Report of the Independent Actuary. December

Transcription

1 Report of the Independent Actuary December

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3 Table of Contents Section 1 : Introduction...1 Background...1 The role of the Independent Actuary...3 Scope of my report...3 Terms of reference...4 Reliances and Limitations...4 Section 2 : Information on which this report is based...5 Scheme of Transfer...5 HLI key documents...6 ALI key documents...6 HLA key documents...7 UHL key documents...7 Reliances...7 Section 3 : Background to the Participant Companies...9 HLI history The business of HLI HLA history The business of HLA ALI history The business of ALI UHL history The business of UHL Section 4 : Main features of the Scheme Scope of transfer Effective Time Conditions for Scheme to become operative Contractual rights With-Profits funds Non-Profits funds Unit-linked funds Unit-linked charges New business... 31

4 ii Tax 31 Further assurance clause Continuity of Proceedings Costs of the Scheme Policyholder communications Section 5 : Pre-Scheme Solvency Positions Introduction Opening Solvency Position Reported Basis Adjusted Basis Economic Basis HLI Pre Transfer Solvency Position Reconciliation between Reported and Adjusted figures Reconciliation between Adjusted and Economic Basis HLI SCR HLA Pre Transfer Solvency Position Reconciliation between Reported and Adjusted figures Reconciliation between Adjusted and Economic Basis HLA SCR ALI Pre Transfer Solvency Position Reconciliation between Reported and Adjusted figures Reconciliation between Adjusted basis and Economic Basis ALI SCR UHL Pre Transfer Solvency Position *or Solvency I equivalent Reconciliation between Reported and Adjusted figures Reconciliation between Adjusted figures and Economic Basis UHL SCR Section 6 : Effects of the Scheme on HLI Policyholders General Considerations Security of HLI policyholders benefits i) Opening Solvency position ii) Risk Profile iii) Projected Solvency position Summary - Security Reasonable Expectations of HLI policyholders i) Funds ii) Reinsurance arrangements iii) Pricing basis for unit-linked funds... 64

5 iv) Charges v) Service vi) Options vii) Tax Conclusion Section 7 : Effects of the Scheme on HLA Policyholders Introduction Security of HLA policyholders benefits i) Solvency position iv) Risk Profile v) Projected solvency Summary - Security Reasonable Expectations of HLA policyholders i) Funds ii) Reinsurance arrangements iii) Pricing basis for unit-linked funds iv) Charges v) Service vi) Options vii) Tax Conclusion Section 8 : Effects of the Scheme on ALI Policyholders Introduction Security of ALI policyholders benefits i) Solvency position ii) Risk Profile ii) Projected Solvency position Summary - Security Reasonable Expectations of ALI policyholders i) Funds ii) Reinsurance arrangements iii) Pricing basis for unit-linked funds iv) Charges v) Service vi) Options vii) Tax Conclusion Section 9 : Effects of the Scheme on UHL Policyholders Introduction... 81

6 iv Security of UHL policyholders benefits i) Solvency position iii) Risk Profile iv) Projected Solvency position Summary - Security Reasonable Expectations of UHL policyholders i) Contractual rights ii) Funds iii) Reinsurance arrangements iv) Pricing basis for unit-linked funds v) Charges vi) Service vii) Options viii) Tax Conclusion Section 10 : Policyholder Communications Policyholder Communication regarding the proposed transfer Section 11 : Summary and overall conclusions Appendix A : Reliances and limitations Reliances Limitations Legal jurisdiction Appendix B : Definitions Appendix C : Glossary... 93

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9 1 Section 1: Introduction Background 1.1 Life Company Consolidation Group ( LCCG ) is a Guernsey based financial services group that through its Irish subsidiary LCCG Ireland Limited ( LCCGI ) has acquired a number of life insurance companies. 1.2 In March 2015, LCCGI acquired IBRC Assurance Company ( IBRC ). Following the change in ownership IBRC was renamed as Harcourt Life Assurance Company Limited. On 3 May 2016 Harcourt Life Assurance Company Limited changed its name to Harcourt Life Assurance Designated Assurance Company 1 ( HLA ). The principal activity of HLA was the provision of investment oriented life assurance and pension products to individuals in Ireland. HLA closed to new business in 2011 and continues to run off its existing book. 1.3 On 1 December 2015, all employment contracts of serving employees of HLA were transferred to a subsidiary of LCCGI, Harcourt Life Services Limited ( HLSL ). HLSL, as a services company, provides policy administration and other administration and management services to HLA and other life assurance entities within the LCCGI Group (both those open to new business and those closed to new business). 1.4 On 2 December 2015, HLA acquired Scottish Mutual International Limited from Phoenix Life Limited ( PLL ). Scottish Mutual International Limited was renamed Scottish Mutual International dac in 2016 and on 3 November 2017 was renamed Harcourt Life Ireland dac ( HLI ). HLI is a life assurance company in run-off that has been closed to new business since 2003 and whose policy administration and management services are outsourced to third party providers. 1.5 On 26 July 2016, HLA acquired Aviva Life International Limited from Aviva International Holdings Limited. Aviva Life International Limited was subsequently renamed Harcourt Life International dac. At the end of June 2017, Harcourt Life International dac acquired the overseas bond business of AXA Life Europe dac, re-opened to the writing of new business and was renamed Utmost Ireland dac ( Utmost ). Utmost is the designated assurance company within LCCGI that is open to new business. In June 2017, LCCGI restructured the companies within the group by transferring ownership of Utmost from HLA to LCCGI by means of an inspecie dividend. 1.6 On 30 November 2016, HLA acquired Augura Life Ireland dac ( ALI ) and Altraplan Bermuda Limited ( Altraplan ) from the OneLife Group. ALI was originally established in 1984 selling traditional non-profit whole of life assurance, unit-linked life and pension business to customers in Ireland. From 2004, it ceased writing new policies until 2011, when, under new ownership, it commenced writing new business, selling unit-linked bonds in Sweden and Norway. Altraplan is a unit-linked business, authorised in Bermuda, whose objective is to sell unit-linked life assurance policies to high net worth investors. Altraplan is closed to new business and is in the process of running off its book of business. 1.7 On 9 March 2017, Union Heritage Life Assurance Company dac ( UHL ) was acquired by HLA from American Income Life Insurance Company which is part of the Torchmark Corporation Group in the United States of America. UHL commenced writing policies in August 2012, primarily writing protection or risk business policies in Ireland. In February 2015, UHL discontinued activities to market and sell insurance policies and ceased writing new business towards the end of Designated Assurance Company or dac

10 2 1.8 The proposed Scheme, which is the subject of this report, aims to bring together the various life assurance companies within the LCCGI Group that are closed to new business and in run off into a single life assurance entity. The proposed Scheme will transfer the ALI, HLA and UHL business into HLI. Following the Scheme, HLI will become the closed book consolidator within the Group, i.e. the life assurance entity within LCCGI into which any future acquisitions of closed books of life assurance business will be transferred. 1.9 The structure of LCCGI before the proposed Scheme is set out in Table 1.1 below and the planned structure post the proposed Scheme is show in Table 1.2 below. Table 1.1 LCCGI structure before transfer LCCGI HLA HLSL Utmost HLI Altraplan ALI UHL Table 1.2 LCCGI structure after transfer LCCGI HLA HLSL Utmost HLI ALI (Empty Shell) UHL (Empty Shell) Altraplan 1.10 The LCCGI strategy in Ireland is to create a consolidated closed book business, (i.e. HLI after the Scheme is complete), together with an open book business specialising in writing overseas life assurance bond business (i.e. Utmost).

11 It has been agreed by the Boards of Directors of HLI, UHL, ALI and HLA to approve the draft Scheme, subject to the requirements of the Central Bank of Ireland ( the CBI ) and the sanction of the Irish High Court. The role of the Independent Actuary 1.12 Under Section 13 of the Assurance Companies Act 1909 (the Act"), any Scheme which provides for the whole or part of the life assurance business carried on by an insurance company to be transferred to another body (including within the same Group), requires the prior sanction of the Irish High Court The Irish High Court will consider the Scheme on the basis of a petition by one, or more, of the parties. The petition must be accompanied by a report on the terms of the Scheme by an Independent Actuary For the purposes of Section 13 of the Act, and subject to the provisions of Section 36 of the Insurance Act 1989, Article 41 of the European Union (Insurance and Reinsurance) Regulations 2015 provides the following: An insurance undertaking whose head office is in the State may, after consultation with the Bank, transfer all or part of its portfolios of contracts, including those concluded either under the right of establishment or the freedom to provide services, to an accepting undertaking whose head office is in the State or another Member State. A transfer shall not be effected unless - (a) The supervisory authority of the home Member State of the accepting undertaking certifies that, after taking the transfer into account, the accepting undertaking possesses the necessary eligible own funds to cover the Solvency Capital Requirement referred to in Regulation 113, and (b) The supervisory authorities of every Member State where the contracts were concluded, either under the right of establishment or the freedom to provide services, and (in a case within paragraph (2)) the supervisory authority of the Member State in the branch is situated, have consented The Actuarial Standard of Practice LA-6 ( ASP LA-6 ), Transfer of long-term business of an authorised insurance company role of the independent actuary, issued by the Society of Actuaries in Ireland, sets out the statutory and professional responsibilities of the Independent Actuary I have been jointly appointed by ALI, HLA, HLI and UHL to act as the Independent Actuary in connection with the Scheme pursuant to Section 13 of the Act. The policies that are proposed to be transferred under the Scheme are referred to in the report as the Transferring Policies I am a Fellow of the Society of Actuaries in Ireland. I am a Consulting Actuary at Towers Watson (Ireland) Limited ( Willis Towers Watson ) of 10/11 Leinster Street South, Dublin 2, Ireland. I have no personal connection with any of ALI, HLA, HLI or UHL. I have previously acted as Independent Actuary for the LCCGI in 2017 in relation to a transfer of a book of business from AXA Life Europe dac to Utmost. Other consultants in Willis Towers Watson have carried out consultancy work for HLI under its previous ownership, although none of these projects were related in any way to the proposed transfer discussed in this report. Scope of my report 1.18 This report has been prepared in respect of the Scheme to be presented to the Irish High Court for the transfer of the Transferring Contracts from ALI, HLA and UHL into HLI of the Transferring Policies in compliance with the requirement for an independent actuary s report in Ireland. As Independent Actuary, I am required to examine the consequences and potential

12 4 consequences of the proposed transfer. In particular, I must consider the implications of the Scheme on the security of policyholders' benefits and the impact on the benefits ultimately payable to policyholders This report considers the consequences of the Scheme for the policyholders of ALI, HLA and UHL (being those policyholders whose policies shall transfer to HLI pursuant to the Scheme) and for the policyholders of the transferee company (HLI). I have only considered the Scheme proposed and I have not considered any alternative Scheme. However, this report compares the position of the life assurance policyholders of the participant companies after implementation of the Scheme with the position if the Scheme was not to proceed In particular, I have considered in this report: the likely effects of the Scheme on life assurance policyholders including, but not limited to, the security of their benefits and their reasonable expectations; and the adequacy of any safeguards in the Scheme to protect the interests of transferring policyholders in the transferee life company. Terms of reference 1.21 Terms of reference for my review of the Scheme and my performance of the role of Independent Actuary have been agreed with ALI, HLA, HLI and UHL and have been discussed with the CBI. These terms are set out above under the headings "The role of the Independent Actuary" and "Scope of my report" In preparing this report I have taken account of the professional standards of practice set out in ASL LA-6 issued by the Society of Actuaries in Ireland This report should be read in conjunction with the following documents: The Scheme; The report by the Head of Actuarial Function ( HoAF ) of HLI on the Scheme; The report by the HoAF of HLA on the Scheme; The report by the HoAF of ALI on the Scheme; The report by the HoAF of UHL on the Scheme; The Policyholder Circular. Reliances and Limitations 1.24 This report is subject to the reliances and limitations as set out in Appendix A of this report.

13 5 Section 2: Information on which this report is based 2.1 In the course of preparing this report I have been provided with a number of documents. These may be broken down into 5 different categories; those relating specifically to the Scheme and those relating to each of the participant companies. Details of these documents are listed below. 2.2 In addition, I have participated in a number of meetings involving the management of ALI, HLA, HLI and UHL. These included meetings with the Heads of Actuarial Function for each of the participant companies. Scheme of Transfer 2.3 The following documents relating to the proposed Scheme of transfer have been considered: The proposed Scheme document The report by the HoAF of HLI on the Scheme The report by the HoAF of HLA on the Scheme The report by the HoAF on the Scheme The report by the HoAF of UHL on the Scheme The Policyholder Circular CBI notification document relating to the proposed transfer Documentation requested by the CBI from the companies relating to the proposed transfer. Post Scheme Own Risk and Solvency Assessment ( ORSA ) Report (assuming the Scheme had taken effect on 31 March 2017) which also included the following addendum papers: Paper setting out the expense assumptions post scheme Paper setting out the possible impact of Brexit Paper relating to the status of litigations within HLA Opinion regarding tax impact of the Scheme HLI capital policy Paper regarding closure of the HLI with-profit fund Paper relating to past Scheme of transfer Paper relating to post scheme servicing arrangements Paper assessing the possible impact of Brexit on HLI s reinsurance arrangements with PLL

14 6 HLSL Board paper of the 18 October 2017 stating the key terms relating to the Master Services Agreement between the participant companies and HLSL due to come into effect on 1 January 2018 which also included financial projections for HLSL Proposed Risk Management Framework of HLI post Scheme HLI key documents 2.4 The key HLI documents I have considered in preparing this report are: HoAF report for HLI as at 31 st December 2016 Actuarial Opinion on Technical Provisions for HLI as at 31 st December 2016 HLI s ORSA for financial year 2016 Directors report and financial statements for HLI for the financial year ended 31 December Reporting Actuary Report for HLI as at 31 December 2016 Auditors Report for the 2016 statutory audit of HLI Auditors Report for the 2016 solvency II audit of HLI Regular Supervisory Report of HLI for 2016 Solvency and Financial Condition Report of HLA for 2016 Document setting out the current policy administration and customer servicing arrangements. With-profit Funds Principles and Practices of Financial Management Paper regarding closure of the HLI with-profit fund Reinsurance treaties relating to operation of the with-profit funds. Floating Charge Deed supporting the reinsurance treaty by which HLI s UWP business is reinsured to PLL ALI key documents 2.5 The key ALI documents I have considered in preparing this report are: HoAF report for ALI as at 31 st December 2016 Actuarial Opinion on Technical Provisions for ALI as at 31 st December 2016 ALI s ORSA for financial year Directors report and financial statements for ALI for the year ended 31 December Regular Supervisory Report of ALI for 2016 Auditors Report for the 2016 statutory audit of ALI

15 7 Solvency and Financial Condition Report of ALI for 2016 HLA key documents 2.6 The key HLA documents I have considered in preparing this report are: HoAF report for HLA as at 31 st December 2016 Actuarial Opinion on Technical Provisions for HLA as at 31 st December 2016 HLA s ORSA for financial year 2016 Directors report and financial statements for HLA for the financial year ended 31 December Regular Supervisory Report of HLA for 2016 Auditors Report for the 2016 statutory audit of HLA Auditors Report for the 2016 solvency II audit of HLA Solvency and Financial Condition Report of HLA for 2016 Paper prepared by the Head of Actuarial Function regarding status of litigations within the company Document setting out the current policy administration and customer servicing arrangements. UHL key documents 2.7 The key UHL documents I have considered in preparing this report are: Reliances Directors report and financial statements for UHL for the year ended 31 December The audited annual returns of UHL to the CBI as at 31 December 2016 Appointed Actuary Report for UHL as at 31 st December 2016 Reporting Actuary Report for UHL as at 31 December 2016 Auditors Letter to Board for the 2016 statutory audit of UHL UHL run off plan May 2015 Document setting out the current policy administration and customer servicing arrangements. 2.8 In carrying out my review and producing this report I have relied without independent verification upon the accuracy and completeness of the data and information provided to me, both in written and oral form, by ALI, HLA, HLI and UHL, particularly in relation to the financial information concerning the solvency position of each company. Where possible, I have reviewed the information provided for reasonableness and consistency with my knowledge of the insurance industry.

16 8 2.9 All information requested by me has been provided by the participant companies.

17 9 Section 3: Background to the Participant Companies 3.1 This Section of the Report sets out some further background on each of the participant companies; HLI - The Transferee HLA - Transferor ALI - Transferor UHL- Transferor 3.2 This Section includes an overview of each company s history, an overview of the products sold by each company and the profile of that business as at 31 March 2017 and how that business is currently administered. 3.3 The current structure of the LCCGI Group and the planned restructuring is set out in the diagram below: Table 3.1 LCCGI structure before transfer LCCGI HLA HLSL Utmost HLI Altraplan ALI UHL Table 3.2 LCCGI structure after transfer LCCGI HLA HLSL Utmost HLI ALI (Empty Shell) UHL (Empty Shell) Altraplan

18 10 HLI history 3.4 HLI began trading in December 1995 and was part of the Abbey National Group. It initially sold international products geared towards international corporate, private (high net worth) individuals and trustee clients. It subsequently expanded into the Irish domestic market with a range of term assurance, pension and savings products. Both unit-linked and with-profits products were offered. 3.5 Prior to November 2017 HLI was known as Scottish Mutual International Limited. 3.6 Since it was first authorised as a life assurance company by the Irish regulator HLI has changed ownership in various transactions. The key historic events are as follows: In November 2004, Banco Santander acquired Abbey National plc, including HLI. In September 2006, Resolution plc acquired the ex-abbey life companies, including HLI, from Santander. In May 2008, the Pearl Group acquired Resolution plc. In March 2010, Pearl Group changed its name to Phoenix Group Holdings. In April 2014, HLI s parent Scottish Mutual International Holdings transferred its holding in HLI to PLL, a subsidiary of Phoenix Group Holdings in the UK, which had been its immediate parent company since September 2009 and is a UK authorised insurance company. In December 2015, PLL sold the business to HLA. 3.7 HLI closed both the international and domestic with-profits products to new business in In January 2004, this closure was extended across the whole book of business. At that time as part of the strategic decision to close to new business, the company entered into a management services agreement with Pearl Group Management Services (Ireland) Limited ( PGMSI ). PGMSI is a service provision company within the Phoenix Group and currently manages the relationships between HLI and its external suppliers on a day to day basis in accordance with the management services agreement. 3.8 A small amount of new premiums continues to be accepted by HLI. The total premiums received in 2016 were 329,000 which includes regular premium income as well as top-up premiums. The business of HLI 3.9 HLI s book of business consists of a range of with-profits, unit-linked and term assurance products. It holds an authorisation for the following classes of insurance business (as defined in Solvency II Directive 2009/138/EC): Class VI: Capital redemption business. Class III: Life assurance contracts which are linked to investment funds (i.e. Unit-linked business and unitised with profits ( UWP ) business), with connected class IV. Class I: Life assurance and contracts to pay annuities on human life, but excluding those contracts that fall under Class II or Class III, with connected class IV For unit-linked business the performance of the contract is directly linked to the performance of the underlying funds that the policy has been invested in. The value at any point in time is by reference to the number of units allocated to the policy and the value of those units. The unit

19 11 value is determined by direct reference to the value of the underlying investments of the unitlinked funds invested in In general, for UWP business some smoothing of investment returns tends to take place. This generally means that there is an indirect link between the unit price and the underlying investments. The policy terms and conditions will set out how unit prices will increase over time. This may be in line with a guaranteed annual rate of increase (which may be zero) plus an additional annual bonus determined by the company taking account of various factors including the investment performance of the UWP funds (which also could be zero). At maturity a final bonus can also apply. Market value reductions (MVRs) are a feature of UWP business. These are typically applied on surrender, other than on pre-defined non MVR dates, so as to ensure that the surrender value is reflective of the performance of the underlying UWP funds A capital redemption contract is an investment contract between the insurance company and the policyholder. It can be distinguished from other classes of business offered by HLI (such as a life assurance contract) by the fact that there is no life assured. A capital redemption contract is always a fixed-term contract, because there is no insurance event that otherwise would terminate the contract. It may be a unit-linked policy or a guaranteed return policy or a combination of the two alternatives. In general, a policyholder would pay a single premium at the outset which could be in the form of units in an investment fund. The benefit at the fixed maturity of the contract could be the greater of a guaranteed maturity value or the bid value of the units at maturity. The policyholder may have an option to surrender part or all of their units at any time with the surrender value determined by direct reference to the value of the underlying investments of the unit-linked funds invested in. Reinsurance 3.13 There are three reinsurance agreements in force as follows: A reinsurance agreement is in place with PLL under which some of the UWP units are reinsured into the one of the PLL sub-funds. The amount reinsured was 7.6 million as at end March There is a further reinsurance agreement with PLL under which some of the unit-linked funds are reinsured into the equivalent PLL unit funds. The amount reinsured was 7.0 million as at year end March There is a reinsurance agreement with Gen Re under which HLI reinsures two-thirds of its risk benefits up to a maximum amount per life. The annual premium paid in 2016 was 47.8K. At the end of March 2017, the sum reinsured was 17.0 million with associated reinsurance asset of 0.2 million The reinsurance arrangements for the with-profits funds and unit-linked business are supported by a floating charge on the assets of PLL. The objective of the floating charge is to rank HLI with-profits policyholders alongside other PLL with-profits policyholders in a wind up situation and therefore enhances the benefit security for HLI policyholders.

20 12 Products 3.15 More detail on each of the products is given below: Investment Bonds The Investment Bonds are whole of life assurance products. Both unit-linked and unitised with-profits versions of this product were sold. The value of the bond is determined by the number of units allocated to a policy multiplied by the unit price. For unit-linked business the unit price reflects the market value of the underlying unit-linked funds. For the unitised with-profits funds, the unit price reflects the smoothed investment experience of the With-Profits fund. The principal death benefit is the return on death of 101% of the greater of the surrender value of the plan and the original investment for ages at death lower than 75. For death at ages 75 or over, the return on death is simply 100.1% of the surrender value of the plan. The surrender value for the unitised with profit version is the value of the units increased by any terminal bonus and reduced by any MVR in force. An early surrender charge will also apply if a surrender is made within the first 5 years of the contract. A MVR is not applied when calculating the With-Profits fund portion of the surrender value for a death claim. There are special guaranteed dates which fall on the 8 th (or any later anniversary chosen at the outset of the plan) anniversary and every 5 years thereafter. This guarantee allows the plan to be surrendered in full, or in part, free from any MVR factor that may be in force at that time. Selexis Investment Bonds The Selexis Investment Bond is a single premium whole of life unitised with-profits policy. The benefit on death is 101% of the bid value of the units attaching to the policy. In certain circumstances, an MVR may apply to the With Profit Fund unit values. If the contract is invested in the With-Profit Fund throughout then a guarantee is given that if the policy is encashed, fully or partially, at the tenth anniversary, the amount payable will be a minimum of 110% of the premium (or part thereof). Note that these guarantees are no longer applicable as all of the policies on HLI s books are in force for more than ten years. The value of the bond is determined by the number of units allocated to a contract multiplied by the relevant unit price. For the unitised withprofits funds, the unit price reflects the smoothed investment experience of the With- Profits fund. Guaranteed With-Profit Bond The Guaranteed With-Profit Bond is a single premium, whole of life (or 80 year) unitised with-profits assurance plan, with a guaranteed maturity value on specified anniversaries. The key feature of this product is the surrender value guarantee on the 15th policy anniversary. The surrender value at this policy anniversary is the larger of the unit value and 140% of the original premium. The majority of these policies were sold in 2001 and 2002 meaning the bulk of the guaranteed dates will have been passed by end At 31 March 2017, there were 143 ( 29m unit value) of these policies in force. The remainder of the guarantees will expire by end of Q Selexis Savings Plan The Selexis Savings Plan is a regular premium whole of life assurance contract. This is a unitised with-profits product. The premium term varies between 10 and 30 years. The benefit on death is 101% of the bid value of the units attaching to the policy. The surrender value is the bid value of the units attaching. For the unitised with-profits funds, the unit price reflects the smoothed investment experience of the With-Profits fund.

21 13 Selexis Investment Mortgage The Selexis Investment Mortgage is a regular premium whole of life assurance contract. This is a UWP product. The premium term varies between 10 and 30 years. The benefit on death is the greater of 101% of the bid value of the units attaching to the policy and the guaranteed minimum death benefit under the policy. For the UWP funds, the unit price reflects the smoothed investment experience of the With-Profits fund. Select Retirement Plans The Select Retirement Plans are deferred annuity contracts. The contract accepted regular and/or single premiums and may be a unit-linked or UWP policy. Policyholder benefits are linked to the value of internal linked funds and/or to the Pension With- Profits Funds. Under the Late Values Plan version of this product there is a 5% maturity bonus paid on death or retirement provided at least ten years of regular contributions have been paid. Flexible Investment Plan The Flexible Investment Plan is a regular premium whole of life unit-linked assurance plan. The surrender value of the plan is the value of the units attaching to the policy. The principal death benefit is the return on death of at least 101% of the surrender value of the plan. The policyholder may opt for additional protection benefits - including extra life assurance, critical illness and payment protection. If any of these options are exercised, they are charged for on a risk premium basis by monthly cancellation of units. A loyalty bonus of 0.5% of the value of units in force at that time will be added to the contract on the eleventh and subsequent policy anniversaries. Guaranteed Self Assurance The Guaranteed Self Assurance is a regular premium non unit-linked contract available for terms of between 5 and 30 years that provides life assurance and critical illness cover along with optional permanent total disability, waiver of premium, hospital cash, surgical cash and accident income benefits. It is available on a single life, joint life or dual cover basis. No benefit is payable on surrender or survival to the end of the policy term Within its policy conditions, HLI reserves the right to modify policy charges in certain circumstances. UWP business 3.17 The UWP fund is notionally separate from the other assets of the company. The UWP fund is split into three sub-funds depending on the currency in which the original policy was written namely euros, pounds sterling or US dollars. The UWP fund operates akin to a smoothed unit-linked fund; the shareholder takes a charge from the fund but the fund does not participate in any other aspects of the business; and the shareholder bears (directly) the cost of any guarantees as they arise. The UWP fund is therefore essentially a smoothed investment vehicle On surrender, policyholders receive the value of their units, which have been increased by the annual bonuses declared, plus any final bonus or less any MVR that may apply at that time. No MVR is applied on death claims, but the calculation is otherwise the same. In addition, no MVR applies on certain guarantee dates. The specific dates of the no MVR application depend on the product but they are typically the 8th and 15th anniversary of the product. The vast majority of products have passed these guarantee dates with the remaining guarantee dates arising before the end of the second quarter of 2018.

22 The operation of the UWP funds is governed by Principles and Practices of Financial Management ( PPFM ) which is published on the HLI website. An additional customer friendly document on the management of the with profit funds is also published on the company website HLI s current practice is to review annual bonuses once a year in March/April (effective May 1) and to review final bonus twice a year, with new rates effective from 1 January and 1 July. MVRs are reviewed monthly and are revised when appropriate. Scales of final and annual bonus rates are set by the HLI Board, on the advice of the Head of Actuarial Function. However, the HLI Board has delegated authority to the HoAF to revise MVR scales as necessary Current annual bonus rates and terminal bonus rates are available on the HLI website ( At the date of this report the annual bonuses ranged from 0% to 1% and the terminal bonuses ranged from 0% to 120% HLI issued five different series of UWP funds, each of which had product features and guarantees. These can be grouped into three distinct blocks of UWP business; i) The International business, known as Series 1, 2 and 5. This is denominated in EUR, GBP and USD. The unit value on this business was 65 million at 31 March This is single premium only. ii) iii) The Domestic business, known as Series 3 and 4. This is EUR denominated and the value of this business was approximately 22 million at 31 March This business includes both single premium and regular premium business. The International business, known as the OLAB units. This is reinsured with PLL which at the date of this report had an A rating from Fitch. The value of this business at 31 March 2017 was 6.5million. This is single premium only business HLI has the following guarantees on its UWP products: A MVA free guarantee on the HLI With-Profits Investment Bond at certain dates set out in the policy terms and conditions. Almost all these liabilities are reassured to PLL. Premium related guarantees on the Guaranteed With-Profits Bond policies within the international business. The guarantees on these will be fully run off by April MVA free guarantees on death. MVA free guarantees at maturity for the domestic pension business. For capital redemption business, there is a guaranteed maturity benefit of at least twice the original investment, less withdrawals, on the 80th anniversary of the commencement of these policies With-profit products are generally currently in the money which means that the current asset share of the policies are higher than the guaranteed values.

23 Table 3.1 below shows a breakdown of the assets and liabilities of the UWP fund as at 31 March 2017, before allowance for reinsurance. Table 3.1 UWP assets & liabilities 000 s Value of Guaranteed Benefits 77,406 Fund for Future Appropriations 30,424 Asset Share 107,830 Bonus Smoothing Account 356 Total value of assets 108,185 Best Estimate Liability An explanation of each of the lines in the table above is set out below: The Value of Guaranteed Benefits represents the value of the UWP units allocated to policies, increased to reflect annual bonuses declared to 31 March The Fund for Future Appropriations and the Value of Guaranteed Benefits combined represent the pool of assets from which final bonuses will be paid. The Asset Share is the sum of the Fund for Future Appropriations and the Value of Guaranteed Benefits. The asset share is calculated by accumulating the premium and actual investment returns, allowing for expenses and other outgoings. The intention is that the amount paid on surrender is, subject to any smoothing that may be operating, close to the underlying asset share. The Bonus Smoothing Account is where any difference between the amount paid out to policyholders upon a claim and the underlying asset share accumulates. The aim is to reduce this bonus smoothing account to zero by adjusting up or down the MVAs and terminal bonuses in aggregate each year. The Total Value of Assets represents the Asset Share plus the Bonus Smoothing Account. The Best Estimate Liability (the BEL ) is the additional reserve set aside by the company to meet the expected liabilities in respect of this business. This includes the expected cost of providing for guarantees on the Guaranteed With-Profits Investment Bond. This amount is covered by shareholder funds. The reserve also covers the expected expenses incurred in administering the business and the expected income of the company from charges. Unit-linked funds 3.27 HLI has unit-linked policyholder liabilities of 192.8m as at 31 March The unit-linked liabilities are matched by unit-linked assets. The majority of these liabilities are denominated in sterling (64%) with 28% in Euros and 8% in US dollars. A summary of HLI s business as at 31 March 2017 is shown in Table 3.2 below:

24 16 Table 3.2 HLI business as at 31 March 2017 Product Number of Policies Funds under Management ( m) Best Estimate Liability( m) Risk Margin ( m) Total Liabilities ( m) Investment Bonds Guaranteed With Profit Bond Investment Bonds Total Class VI Investment Bonds Selexis Investment Bond Selexis Savings Plan Selexis Investment Mortgage Select Retirement Plans Investment Bonds Flexible Investment Plan Selexis Endowment Mortgage Select Retirement Plans , Total Class III 2, Guaranteed Self Assurance Total Class I Total 2, Administration 3.28 Under the terms of the Share Purchase Agreement between HLA and PLL for the acquisition of HLI, a 12-month service transitional plan was put in place from the date of acquisition to transfer four service packages to HLSL. HLSL will provide the services currently provided to HLI by PGMSI, including but not limited to policy administration services, investment

25 17 administration services, actuarial services, and financial and accounting services. The transfer of these services is ongoing and as at the date of this report, three of the four services have transferred and the remaining service package that is still provided by PGMSI will transfer in the coming months HLI also outsources many of its requirements for operational services to HLSL. Additionally, it outsources its Actuarial and Internal Audit functions to Milliman and Mazars respectively. Policy administration services are also provided through the transitional arrangements with PGMSI, by DST Systems, a third party policy administration supplier.

26 18 HLA history 3.30 HLA, formerly IBRC, was acquired by LCCG in March 2015, at which time the name of the company was changed to Harcourt Life Assurance Company Ltd and subsequently to HLA HLA commenced trading as part of the Anglo Irish Bank Group in January 2001, writing wealth management business. It offered a range of unit-linked investment and pension products. Its products consisted mainly of personal and collective portfolio bond products. These portfolio bonds included investments in property, bonds, equity, and cash assets though focused extensively on acquisition and unitisation of properties and property portfolios aimed at high net worth clients. Many of these property investments contained elements of gearing. The last significant collective fund was launched in The company was closed to new business and put into run-off in Since the company was put into run-off a number of the properties that were held within the unit-linked funds have been sold which facilitated the surrender of polices invested in these unit-linked funds. HLA expects to run off its existing business in line with the Resolution Plan submitted to the CBI in March The sale of the remaining properties is expected to complete during The gearing within the various property funds amplified the effects of the Irish property market crash. Consequently, many of these geared property funds materially reduced in value, including reaching a zero value post the property market crash At the time of the acquisition of HLA by LCCG, a new strategy was introduced whereby in parallel with the run off of the existing business, HLA sought to identify, acquire and consolidate other closed life funds and businesses. As a result, HLA subsequently purchased a number of life assurance companies, all of which were closed to new business at the time of the purchase by HLA. These are described below: HLA acquired the entire share capital of HLI in December 2015; HLA acquired the entire share capital of Aviva Life International Limited in July Aviva Life International then changed its name to Harcourt Life International dac which subsequently changed its name to Utmost. In June 2017, ownership of Utmost was transferred from HLA to LCCGI by means of an in-specie transfer; HLA acquired ALI in November 2016; HLA acquired Altraplan in November Altraplan is a unit-linked business authorised in Bermuda selling to high net worth investors; and In March 2017, HLA acquired the entire share capital of UHL from American Income Life Insurance Company. The business of HLA 3.35 This section provides an overview of the business of HLA excluding the various businesses purchased by HLA subsequent to LCCGI s acquisition of HLA. The various companies referred to above that HLA acquired subsequent to LCCGI s acquisition of HLA and which are also participant companies in the Scheme are described separately in the following sections HLA s book of business consists of a range of single premium unit-linked products sold in the Irish market. The range of products includes investments bonds and a number of pension products. These products are largely invested in a range of property funds, although there are also a number of policies invested in personalised investment funds. The sum assured of the policies sold by HLI was 100% linked to the value of the underlying fund so no mortality risk was accepted (irrespective of whether the policyholder dies when the policy is in force) and the policyholders bear investment risk with no guarantees provided by HLA.

27 There were 924 policies with a value above nil in force at 31 March The policy count has reduced significantly in recent years since HLA closed to new business. HLA does not have any reinsurance arrangements in place. It holds an authorisation for the following classes of insurance business (as defined in Solvency II Directive 2009/138/EC): Class I: Life assurance and contracts to pay annuities on human life, but excluding Classes II and III. Class III: Life assurance contracts which are linked to investment funds (i.e. Unit-linked business). Class VII: Management of Group Pension Funds Products 3.38 Table 3.3 below provides a summary of the products that remain inforce. While there are a number of products listed below, they each operate in broadly the same way, other than having different legal structures. The main groupings of policies are: Policies which are invested primarily in cash, equity or managed funds. These are generally either policies that were previously invested in property assets (see below) or products which have been invested in these assets over time. The charge to HLA is typically 0.25% of the assets per annum. Policies which are invested in geared property funds. The property assets were purchased by 2008, at the latest, with an existing expected holding period at the date of purchase of 5-7 years. Due to the property crash many properties were held for longer. Over the last two years HLA has disposed of most properties and is currently in the process of disposing of the remaining properties. When properties are sold, the resulting proceeds are transferred to a cash fund and made available for policyholders to withdraw or to transfer to another policy with another insurer as appropriate. There is normally a fund based charge based on the higher of the premium paid and the current fund value. Unique policies where the assets were initially directed by the policyholder. A small number of these policies remain and their charging structures are unique to each policy. These policies hold a mix of property and other assets HLA does not offer any options or guarantees on any of its policies. HLA does not provide additional benefits payable on death HLA has no reinsurance arrangements.

28 The following table summarises the HLA business as at 31 March Table 3.3 HLA business as at 31 March 2017 Product Additional Voluntary Contribution Plan Approved Minimum Retirement Fund Approved Retirement Fund Number of Policies Funds under Management ( m) Best Estimate Liability( m) Risk Margin ( m) Total Liabilities ( m) Investment Bond Executive Retirement Plan Personal Pension Plan Buy-out Bond Total Class III / Life Assurance Investment Only Business (Trustee Investment Plan) Total Class VII / Group Pension Total Administration 3.42 In December 2015, HLSL was established to provide management services to HLA Group companies in Ireland. All HLA, HLI and ALI staff have transferred to HLSL in order to provide services to all the life companies within the LCCGI Group 3.43 As a consequence, at the date of this report, HLA outsources its oversight requirements in Dublin to HLSL. Unit pricing, policy administration services, financial reporting and policy communication services are all provided by HLSL Additionally, HLA outsources its Actuarial and Internal Audit functions to Milliman and Mazars respectively.

29 21 ALI history 3.45 ALI was originally incorporated in the Republic of Ireland in 1984 as an insurance undertaking, and authorised to write Class I and Class II insurance business. It began trading under the name Combined Life Assurance Company of Europe Limited. In September 2009, it was purchased by NPG Wealth Management Group, now the OneLife Group. LCCG acquired ALI, through its subsidiary company HLA, in November ALI has had two periods of writing business. Up until 2004, it wrote unit-linked life and pensions business and non-linked non-profit whole of life policies, all of which were sold in Ireland. From 2004, it ceased writing new policies until later in 2011, when, under new ownership, it commenced writing new business, selling unit-linked single premium portfolio bonds in Sweden and Norway. In 2014, ALI received, by way of an insurance business transfer, a block of unit-linked and portfolio bonds from PEL Altraplan (Gibraltar) PCC Ltd, then a sister company of NPG Wealth Management Group incorporated in Gibraltar The company closed to new business in 2015, albeit that it still accepts topups from existing policyholders on a number of products. The business of ALI 3.48 ALI holds an authorisation for the following classes of insurance business (as defined in Solvency II Directive 2009/138/EC): Class I: Life assurance and contracts to pay annuities on human life, but excluding those contracts that fall under Class II or Class III. Class III: Life assurance contracts which are linked to investment funds (i.e. Unit-linked business). Products 3.49 ALI s book of business consists of unit-linked and life assurance business. An overview of its products is included below: Perfect Combination Plan (CLACE) Under the Perfect Combination Plan (Combined Life Assurance Company of Europe or CLACE ) Unitised Life product, benefits are payable on surrender or death. This product was sold in modules (base, additional protection, regular savings and investment modules). On death, each module would pay a benefit. This would be the greater of the sum assured amount versus the bid value of the units for the base, additional protection and regular savings (sold pre- April 1991) modules and 101% of bid value of units for the regular savings and investment modules (both sold post April 1991). The investment module sold pre- April 1991 pays the greater of the single premium investment versus the bid value of the units. The surrender value payable is the bid value of the units. Personal Portfolio Bond ( PPB ) and Privileged Structure Bond ( PSB ) products Under the PPB and PSB products, the benefit payable on death is 101% of the surrender value and 101% of the bid value of the units respectively. Adiameris The Adiameris product pays 101% of the surrender value upon the death of the policyholder. This percentage reduces to 100% when the policyholder reaches age 85 and over.