the HoAF of ALI

■ The Directors and the HoAF of UHL

■ Policyholders of HLI, HLA, ALI and UHL

■ The Central Bank of Ireland

■ Professional advisors appointed by any of the above in connection with the proposed transfer

4. No part of this report is to be disclosed to, or relied on, by any third party without the prior written consent of Willis Towers Watson, with the exception of 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.

5. This report must be considered in its entirety as if individual sections are considered in isolation, it may be misleading. Draft versions of this report must not be relied upon by any person for any purpose. No reliance should be placed on any advice not given in writing. If reliance is placed contrary to the guidelines set out above, Willis Towers Watson disclaim any and all liability which may arise.

6. We have not attempted to assess the suitability or quality of HLI's , HLA’s, ALI’s or UHLS’s assets. We have also not investigated, or made allowance for, any claims against HLI, HLA, ALI or UHL other than those made by policyholders under the normal terms of life insurance business. In particular, no account has been taken of liabilities in respect of leases and breaches of legislation, regulatory rules or guidance.

7. Assumptions are made about future experience, including economic and investment experience, tax, expenses, discontinuance rates, mortality, reinsurance and legislation. These assumptions

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have been set by HLI, HLA, ALI and UHL. However, actual future experience is likely to differ from these assumptions, due to random fluctuations, changes in the operating environment and other factors. Such variations in experience could have a significant effect on the results and conclusions of this report. No warranty is given by Willis Towers Watson that the assumptions made in this report will be reflected in actual future experience.

8. Our review is based on the documentation provided by HLI, HLA, ALI and UHL and is from the viewpoint of actuarial advisers. In particular we are not providing you with legal, audit, accountancy or tax advice, which are outside the normal scope of our services. Where, in the course of providing our services, we need to interpret a document, deed, accounts or relevant taxation provision in order to advise you, we do so with the reasonable skill and care to be expected of us in our professional capacity but you acknowledge that we are neither lawyers nor tax advisers nor accountants and accordingly should you want definitive advice for example, as to the proper interpretation of a document, deed, accounts or relevant taxation provision you should consult your lawyers, accountants or tax advisers for that advice.

9. The report does not consider possible financial implications arising from the introduction of new regulatory reporting requirements which may, for example, increase the level of capital support required to sustain the business or constrain the way in which the assets are invested.

10. This report was not specifically intended to, and may not therefore, address the particular needs, concerns or objectives of any individual policyholder.

11. This report was based on data available to Willis Towers Watson on or prior to 1 December 2017, and takes no account of developments after that date. Willis Towers Watson is under no obligation to update or correct inaccuracies which may become apparent in the report.

12. This report is subject to the terms and limitations, including limitation of liability, set out in our Statement of Work document dated 23 June 2017. The total liability of Willis Towers Watson arising out of or in connection with the services provided in contract tort or otherwise (in each case including, but not limited to, negligence) shall be limited to a maximum of €2 million.

13. Willis Towers Watson shall not be liable in contract tort or otherwise for any loss of revenue, business, contracts, anticipated savings or profits or for any other indirect or consequential loss whatsoever.

14. Any limitation of liability shall be construed to the fullest extent permitted by law.

Legal jurisdiction

15. This Report will be governed by and construed in accordance with Irish law and the parties submit to the exclusive jurisdiction of the Irish High Court in connection with all disputes and differences arising out of, under or in connection with this Report. If any part of a provision of this Report is held invalid, illegal or unenforceable then the remainder of such provision shall remain valid and enforceable to the fullest extent permitted by law.

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Appendix B: Definitions Best Estimate Liability (“BEL”): The BEL is the expected value of the present value of future cashflows of a contract including cashflows related to future premium flows, insurance benefit payouts and the expenses of administering the contracts. These cashflows are projected over the contract’s run-off period taking into account all up-to-date financial market and actuarial information.

Risk Margin (“RM”): The RM is the cost of providing an amount of capital equal to the Solvency Capital Requirement necessary to support the insurer’s policyholder obligations over the lifetime of the inforce contracts.

Technical Provisions (“TP”): TP are equal to the sum of the BEL and the RM.

Own Funds: These are the assets held by an insurance company over and above all liabilities including Technical Provisions.

Standard Formula approach to the calculation of the Solvency Capital Requirement (“SCR”): The Standard Formula approach is a standardised calculation method which uses parameters prescribed by European insurance regulators, including the CBI. It is not tailored to the individual risk profile of a specific insurance company and aims to capture the material quantifiable risks that most companies are exposed to including but not limited to underwriting risk, market risk and counterparty default risk. Each company is required by its supervisory authority to perform an assessment of its risk profile in order to ascertain the extent to which its risk profile deviates from the assumptions underlying the Standard Formula SCR calculation. If there is a significant deviation the insurance company is required to consider the possible consequences of such a deviation and how it intends to address these. The SCR figures shown in this report all follow a Standard Formula approach.

Minimum Capital Requirement (MCR): The MCR is defined as a simple factor-based linear formula which is targeted at a Value at Risk measure over one year with 85% confidence. For life insurance business, the formula is based on technical provisions and capital at risk on death or disability, multiplied by specified factors. These factors vary according to whether the business is with-profits, unit-linked or conventional without profits. The MCR has a floor of 25% and a cap of 45% of the SCR. There is an absolute minimum capital requirement of €3.7m for life insurance companies.

Own Risk and Solvency Assessment (“ORSA”): As part of the Solvency II framework companies are required to conduct an ORSA to identify, assess, monitor, manage, and report the short and long term risks a firm faces or may face and to determine the own funds necessary to ensure the overall solvency needs are met at all times. The ORSA is an integral part of the business strategy, taken into account in strategic decisions and is used to help identify and manage risk.

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Appendix C: Glossary ALI - Augura Life Ireland dac

Altraplan - Altraplan Bermuda Limited

ASP LA-6 - Actuarial Standard of Practice LA-6

BEL - Best Estimate Liability

CBI – Central Bank of Ireland

CLACE - Combined Life Assurance Company of Europe

HLA - Harcourt Life Assurance Designated Assurance Company

HLI - Harcourt Life Ireland dac

HLSL - Harcourt Life Services Limited

HoAF - Head of Actuarial Function

IBRC - IBRC Assurance Company

LCCG - Life Company Consolidation Group

LCCGI - LCCG Ireland Limited

LGL - Little Giant Life

MCR - Minimum Capital Requirement

MGF - Minimum Guarantee Fund

MSA - Master Services Agreement

MVR – Market Value Reductions

Oaktree ESL - Oaktree European Senior Loan Fund

OF - Own Funds

OLC – OneLife Company SA

ORSA - Own Risk and Solvency Assessment

PLL – Phoenix Life Limited

PPB - Personal Portfolio Bond

PPFM - Principles and Practices of Financial Management

PSB - Privileged Structure Bond

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RM – Risk Margin

SCR - Solvency Capital Requirement

Solvency I - European Communities (Life Assurance) Framework Regulations 1994

The Act - The Assurance Companies Act 1909

TP - Technical Provisions

TSA - Transitional Services Agreement

UAL - Utmost Administration Limited

UHL - Union Heritage Life Assurance Company dac

Utmost - Utmost Ireland dac

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