FOR THE YEAR ENDING 31 DECEMBER Pacific Life Re Limited ( Solo ); and Pacific Life Re Holdings Limited ( Group ) 19 May 2017

Transcription

1 FOR THE YEAR ENDING 31 DECEMBER 2016 Pacific Life Re Limited ( Solo ); and Pacific Life Re Holdings Limited ( Group ) 19 May

2 Executive Summary 1 This report is a combined solvency and financial condition report ( SFCR ) in that it covers both Pacific Life Re Limited ( PLRL ) solo and Pacific Life Re Holdings Limited ( PLRH ) group. This report is provided in compliance with: The Solvency II ( SII ) Directive 2009/138/EC (the Directive ), published in December 2009, and any amendments to it by the Omnibus II Directive (16330/13), published in May 2014; The SII Delegated Regulation 2015/35 (the Delegated Regulation ), published in October 2014; European Insurance and Occupational Pensions Authority ( EIOPA ) requirements, including EIOPA CP 13/010: Submission of Information to National Competent Authorities, published in September 2013; and Prudential Regulation Authority ( PRA ) requirements, including PRA Supervisory Statement SS4/13, published in December This SFCR has five sections: A Business and Performance; B System of Governance; C Risk Profile; D Valuation of Technical Provisions, Assets and Other Liabilities; and E Capital Management. 3 PLRL is the only insurance undertaking in the PLRH group. The PLRL and PLRH Boards have approved the submission of a single combined SFCR. Paragraphs or sections of this report that are specific to the PLRH group, in that they are not relevant to PLRL solo, are identified in brown font. 4 PLRL and PLRH set out their system of governance in a system of governance document which is available to all staff and was modified in 2016 to meet the requirements of the Senior Insurance Managers regime and Key Function Holders regime. 5 The PLRL SII basic own funds ( BOF ) value as at 31 December 2016 is 1,023.7m, which comprises 173.2m of share capital and 850.5m of reconciliation reserve (within equity), both of which are tier 1 own funds. Ancillary own funds ( AOF ) in the form of unpaid and uncalled shares constitutes a further 100m of regulatory capital funding, as tier 2 own funds. 6 The PLRH group SII BOF value as at 31 December 2016 is 1,028.9m, which comprises 121.1m of share capital and 848.3m of reconciliation reserve (within equity), both of which are tier 1 own funds, and of 59.5m of subordinated liabilities, which is tier 2 own funds. The aforementioned AOF constitutes a further 100m of regulatory capital funding, as tier 2 own funds. 7 The solvency capital requirement ( SCR ) for both entities is calculated using a group partial internal model ( PIM ) approved by the PRA, and using the standard formula ( SF ) for non-pim risks. PLRL has a solvency coverage ratio at 31 December 2016 of 160%, and the PLRH group has a ratio of 161%. 8 Material changes during the year ended 31 December 2016, by reference to the five sections of this SFCR, are summarised as follows: 2

3 A Business and Performance: The termination of two longevity treaties during 2016 resulted in termination payments totaling 70m, 49m of which was retroceded to Pacific Life Insurance Company ( PLIC ). B System of Governance: The system of governance was modified in 2016 to meet the requirements of the Senior Insurance Managers regime and Key Function Holders regime. C Risk Profile: No material changes. D Valuation of Technical Provisions, Assets and Other Liabilities: No material changes. E Capital Management: PLRL was granted the use of a revised transitional measure for technical provisions ( TMTP ) following yield curve changes during

4 Table of Contents... Executive Summary... 2 Approval by the Board of Directors of PLRL of the SFCR for the financial year ending 31 December Approval by the administrative, management or supervisory body of the SFCR and reporting templates Report of the external independent auditor Section A. Business and Performance (Unaudited) A1. Business 15 A1.1 Name and legal form of the undertaking A1.2 Name and contact details of the supervisory authority A1.3 Name and contact details of the external auditor A1.4 Qualifying holdings in the undertaking A1.5 Solvency II reporting currency A1.6 Reporting period A1.7 Legal structure of the group A1.7.1 Pacific Life Re Limited position within the legal structure of the group A1.7.2 Pacific Life Re Holdings Limited position within the legal structure of the group A1.8 Pacific Life Re Limited lines of business and geographical areas of operation A1.9 Any significant business or other events over the reporting period A1.9.1 Product range changes A1.9.2 Company structure changes A1.9.3 Holding company structure changes A2. Underwriting performance 20 A3. Investment performance 24 A3.1 Information on income and expenses arising from investments over the reporting period A3.2 Information about any gains and losses recognised directly in equity over the reporting period 25 A3.3 Information about any investments in securitisation over the reporting period A4. Performance of other activities 25 A5. Any other information 26 Section B. System of Governance (Unaudited) B1. General information on the system of governance 31 B1.1 Structure of the system of governance B1.2 Overview of the Boards and Committees

5 B1.2.1 Role and duties of the Board of Directors B1.2.2 PLRL Board Committees B1.2.3 Executive responsibility B1.2.4 Enterprise-wide risk management B1.3 Governance changes over the period B1.4 Remuneration policy B1.5 Key functions B1.5.1 The actuarial function B1.5.2 The internal control system B1.5.3 The internal audit function B Pricing function B1.6 Material transactions over the period B Material arrangements in place during the period B Changes over the period B1.7 Adequacy of systems of governance B2. Fit and proper requirements 40 B2.1 Overview B2.2.1 Determining an individual s skills, knowledge and expertise B2.2.2 Determining an individual s fitness and propriety B2.3 Outsourced key functions B Asset liability management, investment policy and liquidity management function B3. Risk management system including own risk and solvency assessment 42 B3.1 Risk management system overview B3.2 Risk governance B3.3 Risk strategy, appetite and policy B3.4 Risk identification and assessment B3.5 Scenario testing and modelling B3.6 Risk reporting and escalation B3.7 Risk management culture B4. Risk management strategies, objectives, processes and reporting 46 B4.1 Insurance risk B4.2 Operational risk B4.3 Group risk

6 B4.4 Credit risk B4.5 Market risk B4.6 Liquidity risk B5. Own risk and solvency assessment 54 B6. Any other information 57 Section C. Risk Profile (Unaudited) C1. Underwriting risk 60 C1.1 Underwriting risk at 31 December C1.2 Change in underwriting risk over the period to 31 December C1.3 Risk appetite and tolerance statement C2. Market risk 63 C2.1 Market risk at 31 December C2.2 Change in the market risk over the period to 31 December C2.3 Risk appetite and tolerance statement C3. Counterparty default risk 66 C3.1 Counterparty default risk at 31 December C3.2 Change in the counterparty default risk over the period to 31 December C3.3 Risk appetite and tolerance statement C4. Liquidity risk 67 C4.1 Risk appetite and tolerance statement C5. Operational risk 68 C5.1 Operational risk at 31 December C5.2 Change in the operational risk over the period to 31 December C5.3 Risk appetite and tolerance statement C6. Outcome of stress testing and sensitivity testing results 69 C7. Other material risks 70 C8. Any other information 71 C8.1 Internal model appropriateness Section D. Valuation for Solvency Purposes D1. Bases, methods and main assumptions used for the valuation for solvency purposes for each material class of assets and the nature of differences with IFRS accounting policies 72 D1.1 Deferred acquisition costs D1.2 Intangible assets D1.3 Investments

7 D1.4 Reinsurance recoverables D1.5 Insurance, intermediaries, reinsurance and other receivables D1.6 Cash and cash equivalents D1.7 Any other assets, not elsewhere shown D2. Bases, methods and main assumptions used for the valuation for solvency purposes for each material class of liabilities and the nature of differences with IFRS accounting policies 75 D2.1 Bases, methods and main assumptions used for its valuation of liabilities for solvency purposes 76 D2.1.1 Methodology applied in deriving the technical provisions D2.1.2 Methodology applied in deriving the risk margin D2.1.3 Key assumptions in deriving the technical provisions D2.2 Uncertainty associated with the value of technical provisions D2.3 Differences between the bases, methods and main assumptions used for the valuation for solvency purposes and those used for valuation in financial statements D2.4 Volatility adjustment (Unaudited) D2.5 Transitional measures (Unaudited) D2.6 Other D2.6.1 Recoverables from reinsurance contracts D2.6.2 Changes in assumptions from previous reporting period D3. Bases, methods and main assumptions used for the valuation for solvency purposes for each material class of other liabilities and the nature of differences with IFRS accounting policies 83 D3.1 Provisions other than technical provisions D3.2 Deferred tax liabilities D3.3 Insurance, intermediaries, reinsurance and other payables D3.4 Subordinated liabilities in basic own funds D4. Alternative methods for valuation 85 D4.1 Identification of assets and other liabilities D5. Any other information 86 D5.1 Future management actions D5.2 Assumptions about policyholders behaviour D5.3 Consolidation Section E. Capital Management E1. Own funds 88 E1.1 Management of the own funds

8 E1.1.1 Objectives E1.1.2 Capital management policy E1.2 Components of own funds E1.2.1 Tier 1 basic own funds E1.2.2 Tier 2 basic own funds E1.2.3 Tier 3 basic own funds E1.3 Analysis of change in the own funds from 31 December 2015 to 31 December E Paid-in ordinary share capital E Reconciliation Reserve E Subordinated liabilities E1.4 Eligible own funds to cover solvency capital requirements E1.5 Eligible own funds to cover the minimum capital requirement E1.6 Analysis of change from IFRS equity to basic own funds E1.6.1 Exclusion of UnderwriteMe Limited and UnderwriteMe Technology Solutions Limited equity 93 E1.6.2 Exclusion of preference share receivable E1.6.3 Deferred acquisition costs E1.6.4 Net technical provisions E1.6.5 Intangible asset, prepayment and deferred income balances recognised in relation to a single reinsurance platform E1.6.6 Taxes E1.7 Transitional arrangements applied to basic own funds E1.8 Ancillary own funds E1.9 Restrictions on own funds E2. Solvency capital requirement and minimum capital requirement (Unaudited) 96 E2.1 Detail of the capital requirements for Pacific Life Re Limited E2.2 Calculation of minimum capital requirement E2.3 Explanation for material changes to solvency capital requirement and minimum capital requirement E2.4 Simplifications and parameters used in deriving the solvency capital requirement E2.5 Disclosure of capital add-ons to solvency capital requirement E3. Use of duration-based equity risk sub-module in the calculation of the solvency capital requirement (Unaudited) 98 E4. Differences between the standard formula and the internal model used (Unaudited) 98 E5. Non-compliance with the MCR and noncompliance with the SCR 99 8

9 E6. Any other information 99 Section F. Appendices F1. Glossary 100 F2. Quantitative Reporting Templates 102 9

10 Approval by the Board of Directors of PLRL of the SFCR for the financial year ending 31 December 2016 We certify that: The SFCR has been properly prepared in all material respects in accordance with the PRA rules and SII Regulations; and We are satisfied that: a) Throughout the financial year ending 31 December 2016, the insurer has complied in all material respects with the requirements of the PRA rules and SII Regulations as applicable to the insurer; and b) It is reasonable to believe that, at the date of the publication of the SFCR, the insurer has continued so to comply, and will continue so to comply in future. Approval by the administrative, management or supervisory body of the SFCR and reporting templates Dave Howell Director and Chief Executive Officer Date: 19 May

11 Report of the external independent auditor to the Directors of Pacific Life Re Holdings Limited and Pacific Life Re Limited (together the Group ) pursuant to Rule 4.1 (2) of the External Audit Chapter of the PRA Rulebook applicable to Solvency II firms Report on the Audit of the relevant elements of the Group Solvency and Financial Condition Report ( SFCR ) Opinion Except as stated below, we have audited the following documents prepared by the Group as at 31 December 2016: The Valuation for Solvency Purposes and Capital Management sections of the Group SFCR of the Group as at 31 December 2016, ( the Narrative Disclosures subject to audit ); and Group templates S , S , S , S and Solo templates S , S , S , S , S (together the Templates subject to audit ). The Narrative Disclosures subject to audit and the Templates subject to audit are collectively referred to as the relevant elements of the Group SFCR. We are not required to audit, nor have we audited, and as a consequence do not express an opinion on the Other Information, which comprises: Information contained within the relevant elements of the Group SFCR set out above which are, or derive from, the Solvency Capital Requirement, as identified in the Appendix to this report; The Executive Summary, Business and Performance, System of Governance and Risk Profile elements of the Group SFCR; Group templates S , S , S and Solo templates S , S ; Information calculated in accordance with the previous regime used in the calculation of the transitional measures on technical provisions, and as a consequence all information relating to the transitional measures on technical provisions as set out in the Appendix to this report; The written acknowledgement by management of their responsibilities, including for the preparation of the Group SFCR ( the Responsibility Statement ); Information which pertains to an undertaking that is not a Solvency II undertaking and has been prepared in accordance with PRA rules other than those implementing the Solvency II Directive or in accordance with an EU instrument other than the Solvency II regulations ( the sectoral information ). To the extent the information subject to audit in the relevant elements of the Group SFCR includes amounts that are totals, sub-totals or calculations derived from the Other Information, we have relied without verification on the Other Information. In our opinion, the information subject to audit in the relevant elements of the Group SFCR of the Group as at 31 December 2016 is prepared, in all material respects, in accordance with the financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based, as modified by relevant supervisory modifications, and as supplemented by supervisory approvals and determinations. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK and Ireland)) and ISA (UK) 800 and ISA (UK) 805, and applicable law. Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the relevant elements of the Group Solvency and Financial Condition Report section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the Group SFCR in the UK, including the APB s ethical standards, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 11

12 Conclusions relating to going concern We are required to report in respect of the following matters where: the Directors use of the going concern basis of accounting in the preparation of the Group SFCR is not appropriate; or the Directors have not disclosed in the Group SFCR any identified material uncertainties that may cast significant doubt about the Group s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the Group SFCR is authorised for issue. We have nothing to report in relation to these matters. Emphasis of Matter Basis of Accounting We draw attention to the Valuation for Solvency Purposes, Capital Management and other relevant disclosure sections of the Group SFCR, which describe the basis of accounting. The Group SFCR is prepared in compliance with the financial reporting provisions of the PRA Rules and Solvency II regulations, and therefore in accordance with a special purpose financial reporting framework. The Group SFCR is required to be published, and intended users include but are not limited to the PRA. As a result, the Group SFCR may not be suitable for another purpose. Our opinion is not modified in respect of these matters. Other Information The Directors are responsible for the Other Information. Our opinion on the relevant elements of the Group SFCR does not cover the Other Information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the Group SFCR, our responsibility is to read the Other Information and, in doing so, consider whether the Other Information is materially inconsistent with the relevant elements of the Group SFCR, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the relevant elements of the Group SFCR or a material misstatement of the Other Information. If, based on the work we have performed, we conclude that there is a material misstatement of this Other Information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Directors for the Group Solvency and Financial Condition Report The Directors are responsible for the preparation of the Group SFCR in accordance with the financial reporting provisions of the PRA rules and Solvency II regulations which have been modified by the modifications, and supplemented by the approvals and determinations made by the PRA under section 138A of FSMA, the PRA Rules and Solvency II regulations on which they are based. The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of a Group SFCR that is free from material misstatement, whether due to fraud or error. Auditor s Responsibilities for the Audit of the relevant elements of the Group Solvency and Financial Condition Report It is our responsibility to form an independent opinion as to whether the relevant elements of the Group SFCR are prepared, in all material respects, in accordance with financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based. Our objectives are to obtain reasonable assurance about whether the relevant elements of the Group SFCR are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with ISAs (UK and Ireland) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decision making or the judgement of the users taken on the basis of the Group SFCR. 12

13 A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at Regulation/Audit-and-assurance/Standards-and-guidance/Standards-and-guidance-for-auditors/Auditorsresponsibilities-for-audit/Description-of-auditors-responsibilities-for-audit.aspx. The same responsibilities apply to the audit of the Group SFCR. This report is made solely to the Directors of Pacific Life Re Holdings Limited in accordance with Rule 4.1 (2) of the External Audit Chapter of the PRA Rulebook for Solvency II firms. We acknowledge that our report will be provided to the PRA for the use of the PRA solely for the purposes set down by statute and the PRA s rules. Our audit work has been undertaken so that we might state to the insurer s Directors those matters we are required to state to them in an auditor s report on the relevant elements of the Group SFCR and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group and the PRA, for our audit work, for this report or for the opinions we have formed. Other Matter The Group has authority to calculate its Group Solvency Capital Requirement using a partial internal model ( the Model ) approved by the Prudential Regulation Authority in accordance with the Solvency II Regulations. In forming our opinion (and in accordance with PRA Rules), we are not required to audit the inputs to, design of, operating effectiveness of and outputs from the Model, or whether the Model is being applied in accordance with the Group s application or approval order. Report on Other Legal and Regulatory Requirements Sectoral Information In our opinion, in accordance with Rule 4.2 of the External Audit Chapter of the PRA Rulebook, the sectoral information has been properly compiled in accordance with the PRA rules and EU instruments relating to that undertaking from information provided by members of the group and the relevant insurance group undertaking. Other Information In accordance with Rule 4.1 (3) of the External Audit Chapter of the PRA Rulebook for Solvency II firms we are also required to consider whether the Other Information is materially inconsistent with our knowledge obtained in the audit of Pacific Life Re Holdings Limited s statutory financial statements. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Mark McQueen Mark McQueen ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 19 May 2017 Appendix relevant elements of the Group Solvency and Financial Condition Report that are not subject to audit Group internal model The relevant elements of the Group SFCR that are not subject to audit comprise: 13

14 The following elements of Group template S : - Row R0550: Technical provisions non-life (excluding health) risk margin - Row R0590: Technical provisions health (similar to non-life) risk margin - Row R0640: Technical provisions health (similar to life) risk margin - Row R0680: Technical provisions life (excluding health and index-linked and unit-linked) risk margin - Row R0720: Technical provisions Index-linked and unit-linked risk margin The following elements of Solo template S Row R0100: Technical provisions calculated as a sum of BE and RIM Risk margin - Rows R0110 to R0130- Amount of transitional measure on technical provisions The following elements of Group and Solo templates S Column C0030 Impact of transitional measure on technical provisions - Row R0010 Technical provisions - Row R0090 Solvency Capital Requirement The following elements of Group and Solo templates S Row R0020: Non-available called but not paid in ordinary share capital at group level - Row R0060: Non-available subordinated mutual member accounts at group level - Row R0080: Non-available surplus at group level - Row R0100: Non-available preference shares at group level - Row R0120: Non-available share premium account related to preference shares at group level - Row R0150: Non-available subordinated liabilities at group level - Row R0170: The amount equal to the value of net deferred tax assets not available at the group level - Row R0190: Non-available own funds related to other own funds items approved by supervisory authority - Row R0210: Non-available minority interests at group level - Row R0380: Non-available ancillary own funds at group level - Rows R0410 to R0440 Own funds of other financial sectors - Row R0680: Group SCR - Row R0740: Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds - Row R0750: Other non available own funds The following elements of Solo template S Row R0310: SCR Elements of the Narrative Disclosures subject to audit identified as unaudited. 14

15 Section A. Business and Performance (Unaudited) A1. Business A1.1 Name and legal form of the undertaking 9 The "Undertakings are as follows: The solo entity for SII purposes ( PLRL solo ; Solo ) is PLRL, a company registered in England and Wales; and The group entity for SII purposes ( PLRH group ; Group ) is the group of companies whose parent is PLRH, a company registered in England and Wales, but excluding UnderwriteMe Limited ( UM ) and excluding the direct and indirect subsidiaries of UM. 10 Paragraphs or sections of this report that are specific to the PLRH group, in that they are not relevant to PLRL solo, are identified in brown font. A1.2 Name and contact details of the supervisory authority Prudential Regulation Authority Financial Conduct Authority 20 Moorgate 25 The North Colonnade London London EC2R 6DA E14 5HS A1.3 Name and contact details of the external auditor Deloitte LLP Chartered Accountants and Statutory Auditor Hill House 1 Little New Street London EC4A 3TR A1.4 Qualifying holdings in the undertaking % of the voting rights of PLRL were held by its immediate parent company, Pacific Life Re Services Limited ( PLRS ), as at 31 December The ultimate parent company of PLRL is Pacific Mutual Holding Company ( PMHC ) % of the voting rights of PLRH were held by its immediate parent company, Pacific Life Re Holdings LLC ( PLRH LLC ), as at 31 December The ultimate parent company of PLRH is PMHC. A1.5 Solvency II reporting currency 13 The Undertakings report on a SII basis in GBP. 15

16 A1.6 Reporting period 14 This report covers the financial position as at 31 December This is analysed by reference to the previously reported position, as at 31 December A1.7 Legal structure of the group A1.7.1 Pacific Life Re Limited position within the legal structure of the group 15 The corporate structure of the United Kingdom ( UK ) operating entities, including their United States ( US ) intermediate parent company, is set out below: Pacific Mutual Holding Company ( PMHC ) US ultimate parent company Pacific LifeCorp ( PLC ) US intermediate parent company Pacific Life Re Holdings LLC ( PLRH LLC ) US immediate parent company Pacific Life Re Holdings Limited ( PLRH ) Solvency II ultimate EEA holding company; non-regulated Solvency II reporting Pacific Life Re Services Limited ( PLRS ) Service company; non-regulated Pacific Life Re Limited ( PLRL ) Solvency II solo entity; Solvency I reported returns UnderwriteMe Limited ( UM ) Negligible interest for objective of group supervision UnderwriteMe Technology Solutions Limited ( UMTS ) Negligible interest for objective of group supervision UnderwriteMe Australia (Pty) Limited ( UMA ) Negligible interest for objective of group supervision Figure 1 Corporate structure chart. 16

17 Pacific Life Re Holdings Limited (ultimate EEA holding company for Solvency II purposes) 16 PLRH is the holding company for the UK group. The primary function of PLRH is to act as a holding company and to provide financing to its subsidiary undertakings. All financing to PLRH is provided in the form of common equity, with the exception of subordinated debt sourced from its immediate parent company, PLRH LLC. Pacific Life Re Services Limited 17 PLRS is an intermediate parent company of PLRL. PLRS employs the staff engaged in the PLRL UK operations and provides management services to other entities in the Pacific Life Re ( PL Re ) Division (the Division ), including its operations in Australia, Asia and North America. Pacific Life Re Limited (solo company for Solvency II purposes) 18 PLRL is a reinsurance company operating in the UK and across selected markets through its Singapore, South Korea and Canada branches and through its representative office in Japan. PLRL provides retrocession services to its affiliate in Australia. PLRL carries out an annual Own Risk Solvency Assessment ( ORSA ) which considers all risks that it faces, including those arising from membership of a group. A1.7.2 Pacific Life Re Holdings Limited position within the legal structure of the group 19 The corporate structure of the UK operating entities, including their US intermediate parent company, is set out in section A The financial data included in the PLRH group for SII reporting purposes is determined in accordance with the following waivers: Group supervision: PLRS has a majority shareholding in another subsidiary UM. UM and its subsidiaries are excluded from the PLRH group for SII reporting purposes via a waiver granted by the PRA. The waiver was granted on the grounds that UM and its subsidiaries are of negligible interest with respect to the objective of group supervision and that the necessary changes to UM s governance and risk management structure, and its inclusion in group solvency calculations, would be disproportionate. Other methods: The ultimate parent company of PLRH is PMHC. The PRA has granted a waiver for other methods of group supervision above the level of the PLRH group and therefore no further group SII submissions are being made. A1.8 Pacific Life Re Limited lines of business and geographical areas of operation 21 PLRL is one of the main reinsurance carriers participating in the Division. PLRL writes life reinsurance business in the UK, Ireland, Asia and Australia. 22 The lines of business and geographical areas of operation for PLRH are the same as those of PLRL. 17

18 Europe 23 The Europe business consists primarily of UK and Irish protection and UK longevity business. The protection business comprises mortality, critical illness and income protection business. The longevity business comprises both annuity and longevity swap business. 24 PLRL has grown its longevity business by securing a number of new treaties during the year. PLRL also continues to be successful in income protection business, although this is a much smaller segment of the overall protection market and of the inforce business. 25 Longevity business is ceded on a 70% quota share basis to its affiliate PLIC, and three specific treaties are partially retroceded to a third party. Mortality business is ceded to a retrocession pool comprising affiliate and third party retrocessionnaires in order to maintain the PLRL 3m per life retention, although the volumes ceded are not material. Asia 26 The main line of business in Asia is critical illness. The critical illness products in Asia are very similar to those in the UK, though frequently focussing on cancer benefits. The South Korea market continues to be a source of much larger opportunities, although in 2014 the local regulator enforced restrictive rules for companies reinsuring Korean business from offshore, so PLRL has established a branch in South Korea. 27 PLRL Japanese marketing efforts focus primarily on direct marketing business which involves marketing of life and health products direct to the consumer. This line of business makes up the bulk of both the inforce and new business production for Japan. This exposes PLRL to morbidity risks and is also associated with higher exposure to lapse risk due to participation in the upfront marketing costs associated with this line of business. 28 The quality of data available for setting pricing and valuation assumptions is more limited in Asia than in the UK. However, the data is adequate and the greater range of products and territories means that the risks are more diversified. Australia 29 PLRL accepts retrocession of group protection business from its affiliate Pacific Life Re (Australia) Pty Limited ( PLRA ). This covers principally mortality and total and permanent disability lump sum benefits as well as income protection. A1.9 Any significant business or other events over the reporting period A1.9.1 Product range changes 30 There were no significant new products launched, nor product design changes made, during the year ending 31 December

19 A1.9.2 Company structure changes 31 PLRL has established branches in Canada and South Korea in The Financial Supervisory Service ( FSS ) granted regulatory approval to commence writing reinsurance business in South Korea on 30 March The Canadian Office of the Superintendent of Financial Institutions ( OFSI ) granted regulatory approval to commence writing reinsurance business in Canada on 23 September A1.9.3 Holding company structure changes 32 There have been no changes to the holding company structure. The wider corporate structure changed on 7 March 2016 in that UM established a subsidiary in Australia, UnderwriteMe Australia Pty Limited, but that entity is not subject to SII reporting (see section A1.7.2). 19

20 A2. Underwriting performance 33 The underwriting performance of PLRL by material line of business is presented below on an international financial reporting standards ( IFRS ) basis, and a reconciliation to the profit for the year in the IFRS financial statements of PLRL and PLRH is provided on the next page Protection Longevity Total Protection Longevity Total Premiums Gross 286, , , ,850 46, ,345 Reinsurers' share (2,607) (93,304) (95,911) (1,951) (207,015) (208,966) Net 283,485 39, , ,899 (160,520) 55,379 Claims incurred Gross (182,389) (16,378) (198,767) (134,685) (23,196) (157,881) Reinsurers' share ,746 12, ,110 6,248 Net (181,903) (4,632) (186,535) (134,547) (17,086) (151,633) Change in technical provisions Gross (959) (119,358) (120,317) 11,544 31,789 43,333 Reinsurers' share (39,669) 111,442 71, , ,650 Net (40,628) (7,916) (48,544) 11, , ,983 Acquisition costs Acquisition commission (43,364) - (43,364) (32,033) - (32,033) Reinsurance commission 2 8,328 8,330-4,583 4,583 Other acquisition costs (8,444) (3,928) (12,372) (13,098) (1,515) (14,613) Net (51,806) 4,400 (47,406) (45,131) 3,068 (42,063) Underwriting result 9,148 31,641 40,789 47,972 57, ,666 Figure 2 Summary of underwriting performance over the reporting period by line of business (PLRL and Group numbers are identical). SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 20

21 PLRL Group PLRL Group Underwriting result, per the preceding table 40,789 40, , ,666 Net investment income 101, , Net realised (losses)/gains on embedded derivative (15,590) (15,590) Other operating income 1,960 10,708 1,332 7,404 Foreign currency gains 1,578 1, ,397 Reinsurers share of interest on custody assets (8,859) (8,859) (5,667) (5,667) Other administrative expenses (33,442) (47,534) (20,938) (31,380) Interest payable and similar charges (1,264) (4,638) (126) (3,305) Fair value movement on financial liability (4,142) Tax (17,304) (14,963) (15,578) (14,163) Profit for the year, per the PLRL financial statements 68,981 66,115 Profit for the year, per the PLRH financial statements 62,219 57,076 Figure 3 Reconciliation of underwriting result to the profit for the year in the IFRS financial statements. 34 Premiums ceded to reinsurers for the year ended 31 December 2016 include termination payments totalling 70m ( 49m of which was ceded to PLIC) that were recognised on the termination of two longevity treaties. The termination payments are classified as gross other insurance income in the IFRS financial statements of PLRL and PLRH. 35 Premiums ceded to reinsurers for the year ended 31 December 2015 include a 174.8m initial single premium recognised on the retrocession to PLIC of an annuity treaty, and the reinsurers share of change in long-term technical provisions includes 185m of initial reserves recognised on that retrocession. The annuity line of business is not otherwise material and so has been merged into the longevity line of business. 36 The underwriting performance of PLRL by material line of business, on an IFRS basis as above but then adjusted for significant one-off items, is presented on the next page. The adjustments to 2016 are to remove the aforementioned termination payments and to reverse the associated impact on reserves. The 2015 adjustments are to reflect the aforementioned retrocession arrangement entered into with PLIC as if that arrangement had always been in place. SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 21

22 Premiums Protection Longevity Total Protection Longevity Total Gross 286,092 63, , ,850 46, ,345 Reinsurers' share (2,607) (44,328) (46,935) (1,951) (33,455) (35,406) Net 283,485 18, , ,899 13, ,939 Claims incurred Gross (182,389) (16,378) (198,767) (134,685) (23,196) (157,881) Reinsurers' share ,746 12, ,142 16,280 Net (181,903) (4,632) (186,535) (134,547) (7,054) (141,601) Change in technical provisions Gross (959) (17,460) (18,419) 11,544 31,789 43,333 Reinsurers' share (39,669) 39,486 (183) 207 8,961 9,168 Net (40,628) 22,026 (18,602) 11,751 40,750 52,501 Acquisition costs Acquisition commission (43,364) - (43,364) (32,033) - (32,033) Reinsurance commission 2 8,328 8,330-4,583 4,583 Other acquisition costs (8,444) (3,928) (12,372) (13,098) (1,515) (14,613) Net (51,806) 4,400 (47,406) (45,131) 3,068 (42,063) Underwriting result 9,148 40,594 49,742 47,972 49,804 97,776 Figure 4 Adjusted summary of underwriting performance over the reporting period by line of business (PLRL and Group numbers are identical). 37 The main drivers of underwriting performance for the years ended 31 December 2016 were otherwise as follows: Premiums from new protection treaties entered into during the year and a steady increase in premiums from new business written on existing treaties; Significant volumes of new longevity business being written; SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 22

23 A reduction in reserves due to an update to mortality, morbidity and demographic assumptions following a basis review process; and Increases in values of asset holdings (over and above corresponding increases in IFRS reserves) due to the reduction in risk-free yields over the course of The underwriting performance of PLRL by geographical area is presented below on an IFRS basis. Premiums Europe Asia Australia Other * Total Europe Asia Australia Other * Total Gross 336,704 37,764 43, , ,565 23,348 12,350 1, ,345 Reinsurers' share (95,857) - - (54) (95,911) (208,867) (46) - (53) (208,966) Net 240,847 37,764 43, ,274 18,698 23,302 12,350 1,029 55,379 Claims incurred Gross (170,381) (17,963) (10,638) 215 (198,767) (144,007) (11,396) (1,410) (1,068) (157,881) Reinsurers' share 12, ,232 6, ,248 Net (158,278) (17,963) (10,638) 344 (186,535) (137,868) (11,388) (1,410) (967) (151,633) Changes in technical provisions Gross (110,874) 12,729 (31,098) 8,926 (120,317) 44,464 15,783 (9,817) (7,097) 43,333 Reinsurers' share 71, , , ,650 Net (39,573) 12,729 (31,098) 9,398 (48,544) 244,706 15,784 (9,817) (6,690) 243,983 Commissions Acquisition commission (24,923) (11,831) (6,537) (73) (43,364) (20,506) (11,080) (365) (82) (32,033) Reinsurance commission 8, ,330 4, (2) 4,583 Other acquisition costs (9,938) (1,114) (1,297) (23) (12,372) (12,580) (1,291) (683) (59) (14,613) Net (26,533) (12,945) (7,834) (94) (47,406) (28,501) (12,371) (1,048) (143) (42,063) Underwriting result 16,463 19,585 (5,635) 10,376 40,789 97,035 15, (6,771) 105,666 Figure 5 Summary of underwriting performance over the reporting period by geographical area (PLRL and Group numbers are identical). * The Other geographical area comprises the run-off and general lines of business, which are not material to PLRL and have been aggregated. SOLVENCY AND FINANCIAL CONDITION REPORT (SFCR) 23

24 A3. Investment performance A3.1 Information on income and expenses arising from investments over the reporting period 39 Income and expenses arising from investments over the reporting period are shown below: PLRL Group PLRL Group Investment income and expenses Investment income Gains/(losses) on fixed income securities Fixed income securities 26,777 26,777 26,860 26,860 Cash Total 27,530 27,533 27,101 27,108 Realised gains 50,820 50,820 16,001 16,001 Realised losses (1,005) (1,005) (2,943) (2,943) Net unrealised gains/(losses) 25,375 25,375 (37,833) (37,833) Total 75,190 75,190 (24,775) (24,775) Investment expenses (1,607) (1,607) (1,512) (1,512) Total net investment income 101, , Figure 6 Summary of change in income and expenses arising from investments over the reporting period. 40 PLRL earned investment income on fixed income securities of 26.8m during the year ended 31 December 2016, which is 0.1m lower than the investment income of 26.9m that it earned during the year ended 31 December PLRL made realised gains and losses on fixed income securities of 50.8m and (1)m during the year ended 31 December 2016, whereas it made realised gains and losses of 16m and (2.9)m during the year ended 31 December The higher net realised gains in 2016 primarily resulted from the sale of UK treasury bonds as part of an exercise undertaken by PLRL to lengthen the duration of its asset portfolio. 42 PLRL made net unrealised gains on fixed income securities of 25.4m during the year ended 31 December 2016, whereas it made net unrealised losses of 37.8m during the year ended 31 December This change primarily resulted from a decrease in government bond yields and narrower credit spreads during 2016 compared with an increase in government bond yields and wider credit spreads during The investment income earned on cash balances by PLRH group was marginally greater than that earned by PLRL during the year ended 31 December 2016 and the year ended 31 December This difference arises because PLRS and PLRH hold cash balances which are not included within PLRL solo. 24

25 A3.2 Information about any gains and losses recognised directly in equity over the reporting period 44 There were no investment gains or losses recognised directly in equity during the reporting period. A3.3 Information about any investments in securitisation over the reporting period 45 PLRL held 1.5m US$-denominated securitised assets as at 31 December 2016 (2015: 1.4m). A4. Performance of other activities 46 Material income and expenses during the year ending 31 December 2016, other than those discussed elsewhere in this report, are presented below on an IFRS basis. Net realised gains/losses on embedded derivative Net realised (losses)/gains on embedded derivative (15,590) 445 Figure 7 Summary of net realised (losses)/gains on embedded derivative over the reporting period (PLRL and Group numbers are identical). 47 PLRL has in place a retrocession agreement with PLIC as retrocessionaire. There is one block of annuity business and two blocks of longevity swap business for which the retrocession gives PLIC a security interest in the underlying custody assets held by PLRL. The custody assets are measured at fair value and the return on them is subject to risk exposures, such as credit risk on the financial investments, that are not closely related to the PLIC credit risk exposure to PLRL. PLIC and PLRL therefore recognise corresponding embedded derivative balances, measured at fair value in accordance with Level 2 of the fair value hierarchy under IFRS 13 Fair Value Measurement. These balances are accounted for as a deposit from reinsurer for SII purposes. 48 The initial embedded derivative recognised by PLRL in prior years was nil, but it has subsequently increased and decreased in accordance with decreases and increases, respectively, in the fair value of the custody assets. 25

26 Operating expenses (other than acquisition commission, other acquisition costs and reinsurance commission) PLRL Group PLRL Group Operating expenses (other than acquisition commission, other acquisition costs and reinsurance commission) Reinsurers share of interest on custody assets 8,859 8,859 5,667 5,667 Other administrative expenses 33,442 47,534 20,938 31,380 Total 42,301 56,393 26,605 37,047 Figure 8 Summary of change in operating expenses over the reporting period. 49 The reinsurers share of interest on custody assets of 8.9m (2015: 5.7) arises from the collateral provisions of a retrocession to PLIC and is the PLIC share of the investment income that PLRL receives on the custody assets that PLRL holds in relation to two longevity treaties and one annuity treaty with a third party. 50 Other administrative expenses include employee costs, property costs and depreciation of assets, or recharges thereof. The PLRH group costs of 47.5m (2015: 31.4m) are greater than the PLRL costs of 33.4m (2015: 20.9m) as a result of costs incurred in PLRS that are then recharged to PLRA and Pacific Services Canada Limited ( PSCL ), which are not consolidated within PLRH, and as a result of costs incurred in UM and UMTS. The 6.7m ( 2015: 5.4m) of UM and UMTS costs are included in the consolidated financial statements of PLRH but are not included in the PLRH group when reporting under SII (see section A1.7.2). Tax charged to the Statement of Comprehensive Income PLRL Group PLRL Group Current tax charge 18,045 14,686 16,710 16,221 Deferred tax (credit)/charge (741) 277 (1,132) (2,058) Total tax charge 17,304 14,963 15,578 14,163 Figure 9 Summary of tax charge in the reporting period. 51 Further information about the tax charged to the Statement of Comprehensive Income is included in note 8 in the financial statements of PLRL and PLRH. A5. Any other information Intragroup transactions 52 Material intragroup transactions during the year ending 31 December 2016 are presented below and on the next page on an IFRS basis. The PLRL table shows material transactions between PLRL and members of the Pacific Life group. The Group table shows material 26

27 transactions between members of the SII group (comprising PLRH, PLRL and PLRS) and members of the Pacific Life group that are not in the SII group. Management services Amounts due from/(to) intragroup counterparty at 1 January 2016 Amount of transactions for the period PLRL Settlements paid/ (received) during the period Foreign currency gains/ (losses) Amounts due from/(to) intragroup counterparty at 31 December Pacific Life Re (Australia) Pty Limited - (3,801) 2,476 (74) (1,399) Pacific Life Re Services Limited (1,734) (30,962) 23, (8,784) Pacific Services Canada Limited - (76) 47 (12) (41) UnderwriteMe Technology Solutions Limited Retrocession arrangements (773) Pacific Life Insurance Company (33,200) (26,963) 16, (42,757) * Pacific Life Re (Australia) Pty Limited (1,970) 31,308 (30,341) 1, Pacific Life Reinsurance (Barbados) Limited Group relief (118) (923) (24) Pacific Life Re Holdings Limited - (1,070) - - (1,070) Pacific Life Re Services Limited - (256) - - (256) UnderwriteMe Limited - (541) - - (541) UnderwriteMe Technology Solutions Limited - (1,805) - - (1,805) Total intragroup transactions (37,022) (34,432) 13,143 2,161 (56,150) 27

28 Management services Amounts due from/(to) intragroup counterparty at 1 January 2016 Amount of transactions for the period Group Settlements paid/ (received) during the period Foreign currency gains/ (losses) Amounts due from/(to) intragroup counterparty at 31 December Pacific Life Insurance Company (525) (2,379) 2,911-7 Pacific Life Re (Australia) Pty Limited 1, (2,420) (80) (1,075) Pacific Life Reinsurance (Barbados) Limited (416) Pacific Services Canada Limited 381 1,279 (2,065) (15) (420) UnderwriteMe Limited UnderwriteMe Technology Solutions Limited Retrocession arrangements (773) 143 (238) Pacific Life Insurance Company (33,200) (26,963) 16, (42,757) * Pacific Life Re (Australia) Pty Limited (1,970) 31,308 (30,341) 1, Pacific Life Reinsurance (Barbados) Limited Financing (118) (923) (24) Pacific Life Re Holdings LLC (56,127) (3,368) - - (59,495) Preference shares UnderwriteMe Limited 17,569 12, ,415 Group relief UnderwriteMe Limited - (541) - - (541) UnderwriteMe Technology Solutions Limited - (1,805) - - (1,805) Total intragroup transactions (72,637) 11,072 (15,246) 2,116 (74,695) Figure 10 Summary of intragroup transactions in the reporting period. * The balance due to PLIC consists of reinsurers share of technical provisions of 228.3m, net deposits due to PLIC of 203.3m, termination payments due to PLIC of 49m, reinsurance premiums, claims and commissions payable of 14.7m, and guarantee fee payable of 4.1m. Management services: 53 PLRL receives management services from PLRS and PSCL. PLRS also provides management services to PSCL and PLRA, and it receives management services from PLIC. 54 PLRL entered into a cost contribution agreement on 22 December 2015, with an effective date of 31 December 2015, as a result of which it paid and will pay contributions to the costs PLRS has incurred and will incur in the development and implementation of a global reinsurance operations system platform for use within the Division for the benefit of PLRL and other contributing group companies. The other contributing group companies, which are not part of the SII Group (see section A1.7.2), are PLIC, PLRA and Pacific Life Reinsurance (Barbados) Limited ( PLRB ). 28