American Life Insurance Company (CY) LTD L U X A C T U A R I E S & C O N S U L T A N T S B A H R A I N C Y P R U S I N D I A U A E

Transcription

1 L U X A C T U A R I E S & C O N S U L T A N T S B A H R A I N C Y P R U S I N D I A U A E Portfolio Transfer IA Report American Life Insurance Company (CY) LTD 12 June 2015

2 Table of Contents 1 Introduction 1 2 Executive Summary 3 3 Overview of MetLife Europe Limited 7 4 Overview of American Life Insurance Company (CY) Ltd 11 5 Outline of the Transfer 16 6 Financial Impact 18 7 Risk Profile Changes 21 8 Impact Assessment on Policyholders 23 9 Policyholder Communication 27 Appendices Appendix A: Marios Schizas CV i Appendix B: Sources of Data ii Appendix C: Corporate Structure iv

3 1 Introduction 1.1 Purpose of the Report I have prepared this report as an Independent Actuary ( IA ) on the Transfer of American Life Insurance Company (CY) Ltd ( MetLife CY ) portfolio to MetLife Europe Limited ( MEL ) for the purpose agreed under our engagement letter dated 08 January The transfer covers both life and non-life portfolios of MetLife CY. This report has been prepared in accordance with the Cyprus Law on Insurance Services and other related issues, ( Insurance Law ), and the provision of Article 115, Articles for life business, and for non-life business and we understand the reliance that may be placed on it by policyholders and other related parties such as the Cyprus Superintendent of Insurance in understanding the impact of the proposed transfer on the affected policyholders. In compiling this report Lux Actuaries & Consultants Cyprus Ltd ( Lux, we ) have held regular meetings/calls with the management of both MetLife CY and MEL to obtain detailed information around the transfer and understand the impact on policyholder protection and security, along with reasonable expectations both before and after the transfer. 1.2 Reliance & Limitations This report has been prepared particularly for the use of the bodies or persons listed below: The Courts of the Republic of Cyprus The Cyprus Superintendent of Insurance ( Regulator or SoI ) The Central Bank of Ireland ( CBI ) The directors and senior management of MetLife Cy and MEL The policyholders and insured lives of MetLife CY The report must be considered in its entirety, as reading individual sections in isolation could be misleading. In compiling this report several sources of information have been considered which have been received exclusively from the management of MetLife CY and MEL, which are listed in Appendix B. I have placed reliance on the accuracy of all information received and should not be held liable for any conclusions drawn as a result of considering inaccurate data or information. Any tax implications have been taken directly from the tax experts of MEL. No liability will be accepted by Lux, or me, for any application of this Report for the purpose for which it was not intended, nor for the results of any misunderstandings by any user of any aspect of the report. If other persons choose to rely in any way on the contents of this Report then they do so entirely at their own risk. 1.3 Independent Actuary With regards to the definition for Independent Actuary included in the insurance Law I hereby confirm that I am a Fellow of the institute of Actuaries, having qualified in 2004, and an Executive Director of Lux. I am also a Fellow of the Cyprus Association of Actuaries and acting as Appointed Actuary for a number of Life Insurance and Reinsurance companies. I am aware of the fact that my duty to the Court overrides any obligations to those that appointed me in this position and accept this responsibility. The Regulator has approved my appointment as an Independent Actuary for this transfer. MetLife Portfolio Transfer IA Page 1

4 1.4 Independence Lux has performed actuarial review work for MetLife CY between 2010 and This work stream ended in 2012 and since then Lux has not performed any audit or advisory work for either MetLife CY or MEL. I have no insurance policies with either MetLife CY or MEL and neither I nor my immediate family have any financial interest in either of them. 1.5 Peer Review Process Dimitris Dimitriou, an executive director of the Lux team of similar seniority and experience has acted as peer reviewer on this engagement and is responsible for quality assurance. 1.6 Disclosures This report may not be published or made available without my written consent, apart for the parties mentioned in the Reliance & Limitation section and making the report available for inspection by or circulation to policyholders as required by legislation or in order to meet any other specified legal requirements. A summary of this report may not be made and distributed to any party without my written consent. 1.7 Technical Actuarial Standards This report has been prepared in accordance with the relevant UK Technical Standards (TASs) including the Technical Actuarial Standards on Reporting Actuarial Information (TAS R), Modelling (TAS M), Data (TAS D) and the Insurance TAS. Additionally, a specific TAS on Transformations (TAS T) has been adhered to in the production of the report. This report constitutes an aggregate report as defined by the Financial Reporting Council of the UK in its Technical Actuarial Standard on reporting actuarial information, TAS R. A number of data sources have been used, exclusively provided by MetLife CY and MEL, to support the efforts of the Independent Actuary assessment. A full list of the material used in this assessment is provided in Appendix B. To the extent possible, all material matters have been considered in the preparation of this report. Where material uncertainty exists, I have tried to indicate the extent that the existence of such uncertainty may influence the final results. MetLife Portfolio Transfer IA Page 2

5 2 Executive Summary 2.1 Overview This report sets out my findings, considerations and conclusions of my review in relation to the proposed transfer of MetLife CY portfolio to MEL. The main area of my consideration relates to the impact of the proposed transfer on the policyholder and beneficiaries expectations and security of the existing policyholders and beneficiaries of MetLife CY and MEL. Throughout this report any reference to policyholders applies equally to the corresponding beneficiaries and insureds. My review does not take into account any future potential transfers to MEL or any new business written following the date of the proposed transfer. The transfer is expected to be completed on 01 January 2016 when the statutory basis for reporting liabilities will be Solvency II and hence, in my review and findings for forming my opinion, I have concentrated on figures provided under that basis. The table below provides Solvency II figures for MetLife CY and MEL pre and post transfer as at 31 December 2014: Table 2.1 Solvency II Comparisons 31-DEC-14 ALL FIGURES ARE IN M MEL EXCL CY METLIFE CYPRUS METLIFE CYPRUS TO MEL MEL INCL. CY Total Assets Technical Provisions Other Liabilities Total Liabilities Available Assets Solvency Capital Requirement Regulatory Minimum Risk Appetite Target Solvency Ratio 242% 278% 228% 2.2 Key Findings In my review of the information received and from the discussions I had with the management of MEL and MetLife CY, I have noted the following key findings: Only a portion of MetLife CY assets equal to the Total Liabilities as at 31 December 2015 are being transferred to MEL. Total Liabilities refer to the MetLife CY liabilities calculated under Solvency II basis and include the Best-Estimate Liability (BEL), the Risk Margin (RM) and other Solvency II liabilities. As per the Business Transfer Agreement the remaining of the assets which will include the joint venture with Hellenic Bank, will remain at MetLife CY. At the time of writing this report no further information on the particular assets to be transferred has been available - A work stream for defining these is currently in progress and is expected to complete prior to the transfer date. Note that the terms of the Business Transfer Agreement would allow for the transferred assets to further include an amount equivalent to the Transfer Consideration, of a de minimis amount, which I have ignored for the purposes of this report. A large proportion of the in-force portfolio carries reversionary and/or terminal bonus additions this business represents around 70% in terms of MetLife s Solvency I MetLife Portfolio Transfer IA Page 3

6 liabilities. This does not include products that carry only Excess Interest Benefit additions. I refer to this as participating business in the rest of this report to distinguish it from those other products historically reported by MetLife CY as withprofits business as described in section 4.2. These products do not have the usual features of UK with-profit products however there is a significant element of discretion in the determination of bonus rates and hence pay-outs for these policies. The current bonus methodology for participating contracts is complex and is linked to a prospective surplus calculation under a number of scenarios. Additionally, there is an element of discretion within the bonus determination. MetLife CY and MEL have commissioned consultants to propose clarifications in the bonus declaration methodology. The proposed methodology which has been endorsed by both MEL and MetLife CY is a formulaic approach for setting bonus rates based structured in such a way as to be similar to, although not the same as, the Excess Interest Benefit described in Section 4.1. I have been informed by MetLife CY that under the proposed methodology there will be no changes in the terms and conditions of the policies. The parameterisation of this approach has not been finalised at the time of writing this report however I have been informed by MetLife CY that the parameters will be set in a way to: - Preserve the Policyholder Reasonable Expectations (PRE) - Reduce discretion where applicable and hence enhance transparency and ease of communication to policyholders In relation to the participating business reference assets, the management of MetLife CY has provided evidence that there is no requirement for ring-fencing those assets under Solvency II. Allowance however will have to be made for the investment mix of the assets to be used for the determination of the asset earned rate in the determination of reversionary and terminal bonuses to preserve PRE for participating business. At the time of writing this report, the actual assets on which the earned rate will be made under the proposed bonus methodology has not been finalised. The management commissioned a project to define those assets and make sure that they will not materially affect PRE. At the proposed transfer date 01 January 2016 Solvency II will have been implemented by both jurisdictions, by MetLife CY in Cyprus and MEL in Ireland. Based on the transaction design only market value of assets equal to the Total Liabilities of MetLife CY will be transferred to MEL based on the Business Transfer Agreement. It is therefore of significant importance that the transfer does not happen prior to that date. Completion of the transfer prior to that date will potentially create a gap of an estimated 186.6million due to Irish Solvency I being more onerous than Solvency II. This funding gap will have to be considered in case the transfer moves forward, however management confirmed that the transfer will not take place prior to Solvency II implementation. I have reviewed the Solvency II valuation basis used to generate the MetLife CY bestestimate liability and can confirm that assumptions are in line with the latest experience investigations. Some assumptions have been based on out-of-date experience investigations and management confirmed that these will be updated in the last quarter of 2015 prior to the generated final best-estimate liability figures. Updated assumption parameters and relevant backing evidence will be provided closer to the transfer date when up-to-date figures will become available. I am however comfortable that the methodology followed for the derivation of the Solvency II best-estimate liabilities as described in the various documentation received is compliant with the latest EIOPA guidelines issued in respect to that. MetLife Portfolio Transfer IA Page 4

7 2.3 Conditions Prior to Transfer In forming my opinion, I have relied on a number of conditions that should be fulfilled prior to the implementation of the proposed transfer. These are: The Solvency II balance sheet for both MEL and MetLife CY should be updated and based on data and assumptions as at 30 September 2015 and submitted to the Independent Actuary in the fourth quarter of All assumptions used should be backed by experience investigation where applicable or relevant market experience where company experience is not statistically significant. The formulaic approach for defining the bonus determination of all participating policies should be fully defined and parameterised and submitted to the Independent Actuary in the fourth quarter of Testing should be carried-out and presented to demonstrate that the proposed approach meets PRE and is equitable between policyholders. This work stream is currently in progress and is expected to be completed and approved by the MEL Appointed Actuary prior to the transfer date and go through any additional governance required by MEL and MetLife CY. The work stream in relation to the assets transferred to MEL should be completed and the proposal of which should be approved by the relevant bodies prior to the transfer date. Regulatory approval is granted from both the Cypriot and Irish regulators. The Boards of MetLife CY and MEL approve the proposed transfer as outlined in this report. 2.4 Opinion Based on my review of all documentation provided by the management of both MEL and MetLife CY and regular discussions held with key team members of both Companies to understand the impact on policyholders of the proposed transfer, I note the following: Only assets sufficient to cover Total Liabilities of MetLife CY will be transferred to MEL. The expected incremental SCR for MEL to cover risks of the transferred portfolio is 23.7million and this will be covered by excess assets within MEL. Based on an implied target capital requirement of 125% of SCR there is 662million of projected surplus assets within MEL as at 31 December 2016 hence I do not expect that this will have any material impact on MEL s Solvency Position and coverage ratio. MEL is anticipating significant business volumes through its various branches in the future. Any comments and conclusions expressed in this report do not take into account this business plan. This however will enhance the strategic importance of MEL to the overall MetLife Inc. ( MetLife ) restructure and consolidation. Policyholder reasonable expectations and service quality is unlikely to be impacted by the transfer since no changes to existing third party agreements, reinsurance and/or other internal and external operational arrangements are directly linked to the transfer. Given that MEL & MetLife CY share the same ultimate shareholders there is no difference in terms of the route down which equity contributions can potentially be made if and when required. MEL has an A+ rating from S&P which is partly predicated on S&P s view of the strategic importance of MEL to MetLife Inc. while MetLife CY has no rating. MetLife CY s portfolio post-transfer will be part of an entity of higher strategic importance to MetLife hence it is not expected to enjoy less support from the parent company than it currently does. MetLife Portfolio Transfer IA Page 5

8 Having considered the impact of the transfer on policyholders, and assuming that all conditions required prior to the transfer as listed above are met, it is my opinion that the proposed transfer: will not have a material adverse impact on the security of existing MEL s policyholders will not have a material impact on the security of MetLife CY s transferring policyholders will not affect the contractual obligations of with and without profit and unit-linked policyholders will not materially affect the policyholder reasonable expectations of with-profit policyholders will not be materially disadvantageous to any of the with-profit policyholders, groups of policyholders and/or to policyholders as compared with shareholders will not adversely affect the service quality of MEL s and MetLife CY s transferring policyholders MetLife Portfolio Transfer IA Page 6

9 3 Overview of MetLife Europe Limited 3.1 Background MEL was incorporated on 8 February It was authorised by the CBI on 11 July 2006 and began writing long-term insurance business in January The company initially wrote business in the UK and has expanded to write business in numerous jurisdictions throughout Europe. As at 1 April 2015 MEL operates through a branch establishment in the UK, Portugal, Spain, France, Italy, Bulgaria, Czech Republic and Slovakia and on a freedom to provide services basis in several countries throughout Eastern and Western Europe, where is does not have an establishment. MEL was incorporated as a wholly-owned Irish subsidiary of MetLife European Holdings LLC ( MEH ). During 2012 MEL underwent a change of control as part of the integration of American Life Insurance Company ( Alico ) into the MetLife group, and is now majority owned by MetLife EU Holding Company Limited ( MEUHC ) with a minority shareholding held by Alico. A full corporate structure organization chart following all proposed transfers until 01 January 2016 is included in Appendix D, however an abridged version mainly in relation to MetLife CY is shown below for information. As at 1 April 2015 MEL is owned by MEUHC (3,794,999 ordinary shares) and Alico as a minority shareholder (175,023 ordinary shares). MetLife Europe Insurance Limited (MEIL) is currently owned by MEUHC (1,905,001 ordinary shares) and Alico (143,387 ordinary shares). Management s business plan is for MEL to be its life insurance hub writing a diversified range of products across several European territories. As such, MEL is of strategic importance to the overall MetLife restructure and consolidation approach. MetLife Portfolio Transfer IA Page 7

10 3.2 Nature of Business MEL is authorised by the CBI to undertake life assurance business in the following classes: Class I: life assurance and contracts to pay annuities on human life; (Occupational Pension policies are reported under Class I as per Irish Regulations) Class III: life assurance and contracts to pay annuities, linked to investment funds; Class IV: individual and group permanent health insurance. During September 2012 MEL received permission following a Variation of Permissions ( VoP ) process with the CBI to extend its authorization and is now eligible to write the following business: Class VI: capital redemption operations based on actuarial calculations whereby, in return for single or periodic payments agreed in advance, commitments of specified duration and amount are undertaken. This business is written in Italy. Classes 1 and 2: non-life supplementary insurance, in particular insurance against personal injury including incapacity for employment, insurance against death resulting from an accident and insurance against disability resulting from an accident or sickness. Historically MEL s primary focus has been to write predominantly unit-linked business with investment performance guarantees. However, more recently MEL has begun to write non-linked investment and protection business. From late 2010 onwards MetLife commenced a global restructuring project to integrate the Alico businesses with its own existing businesses. In Europe the project also focussed on preparing MetLife s EEA operations for Solvency II. In 2012 MetLife completed its first cross border mergers and portfolio transfers into MEL and where appropriate its non-life sister company MEIL. As of 1 April 2015 the following transfers have been completed portfolio transfers Spain and Portugal 2012 three way cross border merger from an Italian and Irish company into MEL 2013 cross border merger from France to MEL and portfolio transfer to MEIL 2013 UK portfolio transfers to MEL and MEIL 2014 cross border merger from Bulgaria into MEL 2015 cross border mergers from Czech Republic and Slovakia to MEL with portfolio transfers to MEIL. The European Participating Business ( EPB ) includes benefits with participation dependent on investment performance (and for certain Portuguese products, on other items of technical profit). The participation is formulaic rather than discretionary, with a defined bonus calculation and reference investment portfolios of fixed income assets to support the participation. The benefits on these products also offer guaranteed minimum annual increases. A detailed breakdown of the Long-Term Business by country is provided in the tales below: MetLife Portfolio Transfer IA Page 8

11 Table 3.1 MEL Lines of Business (FIGURES AS AT 31/12/2014 IN 000) TERRITORY POLICY COUNT Irish Solvency I Liabilities Regular Annualised Premium Single Premium UK * 212,176 7,124,737 97, ,479 Spain 1,355, ,802 58,099 15,766 Italy 1,285, ,253 37,908 33,356 Portugal 297, ,821 35,214 17,761 France 1,022, , ,839 - Total 4,173,924 8,463, , ,362 *This includes the FOS, ML and MIL business MEL has a range of reinsurance treaties in place both with a number of third parties, with credit rating of A and above, and also with some intra-group counterparties. The key reinsurance treaties currently in place are summarised as follows: Conventional risk transfer treaties on Risk & Projection ( R&P ) business quotashare, individual surplus, catastrophe excess of loss; Multinational captive treaty on R&P business MetLife via MEL acts an intermediary between a multinational client s subsidiary company in Europe and the captive insurer of said multinational client. MEL s role is to act as the direct writer ceding risks into Alico for retrocession to the client captive; Distribution driven treaties on R&P business some of the commercial partners who reinsurance entity, with minimal retention of risk by MEL; and Intra-group reinsurance treaties with MetLife entities for UK unit-linked products with investment guarantees ( VA ), UK fixed term annuities, French term life business, UK group life and lapse swaps on whole of life and endowment contracts in various territories. 3.3 Investment & Capital Management Investment management of MEL s linked policyholder funds is provided by external fund managers. MEL s other assets are managed through an agreement with MetLife Investments Limited. Non-linked assets are managed by MetLife Investments Limited subject to asset-liability matching ( ALM ) guidelines set by the MEL Investment Committee. The non-linked invested assets of portfolios are classed as either interest sensitive or otherwise. Each investment portfolio is then subject to ALM Guidelines, covering asset type, currency, quality, target mix, concentration limits, and duration targets (of particular importance for interest sensitive portfolios). The Board of MEL has set a range of constraints on the target solvency positions to facilitate the risk management of the business. These capital constraints are detailed below: Sufficient capital must be held to ensure the financial implications associated with any crystallisations of risks to which it is exposed can be met in full. Following Solvency II implementation, the target capital will be based in relation to Solvency II ratios. As stated in the MEL Risk Strategy and Appetite documentation, MEL's current target solvency capital ratio is 125% of the Solvency Capital Requirement ('SCR') Dividend Policy Considerations Proposed dividends will be considered by the Board of MEL on a case by case basis, taking into account the expected capital position over a 12 month time horizon and the risks to that capital position, but in any case will not result in the Company going below the target ongoing solvency level. MetLife Portfolio Transfer IA Page 9

12 3.4 Administration & Governance MEL operates using a mixed administration business model with a number of key services being provided by third parties. Whilst several key in-house functions are being supported by outsourced services, significant in-house resources in the areas of Operations, Product Development, IT and Finance, Risk Management and Actuarial are spread across MEL s head office in Dublin and the branch offices spread out through-out Europe. Any outsourced service to key functions is provided by group-internal outsourcers. MEL operates a management framework designed to actively control and facilitate the ongoing management of the risks and opportunities to which it is exposed. The objective of the framework is to ensure that effective risk management is integrated into the business practices and systems at all levels within the business. To ensure this is adhered to, all branch businesses are required to report back to the MEL Chief Risk Officer on at least a weekly basis and to the MEL Executive Risk Committee every month. The results of the branch risk assessments are consolidated by the Risk Function in Dublin. The Board ensures that the risk management and internal controls reflect the risk appetite and that there are adequate arrangements in place to ensure that there is regular reporting to the Board on compliance with the risk appetite. MetLife Portfolio Transfer IA Page 10

13 4 Overview of American Life Insurance Company (CY) Ltd 4.1 Background & History Alico Cyprus was established in 1955 and operated as a branch of the American Life Insurance Company ( Alico US or Alico ) in the Cypriot life insurance market for more than 50 years. After Alico s acquisition by MetLife in November 2010, the Alico Cyprus branch became part of MetLife, and the trademark was changed to MetLife Alico. The Branch s ultimate controlling party is MetLife. MetLife is a global insurance group, US domiciled, founded in 1868 and operating through subsidiaries and affiliates in over 50 countries. After the acquisition of Alico in 2010, MetLife became a global insurance provider servicing around 90 million customers all over the world. The Alico Cyprus branch was part of the Alico acquired business. MetLife has undergone a global restructuring project and as part of this global restructuring project, the insurance portfolio, assets, liabilities and business relationships were transferred from the Branch of American Life Insurance Company to the company MetLife CY in The remainder of this section outlines background information around MetLife CY s structure, business, financial position and operations. MetLife CY currently operates in Cyprus as a subsidiary of Alico US. It is required to satisfy reporting and reserving requirements in line with the local Cypriot insurance regulations. 4.2 Nature of the Business MetLife CY s insurance portfolio includes traditional policies where the policyholder is entitled to participate in the company profits ( with-profit policies) such as whole of life, endowment, deferred annuity products, non-profit individual life products (whole of life, endowment and term assurance products) and rider (supplementary) policies, as well as unit-linked, personal accidents, group annuities, group life and group medical products. The in-force portfolio as at 31 December 2014 included 69,661 individual and group life, and accident and health policies corresponding to 37 million of annual premiums including rider premiums. The following table shows a breakdown of the Branch s statutory reserves gross of reinsurance as at 31 December 2014 including provision in respect of outstanding insurance claims. MetLife Portfolio Transfer IA Page 11

14 Table 4.1 MetLife CY Cypriot SI Statutory Reserve PRODUCT STATUTORY RESERVE GROSS OF REINSURANCE Q million With-profit - Business with reversionary and terminal bonuses With-profit - Deferred annuities with Excess Interest Benefit and terminal bonus 70.8 With-profit - Business with Excess Interest Benefit Only 36.7 Non-profit business 10.0 Riders 1.7 Unit linked 26.8 Individual personal accident 3.1 Group life 2.6 Group Annuities 8.6 Group medical and personal accident 1.8 Group Personal Accident 1.0 Resilience reserve 27.4 Total The with-profit portfolio consists of a mixture of whole of life and endowment (including pure endowment) type products and deferred annuities. This group can be sub-divided into three categories, namely: - endowment/whole of life with reversionary (regular) and terminal bonuses (issued prior to 2001) - deferred annuities with Excess Interest Benefit and terminal bonus (closed to new business in 2002), and - endowment/whole of life/deferred annuity with Excess Interest Benefit only For ease of reference in this report I have labelled the first two as participating business. Participating business makes up the largest part of the life business and a large portion of these policies have relatively high guaranteed rates of return varying for 4.25% to 6.0%. The Excess Interest Benefit is essentially an additional benefit equal to the part of the return earned on the underlying assets backing the portfolio over and above the technical interest rate after allowing for expenses. This is defined in a formulaic way on policy documentation. The level of the announced earned yield rate is determined each year by the Board of MetLife CY based on the investment performance and on the advice of the Appointed Actuary. All declared benefits are guaranteed. The older contracts offer a combination of reversionary and terminal bonuses without a minimum guaranteed amount similar to UK with-profit contracts. Bonuses are expressed as a percentage of the initial sum assured. There is also a block of deferred annuity contracts issued prior to 2002 that have the Interest Benefit and Terminal Bonus features. The methodology applied by the MetLife CY to calculate the amount of these additional benefits tends to be consistent from year to year. The reversionary and terminal bonuses are declared on the entire participating business portfolio, as opposed to on a per product basis. The reversionary bonuses are treated as additional paid up benefits increasing the sum assured of the policy. Once declared, these are guaranteed for the lifetime of the policy. In addition terminal bonuses may also be declared and are payable upon death, surrender after the 10th policy anniversary or maturity. Terminal Bonuses are not included in the surrender value of the Deferred Annuity contracts. MetLife Portfolio Transfer IA Page 12

15 The amount of annual discretionary benefits declared is determined by the Board of MetLife CY based on the advice of the Appointed Actuary following an ALM study that takes into account the projections of assets and liabilities to test the sustainability of bonus rates under specific scenarios, in order to comply with the relevant Delaware regulations. This methodology is approved by the Board of Directors of MetLife CY. The following table outlines the reversionary bonus rates declared since As shown the declared bonus rate reduced materially in past 10 years. Terminal Bonus rate was set at a flat rate of 15% for 2012, and 7.5% for 2013 and Table 4.2 MetLife CY Reversionary Bonus Declared YEAR BONUS RATE 4.00% 3.50% 3.25% 3.00% 2.75% 2.50% 2.50% 2.50% 2.50% 2.00% 2.00% 0.00% 0.00% MetLife CY has a range of reinsurance treaties in place, with a number of both intra-group and third part counterparties. The key reinsurance treaties currently in place are summarized as follows: Conventional risk transfer treaties for the in-force life portfolio individual surplus; Conventional risk transfer treaties for the in-force Permanent Total Disability portfolio quota - share; Conventional risk transfer treaties for the in-force Dread Disease Riders and Group Life business quota- share; 4.3 Investment & Capital Management MetLife CY s assets are grouped into general account and separate account portfolios. The general account portfolios include technical reserves, outstanding insurance claims and free assets and the separate account portfolio includes the assets backing the unit-linked products. Each portfolio has its own investment objective in line with the documented investment policy of MetLife CY constructed and signed-off by the investment committee which includes the country manager. The investments backing the liabilities consist of a mixture of investments such as Cyprus and other EU government bonds, corporate bonds, mutual funds, Cyprus listed shares, property and short term deposits. The investment portfolio includes no derivatives. Investment guidelines are in full compliance with investment orders specified by the regulator. There are currently no ring-fenced funds in the investment portfolio in relation to the with-profit business. The company s management has sponsored a project in relation to the general management of the participating policies in order to enhance transparency and administrative ease of these contracts. MetLife CY has been well capitalized in the recent years. The table below shows a comparison of the company s capitalisation ratio as at 31 December 2013 and the capitalisation ratio as at 31 December Table 4.3 MetLife CY Capitalisation Ratio (Solvency I basis) Q Q Total Assets Total Liabilities Excess capital Required minimum solvency margin (RMSM) Excess of Capital over and above RMSM Capitalisation ratio (excess capital/rmsm) 616% 317% MetLife Portfolio Transfer IA Page 13

16 In terms of capital management, the MetLife CY s strategy consists of targeting a higher level of capital compared to the required solvency capital (200% of the regulatory solvency capital). Given the change in regulatory condition across Europe and the adoption of Solvency II both assets and liabilities will be based on a more realistic basis and the target solvency ratio will be defined at a pan- European level for all subsidiaries throughout all European jurisdictions. The target level of solvency under Solvency II basis is set to 125%. This figure would have probably been the same for the stand alone MetLife CY Company following Solvency II implementation if the proposed transfer was not in executed. 4.4 Administration & Governance Similarly to MEL, MetLife CY administers business internally with some reliance on group internal outsourcers for the key functions within the operation. This is likely to remain largely the same following the implementation of the proposed transfer unless efficiencies will be identified that will require diversion from the existing model. In such cases it is expected that the company will benefit from economies of scale and ultimately this will be reflected on customer support hence it is not expected to compromising existing client servicing and support. MetLife CY operates a management framework which is designed to effectively assist decision making in order to control and assess the risks and opportunities within the business. This ensures that risk management is integrated within all the business processes. MetLife has a number of Executive Committees, which meet on a regular basis to ensure compliance with the management framework. The following table lists the committees including the Board of Directors that are currently in place with their key roles: MetLife Portfolio Transfer IA Page 14

17 Table 4.3 MetLife CY Committees COMMITTEES FOR SII COMPLIANCE Board of Directors Investment Committee Finance and Risk Committee Audit Committee Management Committee FUNCTIONALITY / ROLE CORPORATE GOVERNANCE Oversight of the business on behalf of the shareholders. Adopts key business decisions. Appoints executive directors, adopts business activities changes, structural/organizational changes, divided distributions capital increases etc. Approves key transactions. Presents the financial reports to the shareholder. Strategic direction and regular monitoring of asset allocation Authorize or approve specific investments Optimize investment returns within the limits of the Board approved risk appetite Set the company s annual investment plan Establish, approve and communicate risk appetite and tolerance Review MetLife s risk exposures Review and discuss the results from risk management assessments Oversees the accuracy, completeness and timeliness of accounting and other documents and reports The adequacy of the Company s internal controls Management systems and the methods for risk assessment Oversee the Company s operational and compliance risk management Roll out enterprise risk self-assessment (ERSA) Identify manage emerging risk, legislative and regulatory initiatives, sales practice and ethics and compliance programs. Set policies and parameters related to underwriting, product, insurance and reinsurance risks. It should be noted that there are certain proposed changes in relation to the risk committees in order to meet the risk, audit and compliance reporting requirements of MEL s Executive Risk Committee. Following the proposed transfer, the local committees and management framework will integrate into MEL s risk management framework. The local Risk Officer and other key function holders will undergo specific training to ensure compliance with MEL s risk governance and reporting standards. MetLife Portfolio Transfer IA Page 15

18 5 Outline of the Transfer 5.1 Background The proposed portfolio transfer of MetLife CY forms a step in a wider reorganisation of the MetLife Group s businesses in Europe in preparation for Solvency II, which comes into effect in 2016, arising from which ultimately, MEL will be the principal MetLife Company in Europe authorized to carry on life assurance business and class 1 and 2 non-life business. Also arising from this project, MEIL will be the principal MetLife Company in Europe authorised to carry on non-life insurance business apart from Class 1 and class 2. MetLife has undergone a global restructuring project and as part of this global restructuring project, the insurance portfolio, assets, liabilities and business relationships have been transferred into MEL over the last few years. The intended group restructure of MetLife CY will be to transfer its insurance portfolio, assets, liabilities and business relationships to a Cypriot branch of MEL. Only assets equal to Total Liabilities will be transferred to MEL from MetLife CY. 5.2 Policies Transferred & Associated Liabilities All the insurance liabilities of MetLife CY, including any outstanding liabilities relating to risks that have already crystalised such as pending claims, will transfer to the Cypriot branch of MEL via a court approved legal process. MEL will need to issue 1 share of nominal value of 1 each at a premium, to MetLife Cyprus Hold Co as consideration for the transfer. The premium will be based on the fair value of the receiving business immediately following the transfer determined by a methodology that will be agreed between MEL and MetLife CY. The following table summarises the characteristics of the transferring policies. Table 5.1 MetLife CY in-force portfolio PRODUCT TYPE CYP SI GROSS RESERVES NO. OF CONTRACTS* PREMIUM SIZE ( ) With-profit - Business with reversionary (regular) and terminal bonuses With-profit - Deferred annuities with Excess Interest Benefit and terminal bonus With-profit - Business with Excess Interest Benefit Only Non-profit business Riders Unit linked Individual personal accident Group life Group Medical Group Annuities Group Personal accident Assets Transferred The portfolio transfer assumes to transfer only insurance assets and liabilities of MetLife CY. Under the Business Transfer Agreement (BTA) sufficient assets to cover transferring Total Liabilities will be transferred to MEL. Only assets equal to the Total Liabilities will be transferred to MEL. Following the transfer MetLife CY is expected to pay a dividend in This dividend does not affect the transfer as it will be based on the residual assets of the company following the transfer to MEL. The dividend will be payable to MetLife EU Holding Company Limited (Ireland) ( MEUHC ). The dividend payment is not yet finalised. MetLife Portfolio Transfer IA Page 16

19 5.4 Transfer Costs The costs in relation to the transfer will not be directly or indirectly transferred to policyholders of MEL or MetLife CY. The costs will be borne entirely by the shareholders of both companies. 5.5 Tax Impact of Transfer I have received confirmation form MEL s tax department that the business transferred from MetLife CY to the MEL Cypriot branch will continue to be subject to Cypriot tax as is currently applicable to MetLife Cyprus. The expectation is that emerging profit will not change from being subject to Cyprus tax and that no additional Irish tax will be applicable. In relation to policyholder tax exemption on premiums payable, it is not expected that the treatment of policyholder premium will be subject to change from Cypriot tax authorities. MetLife Portfolio Transfer IA Page 17

20 6 Financial Impact 6.1 Solvency II Comparisons The proposed transfer will be carried-out based on Solvency II compliant calculations. Following the proposed transfer date (01 January 2016), Solvency II will be in full implementation throughout Europe hence all financial impacts have been considered under Solvency II. The following tables summarise the projected Solvency position of MEL pre and post transfer as at proposed transaction date and based on the latest YE2013 ORSA report that has been submitted to the local regulator: Table 6.1 MEL Solvency II Balance Sheet MEL BALANCE SHEET ( M) MEL* + ON- MEL* + ON- MEL* + CZK, + SHORING SHORING, +CZK MEL* HUN WITHOUT + HUN +CYP, + EVOLUTION(1) ROM 31-Dec Dec Dec Dec-16 Assets Liabilities Own Funds (Available Net Assets) Solvency Non Linked 2, , , ,840.8 Linked 6, , , ,374.2 Reinsurance Asset & Other Total Assets 8, , , ,320.8 Technical Provisions 7, , , ,472.3 Corporate Reserves Deferred Tax Liabilities Other (OH Expense Allowance) Total Liabilities 7, , , ,257.4 Opening Own Funds 1, , , ,638.5 Project Evolution Transfer in Net Income in period (after tax) Capital injections / (Dividends) Closing Own Funds 1, , , ,063.4 SCR ,121.2 Solvency ratio 255% 238% 192% 184% Excess / (shortfall) over SCR (1) Evolution refers to the project of restructuring MetLife s businesses in the EU; On-shoring refers to the option of replacing the current reinsurance arrangement with MetLife Reinsurance of Bermuda through an appropriate derivatives programme executed by MEL (2) MEL* above includes the transfer of MetLife Bulgaria which occurred on 31 December 2014 and MetLife Slovakia, which at time of the ORSA production was also expected to transfer on the 31 December The actual transfer of MetLife Slovakia occurred on 1 April 2015 The above table is based on the YE2013 ORSA report hence the figures appearing are projected based on data and assumptions as at YE2013 and assuming all planned transfers to MEL are successfully implemented, including the transfer of MetLife CY to MEL. For this reason the figures for 2014 cannot be matched with the respective figures in table 2.1. It should be noted that the Transfer in relation to Bulgaria, Slovakia and the Czech Republic have already been executed and that even if the transfers for Hungary and Romania are not executed for any reason, the capitalisation of MEL will still be higher than the target limit following the potential transfer of MetLife CY. Proceeding with the on-shoring option referred to above basically changes the MetLife entity where the hedge is held. The better hedged MEL is the less capital it will need to hold. There is operational risk around any hedging programme which MEL is well aware of and which in the first instance will be mitigated by strong controls. MetLife Portfolio Transfer IA Page 18

21 Table 6.2 MetLife CY Projected Solvency II Coverage Ratio M Own Funds SCR Coverage Ratio 350% 392% 446% Similarly to the MEL table, the above figures are based on projections as at YE2013 and therefore the 2014 figures cannot be matched with the respective figures in table 2.1. The projected Solvency II coverage ratio for MetLife CY starts at 350% and escalates to 446% which is materially higher than the projected coverage at MEL level. It should however be noted that although the projected figures take into account new business and the run-off of the capital intensive with-profit business, it does not factor in the dividend that MetLife CY is expected to pay to the MetLife Holding Company post the MEL transfer. Additionally management have confirmed that if MetLife CY were to remain a standalone entity and not form part of MEL, the Solvency position would not have been as in the financial projections presented in the above table. Dividends would be paid out to reduce the coverage to a target most likely similar to MEL's. It is worth noting that even though, post transfer, the coverage ratio is at a lower level as part of MEL (184%), the absolute amount of excess own funds over SCR is much greater in MEL. Additionally, MEL is a much bigger and more secure entity than the stand alone MetLife CY Company, due to the large diversification of risks it enjoys. This would act in favour to policyholder security. 6.2 Valuation Basis In forming my opinion in relation to the proposed transfer I have mainly taken into account figures derived under Solvency II basis as this will be the new regulatory basis in both jurisdictions at and following the transfer date. MEL and MetLife CY management has also provided figures under both Cypriot and Irish Solvency I basis, which I have took into account but not relied on them. Table 6.3 Solvency Impact of MetLife Cyprus to MEL Estimated Solvency Impact - MetLife Cyprus Cypriot Solvency I Cypriot Solvency I transferring to MEL Cypriot Solvency I Remaining Solvency II transferring to MEL all amounts in m 31-Dec Dec-14 Total assets Total liabilities Closing available assets Solvency capital requirement (RMSM / SCR) n/a 43.6 Solvency ratio 317% -255% n/a 0% Minimum solvency margin (100%/150%/100%) n/a 43.6 Target solvency margin (200%/165%/125%) n/a 54.4 Excess / (shortfall) over minimum n/a Excess / (shortfall) over target n/a The above table shows the shortfall of the transferring business of MetLife CY to MEL under Cypriot and Solvency II. The shortfall mainly arises due to the fact that only assets equal to the Solvency II liabilities are being transferred to MEL. Under Irish Solvency I the shortfall is material ( 186.6m) due to the more prudent regulatory requirements and this would have caused issues for MEL as existing capital resources of MEL would be severely depleted, however I do not consider this an issue as management confirmed that the transfer is not going to happen prior to Solvency II implementation. The transfer is expected to happen on 1 January 2016 when Solvency II will be the only regulatory requirement for MEL hence the only relevant shortfall is the one under Solvency II which stands at MetLife Portfolio Transfer IA Page 19

22 54.4 million which can be comfortably covered by the available capital resources of MEL under Solvency II basis without affecting MEL s target Solvency II coverage ratio of 125%. 6.3 Conclusion The proposed transfer of Total Liabilities of MetLife CY to MEL will be based on a Solvency II compliant basis. Assuming that the conditions as listed in the Section 2.3 are fully met I do not expect that the financial impact on MEL from the proposed transfer will be material. Even though the coverage ratio following the proposed transfer will be at a lower level compared to the pre transfer figure for MetLife CY, the absolute amount of excess own funds will be much higher. MetLife Portfolio Transfer IA Page 20

23 7 Risk Profile Changes 7.1 New Risks to MEL MetLife CY is relatively small compared to the overall risk exposure of MEL. As at YE2014 the SCR stated in respect of MEL is EUR493.6m while the corresponding figure for MetLife CY stands at EUR43.6m, i.e. around 7% of the total MEL SCR as shown in table 7.1 below. Given the small size of the Cyprus market compared to the combined MEL markets, the impact is expected to remain low in the foreseeable future. There are however a number of areas which could potentially add additional risk and should be considered and addressed at the MEL level in the short to medium term: Negative GDP growth in 2014 combined with high unemployment rates could materially affect projected new business levels, surrenders and lapses If at any point with-profit fund segregation is considered, it could increase operation costs and risks Impact of bail-out and austerity measures will impact surrenders, lapses and new business levels Additional credit risk due to investments in Cyprus Government Bonds Political risks due to the long-term situation with Turkey as well as the Troika conditions and local market exposure to Greece Lowering of interest rates in Cyprus and the Eurozone 7.2 Risk Profile Comparisons For the purpose of this report we have considered that SCR and its components accurately reflect the risk profile of the MEL and MetLife CY. The basis of these comparisons is taken out of the ORSA report prepared by MEL for YE2013 which also includes the MetLife CY stand-alone solvency capital requirements. The following table summarises the SCR contributors of MEL and MetLife CY as at YE2014: Table 7.1 SCR components (Amounts) All figures are in m MEL excl. Cyprus MetLife Cyprus MEL incl. Cyprus Market risk Counterparty default risk Life underwriting risk Health underwriting risk Non-Life underwriting risk Diversification Benefits Basic Solvency Capital Requirements Operational risk Loss absorbing capacity of deferred taxes (LACDT) Solvency Capital Requirements MetLife Portfolio Transfer IA Page 21

24 Table 7.2 SCR components (Percentages) Percentage of undiversified BSCR for each module as at 31st December 2014 MEL. Excl Cyprus MetLife Cyprus MEL incl. Cyprus Market Risk 39.7% 51.6% 40.1% Health Risk 3.0% 7.5% 3.2% Counterparty Default Risk 7.2% 13.4% 7.9% Insurance Risk 43.1% 25.1% 42.0% Operational Risk 7.1% 2.3% 6.9% Loss Absorbing Capacity of Deferred Taxes (LACDT) 0.0% 0.0% 0.0% The above tables demonstrate that MEL has a more diversified risk basis resulting from a more balanced assets and liability portfolio. MetLife CY s stand-alone SCR is much more heavily geared towards market risk while the after transfer SCR has a more balanced composition in relation to underwriting, market and counterparty default risks. The picture for MEL pre and post MetLife CY transfer is pretty similar as the notional components of MetLife are relatively immaterially causing minor changes to the over composition of MEL risk characteristics. 7.3 Conclusions There will be no material changes in the risk profile as derived from the SCR components of MEL pre and post transfer due to the relatively small size of MetLife CY compared to the pre-transfer balance sheet of MEL. The risk exposure of MetLife CY will change materially following the proposed transfer as derived from the changes in the SCR components of the stand-alone MetLife CY entity and posttransfer MEL. The resulting risk profile appears to be much more diversified and this I believe contributes towards reducing the volatility in the MetLife s balance sheet which enhances policyholder security. MetLife Portfolio Transfer IA Page 22

25 8 Impact Assessment on Policyholders 8.1 Policyholders Affected In my assessment of the impact of the proposed transfer of the MetLife CY portfolio to MEL I have considered all the policyholders of the in-force portfolio of MetLife CY. This includes non-profit and with-profit policyholders. The relative size in terms of in-force portfolio and related risks of the MetLife CY portfolio compared to the existing and prospective business of MEL is not substantial hence any impact on MEL existing and prospective policyholders is unlikely to be material. Prospective benefits (future and outstanding) are clearly defined for both unit-linked and conventional non-profit policyholders hence both pending and future benefits, for this group of policyholders are unlikely to be affected from the proposed transfer. In relation to with-profit policyholders and given the discretionary element in some future benefits, there could potentially be a higher probability of some impact on future discretionary benefits for this group of policyholders. I have received confirmation from management though that the legal terms of the scheme do not differentiate between with-profit and other MetLife CY s policyholders. In my investigations to understand the potential impact I had various discussions and received numerous documents around the mechanics and the process of bonus declarations. The management of MEL sponsored a project the scope of which is to investigate the management of the participating policies and propose a more transparent, with less discretion methodology for the bonus declaration going forward. The first phase of the project is complete, under which a proposed formula driven methodology has been adopted by the management. Phase two of the project is now under way with the main scope to define and parameterise the formula to ensure that policyholders continue to be equitably treated, policyholder reasonable expectations are met and no policyholders are materially disadvantaged compared to the existing bonus methodology. It should however be noted that the full process to be followed and in particular the assets to be under consideration for future declarations is key in forming an opinion as to the fair treatment of the participating policyholders, which will be formalised following the completion of phase two. Management has indicated that there is no plan to communicate the change in bonus methodology to policyholders. Management has indicated that there will be no change in the terms and conditions of all existing policies following the transfer hence all contractual rights of existing policyholders will remain unchanged. I have reviewed the terms of the draft legal transfer document and I consider that the interests of the policyholder are appropriately protected. In particular in relation to with-profit policyholders, any reasonable expectations of this group of policyholders are not expected to be affected following the transfer as a result of the transfer itself. The results of phase two of the participating business project and subsequent implementation of the recommendations/improvements suggested will enhance clarity, security and fairness of future bonus declarations. This is not a direct consequence of the transfer but a result of a work stream that was going to be implemented irrespective of the proposed transfer. The transfer itself however could have potentially magnified any issues that could have resulted from the lack of ring-fencing of the with-profit reference assets. This is expected to be rectified following the completion of phase two of the participating business project. Under Solvency II requirements the Company is not obliged to formally ring-fence the reference assets of the with-profit policies with the MetLife CY s characteristics as benefits under these contracts are not defined in the same manner as the UK with-profit funds and the element of the withprofit fund Estate does not exist. There will continue to be a regular internal hypothecation of assets to the with-profits business in order to determine the corresponding investment returns, and hence facilitate the relevant bonus declarations. 8.2 Security of Benefits A key consideration in determining the appropriateness of any such transfer is whether the security of any group of policyholder benefits is affected following approval of the proposed transfer. Policyholder security could be adversely affected by the transfer if benefits post transfer become less secure as a direct consequence of the transfer itself. However I have not carried out a quantitative assessment of whether the security is affected based on any one specific quantifiable measure as it is not possible to MetLife Portfolio Transfer IA Page 23

26 quantify all the aspects of policyholder security. Instead I have applied reasoned judgment based on the interplay of factors involved to consider whether policyholders should be any more concerned for the security of their benefits after the transfer. The main factors taken into consideration were: Best-estimate liabilities and respective assets to be transferred and any changes in the methodology and assumptions used for their valuation under MetLife CY compared to MEL The target solvency coverage under Solvency II and any potential difference between MetLife CY and MEL The Total Liabilities and respective assets as at Q will be transferred from MetLife CY to MEL at the proposed transfer date. These figures will not be available until after December 2015 hence any conclusions have been drawn on the Total Liabilities information of the latest ORSA report which is Q The transfer will initially be based on the Q Total Liability figure; however a final run will be done based on Q data to determine the value of assets to be transferred over to MEL. MetLife CY have shared their detailed Solvency II model validation approach with me and I feel that this will provide a comprehensive and appropriate validation of the valuation of Total Liabilities and respective assets using methodology and assumptions in line with the appropriate regulation and guidelines. Table 8.1 Solvency II Transfer Impact to MEL (Based on YE2014 Figures) YEAR 2014 ALL FIGURES ARE IN M MEL EXCL. CYPRUS METLIFE CYPRUS METLIFE CYPRUS TO MEL MEL INCL. CYPRUS Investments (excluding unit-linked) 2, ,231.3 Investments (unit-linked, including variable annuities) 6, ,661.7 Other non-invested assets Deferred Tax Assets Reinsurance Assets Total Assets 9, ,636.0 BEL 7, ,689.1 Risk Margin Technical Provisions 7, ,838.8 Other Liabilities Subordinated Debt Liabilities Deferred Tax Liabilities Total Liabilities 8, ,441.2 Available Assets 1, ,194.9 Recognition of Subordinated Debt as Eligible Assets Net Deferred Tax Asset Limitation Eligible Assets 1, ,194.9 Solvency Capital Requirement Regulatory Minimum Risk Appetite Target Solvency Ratio 242.1% 277.6% 0.0% 228.5% MetLife Portfolio Transfer IA Page 24

27 Only assets equal to Total Liabilities will be transferred to MEL in relation to MetLife CY business hence the SCR calculation at MetLife level is not relevant to the transfer. The solvency level of MEL after transfer will be covered from existing resources at MEL level without support from the existing Own Funds of MetLife CY. The target Solvency Ratio of MEL is 125% which would have most likely been the target ratio of MetLife CY assuming the proposed transfer was not put forward. I understand that the projected solvency coverage ratio for MetLife CY in 2016 would have been materially higher than the corresponding coverage ratio of MEL following the proposed transfer as shown Table 6.2. However, the projected solvency coverage ratio for MetLife CY is more theoretical as it ignores the intended transfer through a dividend form to the parent company which will materially reduce the projected solvency coverage ratio of MetLife CY to levels closer to the target solvency coverage ratio defined at group level (125% of SCR). In addition to that, the amount of free capital on top of the regulatory requirement at MEL level is materially higher and the risks are more diversified at multiple levels which potentially reduces insolvency risk, warranting higher policyholder benefit security. I therefore believe that MetLife CY existing policyholders are not materially disadvantaged from the lower projected Solvency II coverage ratio at MEL following the proposed transfer. 8.3 Policyholder Reasonable Expectations Policyholders tend to form expectations of benefits that will be received in the future. Part of these expectations relate to the actual receipt of benefits upon claim and part relate to the actual amounts to be received, especially for policies where the insurance provider s discretion is involved e.g. in withprofit policies. Policyholder expectations can be formed from the very outset of a policy based on the initial policyholder documentation and communication. However, significant expectations can be formed during the life time of with-profit policy based on the company practice of regular bonus declarations and/or interest rate additions. For non-profit policies where the benefit is normally largely fixed from the outset of the policy, the policyholder expectations relate to a known benefit. For with-profit policies however the final benefit is not fixed from the outset of the policy, and the with-profit policyholders form bonus expectations for the future which are based on the past company practice of declaring bonuses. Management indicated that the methodology and procedure of the bonus declarations and the general management of the participating policies will not be altered as a direct result of the transfer (i.e. the participating business review currently underway would have been required even in the absence of the transfer). Future bonus rates will be declared based on similar principles as prior to the transfer. The formulaic approach to be introduced will be parameterised in such a way so that no group of participating policyholders will be materially disadvantaged hence reasonable expectations are not expected to change as a result of the transfer. For linked policies the main expectations of the future benefits are based on the underlying fund management and fees this incurs, the investment policies, the unit pricing methodology and the management fees charged by MetLife CY. My understanding from discussions with the management is that none of these factors will change as a result of the proposed transfer. MetLife CY s portfolio will be part of a much larger operation with significantly higher significance to the Group compared to the stand alone Cyprus operation. This development will increase capital fungibility if required and will receive higher attention and reputational considerations for the ultimate parent company and indirectly enhance the level of security enjoyed by MetLife CY s policyholders under the status quo scenario. 8.4 Operational Considerations MEL and MetLife CY have various service agreements in place in order to administer and service clients on a regular basis. Management has confirmed that the current agreements will not be changed in any way to adversely affect customer satisfaction. In fact, enhanced efficiencies of the resulting post-transfer operation could potentially enhance customer satisfaction. There may be some minor changes to claims thresholds, reporting lines and some additional reports, but otherwise MetLife Portfolio Transfer IA Page 25

28 processes and procedures for claims handling and customer services are expected to remain to a large extent as they currently are at MetLife CY level. This is in line with experience from previous transfers across Europe into MEL. 8.5 Treating Customers Fairly The treatment of policyholders will not be impacted in any way from the implementation of the proposed transfer and I am satisfied following discussions with the management at both ends the current fair treatment of policyholders will continue following the completion of the transfer. 8.6 Tax Implications I have relied completely on tax specialist of MEL and MetLife CY to understand the implications of the transfer on tax on policyholder benefits. My understanding is that there will be no impact on the rates or structure in taxation of any future benefits received in relation to current in-force policies resulting from the transfer. 8.7 Conclusions Considering the impact of the proposed transfer on policyholders of MetLife CY and MEL, it is my opinion that: There will be no material adverse impact on the security of MetLife CY s policyholders transferring to MEL There will be no material impact on in-force policyholders of MEL as these are listed in various parts of this report The policyholder reasonable expectations, contractual obligations and tax treatment of transferring policyholders will not be affected as a result of the transfer The proposed formulaic approach for setting bonus rates can be structured in a way not to materially disadvantage any of the participating policyholders of MetLife CY Service quality of MetLife CY s policyholders will not be adversely affected as a result of the proposed transfer MetLife Portfolio Transfer IA Page 26

29 9 Policyholder Communication Management have informed me that approval will be sought from the Regulator so that they will not be required to inform existing MEL policyholders of the proposed transfer of MetLife CY. Given the relative size of MetLife CY and that the poet transfer situation will not affect the risk profile and capitalisation level of MEL I have no objection to this. At the time of writing the report, the letters to be sent to existing MetLife CY s policyholders were still not finalised. I have reviewed the draft English version of the letters describing the proposal for the transfer. Management has indicated that the content and structure will not change materially and I have no issues with that. MetLife Portfolio Transfer IA Page 27

30 Appendices

31 Appendix A: Marios Schizas CV 9.1 Background Marios joined Lux in 2010 as the leader of the life insurance sector covering insurance and reinsurance clients in Cyprus, Malta, UK and the Middle East. Previously to joining Lux, Marios worked in the UK for Tillinghast Towers-Perrin, Ernst & Young and Bank of America. He has experience in mergers & acquisitions mainly in the UK and is registered as an Appointed Actuary to a number of jurisdictions including Cyprus. Marios is a Fellow of the Institute of Actuaries UK, having qualified in 2004 and he is also a Fellow of the Cyprus Association of Actuaries. He also holds a BSc in actuarial Science from the London School of Economics. 9.2 Experience Marios is an experienced life actuary with exposure in a lot of European and Middle East markets. He participated in M&A transactions in the UK and Europe and is the Appointed Actuary of a number of life insurers and reinsurers. The following summarise the main experience items: Appointed Actuary Roles in a number of jurisdictions Actuarial reserve review responsibility for a number of insurance and Takaful companies Modelling and Financial reporting work for local and international insurance and reinsurance companies Embedded Value reporting responsibility for listed and unlisted insurance companies Solvency II assistance in all three pillars for EU registered insurance companies Involved in the modelling of a number of M&A transactions and inherited estate projects in the UK market Product design and profit testing of investment and protection products Appendix A Page i

32 Appendix B: Sources of Data 9.3 Sources of Data The following list summarises the main information used in the analysis and conclusions presented throughout this report. Reliance has also been placed on other documents, correspondence and discussions between Lux, MetLife CY and MEL management. 1 NUMBER FILENAME DESCRIPTION MetLife France Transfer - MEL Actuarial & Risk Transaction Report v2.2 2 Project LESS - Bulgaria ARTR - Final v1.4 3 Project LESS - Czech Republic ARTR - Final v1.0 4 Project LESS - Slovakia ARTR - Final v1.5 5 MEL ORSA_ _Refresh v1 5 clean Actuarial risk and transaction report for MetLife France Actuarial risk and transaction report for MetLife Bulgaria Actuarial risk and transaction report for Czech Republic Actuarial risk and transaction report for Slovakia MEL ORSA report as at 01 January IE Report Independent Expert Report for ML 7 EA 7-1st page MetLife CY 2014 Form EA7 8 EA 7-2nd page MetLife CY 2014 Form EA7 9 Facultative Cover EAE MetLife CY 2014 Form EA7 10 MEL Asset and Liability Management Strategy October 2014 MetLife CY ALM strategy document 11 ALICO Cyprus Branch Form AR English v11 MetLife CY AR6 for YE MetLife Europe Limited 2013 Appointed Actuary Board Report v1 1 FINAL 13 Asset Segregation Response by MEL's AA MetLife Europe Limited - AA External Report - ML MIL to MEL Part VII v2 0 MetLife Alico (Cy Ltd) - Signed Financial Statements Period Ended MetLife Europe Limited signed Financial Statements pdf MEL Appointed Actuary Report for YE2013 Response from MEL Appointed Actuary on asset segregation MEL Appointed Actuary Part VII transfer report of ML and MIL into MEL MetLife CY Financial Statements for YE2013 MEL Financial Statements for YE _RP_Client_Brochure_12 MetLife CY policy documentation _RP_Key_Features_15 MetLife CY policy documentation _RP_TC_8 MetLife CY policy documentation 20 MEL - Schedule 4 Report - 31 Dec 2013 FINAL MEL Abstract of the valuation report prepared by the Appointed Actuary for YE Product List Summary_SC_ MetLife CY product list 22 AR FORMS 2013 final MetLife CY AR6 forms as at YE AR Supplementary Notes 2013 draft v3 actuarial ( ) - no track of changes MetLife CY AR6 forms supplementary notes as at YE MEL CBI Returns Final Forms Q MEL forms for Q32014 submitted 25 MetLife Europe Limited signed CBI return Annual Statutory Returns Additional Replies to GAD_No Annual Statutory Returns Additional Reply to GAD_No 2 MEL CBI returns submitted for YE2013 Q&A between Cypriot Regulator and MetLife CY on WP policyholders Q&A between Cypriot Regulator and MetLife CY on WP policyholders Appendix B Page ii

33 Annual Statutory Returns Replies to GAD_No Returns - Additional Comments by ICCS Annual Statutory Returns Replies to GAD_No Annual Statutory Returns Replies to GAD_No 2 32 Current Bonus Declaration Process_V4 33 ICCS Comments on the 2013 Returns 34 SoI - Comments on 2012 Stat Returns Q&A between Cypriot Regulator and MetLife CY on WP policyholders Q&A between Cypriot Regulator and MetLife CY on WP policyholders Q&A between Cypriot Regulator and MetLife CY on WP policyholders Q&A between Cypriot Regulator and MetLife CY on WP policyholders Description of current bonus declaration method Q&A between Cypriot Regulator and MetLife CY on WP policyholders Q&A between Cypriot Regulator and MetLife CY on WP policyholders MEL General Accounts ALM Guidelines MEL Investment Guidelines 36 Investment Guidelines Cyprus 2014 Final MetLife CY Investment Guidelines 37 - MetLife European Group Reorganisation Overview Cyprus Transaction Design v Product List Summary_v4 40 objections - replies 41 objections - replies.pdf 3 42 Project Less - Objections 43 Committees Localisation Cyprus 44 MetLife Cyprus -participating business transfer options Project Evolution - Cyprus ARTR - v MetLife Europe Limited - Twin Peaks Solvency Report 2014 Q4 V3.0 MetLife European re-organisation structures Transaction design charts for transferring MetLife CY into MEL Updated Product list summary for MetLife CY Objections and response to WP fund policyholders in the previous transfer from branch to company Objections and responses to WP fund policyholders in the previous transfer from branch to company Objections and responses to WP fund policyholders in the previous transfer from branch to company SII proposed committees for MetLife CY for efficient system of Governance Report on potential options for transferring participating business into MEL Actuarial Risk and Transaction Report prepared by MEL AA for the proposed transfer MEL Twin Peaks Solvency Position 47 Cyprus Phase B2 - letter to policyholders ENG - v3 1 (EDPD) 2 Draft Policyholder Documentation 48 SII QA Master Template v0.15 (COUNTRY SPECIFIC - shared) SII QA Checklist Master Template Appendix B Page iii

34 Appendix C: Corporate Structure 9.4 Corporate Structure of MetLife CY Pre and Post Transfer Starting Structure Proposed End Structure Appendix D Page iv

35 Simplified Expected European Group Structure (as at 1 January 2016) Appendix D Page v

36 L U X A C T U A R I E S & C O N S U L T A N T S B A H R A I N C Y P R U S I N D I A U A E L U X A C T U A R I E S & C O N S U L T A N T S COPYRIGHT 2014