Retirement Advantage ISSUED. 10 April 2017

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1 ISSUED 1 April 217

2 Introduction Background AKG's Company Profile& Financial Strength Reports are designed to meet the information needs of advisers in assessing the relative strengths of onshore UK life companies, friendly societies and similar providers. Two different styles of report are published by AKG- FULL reports and SHORT reports. A FULL report is produced for each of the leading provider companies in the market, which participate in the production of the reports. For each remaining provider company which is covered, a SHORT report is produced. This is a FULL report. Each reportcollatesrelevant information fromarangeofsourcessuch as acompany sreturnstothepra,itsreport&accountsand material provided by the companies themselves, and incorporates expert independent assessment. For FULL report companies, the process is augmented by regular meetings and other communications with AKG. PLEASE NOTE: This report should be read in conjunction with the supporting explanatory information which is available on-line at About AKG AKG is an independent organisation. Originally established as an actuarial consultancy AKG has, for over 2 years, specialised in the provision of assessment, ratings, information and market assistance to the financial services industry. As the market hasevolved over thisperiod, the range of entitiesconsidered by AKG has expanded. Consequently AKG has brought additional skill sets into its operations. This has meant the inclusion of accounting, corporate finance, IT and market intelligence experience, alongside actuarial resources, to deliver an expanded professional capability. Today AKG s core purpose is in the provision of financial analysis and review services and in the delivery of key value added financial information to support the wider financial services sector and its customers. Regular Reports AKG publishes the following additional reports to assist Providers and Intermediaries: AKG Offshore Profile & Financial Strength Reports- covering offshore life companies. AKG Platform Profile & Financial Strength Reports- covering platform operators. AKG DFM Profile & Financial Strength Reports- covering discretionary fund managers. AKG UK Life Office With Profits Reports- providing further depth in the assessment of with profits funds. For further details, please contact AKG: Tel: +44() or akg@akg.co.uk AKG Financial Analytics Ltd(AKG) 217 This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issuedreportorsubsequentlyissuedratings(atwhichpoint thenewlyissuedreportorratingsshouldbeused),oruntilakgceasestomakesucha report or ratings available. 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Please contact AKG in this regard or with any questions: akg@akg.co.uk, Tel +44() AKGhasmadeeveryefforttoensuretheaccuracyofthecontentofthisreportandtoensurethattheinformationcontainedisascurrentaspossible at the date of issue, but AKG(inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service. AKG Financial Analytics Ltd 1 April 217

3 Index Main Company Page MGM Advantage Life Ltd 2 General Information Distribution Products Service Investment Annual Review Page Group Overview MGM Advantage Life Ltd (MGMAL), formed in 213 under the ownership of funds managed by TDR Capital LLP (TDR), acquired the new business franchise of Marine and General Mutual Life Assurance Society (the Society), a long established mutual life office. The Society had been through significant change, closing its appointed representative division and rebranding as mgmadvantage and focusing on the retirement market providing annuities through the intermediary channel. Challenges remained, specifically access to capital. Proactive attention ahead of any future crystallisation of these challenges saw the Society instigate a far-reaching review of its future capital requirements (Project ICE) in 211. The result of this was that, in February 213, the Society announced it had reached agreement to sell its new business franchise to funds managed by TDR. The transaction completed in November 213 following authorisation of MGMAL by the Prudential Regulatory Authority. The outcome was the closure of the Society to new business, which went into run off, and the launch of MGMAL under new ownership, trading in the retirement income market under the MGM Advantage brand. The deal also included distribution, actioned in December 214, of a goodwill payment of 9m to eligible members and the full reinsurance of the Society's enhanced annuity business, transferred to MGMAL in November 214, and of the unit funds of the Flexible Income Annuity (FIA). All the with profits business, together with the staff pension scheme, remained with the Society, giving MGMAL a more benign risk profile. In January 214, TDR also acquired Stonehaven UK Ltd, a specialist equity release provider to which the group had previously provided mortgage funding. In May 215 MGM Advantage and Stonehaven came together under a single brand, Retirement Advantage. The Society's business was transferred to Scottish Friendly Assurance Society Ltd (Scottish Friendly) on 1 June 215. TDR was founded in 22 and manages in excess of 5bn on behalf of a range of investors. It had previously invested in the UK life sector through a 5% holding in Phoenix Group, the largest UK consolidator of closed funds, with over 5bn of assets under administration, but which it had completely sold in July 214. Corporate Structure (simplified) TDR Capital II ICE Acquisitions S.à r.l (Luxembourg) [86.72%] MGM Advantage Holdings Ltd MGM Advantage Services Ltd MGM Advantage Life Ltd Stonehaven UK Ltd Ratings Company Overall Financial Strength Ratings With Profits Non Profit Unit Linked Service Supporting Ratings Image & Strategy Annual Review MGM Advantage Life Ltd B AKG Financial Analytics Ltd Page 1 1 April 217

4 MGM Advantage Life Ltd Corporate Data Company Type Ownership Open to New Business? Life Insurer TDR Capital II Yes Year Established 213 Head Office Website 11 Cannon Street London EC4N 6EU Tel: Key Personnel Chairman Sir W Proby Chief Executive C D M Evans Executive Chairman, Equity Release R Sharpe Chief Operating Officer R C Fazzini-Jones Chief Financial Officer J S B Smith Chief Risk Officer I B Farr Managing Director, Equity Release T Evans Sales & Marketing Director A Goodey Chief Actuary K E Marshall Non Executive Director (TDR Capital) B J Magnus Non Executive Director J Cusins Non Executive Director M Fairey Company Background MGM Advantage Life Ltd (MGMAL) was formed in 213 under the ownership of TDR Capital II, a fund managed by TDR to acquire the new business franchise, initially operating under the 'MGM Advantage' brand, from Marine and General Mutual Life Assurance Society. This followed a wide ranging strategic review carried out by the Society, which subsequently closed to new business and has now been taken over by Scottish Friendly. Servicing for MGMAL is carried out by MGM Advantage Services Ltd (MGM Services), a newly formed service companythat isasister companytomgmaland alsoowned by funds managed by TDR. The operating infrastructure, people, IT systems, and premises of the Society transferred to MGM Services at the same time that the new business franchise moved to MGMAL. Administration of the business previously within the Society has now transferred to Scottish Friendly. Since May 215, MGMAL has operated under the Retirement Advantage brand, along with its sister company Stonehaven UK Ltd. Overall Financial Strength B Capital availability was always something of a challenge for the Society, acting as a constraint on new business levels. The change in ownership has resulted in the provision of new capital appropriate for MGMAL's strategy. At outset, MGM Advantage Holdings Ltd(MGMAH- the UK parent company) was capitalised with 95m of new capital. MGMAL was initially capitalised with 79m and the servicing company with 11m of equity. MGMAL saw solvency levels, which reduced slightly in 214, increase in 215. MGMAL also received a capital contribution of 4m on 1 March 216 to support continued new business growth and to enhance its solvency position. Reinsurance Approach MGMAL paid total reinsurance premiums of 77m in 215 [214: 79m] under three treaties, which are all with Hannover Re. Annuities were reinsured to Hannover Re by way of a 5% quota share treaty with a deposit-back arrangement as at 31 December 215. MGMAL renegotiated its reinsurance arrangements with Hannover RE in 215, following a review of the effectiveness of its longevity risk transfer. 75% of the longevity risk on new annuity business written from 1 January 216 is now reinsured. On 1 November 214, the Society's enhanced annuity back-book was transferred to MGMAL. There were nil premiums paid [214:.8m] and reserves reinsured of 416.2m [214: 46.9] in 215 in relation to the reinsurance of this business. 419.m[214: 461.4m] was deposited back For enhanced annuities written directly by MGMAL, there were premiums paid of 76.7m [214: 76.8m] and reserves ceded of 154.9m [214: 89.8m] in m [214: 89.8m] was deposited back. For guaranteed annuities written under The Retirement Account, there were premiums paid of.6m, reserves ceded of.6m and.6m deposited back. MGMAL continues to reinsure 434m [214: 458m] of FIA unit funds, although the related in-force policies have now been transferred from the Society to Scottish Friendly. Analysis of Reserves 's 's 's Gross reserves Reinsurance ceded- external Reinsurance ceded- internal Net mathematical reserves Non Profit Business 1,451,359 49,19 961,34 1,627,663 55,781 1,76,882 1,653, ,678 1,81,877 General The company's non profit business consists of enhanced and guaranteedannuitiesandthefia, whichisnowclosedtonew business. Non Profit Reserves 's 's 's UK Life UK Pensions Overseas Total net NP reserves 51,999 51, ,34 566,34 589, ,541 Non Profit Financial Strength Non profit business is protected by the company's solvency position, the presence of its new parent and the various reinsurance arrangements that are in place. AKG Financial Analytics Ltd Page2 1 April 217

5 MGM Advantage Life Ltd Unit Linked Business Approach The Retirement Account and also the FIA range of funds offered by MGMAL reflects the funds previously offered by the Society. With Profits Business The company does not have any With Profits business, so this section does not apply. The funds consist of two main strands, referred to as Active and Passive, both of which contain risk-profiled funds: Adventurous, Balanced and Cautious as well as Protected Funds, which offer a degree of protection from stockmarket volatility. The passive range invests in a basket of index tracker funds managed by Vanguard and ishares, covering UK and global equities and bonds. Asset allocation is managed on advice from Square Mile Investment Consulting& Research (Square Mile). The active range, which is also selected with advice from Square Mile, provides access to funds managed by AXA Framlington, AXA Investment Managers, Columbia Threadneedle, Henderson, Invesco Perpetual, Investec, Jupiter and Standard Life Investments and which meet the relevant risk classification. There is also a Cash Fund managed by Insight. During 215 the Society transferred the unit fund liabilities of the with profits unitised annuity product to Scottish Friendly (under a Part VII transfer arrangement). MGMAL continues to reinsure-in the transferred unit fund liabilities of the with-profits unitised annuity product of Scottish Friendly of 434m[214: 458m]. With effect from 7 September 216, investment administration of the unit linked funds is carried out by Mobius Life. Linked Reserves 's 's 's UK Life UK Pensions Overseas Total net linked reserves 459, ,342 51,542 51, , ,335 Unit Linked Financial Strength Unit linked business is protected by the company's solvency position and the presence of its new parent. AKG Financial Analytics Ltd Page3 1 April 217

6 MGM Advantage Life Ltd Key Financial Data (for y/e: 31/12/15) Long Term Business Admissible Assets 213 's 214 's 215 's Long Term Business Liabilities & Margins 213 's 214 's 215 's Fixed Interest Equities Property Linked Other Total Assets 71,98 46,26 34,828 1,466, , ,36 33,778 1,667,79 829, , ,25 1,714, was MGMAL's second full year of operation. Assets and liabilities remained very much weighted by business originally written by the Society, be it by reassurance or by a formal transfer together with the original capitalisation. Within'Other' assets are 334.m[214: 268.3m] of equity release assets. LT Capital Resources Core tier one capital Tier one waivers Other tier one capital Tier one deductions Total tier one capital Tier two capital Adjustments and deductions 's 's 's 7,97 7,97 37,28 75,766-1,42 74,364 39,737 11,345-16,359 93,986 43,864-9 Non Linked Non Profit Non Linked With Profits Accum'lg With Profits Linked Surplus c/f Other liabilities Investment Reserves Total Liabilities/Margins 51, ,342 18, ,88 1,466, ,34 51,542 7,73 583,182 1,667, , ,335 32,177 6,292 1,714,346 Non profit liabilities relate, predominantly, to net retained impaired annuities transferred in from the Society. Similarly, the linked liabilities are predominantly FIA funds now reinsured in from Scottish Friendly. This position will change over time as MGMAL grows. The deposit back of reinsurance premiums from Hannover Re of 575.5m [214: 551.2m] is shown under Other liabilities. The company having slightly strengthened its Pillar 1 reserving basis in 213, relaxed it in 214, leading to an improvement of around 21m in the capital position. There was a further reduction in 215, which improved the Pillar 1 basis by around 7m. Changes to the treatment of Equity Release business and assets led to a net increase of around 4m. Total Capital Resources 18, ,11 137,76 CR outside the fund 89,429 16,372 15,583 Capital resources increased by 21% on the back of retained profits, with a significant but reduced proportion of MGMAL's capital resources (77%) [214: 93%] held outside the long term fund. Key Revenue Items INCOME Premiums Investment Income Investment Increase 's 's 's 1,25,341 16,844 15,239 1,732 34,623 31,1-4,529 17,974 1,664 EXPENDITURE LT Free Assets Available Capital Resources 's 's 's 18, ,11 137,76 Commissions Policy claims Expenses 655 5, ,47 71,643 13,61 3,39 75,725 12,53 Capital Resources Req't(CRR) 42,189 47,358 49,34 Transfer to P&L 17, 6, Free Assets(Published) Financial Engineering Free Assets(Exc Fin Eng) LT Free Asset Ratios 65,998 66,743 88,726 65,998 66,743 88, % % % Increase in fund 98,98 14,514 29,442 Therevenueaccountshownin213isforonemonthonlyand is dominated by the reinsurance in from the Society. Premiums reduced by 35% in 215 on the back of lower new business volumes. With claims, all annuity payments, increasing by 6% to 75.7m, there was a reduced net inflow of 29.5m [214: 89.2m]. FAR(Published) FAR(Exc Fin Eng) Expense Ratios LT CRR Coverage Ratios CRRCR(Published) CRRCR(Exc Fin Eng) % % % Solvency coverages increased in 215, remaining above the board's target and reasonable. The Solvency II coverage ratio was 124%. MGMAL has since received a capital contribution of 4m in March 216 to support new business growth and enhance its solvency position. New business (% APE) Renewal(% reg premiums) Renewal(% p.a. of mean fund) Expense ratios are volatile due to the relative infancy of the company and would be expected to settle down over time. Overall costs reduced by 15% in 215. Within this renewal costs increased by 1%, with initial costs reducing by 3%, reflecting reduced new business volumes. AKG Financial Analytics Ltd Page4 1 April 217

7 MGM Advantage Life Ltd New Business Data (for y/e: 31/12/15) Investment Bonds With Profits Unitised WP Unit Linked Endowment With Profits Guaranteed Bonds Unitised WP Unit Linked Single 's Regular 's ISA/tax exempt Annuities Miscellaneous Total Investment Protection Whole Life Term IP Critical Illness Long Term Care With Profits Unitised WP Unit Linked Ordinary Pension Individual New Single Premiums 's 's 's UK Life UK Pensions Overseas Total(Direct + External Reins) Growth Rate 1,488,87 1,488,87 24,857 24, % 181,56 181, % Reins Accepted(Intra-Group) New Regular Premiums 's 's 's UK Life UK Pensions Overseas Total(Direct + External Reins) Growth Rate Reins Accepted(Intra-Group) Miscellaneous Total Protection Pensions Individual CPA Miscellaneous With Profits Unitised WP Unit Linked CPA(Impaired Life) 171,891 Bulk Transfer Annuities 9,165 Total Pensions 181,56 Group Business Pension Life IP Critical Illness Miscellaneous New business premiums in 213 were mainly due to reinsurance accepted from the Society of 1.48bn. This reduced to 12.1m in214and zero in215. In 215, MGMAL wrote 171.9m [214: 173.9m] of enhanced annuities, demand for annuities remaining adversely affected by Pension Freedoms. There were also 9.2m [214: 54.9m] of FIA sales, now closed to new business. In Q4 215, MGMAL reported an 18.% share of the enhanced annuity market. At the same date, it also reported 14.3% of the 'standard' annuity market, having entered this market in June 214, via the introduction of postcode/occupation underwriting. MGMAL states that it is the third largest player in both markets. The Retirement Account sales began slowly in 215 as advisers adapted totheintroductionof PensionFreedoms, but have accelerated in 216. Total Group Business TOTAL DIRECT BUSINESS 181,56 Overseas Direct(incl above) External Reins(excl above) Intra-Group Reins(excl above) Industrial Branch(incl above) AKG Financial Analytics Ltd Page5 1 April 217

8 Distribution Method Retirement Advantage s distribution strategy remains focused on financial advisers operating in the retirement market. Adviser contact is managed using a combination of 22 face-to-face sales and 3 key account representatives in the field, together with specialist technical support and telephony. Telephone Account Managers and a Quote Chasing Team follow up quotations with advisers and hence provide vital support to the new business acquisition work of the business development team. Tele-Underwriting representatives have now been made available to support advisers and clients through the enhanced annuity new business process. Retirement Advantage continues to work on linking and interaction with the key adviser portals in order to enhance quotation levels and associated business efficiencies. The main difference now is that equity release related distribution opportunities are being explored, in addition to annuity business, with financial advisers and portals. Distribution Split Regular Premium % IFAs Other Partnerships/Direct Single Premium % Image and Strategy The main event recently from an image perspective has been therebrandofthebusiness inmay215.mgmadvantageand Stonehaven merged and rebranded to create Retirement Advantage with a move to shared product development and distribution initiatives as a result. The new brand was launched alongside the strapline 'feel better equipped'. The business focuses on supporting clients in retirement through secure income pension products and equity release products, hence being able to work with two of the core asset pools in retirement- pension savings and property equity. This wider brand positioning and initial recognition in the market as to the perception of the business operating in a broader 'at retirement' space is positive. Since the rebrand key strategic developments have included the launch of 'The Retirement Account' in November 215; the transfer of all MGM policies to Scottish Friendly and a move to a new operating model which makes greater use of outsourcing to control cost and enable flexibility and scale growth. The business has good recognition in its chosen, intermediated, market, particularly for its new products. Products/Proposition Overall Product Philosophy Having merged its retirement income and equity release divisions, Retirement Advantage offers a focussed product range aimed at the in-retirement market. The Retirement Account, launched in November 215, is a key part of Retirement Advantage s product response to Pension Freedoms. It combines a Guaranteed Annuity and Pension Drawdown into one account, offering flexibility and choice and helping to manage pension investments and benefits in a tax efficient way. A Protected Index Portfolio Fund, was also launched within The Retirement Account, to deliver volatility control aligned with a basket of index funds Retirement Advantage has persisted with its Enhanced Annuity products but there have been some changes to the proposition in more recent times. Postcode/Occupation rate terms have been offered from June 214 meaning that Retirement Advantage now has an offering in the standard and enhanced annuity market. Effectively all annuities are processed on an underwritten basis. The range of annuity guarantee periods available to clients was extended in April 215, clients can now select any guaranteed period between 1 to 3 years. Valueprotection, up to 1%, was also added as an option to the annuity product meaning that clients have greater death benefit flexibility The Flexible Income Annuity an investment-linked annuity which provides flexibility to change income levels at different stages of retirement, a minimum income guarantee and the potential for income growth is now closed to new business. Three lifetime mortgage options are offered within the Equity Release proposition. Lump Sum - a traditional interest roll-up lifetime mortgage InterestSelect-allowingsome,orall,oftheinteresttobe paid off each month Voluntary Select - allowing the repayment of interest and/or capital. In additiontotheproducts shown below, which are written by MGMAL, equity release products are written by Stonehaven. Products Currently Marketed Pension Products Enhanced CPA Standard CPA Retirement Account (including Drawdown) Product Awards and Benchmarks MGM Advantage was commended in the Best Enhanced Annuity Provider category at the Investment Life & Pensions Moneyfacts Awards 214. Retirement Advantage was named as Pensions Innovator of the Year for its Retirement Account in the Moneywise Pension Awards 216. Retirement Advantage (The Retirement Account) also won the Innovation Award at the Investment Life & Pensions Moneyfacts Awards 216. Various equity release products from Stonehaven achieved 215 Five Star Ratings from Moneyfacts in the Lifetime Mortgages & Home Reversion Schemes category. AKG Financial Analytics Ltd Page6 1 April 217

9 Service Approach Retirement Advantage remains committed to delivering a positive service experience for advisers and clients. A Customer Charter is published on the homepage of the Retirement Advantage website which pledges to work to four key tenets: Simplicity; Straight talking; Keeping promises; Putting things right. Furthermore there is a promise of a 25 no hesitation payment if Retirement Advantage fails to meet a customer s expectation based on these principles. In seeking to deliver this service and operational excellence and aware of its relatively small size in market terms, Retirement Advantage has developed a flexible and scalable outsource model. This sees it retaining key management and intellectual property functions, whilst outsourcing other administrative activities to a number of selected specialist externalfirms. Themovetothismodelwascompletedin216 with key ingredient partners being: Equiniti (for Customer Service, IT, Business Change and HR payroll); Mobius Life (for unit linked investment administration); and McCurrach (for face to face and telephone based sales functions). e-business Portal integration remains a vital requirement for annuity providers in terms of distribution of their products to financial advisers and the company uses its 'hub' approach to facilitate 'plug and play' enhancements. Retirement Advantage has electronic links in place with AMS, IRESS, Assureweb, TOMAS, Hargreaves Lansdown, Annuity Line and Webline for underwritten annuity quotes. Retirement Advantage considers its system infrastructure capability has enabled it to link more quickly and cost effectively with the quotation portals, driving more quotes online and leveraging the online underwriting capability for competitive pricing. Furthermore the capability enabled Retirement Advantage to carry out swift updatestoeach of theportals in relation tothe April 215 pension changes. Service Standards & Awards MGM Advantage achieved a Five Star Rating in the Financial Adviser 213 and 214 Service Awards, with Stonehaven receiving 4 Stars on both occasions. Assessed under the new brand since 215, Retirement Advantage achieved 5 stars for Life & Pensions and 4 stars for Mortgages in 216 [4 and 5 stars respectively in 215]. The company is a Gold status 'Investor in People'. Internal service standards are also very high (including resources such as 99% of quotes being processed within 24 hours). Outsourcing As above the company makes extreme use of outsourcing as part of its business model including the use of Equiniti, Mobius Life and McCurrach along with other professional service providers. The company's Retirement Account product also utilises technology from GBST. Investment Overall Approach Investment management strategy and decision making at Retirement Advantage is driven by two key committees: the Executive Risk & Investment Committee (ERIC) and the Risk & Capital & Investment Committee(RCIC). In October 214 Insight Investment was appointed as the new manager for the corporate bond portfolio, replacing Goldman Sachs Asset Management. Insight manages the Enhanced Annuity Fixed Income Asset through a portfolio of Cash, Gilts and Corporate Bonds (AAA, AA, A and BBB) and the Shareholder Fund, via the Insight Liquidity Funds. The portfolio is well diversified across sectors, nationalities and securities. Retirement Advantage states that the portfolio has been successfully transitioned towards a Solvency II compliant cash flow matching strategy. Retirement Advantage s Retirement Account and Flexible Income Annuity offers a guided panel of active and passive funds for investment. Square Mile has replaced Morningstar and provides Retirement Advantage with a range of services in respect of the Flexible Income Annuity including notification ofanyissuesthatmayimpact ontheperformance of thefunds and provision of a detailed monthly analysis of the performance of the funds with consideration of key market factors and longer-term outlook. Square Mile attends Retirement Advantage s Investment Committee meetings on a quarterly basis to discuss the fund range, provide an update on any relevant changes and to answer specific questions or concerns. Guidance on which funds should be included in the active fund range, when changes might be made and what replacement funds should be considered is also provided by Square Mile, as are recommendations for the asset allocation for Retirement Advantage s range of passive fund portfolios. Funds Under Management MGMAL had funds under management of 1.8bn as at 31 December 215[214: 1.8bn], since increased to 1.9bn as at 3 June 216. Annual Review 215 was a year of change. Merger with Stonehaven saw a rebrand to Retirement Advantage. The Retirement Account was launched in response to the introduction of Pension Freedoms. The Society's business transferred to Scottish Friendly. Against this background, MGMAL's new business volumes fell, albeit in a difficult market. On a positive side, the strongest ever Solvency I position was reported and Retirement Advantage remained highly regarded for service. In its second full year of trading, MGMALreported a pre-tax profit of 43.m [214: 43.9m, including 2.5m of negative goodwill]. No dividend was paid or distribution made [214: nil and 4.5m respectively]. Stonehaven UK Ltd reported a small pre-tax loss of 111k in 215 [214: 85k profit] and paid no dividend [214: nil]. MGMAH reported a pre-tax profit of 43.m[214: 32.7m]. Change continued into 216, with the disposal of the Head Office in Worthing and the continued evolution of its outsourcing model, with new partnerships with Equiniti and Mobius Life. In April 217, Retirement Advantage announced that Craig Fazzini-Jones would replace Chris Evans as Group CEO in May 217. AKG Financial Analytics Ltd Page7 1 April 217

10 Guide to AKG Ratings Financial Strength Ratings- Introduction The aim of AKG s financial strength ratings is to assist advisers and others to assess the relative strengths of individual provider companies. AKG s concept of financial strength starts with the fundamental issue of a company s ability to meet all of its guaranteed payments to policyholders, but extends beyond this by aiming to factor in the degree to which a policyholder s expectations are likely to be met - or even exceeded - in the long-term. For performance-related products, where the eventual return generally depends largely upon a company s success in consistently delivering superior investment performance, and in containing expense charges, a company s ability to meet expectations is likely to be heavily dependent upon whether or not it is able to sustain its operations in the relevant market, and whether or not it can maintain, or improve, its competitive position. As a result, AKG believes that, ideally, the evaluation of financial strength should depend upon the type of product under consideration. A particular company may be judged as very strong in the context of one particular product line, but it may be weaker in another context. An illustration of this concept is a company that currently only markets unit linked business, but which has a very small closed block of with profits business, written many years ago. Such a company may be judged as good for unit linked business, whilst considered poor in respect of with profits business. Since the inception of AKG s Company Profiles and Financial Strength Reports, AKG has consistently promoted and developed the concept of providing financial strength ratings separately for each of the three major product categories - With Profits, Non Profit and Unit Linked. All AKG s financial strength ratings should be used with care, since even the more detailed approach described above represents something of a simplification. To illustrate this point, for example, the 'Non Profit' category covers a multiplicity of different products. It is clear that slightly different criteria should be used for, say, short-term policies with fully guaranteed terms (e.g. Guaranteed Bonds), than for longer-term policies with terms that can be varied at the company's discretion (e.g. Renewable or Reviewable Term). AKG assesses financial strength using consistent methodology and objective measures wherever possible, and based on the detailed analysis of the company s particular strengths and weaknesses. The objectives and criteria for each of the financial strength ratings are summarised below: With Profits Financial Strength Rating The objective is to assess the overall strength of the company s with profits funds. The initial concern is the company's ability to meet its ongoing guaranteed, or promised, commitments, i.e. existing sum assured and bonuses. However, the company's ability to continue to compete successfully in the with profits market is also particularly relevant, given that closed funds are sometimes bad news for policyholders. In such situations, overall expenses tend to increase as a proportion of the fund and investment performance may well deteriorate. These, together with other factors, may make it difficult for companies in such situations to maintain competitive bonus rates at future declarations, although existing declared bonuses are not affected (other than possibly by MVRs). The main criteria taken into account are: capital base and free asset position, with profits realistic balance sheet position, the amount of with profits business in-force, parental strength (and likely attitude towards supporting the company), and image and strategy. Excellent Very good Good Adequate Poor Not rated NOTE: More detailed analysis of with profits companies is included in AKG s UK Life Office With Profits Report. Non Profit Financial Strength Rating The objective is to assess the company's ability to meet all guaranteed payments arising from such contracts as term plans, annuities etc. The main criteria taken into account are: free assets, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), and image and strategy. Excellent Very good Good Adequate Poor Not rated AKG Financial Analytics Ltd 1 April 217

11 Guide to AKG Ratings Unit Linked Financial Strength Rating Whilst this is essentially a non profit line, and the primary objective is to assess the company's ability to meet all guaranteed payments arising, AKG also seeks to take into account the extent to which the company is likely to be able to sustain its unit linked operations, and whether or not it is likely to be able to maintain, or improve, its competitive position. Thus strategic issues are also relevant, because of their bearing on the quality of investment management offered, and because of companies' rights to increase charges etc. The main criteria taken into account are: free assets, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), typical fund performance achievements, and image and strategy. Excellent Very good Good Adequate Poor Not rated Overall Financial Strength Rating The objective is to provide a simple broad-brush indication of the general financial strength of a company. In addition to an assessment of the company s ability to meet all of its guaranteed payments to policyholders, AKG also aims to factor in the degree to which policyholders expectations are likely to be met - or even exceeded - in the long-term. This involves an assessment of a company s ability to survive in its current form for the long term. The overall rating inherently reflects the mix of business in-force within the company, since different types of policyholder have different expectations, and the company s particular strengths and weaknesses in respect of its key product areas. The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of business in-force): capital base and free asset position, with profits realistic balance sheet position, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), typical fund performance achievements, and image and strategy. A B+ B B- C D Superior Very strong Strong Satisfactory Weak Very Weak Supporting Ratings- Introduction Supporting ratings are provided only in full reports, and are assessed at the brand level. AKG assesses three key supporting areas, using consistent methodology and objective measures wherever possible. The aim is to assist advisers and others to consider the relative merits of the brands that they deal with. AKG's objectives and criteria for each of these ratings are summarised below: Service Rating The objective is to assess the quality of the organisation's service to the intermediary market in respect of the brand concerned. Criteria taken into account include: performance in surveys, awards and benchmarking exercises (external and internal), the organisation's philosophy, service charters, the extent of investments designed to improve service, and feedback from intermediaries. Excellent Very good Good Adequate Poor Not rated Image and Strategy Rating The objective is to assess the effectiveness of the means by which the organisation currently positions itself to distribute its products for the brand concerned and the plans it has to maintain and/or develop its position. Criteria taken into account include: overall trends in the company s market share position, brand visibility and reputation, feedback from intermediaries and industry commentators, and AKG s view of the company s general strategy. Excellent Very good Good Adequate Poor Not rated Annual Review Rating This is an end of year view for the last year for which Report and Accounts, returns to the PRA, etc., are available, together with comment on any significant post-balance sheet events. It is an assessment of how the brand has fared against its peers, and how it is perceived externally. Criteria taken into account include: increase/decrease in market shares, expense containment, publicity - good or bad, press or market commentary, regulatory fines, and competitive position. Excellent Very good Good Adequate Poor Not rated AKG Financial Analytics Ltd 1 April 217

12 AKG Financial Analytics Ltd Anderton House, 92 South Street Dorking, Surrey RH4 2EW Tel No: +44() Fax No: +44() AKG is an independent organisation specialising in the provision of assessment, ratings, information and consultancy to the financial services industry AKG Financial Analytics Ltd 217