Dervla Tomlin FSAI. Appointed Actuary

Transcription

1 Report by the Appointed Actuary of Irish Life Assurance plc on the proposed transfer of life assurance business from Canada Life Assurance (Ireland) Limited Dervla Tomlin FSAI Appointed Actuary 18 July 2013

2 Table of Contents 1. INTRODUCTION 1 2. INFORMATION ABOUT IRISH LIFE ASSURANCE 2 3. INFORMATION ABOUT CANADA LIFE ASSURANCE (IRELAND) 6 4. PROPOSED SCHEME OF TRANSFER SECURITY OF BENEFITS POST TRANSFER IMPACT OF THE SCHEME ON POLICYHOLDERS BENEFITS CONCLUSIONS 19 APPENDIX: RELIANCES 20

3 1. Introduction 1.1 On 19 February 2013 it was announced that Great-West Lifeco Inc ( Great-West ), was to buy Irish Life Group Limited, the parent company of Irish Life Assurance plc ( Irish Life ) from the Minister for Finance. The transaction completed on 18 July Following the acquisition, a portfolio transfer is proposed from Canada Life Assurance (Ireland) Ltd ( CLI ) to Irish Life. 1.2 The proposed transfer will result in the consolidation of Great-West s life assurance operations in Ireland. The simplified structure of having one Irish life assurance company will lead to reduced regulatory and administrative costs. 1.3 In accordance with the requirements of the Assurance Companies Act 1909, the sanction of the High Court is required to transfer the long term business of an authorised insurance company. 1.4 Subject to Court approval, it is proposed that the transfer will take effect from 1 January The assets and liabilities of CLI, except for certain excluded assets, will be transferred to Irish Life, in exchange for shares in Irish Life equal to the fair value of the net assets transferred. All of the rights and obligations of CLI shall be transferred to Irish Life. Throughout this document the term Scheme is used to describe all of the proposals included in the legal documentation surrounding this proposed transfer. Further detail on the proposed Scheme is provided in section A report from an Independent Actuary must be presented to the High Court as part of the Scheme. It has become common practice for the report of the Independent Actuary to be accompanied by reports from the Appointed Actuary of both the transferring entity and the receiving entity. 1.6 I have prepared this report in my capacity as the Appointed Actuary of Irish Life. The purpose of this report is to consider the effects of the proposed Scheme on the policyholders of Irish Life, paying particular regard to the security of their benefits, their fair treatment and their reasonable expectations regarding the operation of their life assurance policies. This report has been prepared solely for the purpose of assessing the terms of the proposed Scheme. It should not be relied upon for any other purpose. 1.7 I am a Fellow Member of the Society of Actuaries in Ireland having qualified in I have been the Appointed Actuary of Irish Life since October If the Scheme is sanctioned by the Court, my Appointed Actuary responsibilities will also encompass the transferred business of CLI. 1.8 A summary of the principal documents which I have considered in the preparation of this report is shown in the Appendix. In addition, I have had access to, and discussions with, the management of CLI. I have relied on the accuracy of the information provided. Based on my own experience of the insurance industry I am satisfied that the information appears reasonable but I have not independently verified it. This report is based on the information available to me at, or prior to, 18 July The security of benefits and fair treatment and reasonable expectations of CLI policyholders are considered by the CLI Appointed Actuary in her report. I have relied on the investigations carried out, and opinions reached, by the Appointed Actuary for CLI in the assessment of the impact of the Scheme on CLI policyholders. 1

4 2. Information about Irish Life Assurance Overview 2.1. Irish Life is Ireland s largest life assurance company. Following the recent acquisition of its parent company, Irish Life Group Limited, Irish Life is part of the Great-West group Irish Life operates a multi-channel distribution strategy for its products and services. For individual customers, it provides a comprehensive product range including pensions, protection, investment and regular savings products. It also provides a wide range of group pension and protection solutions to employers, pension schemes and affinity groups At the end of 2012 Irish Life had almost 718,000 policies in force, comprising 375,000 non-linked policies (31 December 2011: 368,000) and 343,000 unit-linked policies (excluding group pensions) (31 December 2011: 358,000). The benefits of the unitlinked policies are linked to the performance of investment funds. Total policyholder unit-linked funds under management were 24.6 billion (31 December 2011: 22.4 billion) Irish Life s unit-linked business includes individual and group life and pension business. Some unit-linked products have attaching guarantees or capital protection provided either by Irish Life or third parties. The non-linked business includes annuities, income protection, and term assurances The life assurance business of Irish Life consists wholly of non-participating policies which are written in the Continuing Fund. The Irish Life Shareholder Fund is entitled to the entire surplus arising on this business The table below summarises the numbers of policies and the mathematical reserves, net of reinsurance ceded, of Irish Life at 31 December 2012: Summary of Irish Life Business at 31 December 2012 Number of Unit Liability Mathematical reserves (net of reinsurance) Contracts ( m) ( m) Savings & Investment 112,562 3,060 3,170 Pensions 158,230 21,031 21,314 Protection (excluding Income Protection) 409, Annuities 30, ,258 Income Protection* 6, Group Risk* Total 717,902 24,551 26,876 * In addition to the number of contracts shown, Irish Life had 2,462 group risk and PHI schemes in place. Risk Profile 2.7. The range of risks to which Irish Life is exposed includes market risks (equity, property and interest rate risks), credit risk and insurance risks (mortality, morbidity, expense and lapse risks). Other risks include concentration, liquidity, operational and other non-financial risks (e.g. strategic and reputation risk). The range of risks to which Irish Life is exposed is similar to those relevant to other large life insurance 2

5 companies. Risks are identified, assessed, monitored, managed and mitigated through Irish Life s risk management system Market risk is mitigated by matching assets and liabilities as closely as possible Investment guarantees are provided on a small proportion of the unit-linked business. The main guaranteed funds operated by Irish Life are the Secured Performance Fund (SPF), the Exempt Guaranteed Fund and the Stabilised Profits Fund. The total asset value of these funds was approximately 1.1bn at 31 December Reductions in interest rates and/or falls in stock markets would increase the cost of these guarantees to Irish Life. Irish Life sets aside mathematical reserves for these guarantees which have been calculated on a prudent basis and which include allowance for the possibility of adverse interest rate and stock market movements. The exposure to investment guarantees is monitored and managed on an on-going basis. The SPF is closed to new inflows which limits the potential future risks faced by the company. In December 2012, the Board approved a proposal to hedge a portion of the equity exposure arising from investment guarantees on the SPF The total mathematical reserve for investment guarantees and other financial options at 31 December 2012 was 149m including 98m in respect of the SPF The assets backing non-linked liabilities are invested mainly in EU government bonds and in cash. Assets in the Shareholder Fund are mainly invested in a mix of cash, fixed interest and property assets Irish Life is exposed to counterparty credit risk in relation to fixed interest and cash holdings backing non-linked liabilities, unit-linked liabilities where Irish Life has provided a credit risk guarantee, and assets held in the Shareholder Fund. As at 31 December 2012, these assets included 452m of Irish and Italian government bonds and Irish bank bonds and deposits. In valuing its liabilities Irish Life makes additional allowance for credit risk on lower rated bond holdings. Cash holdings are well diversified across a range of highly rated international banks Irish Life uses reinsurance to improve capital efficiency, to protect against adverse claims experience, and to support new business financing. The mathematical reserves at 31 December 2012 are net of a 2.6 billion offset in respect of reinsurance ceded. 1.5 billion of this reduction is due to annuity reinsurance for which the backing assets are held in charged collateral accounts. The regulatory offset for other reinsurance treaties reflects the prudent regulatory regime. The underlying exposure on a best estimate basis is relatively small (maximum economic exposure 22m in respect of any one reinsurer). A regular assessment is carried out on all reinsurance company ratings to monitor counterparty credit risk. If a company rating falls below the minimum acceptable level then new business is no longer placed with that company. Solvency Position The security of policyholders benefits is provided by the size of an insurer s assets relative to its liabilities. Under the existing regulatory regime ( Solvency I ) liabilities are valued on a prudent basis while assets are predominately valued at market value. In addition, the regulatory regime requires that the excess of assets over prudent liabilities must in turn exceed a prescribed minimum level, thus providing a minimum level of security. 3

6 2.15. The table below summarises the solvency position of Irish Life under the existing regulatory regime as at 31 December 2011 and 31 December Irish Life solvency position ( m) 31 December December 2011 Total Assets 28,558 26,151 Total Liabilities (including other liabilities) 27,775 25,447 Total Available assets (= (1) (2)) Required minimum solvency margin Excess assets (= (3) (4)) Solvency coverage (= (3) / (4)) 188% 175% As at 31 December 2012 the audited regulatory returns to the Central Bank of Ireland (CBI) showed that the total life assurance business assets of Irish Life were 28,558m whilst mathematical reserves and other liabilities amounted to 27,775m. Thus there were assets of 783m available to cover the required minimum solvency margin ( RMSM ) for Irish Life of 416m, giving a solvency coverage ratio of 188% at 31 December The assets available to cover the solvency margin requirement were funded by equity and retained earnings of 575m and subordinated debt of 208m. The subordinated debt was issued in 2007 in the form of perpetual capital notes. The notes have no maturity date but are redeemable at the option of Irish Life, subject to prior regulatory consent Irish Life has continued to trade normally since the date of these returns The CBI generally expects well-established companies to maintain a solvency cover ratio of at least 150%. Irish Life operates an internal target to maintain assets of at least 175% of the RMSM. Whilst the solvency cover ratio was higher than target at 31 December 2012, the solvency cover is expected to revert to the target level in the future The internal target of 175% represents a healthy solvency position given the risks to which the company is exposed. It provides a buffer to maintain the solvency cover above 150% in the event of adverse experience I prepare an annual Financial Condition Report ( FCR ) for the Board of Directors of Irish Life. The FCR is an internal report which is submitted to the CBI on a triennial basis. The purpose of the report is to identify plausible threats to the satisfactory financial condition of the company, actions that lessen the likelihood of those threats and actions that would mitigate those threats if they materialised. The most recent FCR was presented to the Board of Irish Life in September An updated set of financial projections was prepared in May 2013 making allowance for expected operational changes arising as a consequence of the acquisition by Great-West The projections show that, under the current prudent regulatory regime, strong earnings are expected to emerge over the next five years and that the solvency cover ratio is expected to remain at the target level of 175% after significant dividend payments. The projections also show that the solvency position of Irish Life is resilient to a range of adverse scenarios including credit defaults and adverse changes in sales volumes, persistency experience, expense levels, investment market performance and product margins. The projections show that while the solvency cover would drop below 175% in plausible adverse scenarios, solvency 4

7 cover would not fall below 150% and would recover relatively quickly to the target level of 175%, assuming emerging earnings were retained in the company and were not paid out as dividends during the recovery period A new regulatory regime ( Solvency II ) is planned for insurers across Europe. Under Solvency II, capital adequacy requirements will be harmonised across Europe and an economic risk-based approach will be adopted which will provide incentives for firms to properly measure and manage risks. The Solvency II Directive was adopted by the European Parliament in April The current expectation is for full implementation from 1 January The most recent calculations were carried out by Irish Life in the first quarter of 2013 based on the proposed Solvency II rules and a 31 December 2011 financial position. They demonstrate that Irish Life is well capitalised on a Solvency II basis. 5

8 3. Information about Canada Life Assurance (Ireland) Overview 3.1. CLI is part of the Great-West group. It is a wholly owned subsidiary of Canada Life Limited and, through intermediate holding companies, of The Canada Life Assurance Company ( CLACO ). In October 2012, the life assurance business of the Irish branch of CLACO was transferred into CLI, through a portfolio transfer process The company has written a range of unit-linked and non-linked business. Some of CLI s non-linked business participates in profits, receiving bonuses which reflect the investment, mortality, lapse and expense experience of the fund in which their policy is invested ( participating business ) whilst other lines of non-linked business do not ( non-participating business ) The life assurance fund of CLI comprises three sub-funds. Participating policies are maintained within the Canada Life Ireland Individual Life Closed Par Sub-Fund ( Closed Par Sub-Fund ) and the Canada Life Ireland Individual Life Open Par Sub- Fund ( Open Par Sub-Fund ), collectively known as the Par Sub-Funds. Other policies are maintained within the Non-Par Sub-Fund The following table summarises the numbers of policies and the mathematical reserves, net of reinsurance ceded, at 31 December 2012: Summary of CLI Business at 31 December 2012 Par Funds Mathematical reserves (net of Number of Unit Liability reinsurance) Contracts ( m) ( m) Closed Par Sub-Fund 6, Open Par Sub-Fund 2, Sub-total 8, Non-Par Sub-Fund Unit-linked investment and pensions 1 77,503 2,726 2,757 Annuities 4, Individual protection 58, Group risk 2-7 Sub-total 140,384 2,861 3,219 Total 149,254 2,861 3,345 Note: (1) Unit-linked life and pensions includes the UWP Fund, which has reserves of 237m at 31 December 2012 (2) The number of policies shown in the table does not include 137 group schemes Following the acquisition by Great-West of Irish Life, the operations of the CLI and Irish Life businesses will be combined. New business will be written through Irish Life. CLI will close to new business by August 2013, with the exception of increments and the exercise of options on existing CLI policies, which will continue to be facilitated in CLI until the portfolio transfer is complete. It is planned that the administration of CLI insurance business will be migrated onto Irish Life administration systems. This migration will occur irrespective of the portfolio transfer. The migration is expected to be completed in

9 Par Sub-Funds 3.6. CLI s Par Sub-Funds consist mainly of endowment policies, with some whole of life policies and a small block of deferred annuity policies. These participating policies receive bonuses which reflect the investment, mortality, lapse and expense experience of the Par Sub-Funds At the demutualisation of CLACO (on 4 November 1999) the Par Sub-Fund that existed at that time was restructured in accordance with the Office of the Superintendent of Financial Institutions in Canada ( OSFI ) guidelines for demutualisation. As a result, the Closed Par Sub-Fund was established with all the participating policies that were in-force at the demutualisation date. The original size of the Closed Par Sub-Fund was determined so as to ensure that together with future premiums it was sufficient on best estimate assumptions to meet contractual obligations and policyholders reasonable expectations of future bonuses. The assets were allocated for the sole benefit of policyholders in that fund. No shareholder transfer with respect to any future profits is allowed out of the Closed Par Sub-Fund. Operating Rules, which limit the expenses and tax that can be charged to the fund, were put in place. The Operating Rules for the Closed Par Sub-Fund outline the policy for declaring bonuses and the Board of Directors and the Appointed Actuary must operate within this policy Canadian regulations require that margins of prudence be added to the assumptions used to calculate the best estimate reserves in the Closed Par Sub-Fund. The value of these margins is held in a fund termed the Ancillary Fund which is held in the Non- Par Sub-Fund. The Ancillary Fund amounted to 2.5m at 31 December As the policies in the Closed Par Sub-Fund mature the required margins reduce and can be released to the Shareholder Fund New participating business written after demutualisation was written into the Open Par Sub-Fund. The Open Par Sub-Fund was closed to new business in December A percentage of the cost of bonuses added to policies in this fund is transferred to the Shareholder Fund. As required under the terms of the scheme of transfer under which the life assurance business of the Irish branch of CLACO was transferred into CLI, this percentage equals that set by CLACO for all its open participating funds. The percentage depends on a series of parameters and has varied between 3% and 3.5% since demutualisation (3.17% in 2012). It will continue to be set by CLACO following this portfolio transfer The Open Par Sub-Fund, Closed Par Sub-Fund and Ancillary Fund are all invested in accordance with the same investment policy The Operating Rules for the Closed Par Sub-Fund allow it to be merged with another fund or sub-fund, subject to regulatory approval, when, in the reasonable opinion of the Appointed Actuary, the number of policies remaining and value of liabilities are too small to warrant the cost of maintaining the sub-fund. The terms of the 2012 transfer of the life assurance business of the Irish branch of CLACO into CLI enable CLI to merge the Open Par Sub-Fund with another fund or sub-fund, subject to similar conditions. The 2012 scheme specifically refers to the risk of a tontine effect arising in the sub-fund. Both the Operating Rules and the 2012 Scheme of Transfer require that, when a Sub-Fund is merged with another fund, the assets allocated to the Sub-Fund at that time are used exclusively to provide for guaranteed benefits, expenses and taxes and policyholder reasonable expectations for bonuses and other non-guaranteed benefits for which such Sub-Fund was maintained. 7

10 3.12. If a decision was taken to merge a Par Sub-Fund with the Non-Par Fund then policies would no longer be treated as participating business and would provide fixed benefits to policyholders. Non-Par Sub-Fund The Non-Par Sub-Fund consists of a similar range of protection, savings, pensions and investment business as Irish Life. In addition, CLI has written Unitised With Profit ( UWP ) and a small amount of Variable Annuity ( VA ) business UWP business operates on a similar basis to other unit-linked business but with smoothing applied to the unit prices and with guarantees on maturity or on death. The UWP Fund provides full participation in investment profits and losses, as well as exit profits and losses, in the fund. The fund is closed to new business since April 2010, so inflows are limited to regular premiums on existing policies ( 8m in 2012) Due to investment market performance over recent years, exit losses are projected to arise in future years in the UWP Fund as guaranteed payouts are expected to exceed the value of the underlying assets in respect of the exiting policies. This guarantee cost would be met by the UWP Fund in the first instance until such time as there are no assets remaining in the fund at which stage the guarantee costs would be met by the shareholder. In February 2010, the Board of Directors of CLI approved an upper limit on the reduction in the fund return arising from exit losses. This upper limit has been set to a cumulative annualised rate of 1.5% of the fund s value from the start of Any guarantee costs in excess of this limit will be met by the company. The limit is not guaranteed. The Board can change it in adverse scenarios such as a material deterioration in the financial position of the UWP fund or the financial position of the company or its parent The shareholder exposure to the cost of guarantees on the majority of the UWP Fund is reinsured to London Life and General Reinsurance Company ( LLGRC ). CLI s exposure is limited to the guarantees on business written since 1 January % of the UWP business was written prior to that date. CLI held a reserve of 1.9m as at 31 December 2012 in relation to guarantees in respect of the portion of the UWP business that is not reinsured. LLGRC is an unrated reinsurance company within the Great-West group. LLGRC had a financial strength rating of A from A.M. Best (a rating agency specialising in the insurance sector) as at 2 July This rating was subsequently withdrawn in response to management s request to no longer participate in the interactive rating process CLI commenced writing variable annuity business in Variable annuity business is unit-linked business with investment performance guarantees. The investment guarantees provided by CLI are guaranteed minimum withdrawal benefits and guaranteed minimum death benefits. The guarantees on the variable annuity business are fully reinsured to CLACO, which is rated A+ by A.M. Best and AA by Standard & Poors at July The unit-linked reserves on this business are 60m at 31 December The reserve for guarantees and expenses net of reinsurance was 0.1m at 31 December Shareholder Fund The CLI Shareholder Fund is entitled to the surplus arising in the Non-Par Sub-Fund and a percentage of the cost of bonuses added to policies in the Open Par Sub-Fund. 8

11 Risk Profile The main risks faced by CLI are similar to those to which Irish Life is exposed, i.e. market, credit and insurance risks CLI is exposed to the risk of asset values in the Par Sub-Funds and Ancillary Fund falling below guaranteed liabilities. In that instance, the company would be required to support the funds. The Par Sub-Funds have surplus assets which are available to be distributed to policyholders in the future in the form of reversionary and terminal bonuses. As future bonuses can be varied in line with actual experience, the surplus assets in the fund provide a strong buffer against the risk of adverse experience on the Par Sub-Funds. The assets and liabilities of the Par Sub-Funds are reviewed quarterly The reinsurance on the UWP Fund and on variable annuity business provides significant protection to CLI against the impact of market movements on the cost of guarantees. CLI is exposed to counterparty risk to LLGRC and CLACO, which are both companies within the Great-West group. The variable annuity treaty is collateralised above a 10 million threshold A financial reinsurance treaty is in place with three companies within the Great-West Group (CLACO, the Great-West Life Assurance Company and London Life Insurance Company). Under this treaty, CLI received an advance of future surpluses expected to arise on specified cohorts of business. The repayment (with interest) is contingent on future surpluses emerging CLI is exposed to credit risk on assets backing shareholder free assets and nonlinked reserves. CLI s shareholder assets and assets backing non-linked reserves are primarily invested in cash, government bonds and a diverse portfolio of corporate bonds. As at 31 December 2012 German sovereign bonds accounted for 14% of these assets. French and Dutch sovereign bonds accounted for a further 19% between them and corporate bonds accounted for 37%. The company has some exposure to Irish bonds which are higher-yielding and therefore considered to be more exposed to the risk of default. In valuing its liabilities CLI makes additional allowance for credit risk on these lower-rated bond holdings. Some of the company s Irish government bonds matured in 2013 and the proceeds have not been reinvested in Irish government bonds. All of CLI s corporate bond investments are rated BBB or higher and the portfolio is well diversified As at 31 December 2012, 68% of the life and serious illness benefits were reinsured, spread amongst well rated reinsurers CLI is exposed to longevity risk on its annuity portfolio that is, the risk that on average annuity policyholders live longer than expected. CLI has chosen not to reinsure this risk CLI also has a small block of guaranteed annuity options on legacy unit-linked policies. As at 31 December 2012, the reserve for guaranteed annuity options was 13m. 9

12 Solvency Position As at 31 December 2012 the audited regulatory returns to the CBI showed that the total life assurance business available assets of CLI were 3,653m whilst mathematical reserves and other liabilities amounted to 3,499m. The overall solvency coverage ratio was 306% at 31 December The table below summarises the solvency position of CLI under the existing Solvency I regime at 31 December 2011 and at 31 December CLI solvency position ( m) 31 December 31 December December (incl. Irish Branch) 1 (excl. Irish Branch) (1) Total Assets 3,653 3,605 3,076 (2) Total Liabilities 3,499 3,466 3,005 (3) Total Available assets (= (1) (2)) (4) Required minimum solvency margin (5) Excess assets (= (3) (4)) (6) Solvency coverage (= (3) / (4)) 306% 261% 206% Note: (1) Including the Irish Branch which was transferred in 2012 (see Paragraph 3.1) The available assets and required solvency margin of CLI increased in 2012 following the transfer of the policies of the Irish branch of CLACO into CLI. The increase in the solvency ratio as a result of the transfer was mainly due to the impact of the Par Sub- Funds The split of the solvency position at 31 December 2012 between the Par Sub-Funds and the rest of the business is set out in the table below. CLI solvency position ( m): Par Non-Par /Shareholder Total (1) Total Available assets (2) Required minimum solvency margin (3) Excess assets (4) Solvency coverage 1073% 218% 306% The solvency position of the Closed Par Sub-Fund and Open Par Sub-Fund is set out in the table below. CLI solvency position ( m): Closed and Open Par Sub-Funds Closed Par Open Par Total Par (1) Total Available assets (2) Required minimum solvency margin (3) Excess assets (4) Solvency coverage 1363% 352% 1073% 10

13 3.32. The solvency coverage ratio in respect of the Par Sub-Funds was 1073% at 31 December The available assets in the Par Sub-Funds include the surplus assets which are available to be distributed to policyholders in the form of bonuses. As future bonuses can be varied in line with actual experience, the available assets in the fund provide a strong buffer against the risk of adverse experience on the Par Sub-Funds The solvency cover excluding the Par Sub-Funds was 218% at 31 December CLI has a target to maintain assets of between 150% and 200% of the minimum solvency margin requirement excluding Par Sub-Funds. Historically the solvency margin has been at or above the upper end of this range Similar to Irish Life, financial projections have been prepared by CLI that consider the projected solvency position of the company over the next five years and the potential impact of a range of adverse scenarios. The financial projections indicate that CLI solvency cover is expected to remain strong but that there is limited dividend capacity. The projections illustrate that CLI s solvency cover would not fall below 150% under any of the broad range of adverse scenarios tested As noted in paragraph 2.23, a new capital regime, Solvency II, is expected to be implemented from 1 January The most recent calculations were carried out by CLI based on the proposed Solvency II rules based on a 31 December 2011 financial position. The calculations demonstrated that CLI is well capitalised on a Solvency II basis. 11

14 4. Proposed Scheme of Transfer 4.1. Subject to Court approval, it is envisaged that the business of CLI will transfer to Irish Life on 1 January All of the assets, except for certain excluded assets, will be transferred to Irish Life. Excluded assets comprise 4.0m in cash which will cover CLI s capital requirement (of 3.7m) post transfer All liabilities associated with the business will be transferred to Irish Life. Should there be any regulatory, tax or policyholder liability arising in the future on the transferring business then no indemnity will be offered by CLI to Irish Life. Irish Life will assume the entire liability (without limitation) for the transferring business The Scheme includes provisions on the further actions to be taken if particular assets and liabilities cannot be legally transferred on the effective date Under the proposed Scheme, the transferring assets will include the rights of CLI under its reinsurance treaties, to the extent to which those rights may be transferred under the auspices of the proposed Scheme. The proposed Scheme does not apply to treaties which are not subject to Irish law or where the counterparty is not domiciled in Ireland. However, CLI has separately obtained agreement from these reinsurers to transfer the rights under the relevant reinsurance treaties to Irish Life with effect from the date of the portfolio transfer Post transfer the Irish Life Assurance Fund will comprise the following sub-funds: - the Continuing Fund - the Closed Par Sub-Fund - the Open Par Sub-Fund Irish Life will continue to maintain the Continuing Fund in accordance with the terms with which it was operated before the transfer. All the asset and liabilities of the CLI Non-Par Sub-Fund will transfer to the Continuing Fund The Closed Par Sub-Fund will receive all the assets and liabilities of the CLI Closed Par Sub-Fund. The Open Par Sub-Fund will receive all the assets and liabilities of the CLI Open Par Sub-Fund. The Par Sub-Funds will then continue to be operated in accordance with the same terms which were applied by CLI before the transfer Irish Life will continue to maintain its Shareholder Fund. All the assets and liabilities of the CLI Shareholder Fund, other than the excluded assets, will transfer to the Irish Life Shareholder Fund Subject to the specific terms and conditions of any relevant policy, the rules of any relevant investment fund, and where relevant, to the opinion of the Appointed Actuary, Irish Life may: - exercise such discretions under the transferred policies as are available to be exercised in accordance with the applicable principles, and having regard, as appropriate, to such considerations as are from time to time in use in relation to such business in the Canada Life Group; 12

15 - modify the terms and conditions applicable to any policy or investment fund, in accordance with the principles, and having regard, as appropriate, to such considerations as are from time to time in use in relation to such business in the Canada Life Group Irish Life may in the future cease to maintain either the Closed Par Sub-Fund or the Open Par Sub-Fund and instead merge the Sub-Fund with the appropriate Fund or Sub-Fund maintained by Irish Life at that time, in the same circumstances and subject to the same provisions and terms and conditions as such power was exercisable by CLI prior to the transfer. In particular, Irish Life may exercise these powers, which prior to the transfer were exercisable by CLI, on the advice of the Appointed Actuary and, if required, of the Central Bank of Ireland and, if required, of the Canadian insurance regulator The unit-linked funds maintained by CLI immediately prior to the portfolio transfer date will, on and from the portfolio transfer date, be maintained by Irish Life and the assets appropriated to each CLI unit-linked fund immediately prior to the portfolio transfer date will, on the portfolio transfer date, remain so appropriated. Following the portfolio transfer, some of the unit-linked funds previously operated by CLI may be merged with similar funds already operated by Irish Life. Any such merger of unitlinked funds and any changes to the rules of operation (including unit pricing) of the unit-linked funds following the portfolio transfer will comply with principles set out in 4.10 above If any transferred policy includes an option under the terms of the policy (for example, for the issue of a replacement policy), then the option may be satisfied by the issue of a new Irish Life policy complying with the terms of the option or the issue by Irish Life of the nearest available alternative policy CLI and Irish Life will each bear its own costs incurred in connection with the transfer, with the exception of the fees payable to legal advisors, tax advisors and the Independent Actuary, which will be borne by CLI CLI and Irish Life may jointly consent to any modification or addition to the proposed transfer or to any further condition or provision affecting it which the Court approves The Scheme provides that the transfer will not occur until CLI and ILA are satisfied that it will not result in any material adverse tax consequences, other than such tax consequence that the Independent Actuary has deemed does not materially adversely impact the security of benefits for policyholders or their reasonable expectations. Following correspondence between their tax advisors and the Irish Revenue Commissioners, CLI and ILA are satisfied that there are no material adverse tax consequences arising from the portfolio transfer. 13

16 5. Security of Benefits Post Transfer 5.1. The security of policyholders benefits is provided by the size of an insurer s assets relative to its liabilities. The Irish Life policyholders will be impacted by the proposed Scheme as the assets and liabilities of the Canada Life Ireland Non-Par Sub-Fund will transfer into the Continuing Fund. In addition, the Shareholder Fund which is currently available to support the Continuing Fund may in future be called upon to support the Par Sub-Funds In assessing the implications of the proposed Scheme on the security of benefits, I have considered the risk profile, the solvency position and the outlook for the future solvency position of Irish Life before and after the transfer. Risk Profile post Transfer 5.3. The risks associated with the transferred business are similar to those to which Irish Life is currently exposed. The key risks are market, credit and insurance risks A key consideration for Irish Life is the transfer of participating, UWP and variable annuity business to Irish Life from CLI, given the investment guarantees associated with this business and the fact that Irish Life does not currently write such business The risk that the Irish Life Shareholder Fund will be required to support the Par Sub- Funds in the event of stressed conditions has been considered. The solvency position of the Closed and Open Par Sub-Funds were 1363% and 352% respectively at 31 December 2012 with excess assets of 46m and 3.7m respectively. Stress testing has been carried out which demonstrates the strong resilience of the Par Sub- Funds to a range of market stresses, including decreases in equity and property values, a decrease in interest rates and a sovereign default stress. For each of the stress tests, while the level of future bonuses would reduce, the Par Sub-Funds remain well capitalised with an ability to sustain further shocks. Until its wind-up in 2012, Irish Life also managed a closed book of participating business and therefore has experience of managing such business The reinsurance in place with LLGRC on the UWP business and with CLACO on the variable annuity business will significantly reduce Irish Life s exposure to market risk on this business. Net of reinsurance, the reserve in relation to guarantees on these two blocks of business are 1.9m and 0.1m respectively. Irish Life will be exposed to counterparty risk to LLGRC and CLACO. The variable annuity treaty is collateralised over 10m. As noted in paragraph 2.9, Irish Life provides investment guarantees on some of its legacy unit-linked business and has a robust process in place for managing and monitoring the associated risks. This experience ensures that Irish Life is in a position to appropriately assess and manage the risks associated with the transferring policies with investment guarantees The other key additional risks to which Irish Life will be exposed as a result of the proposed transfer are increased expense, lapse, operational and longevity risks. Irish Life carefully monitors lapses and expenses. In the event that expenses or lapses are higher than expected it is likely that management action would be taken to reduce expenses. Under the terms of the proposed Scheme, all liabilities of CLI will become liabilities of Irish Life. It is possible that future liabilities could emerge in relation to legal, tax or regulatory issues in connection with the business that CLI has written in the past. Following the proposed transfer, the exposure to longevity risk will be 14

17 relatively higher than the current Irish Life exposure. Given the size of the total balance sheet, these risks are still within acceptable levels. Solvency position post transfer 5.8. The table below shows a pro-forma combined solvency position of Irish Life and CLI if the proposed transfer had taken place at 31 December Pro-forma solvency position at 31 December 2012 ( m) CLI Combined Combined (Excl Par Sub- CLI (incl Par Sub- (excl Par Sub- Irish Life Funds) (Par Fund) Fund) Fund) Total Available assets RMSM Excess assets Solvency coverage 188% 218% 1073% 205% 196% 5.9. The key pro-forma adjustments on consolidation are: - A reduction of 4.0m in net assets reflecting the excluded assets not transferred as part of the Scheme (see paragraph 4.2). - An increase in the net assets of 22m because increased credit can be taken for Irish Life s subordinated debt on consolidation. - A reduction in the required minimum solvency margin of 1.3m due to consolidation benefits In return for the transfer of the business, Irish Life will issue shares equal to the fair market value of the business being transferred. Given the structure of the transaction, the consideration paid to acquire the business of CLI will have no net impact on Irish Life s solvency position The pro-forma solvency position in the table above is presented on a consolidated basis including the Par Sub-Funds and on a consolidated basis excluding the Par Sub-Funds The solvency position of the Par Sub-Funds is the same post transfer as pre transfer. The Par Sub-Funds have surplus assets which are available to be distributed to policyholders in the future in the form of reversionary and terminal bonuses. As future bonuses can be varied in line with actual experience, the surplus assets in the fund provide a strong buffer against the risk of adverse experience on the Par Sub-Funds The Irish Life solvency coverage on a pro-forma combined entity basis excluding the Par Sub-Funds would have increased from 188% to 196% post transfer. Following implementation of the Scheme it is expected that Irish Life s target cover ratio (excluding the Par Sub-Funds) will remain at 175% so the actual ratio would reduce from 196% over time The ability of Irish Life to withstand adverse experience or shocks in investment markets, and adverse experience on the underlying insurance portfolio following the transfer has been tested, on a pro-forma basis, assuming solvency cover at the target level of 175%, excluding the Par Sub-Funds. The tests are similar to those carried out for Irish Life and CLI separately (see Paragraphs 2.22 and

18 respectively). The assessment indicates that the solvency margin cover would not fall below 150% except under very extreme adverse scenarios and hence that the 175% target represents a healthy solvency position given the risk profile of the business post transfer Whilst CLI s solvency ratio for the Non-Par Fund has historically been above 175%, this has reflected CLI s financial position. CLI had higher unit costs compared to Irish Life due to its size relative to Irish Life, which required CLI to hold a higher solvency buffer against adverse experience on unit costs. CLI s higher unit costs also reduced profitability, and financial projections indicated that CLI had limited dividend capacity over the next five years, which means unlike Irish Life CLI could not reduce dividends in adverse scenarios in order to improve the solvency cover. Following the proposed portfolio transfer and the combination of the CLI and Irish Life businesses, the unit costs of CLI will reduce and the key reasons for holding a higher solvency ratio for the CLI Non-Par Fund will no longer apply The solvency figures quoted above all relate to the current prudent regulatory regime. As noted earlier, a new regime Solvency II is planned for EU insurers. Under this new regime solvency requirements will be more closely aligned to the underlying risk profile of the insurer. On a standalone basis, both Irish Life and CLI are well capitalised based on the proposed Solvency II rules. On a consolidated basis this is also expected to be the case. 16

19 6. Impact of the Scheme on Policyholders Benefits Irish Life Policyholders 6.1. I have carried out an assessment of the fair treatment and reasonable benefit expectations of Irish Life policyholders post transfer. I have considered the following aspects: - Security of benefits - Policy terms and conditions - Current practices and approach to policyholders reasonable expectations - Expenses and charges - Servicing of policies - Policyholder communication 6.2. Security of benefits A fundamental policyholder expectation that applies to all product types is that the life assurance business is operated on sound financial lines that will enable the company to meet its commitments to policyholders and, in particular, to establish adequate technical reserves and solvency margin. The Irish Life policyholders will be impacted by the proposed Scheme as the assets and liabilities of the Canada Life Ireland Non-Par Sub-Fund will transfer into the Continuing Fund. In addition, the Shareholder Fund which is currently available to support the Continuing Fund may in future be called upon to support the Par Sub- Funds. As outlined in section 5, if the transfer takes place, the solvency cover for Irish Life policyholders is expected to increase slightly immediately post transfer and should continue to be resilient to a wide range of adverse scenarios. The risk that the Irish Life Shareholder Fund would be required to support the Par Sub-Funds is considered to be small given the current solvency position of the funds and the resilience to future stresses as noted in section Policy terms and conditions The Scheme does not make any changes to the terms and conditions of existing Irish Life policies. The benefits for non-linked Irish Life policyholders are fixed and will not change as a result of the Scheme of Transfer. There will be no change to Irish Life unit-linked policyholder benefits as a result of the transfer. Irish Life will maintain appropriate unit pricing mechanisms in respect of the unit-linked funds Current practices and approach to policyholders reasonable expectations There will be no changes to the practice and approach to policyholders reasonable expectations ( PRE ) following the transfer. The on-going interpretation of PRE will continue to be assessed by the Irish Life Board of Directors Expenses and charges The implementation of the Scheme has no adverse impact on Irish Life policy charges. For those charges over which Irish Life can exercise discretion, for example reviewable risk charges that apply to unit-linked policies, there will be no changes to the process by which this discretion will be applied following the implementation of 17

20 the Scheme. The expense base of Irish Life is not expected to be materially adversely affected as a consequence of the Scheme Servicing of policies The Scheme does not involve changes to the servicing of Irish Life policies. Therefore, the implementation of the Scheme should not have a material adverse effect on the service levels to existing Irish Life policyholders Policyholder communication Section 13 of the 1909 Act requires that, unless the Court otherwise directs, certain materials must be transmitted to each policyholder of both CLI and Irish Life. These materials include a statement summarising the proposed Scheme and the Independent Actuary s Short Form Report. Irish Life and CLI intend to petition the Court for an exemption from the requirement to post these materials to all existing (pre-transfer) Irish Life policyholders on the basis that the Independent Actuary has concluded that neither the security of benefits nor the fair treatment and reasonable benefit expectations of the existing Irish Life policyholders will be materially adversely affected by the proposed Scheme. These materials will be available on the Irish Life website and at the Irish Life head office. This report and other actuarial reports will also be available. Irish Life intends to advertise the proposed transfer in the main national daily and weekend newspapers and on-line. I consider this approach to be reasonable. CLI Policyholders 6.8. I note the commentary by and conclusions of the CLI Appointed Actuary as set out in her report in relation to the security of benefits and fair treatment and reasonable expectations of CLI policyholders and in particular the following sections: - Unit-linked business (Section 5.3) - Servicing Arrangements (Section 5.5) - Security (Section 6.1) - Policyholders Reasonable Expectations (Section 6.2) - Conclusions (Section 6.3) I have not repeated the detail of the comments made in the CLI Appointed Actuary report in this report. 18

21 7. Conclusions 7.1. Having considered the impact of the proposed Scheme on existing Irish Life policyholders it is my opinion that: a) the Scheme will have no material adverse impact on the security of the existing Irish Life policyholders; and b) the fair treatment and reasonable benefit expectations of existing Irish Life policyholders will not be materially adversely affected by the Scheme. 19

22 Appendix: Reliances In the course of preparing this report, I have been given free access to documentary evidence held by CLI to allow me to investigate all aspects of the proposed Scheme. In addition, I have had access to, and discussions with, the management of CLI and, in particular, the Appointed Actuary of CLI. I have relied on the accuracy of the information which has been provided to me. I am satisfied with the reasonableness of the information provided but have not independently verified it. In producing this report, reliance has been placed on, but not limited to, the following information received from CLI (unless otherwise stated). Legal documents - The Scheme and other related legal documents (provided by McCann FitzGerald) - The Policyholder Circular (provided by McCann FitzGerald) - Formal letter of notification to the Central Bank from Canada Life Ireland in respect of the proposed Scheme dated 31 May 2013 (provided by McCann FitzGerald) Actuarial reports - Report from the Appointed Actuary to the Board of Canada Life Ireland in respect of the actuarial investigation as at 31 December Report from the Appointed Actuary and Head of Actuarial to the Board of Canada Life Ireland on Variable Annuity Business as at 31 December Financial Condition Report from the Appointed Actuary to the Board of Canada Life Ireland as at 31 December Updated Financial Projections prepared in May CBI Basis Setting report for Canada Life Ireland as at 31 December Recommendation for Annual Bonus Rates for Canada Life Ireland s Unitised With Profit Fund for the year commencing 1 April Canada Life s report on the CLA Irish Branch dividend proposal Canada Life s report on Solvency II calculations for the year end 2011 Financial Condition Report dated 19 August Canada Life s report on Solvency II Contract Boundaries dated 9 August 2012 Regulatory submissions to the Central Bank - Annual Returns from Canada Life Ireland to the Central Bank for the financial year ended 31 December Quarterly Returns from Canada Life Ireland to the Central Bank in respect of the quarter ended 31 March 2013 Directors Reports and Financial Statements - Directors Report and Financial Statements for Canada Life Ireland in respect of the financial year ended 31 December