Area Life International Assurance DAC
Report of the Independent Actuary on the proposed Scheme to transfer the business of Area Life International Assurance DAC to Aviva Life and Pensions Ireland DAC
Prepared by: Gordon Wood
Date: November 2019
Aviva: Confidential
Executive summary
Contents…………………………………………….…………….……… ...... 1 1. Executive summary ...... 2 1.1 Overview...... 2 1.2 Basis for opinion ...... 2 1.3 Conclusions ...... 2 1.4 Supplementary Letter ...... 3 2. Introduction ...... 4 2.1 Independent Actuary ...... 4 2.2 Purpose of this Report ...... 4 2.3 Scope of this Report ...... 4 2.4 Independence ...... 5 2.5 Terms of reference ...... 5 2.6 Statements of reliance and limitations ...... 7 2.7 Legal jurisdiction ...... 7 2.8 Duty to the Court ...... 7 2.9 Statement of truth ...... 7 3. General considerations ...... 8 3.1 Approach to review the level of security of policyholders’ benefits ...... 8 3.2 Approach to review the rights and expectations of policyholders ...... 8 3.3 Capital policy ...... 8 3.4 Policyholder Communication ...... 9 4. Outline of proposal ...... 10 4.1 Background to the proposal ...... 10 4.2 Details of the proposal ...... 10 4.3 With-profits business ...... 10 5. Area Life International Assurance DAC (“ALI”) ...... 13 5.1 Background ...... 13 5.2 Recent history and future development ...... 13 5.3 Nature of business written ...... 14 5.4 Risk profile of Area Life’s business ...... 15 5.5 Solvency position...... 16 5.6 Own Risk Solvency Assessment (“ORSA”) ...... 17 6. Aviva Life and Pensions Ireland (“ALPI”) ...... 19 6.1 Background ...... 19 6.2 Recent history and future development ...... 20 6.3 Nature of business written ...... 21 6.4 Risk profile of ALPI’s business ...... 22 6.5 Solvency position...... 23 6.6 Own Risk Solvency Assessment (“ORSA”) ...... 23 7. Effect of the Scheme on policyholders ...... 24 7.1 Introduction ...... 24 7.2 Security of policyholder benefits ...... 24 7.3 Rights and expectations of policyholders ...... 26 7.4 Other considerations ...... 27 8. Conclusions ...... 29 Appendix A: Documents reviewed ...... 30
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Executive summary
1. Executive summary
1.1 Overview
I have been appointed as the Independent Actuary required to report to the High Court of Ireland (“the Court”) on the terms of the proposed scheme of transfer of the life assurance business of Area Life International Assurance DAC (“ALI”) to Aviva Life and Pensions Ireland DAC (“ALPI”), pursuant to an insurance business scheme of transfer under Section 13 of the Assurance Companies Act 1909 (“the 1909 Act”)
This report sets out my findings and conclusions from my review of the proposed scheme of transfer and, in particular, considers the impact of the proposed transfer on the security of the benefits and the benefit expectations of the existing long-term insurance policyholders of ALI and ALPI.
This report has been prepared under the terms of the guidance set out in Actuarial Standard of Practice (“ASP”) LA-6 issued by the Society of Actuaries in Ireland.
The contents of this Report have been peer reviewed to check quality and completeness, by James Maher. James is a partner at EY, a Fellow of the Society of Actuaries in Ireland and of the Institute and Faculty of Actuaries and has over 20 years’ experience of actuarial work in the life insurance industry.
1.2 Basis for opinion
To reach my conclusions, I have sought to:
► Exercise my judgement in a reasoned and justifiable manner;
► Describe the impact on all classes of beneficiaries;
► Indicate how the Scheme might lead to any changes in the material risks to the benefits of different classes of beneficiaries;
► Indicate (in broad terms) the impact on the actuarial information of adopting alternative plausible assumptions;
► Assess the impact of all classes of beneficiaries;
► Indicate the rationale for the proposal for the Scheme to proceed;
► Include (in summary) the most material information on which my opinion is based;
► Describe the rationale for my opinion.
My opinions are based on my review of the documents set out to me by ALI and ALPI during the review process. The documents reviewed are set out in Appendix A. Any issues arising from my review of these documents have been noted by exception in the main body of this report.
1.3 Conclusions
I have reviewed documents provided by ALI and ALPI, and also held discussions with key members of each entity to understand the implications of the proposed transfer and the impact of this on policyholders,
Having considered the impact of the Scheme on the policyholders (existing and transferring) of ALI and ALPI, it is my opinion that the Scheme:
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Executive summary
► will not have a material adverse impact on the security of ALI’s policyholders;
► will not have a material adverse impact on the security of ALPI’s policyholders; and,
► will not affect the reasonable expectations of the policyholders of ALI and ALPI.
1.4 Supplementary Letter
If anything materially changes after provision of this report, details of those changes and any implications for my conclusion can be brought to the Court’s attention by a supplementary letter from myself.
This report is based on information made available to me up to 25 November 2019 and takes no account of developments after this date.
Gordon Wood, FIA, FSAI
November 2019
Associate Partner Ernst & Young LLP Atria One 144 Morrison Street Edinburgh EH3 8EX
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Introduction
2. Introduction
2.1 Independent Actuary
When an application is made to the Court for an order to sanction the transfer of long-term insurance business from one insurance company to another, the application is subject to Section 13 of the 1909 Act. The Act requires the application to be accompanied by a report on the terms of the Scheme by an Independent Actuary.
I have been appointed by ALI pursuant to section 13 of the 1909 Act as the Independent Actuary in connection with the scheme involving the transfer of all of the long-term insurance business of ALI to ALPI. The shareholders of ALI will be responsible for payment of fees incurred by me in my capacity as Independent Actuary for the proposed scheme.
I am a Fellow of the Institute and Faculty of Actuaries, having qualified in 1988, and am an Associate Partner in the EMEIA Insurance – Risk and Actuarial Services practice of Ernst & Young LLP (“EY”), Atria One, 144 Morrison Street, Edinburgh, EH3 8EX. I lead the consulting actuarial team for EY in Scotland, undertaking a wide variety of advisory and audit engagements working for life assurance clients in the actuarial and risk areas.
Prior to joining EY in 2007, I was the Chief Actuary for Abbey National Insurance Division, holding the regulatory Actuarial Function Holder (“AFH”) positions for Scottish Mutual, Scottish Provident and other regulated companies.
I am also a Fellow of the Society of Actuaries in Ireland and hold a current Practising Certificate issued by the Institute and Faculty of Actuaries. As well as general audit and actuarial advisory experience in Ireland, I have also held Appointed Actuary / Head of Actuarial Function responsibilities and previously acted as an Independent Actuary.
The Central Bank of Ireland (“CBI”) has been made aware of my appointment as the Independent Actuary for this transfer. No objections have been raised with regards to the appointment.
2.2 Purpose of this Report
The purpose of this Report is to review the consequence of the Scheme for all policyholders affected (ALI as well as ALPI policyholders). I am concerned particularly to assess whether the Scheme provides sufficient protection for policyholders’ interests in the changed circumstances which will apply following the implementation of the Scheme.
To the best of my knowledge, I have taken account of all material facts in assessing the impact of the Scheme and in preparing this Report. I am only required to consider the Scheme proposed to me and hence this Report does not consider possible alternative schemes. However, I have also considered the position of ALI and ALPI should the transfer not take place. This is shown in the relevant sections below.
2.3 Scope of this Report
As the Independent Actuary for the Scheme, I must have regard to the provisions of Section 13 of the 1909 Act, and also take account of guidance issued by the CBI. This means that this report must consider the consequences of the Scheme for all policyholders affected (ALI as well as ALPI policyholders), including whether the Scheme provides sufficient protection for policyholders’ interests in the changed circumstances which will apply following implementation.
The Scheme will be submitted to the Court for sanction under Section 13 of the 1909 Act. This Report will be presented to the Court at an initial hearing. In order to reflect any updated financial information
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Introduction
or circumstances nearer to the date of the final hearing, I may provide a supplementary letter setting out my updated opinions in respect of the Scheme. It is likely that the Court will consider the contents of these Reports in deciding whether to sanction the Scheme
2.4 Independence
I, my immediate family, my team (including the peer reviewer) and their immediate families do not hold any policies, investments, shareholdings nor have any other financial interests with any of the Companies. I have an interest in a group private medical insurance policy that my employer has taken out with Aviva UK Life and Pensions Limited on commercial terms. I and my team have not been materially involved in advising the Companies on any significant projects in the past.
In 2015, I acted as Independent Expert for a portfolio transfer in the UK of the long-term business of Aviva Annuities Limited into Aviva UK Life and Pensions Limited.
EY has carried out and continues to carry out a number of different projects for Aviva plc (“Aviva”). Partners and staff of EY have not acted for the Companies in projects relating to valuation of assets or liabilities within the Companies or capital modelling or financial reporting work for the Companies.
EY has carried out and continues to carry out a number of different projects for ALPI. Partners and staff of EY have not acted in projects relating to valuation of assets or liabilities within the Companies or capital modelling or financial reporting work for the Companies. As noted elsewhere in this report, AIH did engage with EY Italy tax and transaction specialists to ensure that tax consequences and implications were properly considered.
My role as Independent Actuary has been considered by EY’s internal processes. It has been determined that these engagements do not compromise my independence, create a conflict of interest, or compromise my ability to report on the Scheme.
I consider myself and my team to be appropriately independent of both parties for the purposes of the Scheme.
2.5 Terms of reference
The CBI has issued guidance on the form of the scheme report which is set out in paragraphs 4.1 to 4.6 of the relevant Actuarial Standard of Practice (“ASP”) LA-6 v. 2.2.
The terms of reference for my review of the Scheme have been agreed with ALI and ALPI. The CBI have been informed of my appointment as Independent Actuary and did not raise any objections.
Among other things, the terms of reference for my review of the Scheme require me to consider (separately for the transferring policyholders and for policyholders of ALPI):
1. The name of the party which has appointed the Independent Actuary and a statement of who is bearing the costs of that appointment.
2. A statement of the Independent Actuary’s professional qualifications.
3. Whether or not the Independent Actuary has a direct or indirect interest in any of the parties which might be thought to influence the Independent Actuary’s independence; if the Independent Actuary has an interest, it should be disclosed.
4. The scope of the report in accordance with paragraph 4.4 of the relevant ASP LA-6 v. 2.2 6.
5. The purpose of the scheme.
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6. A summary of the terms of the scheme insofar as they are relevant to the contents of the Independent Actuary’s report.
7. What documents and reports the Independent Actuary has considered in relation to each of the companies involved in transfer and whether there was any additional information which was requested but not provided.
8. The cost and tax consequences of the scheme, in so far as these will affect policyholders’ funds.
9. The effect of the scheme on the security of policyholders’ contractual benefits.
10. The effect of the scheme on the nature and value of any rights of policyholders to participate in profits. In particular, if any such rights will be diluted by the scheme, how any compensation being offered to those policyholders as a group (which might take the form of an injection of funds, an allocation of shares, or cash payments) compares with the value of that dilution, and whether the extent and method of its proposed division is equitable as between different classes and generations of policyholders.
11. The likely effect of the scheme on the approach used to determine the amounts of non- guaranteed benefits such as reversionary (or similar bonus which is added periodically over the term of the contract) and terminal bonuses and surrender values, and the levels of discretionary charges, for example under unit-linked policies; and what safeguards are provided by the scheme against a subsequent change of approach that could act to the detriment of existing policyholders of either company and is not due to external circumstances beyond its control.
12. The likely effects of the scheme on matters such as investment management, new business strategy, administration, expense levels and valuation bases, in so far as they may affect the ability of the companies to meet throughout the lifetime of existing policies the reasonable expectations of the holders of these policies.
13. In the case of any mutual company involved in the scheme, the effect of the scheme on the proprietary rights of members of that company and, in particular, the significance of any loss or dilution of the rights of those members to secure or prevent further constitutional changes which could affect their expectations as policyholders (for examples, losing the ability to change the board and therefore control over a board’s decision to convert a closed fund). The Independent Actuary should state whether, and to what extent, members will receive compensation under the scheme for any diminution in their proprietary rights, and comment on its appropriateness.
14. Also, when commenting on the fairness of the scheme, the Independent Actuary should pay particular attention to any differences in treatment between policyholders with voting rights and those without. It will assist the Independent Actuary if the issues involved are adequately explained in the directors’ circular to policyholders.
15. Which matters, if any, the Independent Actuary has not taken into account or evaluated in the report that might nevertheless be relevant to policyholders’ consideration of the scheme.
16. The Independent Actuary’s overall assessment of the likely effects of the scheme on the reasonable expectations of long-term policyholders; whether the Independent Actuary is satisfied that for each of the companies concerned the scheme is equitable to all classes and generations of its policyholders; and whether for each relevant company the scheme places obligations on the directors, or provides for future certification by its Appointed Actuary, sufficient in the Independent Actuary’s opinion for the protection of those expectations.
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2.6 Statements of reliance and limitations
This report, and any extract or summary thereof, has been prepared particularly for the use of the bodies or persons listed below:
► The Court;
► Directors and senior management of ALI;
► Directors and senior management of ALPI;
► CBI or any other governmental department or agency having responsibility for the regulation of insurance companies in Ireland;
► Italian Istituto per la Vigilanza Sulle Assicurazioni (“IVASS”);
► Policyholders of ALI and ALPI;
► Professional advisors of any of the above.
This report must be considered in its entirety since individual sections, if considered in isolation, may be misleading. Draft versions of this report and any other interim working papers must not be relied on by any person for any purpose.
I have provided a summary of my report for inclusion in the policyholder circular and, other than this, no summary of my report may be made without my express consent.
This report has been prepared by EY on an agreed basis as set out in our engagement letter of 6 May 2019 for ALI and ALPI in the context of the Scheme and must not be relied upon for any other purpose.
No liability will be accepted by EY, or me, for any application of this Report for a purpose for which it was not intended, nor for the results of any misunderstanding by a user of any aspect of the report. If other persons choose to rely in any way on the contents of this Report, then they do so entirely at their own risk.
2.7 Legal jurisdiction
This Report will be governed by and construed in accordance with Irish law and the Irish courts will have exclusive jurisdiction in connection with all disputes and differences arising out of, under or in connection with this Report.
2.8 Duty to the Court
In reporting on the ALI to ALPI scheme as the Independent Actuary, I recognise that I owe a duty to the Court to assist it on matters within my expertise. This duty overrides any obligation to ALI and / or ALPI. I confirm that I have complied with this duty.
2.9 Statement of truth
I confirm that I have made clear which facts and matters referred to in this Report are within my own knowledge and which are not. Those that are within my own knowledge, I confirm to be true. The opinions I have expressed represent my true and complete professional opinions on the matters to which they refer.
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General considerations
3. General considerations
3.1 Approach to review the level of security of policyholders’ benefits
As part of my role as Independent Actuary for the transfer of ALI into ALPI, I must consider the security of policyholder benefits for both ALI and ALPI, which is the effect of the implementation of the Scheme on the likelihood that policyholders will receive their benefits when these are due.
Security for benefits is provided by the amount by which the long-term fund assets exceed the long- term fund liabilities. The principal consideration regarding security is whether ALPI will have adequate capital following the transfer of business, and whether this is likely to remain the case. A company’s need for capital in future depends on the nature of its in-force business and the type and volume of new business that it expects to write. It also depends on the extent to which the assumptions made in valuing the business (for example, about type of assets held, future investment returns, mortality experience, persistency and expenses) are borne out in practice.
The assessment of the security of both the transferring ALI and existing ALPI policyholders is also affected by the relative sizes of ALI’s and ALPI’s businesses.
In addition to the regulatory capital requirements, insurance companies will often draw up a capital policy that defines a target (or minimum) level of additional capital that will be held.
I note that the level of capital held by the companies is not the only consideration for policyholder security. I particularly consider wider elements than the capital policy in my assessment of benefits security, such as the approaches, including management actions, to the breaches of the capital policy and the governance around changes to it.
I have also considered the potential impact of the Scheme on the risk profile of the business that the policyholders are exposed to.
3.2 Approach to review the rights and expectations of policyholders
As part of my role as Independent Actuary for the transfer of ALI into ALPI, I must also consider the effect of the Scheme on policyholders’ benefit expectations.
This involves consideration of areas where discretion is involved on behalf of the relevant insurance company, for example in determining the charges applied to a policy and the benefits granted to the policyholder, as well as consideration of the implementation of the Scheme on the management, service and governance standards of the company in question.
3.3 Capital policy
In order to mitigate the risk of failing to meet regulatory capital requirements, most insurance companies, including ALI and ALPI, hold capital in addition to the level required by the Regulators. The minimum capital that ALI and ALPI aim to hold is set out in their respective risk appetite frameworks.
To assess the solvency position in line with the solvency risk appetite, I consider the use of solvency ratios, such as the ratio of eligible own funds to the SCR as defined in the solvency risk appetite framework, to be a useful indicator of the immediate impact of security of policyholders’ benefits after the implementation of the Scheme. In particular, the pre and post transfer solvency ratios are calculated using consistent methods and assumptions. These are calculated based on the Solvency II results for each company, and I have considered the Solvency II position as at 31 March 2019.
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General considerations
There is also a potential concern that the companies’ solvency position would be weakened in future due to subsequent actions such as the payment of excessive dividends to shareholders. Such actions are constrained by the target solvency that is held at a higher level than the Solvency II Pillar 1 capital requirement. ALPI management has confirmed that relevant management actions will be taken in the event of the solvency ratio falling below the pre-defined thresholds set in the solvency risk appetite.
Therefore, even if the companies currently have different estimated solvency ratios, I would generally not consider this to have a materially adverse effect on the benefit security of the ALI and ALPI policyholders post transfer, given the equivalence of the approach and methodology.
3.4 Policyholder Communication
As part of the transfer process, there is a requirement to communicate with affected policyholders about the transfer and its likely impacts. The requirement is strictly for all affected policyholders to be communicated with. In practice, it is normal for companies to apply to the Court to seek dispensation from the full requirement and seek approval to only communicate with policyholders who are materially affected. In this case, the companies believe that it is only the ALI policyholders who are materially affected, and given the much larger size of ALPI, there is no need to communicate with its policyholders. Thus, the proposal to the Court is that policyholder communications are only sent to ALI. If approved, I can confirm that I have no concern about this.
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Outline of proposal
4. Outline of proposal
4.1 Background to the proposal
ALI is an authorised life assurance undertaking which offered a range of saving and investment life assurance products to Italian residents between 1997 and 2007 via bancassurance and intermediary channels. ALI has been closed to new business since 2007 although continues to accept incremental business on its existing policies. The main operational focus of ALI is now the servicing of existing policyholders and payment of claims.
Further information on the transfer is detailed below.
4.2 Details of the proposal
Assets equalling the policyholder liabilities of ALI and 150% of diversified SCR will be transferred to ALPI on the Effective Date of 01/04/2020, subject to Court approval. The reserves and policies to be transferred from ALI to ALPI will be those in-force at the Effective Date. Further details of the solvency ratios of ALI, ALPI and the combined company can be found in later section 7.2.2. All of the direct costs of the transfer will be borne by Aviva Italia Holding S.p.A. (“AIH”), apart from the cost of this Independent Actuary report which will be borne by ALI.
The transfer involves the policies being transferred to ALPI and then transacted through an Italian branch. This requires a branch application to the CBI from ALPI, the costs of this application will also be borne by AIH.
A sub-fund of the Other Business Fund will be set up in ALPI DAC to receive the business, which would not be required to be treated as ring-fenced for Solvency II purposes.
The Scheme involves the transfer of the existing products on their current terms and does not introduce changes to those terms. ALI has written primarily traditional ‘European’ with profits and unit-linked contracts. The impact of the Scheme on the business is discussed below.
4.3 With-profits business
4.3.1 Actuarial discretion
The with-profits business sold by ALI offers annual bonuses as well as a discretionary terminal bonus. The annual bonuses are awarded based on a percentage of the earned yield on the overall pool of backing assets with the difference between percentage allocated and total yield being the company allowance for the costs incurred. This is similar to ‘European style’ with-profits policies. However, the terms and conditions of these contracts also allow for a terminal bonus to be distributed, at the discretion of the Appointed Actuary/Head of Actuarial Function (“HoAF”).
In practice, ALI have not distributed a terminal bonus for many years. In addition to this, communications sent to policyholders do not include any information on scenarios when a terminal bonus distribution would be distributed. The terminal bonus feature does not exist for Italian with- profit products, and so customers would be unfamiliar this.
The CBI have recently announced the forthcoming introduction of the With Profit Operating Principles (WPOP) regime, which will apply to Irish companies with with-profits business from 1st January 2020. Where products are European style and there is no discretion applied in the derivation of the annual bonus, an exception from WPOP can be applied for from the CBI. The existence of the terminal bonus in the terms and conditions for ALI products could prevent ALI With-Profits business from being exempted from the regime.
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Outline of proposal
To address this issue, ALI have produced an Operating Principles paper. This covers an outline of the existing With-Profit Operating principles, the expectation of future terminal bonuses and consideration of whether the WPOP regime applies to ALI. The paper has now been approved by the ALI Board.
Richard O’Sullivan, as Head of Actuarial Function of ALPI has confirmed that they will follow the current operating principles used for the ALI with profits policies. The Scheme of Transfer sets out in broad terms how the new with-profit fund will be managed, and I am comfortable with the process outlined. This Scheme of Transfer will be required to be approved by the ALPI Board. Therefore, there is no material impact on the operation of these policies.
4.3.2 Segregation of assets
Currently ALI operates one sub-fund to include all the non-linked assets, which relates to With-Profits, conventional non-profit, unit-linked and shareholder assets. Due to the single sub-fund, the assets that back these different product types are one block of assets.
The AreaGest sub fund is not accounted for separately, and so the assets will need to be split on transfer.
Assets to the value of the liabilities plus SCR and agreed capital buffer are being transferred to ALPI. Thus ALI will retain a small amount of assets, broadly equal to the difference between the SCR plus the capital buffer and the minimum required MCR currently required to be held in ALI and residual shareholder assets. Of the assets transferring to ALPI, assets equal to the unit-linked liabilities and SCR plus buffer will be maintained in the ALPI Other Business Fund (”OBF”). And the separate With- Profit sub-fund will be populated with assets sufficient to match the With-Profit liabilities and an immaterial amount of convention non-profit liabilities of around €57,000.
Management have confirmed that the assets backing unit-linked funds are separately identifiable and assets required to back the With-Profit liabilities will be selected first, with a view to matching most appropriately by quality and duration, with the residual assets being used for the shareholder assets in the OBF.
I agree that the methodology described above to be applied to allocate assets is appropriate.
4.3.3 Unit-linked liabilities
ALI’s unit-linked business contains unit-linked endowment assurance contracts and whole of life assurance contacts. Under the scheme, ALI’s unit-linked funds will remain unchanged.
Under the current policy terms, the terms and conditions may be amended at the discretion of the Actuarial Function Holder under certain circumstances including after amendments to laws, fiscal treatment of the policy, assets used to cover the policy liabilities or where the price of the internal funds cannot be obtained.
4.3.4 Other liabilities
In addition to with-profits and unit-linked contracts, ALI holds without profit term assurance contracts, however, these represent a very small proportion of overall liabilities. Under the Scheme, these liabilities will be covered by assets in the With-Profit fund.
4.3.5 Reinsurance arrangements
A combined quota share and surplus treaty is in place with respect to ALI’s traditional business written before 31/12/2000. The reinsurance is provided by three reinsurers in the following ratio; Hannover Re (40%), Gen Re (30%) and XL Re (30%) and covers regular premium endowment assurances,
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Outline of proposal
deferred annuities and deferred capital policies on a quota share basis. The surplus part of this treaty covers regular premium endowment assurance contracts.
Management has confirmed that these contracts will be novated from ALI to ALPI, and so there is no change to the reinsurance arrangements.
An internal reinsurance agreement in respect of the guaranteed annuity option is provided by Aviva S.p.A. The treaty covers policies converting to guaranteed annuities after 1st January 2009. All Rendita Classica product variants are covered while only Mista Classica and Capitale Classica policies with a technical rate of 4% are covered. Management have confirmed that this contract will also be novated unchanged from ALI to ALPI.
4.3.6 Policy administration
The administration of policies is currently outsourced to Aviva S.p.A and Aviva Italia Holding S.p.A. (“AIH”). This is not expected to change as a result of the transfer and the current companies will continue to administer the policies.
4.3.7 Management structure
No changes have been proposed to the management structure of ALPI after the transfer has taken place.
4.3.8 Cost of the Scheme
All of the direct costs incurred as part of the transfer will be borne AIH, apart from the cost of this Independent Actuary report which will be borne by ALI. Therefore, the policyholders will not bear any of the costs of the Scheme.
There will also be no increases to the charges to any policyholders arising directly as a result of the transfer of business to ALPI.
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Area Life International Assurance DAC (“ALI”)
5. Area Life International Assurance DAC (“ALI”)
5.1 Background
ALI is a direct and wholly-owned Irish subsidiary of AIH, a public limited company incorporated under the laws of Italy, which is in turn a subsidiary of Aviva Group Holdings Limited. AIH is the holder of 100% of the capital of ALI having acquired the shares of the then minority shareholder, Societa Partecipazioni Finanziarie (“SOPAF”) in 2015.
ALI is authorised by the CBI to undertake life assurance business in the following classes:
► Class I: life assurance and contracts to pay annuities on human life;
► Class III: life assurance and contracts to pay annuities, linked to investment funds;
The key products are primarily regular premium deferred annuities and capital policies as well as unit- linked whole of life and endowment assurance contracts. Further details on the nature of the business written are provided in section 5.3.
ALI operates using an outsourced business model with a number of key services being provided by Aviva S.p.A and AIH. The services provided include:
► Communication with policyholders;
► Policy administration including claims handling and processing, premium collection and payment of commission and fees;
► Management of reinsurance contracts undertaken by ALI;
► Production of accounting and actuarial information for ALI;
► Investment services;
► Information Technology services;
► Anti-Money Laundering services;
► Procurement services;
► Complaints management;
► Tax services.
5.2 Recent history and future development
ALI was established and began writing long-term insurance business in 1997. The Company offered a range of saving and investment life assurance products to Italian residents between 1997 and 2007 via bancassurance and intermediary channels. The Company has a branch in Italy based in Milan and branch accounts are prepared with local taxes paid based on profitability reported in the branch.
ALI has been closed to new business since 2007 and its main operational focus is now the servicing of existing policyholders and payment of claims. Due to the cost structure inefficiency of continuing to run-off the business in Ireland, ALI and AIH management have assessed that the most appropriate means of running off the business is to complete a portfolio transfer.
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Area Life International Assurance DAC (“ALI”)
5.3 Nature of business written
5.3.1 Liabilities
At 31 December 2018, ALI had around 2,900 policies and SII BEL of €74m. ALI is exclusively focussed on providing investment and savings products to Italian residents.
The following Class I products have been written by ALI;
► Rendita Classica: Regular premium deferred annuities;
► Capitale Classica: Regular premium deferred capital policies;
► Mista Classica: Regular premium endowment assurance;
► Vita Moderna: Regular premium deposit administration savings plans;
► Vita Classica: Level term assurance business; and
► Mutuo Sicuro: Decreasing term assurance.
There are investment guarantees on the first four products above in terms of minimum levels of yield applied to the revaluation of benefits based on book yields. Guaranteed annuity conversion terms are available at maturity for the Rendita business and the Capitale and Mista business, although take up of this option has been very low historically.
The following Class III products have been written by ALI;
► Regular, recurrent and single premium unit-linked whole of life contracts; and
► Regular and single premium unit-linked endowment assurance contracts.
The death benefits provided on unit-linked business generally range from 100.1% to 101.5% of the unit value. While the terms and conditions allow the company to convert UL policies at market rates in practice the rates applied are one or two iterations behind due to time to maturity restrictions and communication requirements. GAO reserves are held to capture the time lag. A number of products also offer annuity conversion options at non-guaranteed rates.
The table below shows the breakdown of the reported Solvency II liabilities as at 31 March 2019.
31 March €m’s 2019 Unit Linked (Unfunded) 30.3 Technical Provisions 36.2 Reinsurance Deposit 9.6 Miscellaneous other 3.4 liabilities Branch Tax Due 0 Tax Asset Payment Due 0
Creditors 3.5 Risk Margin 1.0
Total Liabilities excl. DTL 84.8 Deferred Tax Liability 0.1 Total Liabilities incl. DTL 84.9
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Area Life International Assurance DAC (“ALI”)
5.3.2 Reinsurance
ALI has a number of reinsurance agreements in place with four different reinsurers. In particular, these agreements are:
► A combined quota share and surplus treaty covering traditional business written before 2001. The reinsurance is divided between the reinsurers Hannover Re, Gen Re and XL Re.
► A guaranteed annuity option treaty provided by Aviva S.p.A. The treaty covers the majority of policies converting to guaranteed annuities from 1 December 2008.
At 31 March 2019, the total reinsurance asset for traditional business totalled €15.6m.
5.4 Risk profile of Area Life’s business
5.4.1 Financial risks
Financial risks include changes in fixed interest rates, equity prices, property values, as well as the risk of counterparty defaults. The impact on the capital resources of ALI will depend on the extent to which the value of assets and liabilities move in line following movements in the risk factors.
The principal financial risks for ALI are considered individually, as are any risk mitigations that ALI has put in place.
5.4.1.1 Market risk
Each of ALI’s unit-linked products are linked to internal funds and the value of in-force business for unit-linked business can be negatively impacted by adverse movements in equity markets.
ALI is also exposed to spread risk on its bond portfolio, either those backing the traditional business or those contained in unit-linked funds. The corporate bond portfolio represents c. 11% of ALI’s traditional assets. The remainder of ALI’s traditional liabilities are backed by Italian government and other sovereign debt issued by EU member states. The widening of credit spreads on these assets would lead to a material exposure in terms of potential reductions in net asset position.
The value of the in-force business for unit-linked business can be negatively impacted by adverse interest rate movements. The asset liability position is actively managed by the ALI Investment Committee, and the negative BEL on the unit linked business provides a hedge against changes in interest rates.
The value of in-force business for unit-linked business can also be negatively impacted by adverse currency movements. However, based on management’s look through assessment, they have noted limited exposure to currency fluctuations in respect of this business. ALI has no exposure to currency movements on their traditional business as the liabilities and backing assets are Euro denominated.
5.4.1.2 Credit risk
The counterparty risk capital held by ALI is driven by the company’s exposure to different banks and reinsurance counterparties.
ALI maintains deposits with a number of banks, the key ones being Banca Popolare di Cremona which is rated BBB (negative). Since September 2016, ALI has reduced the cash balances and invested in a
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Area Life International Assurance DAC (“ALI”)
mixture of corporate bonds and an Italian Treasury Credit Certificate in order to avoid increases in its SCR.
The reinsurance deposit held mitigates the credit risk on the external reinsurance treaties, however the exposure is increasing due to policies maturing and converting to an annuity.
ALI use the Standard Formula for calculating their solvency requirements. The standard formula does not require additional capital to be held for the credit risk associated with government bonds. ALI have identified that they have a high percentage of assets in Italian and EU government debt, and therefore identified that the Standard Formula may not be appropriate. Following additional analysis, management of ALI are satisfied that this risk is managed and there is no requirement to hold additional capital. As ALPI also use the Standard Formula, there will no extra capital requirement for this credit risk due to the transfer.
5.4.2 Non-financial risks
The main non-financial risks include lapse risk on unit-linked business, expense risk, mortality/longevity risks and operational risks.
The principal non-financial risks for ALI are considered individually, as are any risk mitigations that ALI has put in place.
5.4.2.1 Lapse risk
Lapse risk, particularly on the unit-linked business, is a large component of the overall SCR. ALI’s products have been designed to withstand adverse developments in lapse or paid-up experience through the use of surrender penalties or benefit reductions on policies becoming paid-up.
5.4.2.2 Expense risk
The key drivers of the level of expense reserves that ALI is required to hold are the level of expenses incurred in administering the business and the timing of the portfolio transfer to ALPI.
The main mitigating actions available with respect to expense inflation are to continue to analyse and monitor expenses and to remain efficient by achieving ongoing improvements to processes across the business.
5.4.2.3 Mortality / longevity risk
ALI has generally targeted its products at pre-retirement lives where mortality rates are lower and so the level of mortality risk exposure is low. For traditional business, the exposure is reduced through the use of reinsurance, whilst the exposure is also limited on unit-linked business due to the low levels of sum assured on the products.
5.4.2.4 Operational risk
ALI outsources its key administration functions to a shared service company within the Aviva Italy group of companies as described in section 5.1. ALI mitigates its outsourcing risk by monitoring the adherence of the service provider to the requirements of the outsourcing SLA.
5.5 Solvency position
The table below summarises the pre-transfer Solvency II position of ALI as at 31 December 2018 and 31 March 2019 as calculated by management.
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Area Life International Assurance DAC (“ALI”)
This table summarises the Solvency II position of ALI as at 31 December 2018, 31 March 2019 and the adjusted 31 March 2019. The adjustment was due to two items relating to Q1 2019 events which were only reflected in Q2 2019, this was due to ongoing investigations which were not completed prior to the reporting deadline.
Reported Reported 31 March Pro-forma adjusted €m’s 31 December 2018 2019 31 March 2019 Total Assets 101.4 93.8 91.7 Total Liabilities excluding 91.8 84.8 83.9 Deferred Tax Liability Deferred Tax Liability 0.3 0.1 0.1 Total Liabilities including 92.1 84.9 84.0 Deferred Tax Liability Net Assets 9.3 8.9 7.7 Admissible Net Assets for 9.3 8.9 7.7 SCR purposes SCR 2.2 2.5 2.5 SCR Coverage Ratio 423% 357% 309% Admissible Net Assets for 9.3 8.9 7.7 MCR purposes MCR 3.7 3.7 3.7 MCR Coverage Ratio 252% 239% 207%
On 31 March 2019, ALI had admissible capital resources of €7.7m to cover a Solvency II SCR of €2.5m, which represents a Solvency II SCR cover ratio of 309%. Given that the MCR of €3.7m is higher for ALI, the minimum capital requirement cover ratio of 207% is a more meaningful metric.
The expected Solvency II position of the combined company after the transfer has taken place is considered in section 7.2.
5.6 Own Risk Solvency Assessment (“ORSA”)
5.6.1 Legal requirement
The ORSA is defined as the entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long term risks an insurance undertaking faces or may face and to determine the own funds necessary to ensure that the undertaking’s overall solvency needs are met.
Under Solvency II regulations, an ORSA report must be produced, including the outcome of the combined processes and procedures in place to manage and assess the risk and solvency position of ALI.
5.6.2 ORSA and SFCR review
I have reviewed the ORSA output and note that this forecasts that ALI is sufficiently well capitalised to be continuously compliant with all regulatory capital levels throughout the plan period (2018- 2021) assuming that the portfolio transfer takes place by 31 December 2019. These projections assumed that the €1.9m capital injection would be approved by the CBI. This capital was confirmed by the CBI as eligible for Tier 1 basic own funds, it previously was classified as a subordinated loan from the liquidation of SOPAF.
I note that the key risks that ALI faces over the plan period relate to the timing of the portfolio transfer and the exposure to continued expense overruns. In the scenario in the SFCR where there is no portfolio transfer, this leads to a fall of the MCR ratio below 100% from FY19 to the end of the projection period.
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I have reviewed the details of the ORSA, including the key assumptions, the solvency and the risk profile. The ORSA assumes a transfer data of 31 December 2019. The actual plan has a three-month delay, with a transfer date of 31 March 2020. I consider that this change in date will have no material difference on the conclusion reached in the ORSA. Therefore, I believe the conclusion reached within the ORSA to be reasonable.
There were no material issues in this ORSA which are likely to invalidate my conclusions.
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Aviva Life and Pensions Ireland (“ALPI”)
6. Aviva Life and Pensions Ireland (“ALPI”)
6.1 Background
ALPI is a subsidiary of UKLAP. It has a number of subsidiaries, however, none of these are regulated insurance companies.
Friends Provident Life Office (‘FPLO’) was established in England in 1832 as a mutual life company. It wrote business into Ireland through an Irish Branch. In 1990, Friends Provident Life Assurance Company (‘FPLAC’) was established in Ireland to acquire the Irish Branch business of FPLO under a Scheme of Transfer approved by the Irish High Court. In 1993, FPLAC acquired NM Life Assurance Ireland Limited (‘NMLAIL’) and in 1995 the business of NMLAIL was transferred into FPLAC following High Court approval. In 1998, FPLAC was renamed Friends First Life Assurance Company (‘FFLAC’).
Norwich Union (‘NU’) was founded in 1808 as a mutual life insurer based in Norwich and operated as a branch in Ireland from 1816 to 1997. In 1997 NU demutualised and business written up to that point was transferred to Norwich Union Life Insurance Ireland Limited (‘NULIIL’).
General Accident (‘GA’) operated in Ireland since 1887 through a branch of the UK called The General Life and Fire Assurance Company. Commercial Union (‘CU’) operated in Ireland since 1896, and owned Hibernian Group, including Hibernian General Insurance.
In 1981, the Irish branch business of the Life Association of Scotland, a UK company incorporated in 1838, was converted to a local Irish company, the Life Association of Ireland. This entity then became part of the Hibernian Group in 1985, being renamed Hibernian Life Limited.
In 1998 GA and CU merged to form CGU. The GA branch was closed, and all future business was written through Hibernian Life Limited.
CGU and NU merged in 2000 to form CGNU plc and subsequently renamed Aviva plc. NUIIL was rebranded Hibernian Life & Pensions Ltd in October 2000. On 1 January 2001 all assets and liabilities of Hibernian Life Limited were transferred to Hibernian Life & Pensions Ltd and the former ceased to exist shortly thereafter.
In 2010 Hibernian Life & Pensions was rebranded Hibernian Aviva Life & Pensions and subsequently renamed Aviva Life & Pensions Ireland Ltd.
Aviva Life & Pensions Ireland Ltd was a subsidiary of Aviva Insurance Limited, a non-life insurance undertaking incorporated in the UK which, in turn, was directly and wholly owned by Aviva Group Holdings Limited (‘AGH’). AGH was directly and wholly owned by Aviva plc.
As part of a restructuring of the UK and Irish operations of Aviva plc, the ownership of Aviva Life and Pension Ireland Ltd company was transferred to UKLAP from AIL. All assets and liabilities of Aviva Life and Pension Ireland Ltd were transferred to a branch of UKLAP on 1 January 2015.
In March 2019, the UKLAP Irish Branch and Overseas Life Assurance Business was transferred to FFLAC following approval of the Scheme of Transfer from the High Court of Justice of England and Wales. The company was rebranded to ALPI. The policies were transferred to the following funds:
► The non-profit ‘Irish’ policies in the non-profit fund of UKLAP were transferred to ALPI’s OBF ► The with-profit ‘Irish’ policies in the Irish With-Profit sub fund of UKLAP were transferred to a new segregated sub-fund, ALPI Irish With Profit fund. ► The ‘Other non-UK EEA’ policies in the non-profit fund of UKLAP were transferred to ALPI’s OBF, but immediately reinsured back into the UKLAP NPSF ► The ‘Other non-UK EEA’ policies in with-profits sub-funds of UKLAP were transferred into separate sub funds as follows, ALPI New Fund, ALPI Old Fund, ALPI FP Fund, and ALPI FLAS
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Fund. This business was fully reinsured back into the UKLAP with-profits sub funds from which it transferred. ► Policies in the UKLAP Belgian Sub-Fund were transferred to ALPI and reinsured back into the UKLAP Belgian Sub-Fund.
The pre-transfer fund structure of ALPI is summarised below
6.2 Recent history and future development
In November 2017, Aviva PLC agreed the purchase of FFLAC. This purchase was subject to a successful change of control application with the CBI. Approval of the transaction was granted in May 2018.
The company was rebranded as ALPI DAC on the 29 March 2019.
ALPI is authorised as a Life Insurer under the European Union (Insurance and Reinsurance) Regulations 2015, by the Central Bank of Ireland.
It is a wholly owned subsidiary of UKLAP.
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6.3 Nature of business written
Below is a summary of the types of business written by each ALPI fund:
Fund Conventional Unitised Conventional Unit Annuities Open to With-Profits With- Non-Profit Linked New Profits Business
Par Fund ✓ ✓ ✓ N** ✓ I
Closed ✓ ✓ I Fund
ALPI ✓ ✓ I IWPF
OBF N** ✓ ✓ ✓ Y
ALPI New ✓ ✓ ✓ I Fund (sub fund of OBF)
ALPI Old ✓ ✓ ✓ I Fund (sub fund of OBF)
ALPI FP ✓ ✓ I Fund (sub fund of OBF)
ALPI ✓ N FLAS Fund (sub fund of OBF)
ALPI ✓*** N Belgian Fund (sub fund of OBF)
* Y= Yes, N=No, I=Increments Only ** The policies which facilitate investment in unitised with-profits are essentially unit-linked policies written in the Other Business Fund with Unitised WP within the Participating Fund offered as a fund choice. *** This is European Style participating business
6.3.1 Liabilities
The table below shows the breakdown of the reported Solvency II liabilities as at 31 March 2019.
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Aviva Life and Pensions Ireland (“ALPI”)
31 March €m’s 2019 Technical Provisions – Health 240.7 Technical Provisions – Life 3,838.1 Technical Provisions – Unit 8,480.4 and Indexed Linked Provisions other than 19.5 Technical Provisions Derivatives 67.3 Pension benefit obligations 10.3 Creditors 430.0 Risk margin 169.6 Total Liabilities excl. DTL 13,255.8 Deferred Tax Liability 12.0 Total Liabilities incl. DTL 13,267.8
6.4 Risk profile of ALPI’s business
For management purposes, ALPI is divided between a Long-Term Business Fund (“LTBF”) and a Shareholder Fund (“SHF”). The LTBF contains all the assets and liabilities relating to insurance policies written by ALPI. The Shareholder Fund contains capital attributable to shareholders.
ALPI’s main risks are largely spread across the Market, Life Underwriting and Health Underwriting modules, with smaller amounts of counterparty and operational risk exposure. The Market, Life and Health modules each have multiple risk sub-modules within them. The capital held in respect of ALPI’s risks is assessed on a standard formula basis.
The top 5 shareholder risk sub-modules (i.e. excluding risks entirely within a ring-fenced fund) on an undiversified standard formula basis are:
• Life Lapse;
• Life Longevity;
• Spread;
• Equity
• Healthcare Disability.
The make-up of the overall SCR components is shown below:
Reported 31 March €m’s 2019 Market risk 248.7 Counterparty risk 50.0 Life underwriting risk 279.3 Health underwriting risk 79.3 Non-life underwriting risk 0 Diversification -181.1 BSCR 476.2 SCR 420.2
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6.5 Solvency position
The table below summarises the pre-transfer Solvency II position of ALPI as at 31 March 2019 as calculated by management.
Reported 31 March Revised 31 March €m’s 2019 2019 Total Assets 14,015.2 Total Liabilities excluding 13,255.8 Deferred Tax Liability Deferred Tax Liability 12.0 Total Liabilities including 13,267.8 Deferred Tax Liability Net Assets 747.4 799.3 Admissible Net Assets for 578.5 630.3 SCR purposes SCR 420.2 420.2 SCR Coverage Ratio 137.7% 150.0%
One condition of the Part VII scheme was that UKLAP will provide sufficient capital for ALPI to meet a solvency coverage ratio of 150% on the 31 March 2019. Capital was provided in two steps, an estimated capital injection in advance of the transfer followed by an additional contribution after the quarter end position was calculated. The Part VII scheme made provision for a formal true up of the required capital to be completed within 12 months of the effective date. This process is ongoing.
The revised position makes allowance for an additional capital injection, €51.8m, received on 27 June 2019 from UKLAP in accordance with the above condition.
ALPI’s Solvency Risk Appetite (“SRA”) was developed in line with Aviva Group standards. The SRA, together with consideration of the level of distributable reserves, is the primary mechanism used by ALPI to determine the ability to release excess assets to the shareholder as a dividend, subject to Board approval. The capital requirements of the with-profits funds can be covered by the surplus in the with-profits funds and, to the extent necessary, the shareholder funds. The SRA is set to 150% coverage of the SCR.
6.6 Own Risk Solvency Assessment (“ORSA”)
6.6.1 ORSA and SFCR review
I have reviewed the ORSA output and note that this forecasts that ALPI is sufficiently well capitalised to be continuously compliant with all regulatory capital levels throughout the plan period (2018- 2021). The ORSA was produced after the change of control of FFLAC to Aviva and includes the ALPI business that was due to transfer to FFLAC as part of the ‘Brexit’ Part VII scheme transfer on 29th March 2019.
FFLAC have provided details on the solvency position for eight point in time scenarios, these are at Q1 2019. FFLAC have also provided projections for the solvency position over Q1 2019, Q4 2019, Q4 2020 and Q4 2021 for five further scenarios. I note that FFLAC was projected to remain solvent in each of the five projections and remained solvent in six of the eight point in time scenarios.
I have reviewed the details of the ORSA, including the key assumptions, the solvency and the risk profile. In the extreme market shock ALPI would require UKLAP or group capital support, and the credit limit framework which is to be embedded in 2019 will ensure that the risks from there two scenarios will be monitored. Therefore, there were no material issues in this ORSA which are likely to invalidate my conclusions.
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Effect of the Scheme on policyholders
7. Effect of the Scheme on policyholders
7.1 Introduction
In this Section, I consider the impact of the Scheme on the policyholders of both ALI and ALPI.
The key issues to consider are listed below:
► Security of policyholder benefits for both ALI and ALPI policyholders;
► Rights and expectations of both ALI and ALPI policyholders, including the companies’ interpretation of PRE.
In addition, I have considered:
► Tax consequences as a result of the Scheme;
► Policyholder surrender option triggered by the portfolio transfer;
► Reinsurance agreements post-transfer; and
► Cost of the Scheme.
7.2 Security of policyholder benefits
7.2.1 Current solvency position of both entities
Currently, the solvency positions of both ALI and ALPI are assessed under the Solvency II regime.
For ALI, it should be noted that the SCR calculated as at 31 December 2018 is lower than the corresponding MCR. Therefore, the MCR is a more meaningful metric to consider as this is the absolute minimum amount of capital that ALI will need to hold. ALI’s target solvency ratio is set as 140% and, based on 31 December 2018 results, the actual solvency ratio is 252% assuming a transfer date of 31 March 2020, exceeding both the target and regulatory minimum.
In contrast, the SCR is the more meaningful metric to consider for ALPI and management have also set a target solvency ratio of 150%. Based on the 31 March 2019 results the actual solvency ratio is 138%, which is below the target but above the regulatory minimum. Please see section 6.5 above, where I set out the actions taken by management to restore the solvency position to the target ratio.
The current solvency ratio of ALI is 252%, however it can be seen in the ORSA and SFCR that in the scenarios of a delayed or no transfer, the solvency ratio deteriorates quickly. The capital policy of ALI includes a target ratio of 140%, ALPI has a target ratio of 150%. I have considered the solvency position of the combined entity in further detail in Section 7.2.2.
7.2.2 Solvency position at point of transfer
The table below shows the solvency position of ALI and ALPI on a pre and post transfer basis. The proposed Scheme intends to transfer assets equal to policyholder liabilities and 150% of diversified SCR at the date of transfer from ALI to ALPI.
ALI will have €5.2m assets remaining following the transfer. The impact of the transaction is shown below. The transfer of external reinsurance arrangements will require ALI to make a payment to ALPI in respect of the present value of the expected future interest payments on the reinsurance deposits (a reduction of c. 300k to ALI’s net assets).
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Effect of the Scheme on policyholders
The pre-transfer and combined solvency position for ALI and ALPI is shown below.
ALI ALPI Pro-forma Revised Pre Transfer Pre Combined corrected Transfer Impacts €m’s Transfer Balance Pre Transfer BasisA Basis Sheet Basis Total Assets 91.7 14,015.2 14,067.1 -5.2 14,153.5 Total Liabilities 83.9 13,255.8 13,255.8 -0.8 13,338.9 excluding Deferred Tax Liability Deferred Tax Liability 0.1 12.0 12.0 -0.1 12.0 Total Liabilities 84.0 13,267.8 13,267.8 -0.9 13,350.9 including Deferred Tax Liability Net Assets 7.7 747.4 799.3 (4.3) 802.6 Admissible Net Assets 7.7 578.5 630.3 (4.3) 633.7 for SCR purposes SCR 2.5 420.2 420.2 (0.3) 422.4 SCR Coverage Ratio 309% 137.7% 150.0% 150.0% Admissible Net Assets 7.7 for MCR purposes MCR 3.7 MCR Coverage Ratio 207%
The table above shows that ALPI’s balance sheet is far larger than that of ALI. On a pre-transfer basis, the SCR ratio is significantly higher for ALI than ALPI, however since the MCR is higher than the SCR for ALI, it is misleading to compare the two entities using this ratio.
ALI’s contribution to the overall capital requirements is minimal, given the larger existing life portfolio of ALPI. On a post-transfer basis, the SCR coverage ratio is unchanged for ALPI at 150%. This is equal to ALPI’s target solvency ratio of 150%, and above ALI’s target solvency ratio of 140%.
I also recognise that the balance sheet of ALPI is very much larger than ALI’s standalone position and that ALI would require regular capital injections to remain solvent if the transfer were not to take place.
In terms of ongoing solvency monitoring, management have confirmed that they comply with a Capital Management Policy, that is in line with the Aviva Capital Management Standard, and the Risk Appetite Framework, which requires (among other items) the continuous assessment of current and future capital requirements and solvency position. It also requires the business to maintain effective controls to ensure that the board and senior management have the information needed to assess, challenge, monitor and manage capital, including assessing the impact of stressed conditions. Therefore, I am of the opinion that the security of the transferring policyholders is improved as a result of the transfer.
An external valuation is being conducted on ALI, both for tax purposes as well as to decide any consideration for the transfer. It has been confirmed that any amount due will not be paid by ALPI, and therefore there is no impact on the security of ALPI policyholders.
Due to the relative size and current solvency ratio of ALI, I am of the opinion that the security of ALPI policyholders is not materially affected by the transfer.
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Effect of the Scheme on policyholders
7.2.3 Estimated effect on risk profile
After the implementation of the Scheme, the ALI policies will be direct policies of ALPI. These policies will be directly exposed to the risk profile of ALPI which has a different mix of business to ALI.
I note that ALI’s contribution to the overall capital requirements of the combined entity are minimal, given the larger existing portfolio of ALPI’s insurance business.
7.2.4 Future business plans
The products previously sold by ALI are closed to new business and so will be managed in run-off within ALPI. The management of ALPI have noted that they will continue to sell their portfolio of products that are open to new business during their normal course of business.
I understand that the with-profits business of ALI will be managed through a dedicated sub-fund created within ALPI post-transfer. The assets backing unit-linked liabilities will also be transferred as part of the transfer to the separate OBF.
The Scheme of Transfer sets out in broad terms how the new with-profit fund will be managed and I am comfortable with the process outlined. This Scheme of Transfer will be required to be approved by the ALPI Board. A paper setting out in more detail the operating principles within ALI has recently been approved by the ALI Board, The ALPI Head of Actuarial Function has confirmed that he will follow those operating principles for the ALI with profits policies in the new fund within ALPI. Therefore, there is no material impact on the operation of these policies.
7.2.5 Ongoing administration and governance
ALI operates using an outsourced business model with a number of key services being provided by Aviva S.p.A. and AIH. In particular, these services include communication with policyholders and policy administration including claims handling and processing, premium collection and payment of commission and fees.
The companies providing these services will be effectively unchanged following the transfer and hence I am satisfied that the administration services will not be impacted by the Scheme.
Management have also noted that no changes have been proposed to the management structure of ALPI after the transfer has taken place.
I have reviewed the current service agreements in place and have considered the service standards and governance structure that are currently in place. Specifically, management have confirmed that on-going investment strategy for the business acquired will be in-scope for the ALPI ALCO. (Asset and Liability Committee).
I am satisfied that the Scheme should have no material effect on the service standards experienced by policyholders of either ALI or ALPI.
7.3 Rights and expectations of policyholders
7.3.1 Policyholder’s reasonable expectations (PRE)
Under the “Domestic Actuarial Regime and Related Governance Requirements under Solvency II” issued by the CBI, the Head of Actuarial Function is required to outline their interpretation of PRE and how these have been considered in establishing the technical provisions.
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Effect of the Scheme on policyholders
The Scheme itself will transfer the policies on their existing terms and does not introduce any changes to those terms.
We note that Richard O’Sullivan, as Head of Actuarial Function of ALPI, has confirmed that ALPI will continue to run the ALI with-profits business in accordance with the current operating principles.
7.4 Other considerations
7.4.1 Tax consequences
I have relied on the tax specialists to understand the implications of the portfolio transfer on tax. I understand that since the entire portfolio of ALI has been sold through an Italian branch, the ALI policyholders are already subject to the Italian tax regime.
ALI holds an exemption from Irish exit tax, which ALPI are working to understand if this can be transferred with the business. If the exemption is not granted, policyholders would have to sign a non- resident declaration at the point of claiming and would then be exempt from the tax. Therefore, while this may be a slight administrative inconvenience, I believe that there is no material adverse impact to the policyholders as a result.
The tax report states that the proposed transfer should not result in any significant adverse Irish tax consequences for ALI, or Irish or Italian tax consequences from ALPI.
7.4.2 Reinsurance agreements post-transfer
The existing external reinsurance arrangements in respect of the combined quota share and surplus treaty in respect of ALI’s traditional business will be novated from ALI to ALPI.
The transfer will require ALI to make a payment in respect of the present value of the expected future interest payments on the reinsurance deposits.
The intention is for the internal reinsurance agreement in respect of the guaranteed annuity option provided by Aviva S.p.A to continue unchanged post transfer.
7.4.3 Surrender option
In accordance with Italian regulation policyholders are entitled to an option of exercising a 60-day penalty free exit option. I note that the Scheme is making no changes to contractual terms.
The with-profit business has reserves higher than current surrender values so there is no ‘surrender strain’ if with-profit policyholders were to take up this option. On the unit-linked side, the ALI HoAF has deemed that a full take-up of this option would be very remote and therefore the likely impact is immaterial. Given the potential take-up of this penalty free option, I believe the financial impact of any surrender strain is unlikely to be material.
7.4.4 Cost of the Scheme
All of the direct costs incurred as part of the transfer will be borne by AIH with the exception of the costs of producing this Report, which are being met by ALI. Such costs will not adversely affect policyholder security.
There will also be no increases to the charges to any policyholders arising directly as a result of the transfer of business to ALPI, however future charges may be changed by ALPI in accordance with its own governance process.
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Effect of the Scheme on policyholders
7.4.5 Matters not considered
I do not believe that there are any material issues not considered within this report.
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Conclusions
8. Conclusions
► Having regards to the size of the ALI’s portfolio transfer in terms of liabilities and capital requirements relative to the wider ALPI portfolio of assets and liabilities, I am satisfied that there will be no material adverse effect on the security of the benefits for either ALI or ALPI policyholders following the implementation of the Scheme on the Effective Date.
► I am satisfied that there will be no material adverse effect on the reasonable benefit expectations of either the ALI or ALPI policyholders following the implementation of the Scheme on the Effective Date.
► I am satisfied that there will be no material adverse effect on the service levels experienced by either the ALI or ALPI policyholders following the implementation of the Scheme on the Effective Date.
Gordon Wood, FIA, FSAI
November 2019
Associate Partner Ernst & Young LLP Atria One 144 Morrison Street Edinburgh EH3 8EX
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Documents reviewed
Appendix A: Documents reviewed
The following table lists the documents reviewed for the purposes of preparing this report.
Entity Document name Description
Area life Saving unit note - Pricing ALI ALI Pricing issue paper issue Board Paper
ALI HeB paper to board ALI Terminal bonus paper
Appendix 2 - Product Review - ALI ALI Product review paper Deep Dive
ALI DAC - FY18 Annual Report ALI DAC FY18 annual report and audited financial ALI and Audited Financial Statements statements (Signed)
Area Life Solvency II Reporting ALI Review - Final Draft Report for ALI II Reporting review Issue 01.02.19
GAO Reinsurance Treaty_Aviva ALI ALI Reinsurance contract SpA_AreaLife
1. Reinsurance Gen Re QS & ALI ALI Reinsurance contract Surplus Treaty _Part 1
2. Reinsurance Gen Re QS & ALI ALI Reinsurance contract Surplus Treaty _Part 2
3. Reinsurance Gen Re QS & ALI ALI Reinsurance contract Surplus Treaty _Part 3
4. Reinsurance Gen Re QS & ALI ALI Reinsurance contract Surplus Treaty _Part 4
1. Reinsurance Hannover Re ALI ALI Reinsurance contract Q+Surplus (Signed) 061999
ALI Reinsurance 1.3.11 - XL RE ALI Reinsurance contract
ALI 1. ALI All Funds Bank Signed ALI Investment management contract Agreement 140312
ALI 1. Morgan Stanley outsourcing ALI Investment management contract agreement signed 240119
ALI AAL 1.6.4 Morgan Stanley ALI Investment management contract Agreement
ALI AAL 1.6.5 Morgan Stanley ALI Investment management contract commission rebates agreement
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Documents reviewed
Entity Document name Description
ALI AAL 1.6.6 JPM Contract 290311 ALI Investment management contract (1)
ALI 3. AIH Risk & Actuarial Services ALI management service contract addendum 14062018 signed
ALI 5. SLA AIH & ALI - 2010_12_22_Holding ALI final ALI management service contract contract signed
ALI 6. SLA AIH & ALI 2014_11_26_Infragroup ALI management service contract agreement_amendment_Signed
ALI 8. SLA AIH addendum_additional services_finance adminstration & ALI management service contract operations 2019 MC signature only
ALI Area Life Solvency II Reporting Action plan to complete management actions on Review - Action plan Final - 30 governance/risk areas May
ALI Area Life International DA|C- Risk Committee ALI risk committee meeting 27.04.2018V2_8015346
ALI ALIA Risk committee papers ALI risk committee meeting 12.09.2018
ALI ALIA Risk Co Meeting ALI risk committee meeting 20.02.2019
ALI Risk Committee Papers 2018-07- ALI risk committee meeting 17
ALI ALIA Risk Co Meeting Papers ALI risk committee meeting 14.12.2018
ALI ALIA Risk CO Meeting Papers ALI risk committee meeting 11.04.2019
ALI AFOp_ALI_2018 ALI AFOP 2018
ALI_Actuarial_Function_Report_2 ALI ALI Actuarial Function Report 018
ALI_Reporting_Actuarial_Report_ ALI ALI Reporting Actuarial Report 2018
C33583_20181231_SolvencyIIA ALI ALI SFCR nnualSFCR_Return_2
EY 31
Aviva: Confidential
Documents reviewed
Entity Document name Description
ALI SFCR QRT ALI SFCR
ALI C33583_20190101_DC_ORSA ORSA sign off
ALI ORSA HOAF Opinion 2018 Final Head of Actuarial Function opinion
ALI IFRS to SII Reconciliation AL YE18 IFRS to SII reconciliation
ALI Area Life International Assurance ALI Due Diligence report DAC Due Diligence Report_Final
ALI S.06.03.01.01 S.01.02.01.01 S.05.01.02.02 S.06.03.01.01 S.12.01.02.01 S.23.01.01.01 S.23.01.01.02 ALI QRTs S.28.01.01.03 S.28.01.01.04 S.28.01.01.05 SE.01.01.17.01 SE.02.01.17.01 SE.06.02.16.01 SE.06.02.16.02
ALI ALI Portfolio Transfer - CBI ALI CBI presentation July 2019 presentation 30th July
ALI ALI Reporting Actuary Report YE ALI Reporting Actuary Report YE18 2018
ALI ALI Audit Committee pack ALI Audit Committee pack April 2016 21.04.16 – 1
ALI MD Report Board July 2019 final Managing Director report July 2019
ALI ALIA Audit Co Papers ALI Audit committee papers July 2019 18.07.2019 v2
ALI ALIA Board Papers 18.07.2019 ALI Board papers July 2019
ALI ALIA Risk Co Papers 11.07.2019 ALI Risk committee papers July 2019
EY 32
Aviva: Confidential
Documents reviewed
Entity Document name Description
ALI Area Life International Assurance dac - Capital Contribution Letter – ALI Capital contribution confirmation from CBI PDF
ALI Area Life_GAO Liability_Draft ALI investigation into the 2.8.19
ALI Audit Committee Paper 31 July ALI Audit committee papers July 2019 Final
ALI IEAPRT_MFD008_4543_001 Letter from J.P. Morgan
ALI reinsurance-agreement (1) ALI reinsurance agreement
ALI Appendix 1 - Compliance appendices Risk committee appendices – Compliance appendix
ALI Appendix 2 - Data Protection Risk committee appendices – Data protection Policy 2019 and attachments policy
ALPI 2019 ARTP Friends First ARTP YE18
ALPI signed AOTP FFLAC AOTP April 2019
ALPI FF - Reviewing Actuary - 31 Dec 2018_FINAL_sent_25April2019_ FFLAC Reviewing actuary report December 2018 clean(1)
ALPI ALPI DAC Q1 19 QRTs ALPI Q1 2019 QRTs
ALPI L064 IFRS to SII IFRS to SII bridge
ALPI ALPI DAC FINANCIAL ALPI YE18 financial statement STATEMENTS YE 2018 SIGNED
ALPI ALPI DAC Solvency ALPI solvency monitoring report for Board Risk Monitoring_v1.0_BRC_2019061 Committee 1
ALPI FFLAC 2018 ORSA FFLAC ORSA 2018 v3.0_Board_20181205
ALPI Solvency and Financial Condition Report - Friends First Life FFLAC SFCR 2018 Assurance Company - 2018
ALPI ALPI DAC Solvency ALPI solvency monitoring report for Board Risk Monitoring_v0.2_BRC_2019061 Committee 1 v2
EY 33
Aviva: Confidential
Documents reviewed
Entity Document name Description
ALPI Group FERP - Ireland response - ALPI solvency monitoring July 19
ALPI Risk Capital Risk tolerances Tolerances_02092019
ALPI Solvency Risk Appetite - Q2 2019 Backing solvency information
EY 34
Aviva: Confidential