2012 07 AKG Offshore with Profits Bond Report
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JULY 2012 OFFSHORE LIFE OFFICE WITH PROFITS BOND REPORT OFFSHORE LIFE OFFICE Copyright WITH PROFITS BOND REPORT © AKG Actuaries & Consultants Ltd (AKG) 2012 This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make such a report or ratings available. The report contains assessment based on available information at the date as shown on the report’s cover and in its page footer. This includes prior regulatory data which may have an earlier date associated with it, but the report also takes into account all relevant events and information, available to and considered by AKG, which have occurred prior to this stated cover and footer date. Events and information subsequent to this date are not covered within it. All rights reserved. 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OFFSHORE LIFE OFFICE Contents WITH PROFITS BOND REPORT Contents Page Introduction Purpose and Scope of Report 2 Availability of Information 2 With Profits Glossary 3 Company Analysis 4 Guide to AKG’s Rating System 4 AKG With Profits Fund Ratings 7 About AKG 8 Companies AEGON Ireland plc 9 Aviva Life International Ltd 15 AXA Isle of Man Ltd 23 CMI Insurance Company Ltd 33 Friends Provident International Ltd 46 LCL International Life Assurance Company Ltd 54 Prudential International Assurance plc 60 Scottish Mutual International Ltd 69 © AKG Actuaries & Consultants Ltd Page 1 July 2012 OFFSHORE LIFE OFFICE Introduction WITH PROFITS BOND REPORT Purpose and Scope of Report This is a new volume focusing on offshore Sterling with profits bond business, in response to market demand to consider this type of business using the same robust AKG framework and data set as onshore with profits business / variants. It is therefore intended as a companion to AKG’s UK Life Office With Profits Reports, which remain AKG’s most extensive reference resource in the context of with profits business. For the purposes of this report, AKG’s definition of ‘offshore’ business is business marketed within the UK by life companies situated outside the UK. In the 1990’s and early 2000’s the market for such offshore with profits bond business was substantial. AKG has identified eight current companies that contain such business - four domiciled in the Republic of Ireland and four in the Isle of Man*. In most instances, however, this type of business was designed to be reinsured back to an associated UK life company. The only exception being that part of the business written by Scottish Mutual International Ltd is retained offshore. The main reason for investing offshore has always been the ability to benefit from a gross roll up of assets. A significant proportion of the business originally written has now been surrendered, and only Prudential International Assurance plc continues to write new offshore with profits bond business in any material volume. The volume of offshore with profits bonds remaining in force is still quite large, though, and the business has now been in force long enough for AKG to enquire about past performance achievements for a variety of durations up to 15 years in force. *The Isle of Man is an internally self-governing dependency of the British Crown and its people are British citizens, and although it is part of the British Islands, it is not part of the United Kingdom. Availability of Information AKG has attempted to obtain as much detailed information (particularly of a product and financial nature) as possible about each of the companies profiled in this report. However, despite an overall improvement in recent years, the depth of information available to AKG in respect of offshore business varies quite a lot from one company to another, for the following reasons: the depth of information about offshore life companies which is available within the public domain varies greatly from one territory to another. In particular, the Isle of Man regime is less open than that in the Republic of Ireland. the extent of additional information made available to commentators such as AKG (on a voluntary basis) varies greatly from one company to another. some companies have disclosed information to AKG, but on a confidential basis, so that AKG are unable to publish it within the report. This situation remains far from satisfactory as far as AKG's objective of providing informed commentary on financial strength issues is concerned, but it reflects the current status of the offshore market. In fact, it is fair to say that the privacy laws that operate in some jurisdictions form part of the appeal of the overall proposition for some investors. The existence of reinsurance arrangements for offshore with profits bond business with UK life companies has helped AKG obtain some relevant information from those reinsurers, which are subject to a higher level of disclosure. Indeed it is the position of the reinsurer that is of primary importance in many respects for the business under consideration. AKG's aim is to publish comparable information, presented in a consistent manner, for each company. AKG's approach to rating companies which do not supply relevant information is naturally much more cautious than for those that do. © AKG Actuaries & Consultants Ltd Page 2 July 2012 OFFSHORE LIFE OFFICE Introduction WITH PROFITS BOND REPORT With Profits Glossary The glossary below defines a number of abbreviations which are used in explaining with profits business. Some are specific to with profits, but we have also included some wider abbreviations either related to with profits or often used in its broader insurance context. This list does not purport to be exhaustive, but AKG hopes it contains the majority of abbreviations used within or related to with a profits context. Conventional With Profits: Products characterised by a guaranteed sum assured to which regular (annual) bonuses, and possibly a terminal (final) bonus, are added. Few offices now offer conventional with profits, these having been superceded during the 1980's by unitised with profits products. Unitised With Profits: The relevant part of the with profits fund is divided into units (similar to a unit linked fund) and the unit value is used to define individual policy values. Surplus is distributed by allocation of additional units or by incrementing the unit value. Asset Share: The premiums paid by the policyholder, less deductions for expenses, tax and other charges, plus allocations of business profits, accumulated at the rate of investment return achieved. [Note: In practice, there is some variability as to which of the above elements are included, depending upon profit sharing philosophy]. Common Abbreviations A-Z: CFPPFM Consumer Friendly Principles and Practices of Financial Management CMA Contractual Minimum Addition CPPI Constant Proportion Portfolio Insurance CRR Capital Resources Requirement CWP Conventional With Profits DA Deposit Administration EBR Equity Backing Ratio (including Property) FAR Free Asset Ratio FSA Financial Services Authority GAO Guaranteed Annuity Option GAR Guaranteed Annuity Rate GMP Guaranteed Minimum Pension IB Industrial Branch ICA Individual Capital Assessment ICG Individual Capital Guidance LTA Long Term Assets LTBF Long Term Business Fund MCR Minimum Capital Requirement MVR/MVA Market Value Reduction/Market Value Adjuster NPSF Non Profit Sub Fund OB Ordinary Branch PPFM Principles and Practices of Financial Management PRE Policyholder Reasonable Expectations RBS Realistic Balance Sheet RCM Risk Capital Margin RMM Required Minimum Margin TCF Treating Customers Fairly UWP Unitised With Profits WCR Working Capital Ratio WP With Profits WPB With Profits Bond WPC With Profits Committee WPFAR With Profits Free Asset Ratio WPICC With Profits Insurance Capital Component © AKG Actuaries & Consultants Ltd Page 3 July 2012 OFFSHORE LIFE OFFICE Introduction WITH PROFITS BOND REPORT Company Analysis The analysis provided for each company (and any relevant reinsurance company) is based on information collated from a number of sources, including meetings with a number of the offices, a questionnaire completed by some of the companies, statutory accounts, statutory insurance company returns, PPFMs, CFPPFMs, reports to with profits policyholders, websites and any other available material, including AKG’s own company research archives.