PEL Altraplan (Gibraltar) PCC Limited Augura Life Ireland

Transcription

1 PEL Altraplan (Gibraltar) PCC Limited Augura Life Ireland Summary report of the Independent Actuary on the terms of the Proposed Insurance Business Transfer Scheme Prepared by: Philip Simpson, FIA, FSAI 11 Old Jewry London, EC2R 8DU United Kingdom Tel +44 (0) Fax +44 (0) August 2013 milliman.co.uk

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3 1. INTRODUCTION The Independent Actuary 1.1 When an application is made to the Supreme Court of Gibraltar ( the Court ) for an order to sanction the transfer of long-term insurance or reinsurance business from one insurer to another, the application is subject to Section 91 of the Financial Services (Insurance Companies) Act 1987 of Gibraltar ( FSICA ) and must be approved by the Court. The application to the Court must be accompanied by a report on the terms of the Scheme by an Independent Actuary. 1.2 I have been instructed by NPG Wealth Management Group ( NPG ), a subsidiary of NPG Wealth Management S.à.r.l. incorporated in the Grand Duchy of Luxembourg, to report, in the capacity of the Independent Actuary, on the terms of the proposed scheme providing for the transfer of the long-term insurance business of NPG s Gibraltarian subsidiary PEL Altraplan (Gibraltar) PCC Limited ( PAG ), trading as Vestalife, to NPG s Irish subsidiary Augura Life Ireland Limited ( ALI ). A summary of the report prepared by the Independent Actuary must be provided to policyholders. In the remainder of this summary report I refer to my report on the Scheme dated 17 May 2013 as the Scheme Report and I refer to this proposed scheme of transfer as the Scheme. 1.3 This summary report is subject to the same reliances and limitations as are set out in the Scheme Report. In the event of any conflict of interpretation between the summary report and the Scheme Report, the interpretation contained in the Scheme Report will prevail. 1.4 A copy of the Scheme Report is available upon request from PAG or ALI. General considerations of the Independent Actuary 1.5 My terms of reference have been reviewed by the Gibraltar Financial Services Commission ( FSC ). 1.6 I am a Fellow of the Institute and Faculty of Actuaries, a Fellow of the Society of Actuaries in Ireland and a Principal of Milliman, Consultants and Actuaries, ( Milliman ). 1.7 In assessing the impact of the Scheme on the policyholders of PAG and ALI, and whether those policyholders are being treated fairly as a result of the implementation of the Scheme, I need to consider the terms of the Scheme generally and how the policyholders are likely to be affected by the Scheme, in particular: The effect of the Scheme on the security of the policyholders contractual rights, including the likelihood and potential effects of the insurer becoming insolvent; and The likely effects of the Scheme on the reasonable expectations of policyholders. 1.8 I have not considered alternative schemes and this is reflected in the Scheme Report. 2. BACKGROUND TO THE SCHEME 2.1 The two companies directly involved in the Scheme, PAG and ALI (respectively Gibraltarian and Irish incorporated entities) are both part of NPG. A summary description of these companies is provided in Sections 2 and 3 of the Scheme Report, and of NPG in Section 4 of the Scheme Report. 2.2 The primary reasons for implementing the Scheme are to bring operational and capital efficiencies to the running of NPG s businesses resulting from only having one subsidiary selling new business into the Scandinavian market and managing the existing business. It is intended for ALI to focus on Scandinavia for new business, and the Scheme will transfer PAG s business into ALI to reduce the risk of increasing future expense inefficiencies and make more efficient use of capital. 2.3 The Scheme is scheduled to be presented to the Court later in If it is approved the business of PAG is intended to transfer to ALI on 31 December A summary of the Scheme is given in Section 5 of the Scheme Report. In brief, under the Scheme: All of the long-term insurance policies of PAG will be transferred to ALI. 2

4 All of the other rights, assets, obligations and liabilities of PAG will be transferred to ALI (except for certain assets, primarily cash on deposit, which will remain and will ultimately revert to NPG upon the eventual winding up of PAG). 2.5 In addition to the Scheme, separately but related to the overall transaction, an intra-group financial reinsurance arrangement will be entered into before the transfer to preserve the value of certain assets in PAG. My conclusions in this summary report reflect the impact of both the Scheme and the financial reinsurance arrangement. If the Scheme is not implemented then the financial reinsurance will not be effected. If the Scheme is implemented and the financial reinsurance agreement not implemented my conclusions remain unchanged. 2.6 In the Scheme Report I consider the issues concerning the policyholders of PAG and ALI. 2.7 I summarise below the issues arising from the transfer for the policyholders of PAG and ALI. 3. EFFECT OF THE SCHEME ON THE SECURITY OF POLICYHOLDERS BENEFITS Introduction 3.1 In Section 7 of the Scheme Report I consider the effect of the Scheme on the security of benefits of the policyholders of PAG and ALI, and I include a summary of my key findings in this section. 3.2 The security of policyholders benefits in a company is principally related to the extent to which the value of the assets in the company exceeds the value of the company s liabilities, and to the degree of prudence in the calculation of the value of the company s assets and liabilities. The regulatory environment the company operates in will also influence the security of benefits. 3.3 Under the Scheme, the policies of PAG will be transferred into ALI, which is an Irish incorporated and authorised company that does not share the protected cell company ( PCC ) structure of PAG, and therefore the key issues around security of benefits to consider are: The change in the supervising authority for PAG policyholders; The migration from a PCC of PAG policyholders; The financial position of ALI after the implementation of the Scheme; and The change in the risk exposure of PAG and ALI policyholders following the implementation of the Scheme. 3.4 I cover each of these, in summary, below. Change in Supervising Authority for PAG Policyholders 3.5 Following the implementation of the Scheme, the business of PAG will be regulated by the Central Bank of Ireland ( CBI ), which is the Irish insurance regulator. 3.6 The rules of the CBI around the level of reserves and capital which insurers must hold in respect of their unitlinked liabilities (i.e. those applying to PAG) are largely the same, as they both flow from the same European Life Directive, and share the same format as those of the FSC. 3.7 The CBI additionally requires an insurer to manage its business with reference to a Financial Condition Report, which demonstrates to the Board the possible effects of plausible, but suitably extreme, stresses to its business plan. The rationale is that this should improve risk management by better illustrating the risks an insurer runs as part of its business. 3.8 Furthermore, the proposed new European prudential insurance regulatory regime, Solvency II, is expected to replace the current approach to quantifying liabilities and capital requirements for all EU companies. The implementation date for Solvency II has not yet been decided, but it will not be before 1 January After the Solvency II implementation date, all EU insurers will be subject to the same rules on reserving and capital. 3

5 3.9 I am therefore satisfied that the change in regulatory regime for PAG policyholders as a result of the implementation of the Scheme will not have a materially adverse effect on the security of benefits of PAG policyholders. Migration from a PCC 3.10 Following the implementation of the Scheme, the business of PAG will no longer be in a protected cell structure Policyholders are informed that PAG operates as a Gibraltar PCC, but this is not the emphasis of the sales literature and PAG warrants that it is its belief that the existence of the PCC was not a key reason that policyholders chose to invest with PAG I have concluded that for the class of unit-linked policyholders as a whole (here with no or minimal guarantees or non-linked benefits) the PCC does not provide material extra benefits in the event of insolvency of an insurer in terms of the total benefits secured for the policyholders compared to Irish insurance insolvency regulations. Both in the case of the PSB cell and in the case of individual Adiameris cells, the risks that could lead to a cell s assets significantly falling short of a cell s liabilities are extreme in nature and are not likely to be a consequence of the benefit structure of the products sold by PAG In transferring to an existing insurer, the policyholders of PAG will be exposed to the pooling of assets to, or from, ALI s existing policyholders in the event of insolvency of ALI. In that scenario, not being part of a PCC is a potential disadvantage to PAG s current policyholders. This is a two-way issue: if the insolvency is triggered, for example, by the fraudulent mis-direction of the assets attributed to PAG policyholders, then they may have recourse to some of ALI s other assets, and the lack of a PCC structure is an advantage to PAG policyholders and a disadvantage to ALI s other policyholders In the instance of insolvency, the Irish regime may afford some judicial flexibility in distributing the insurance claims compared to the strict segregation of the PCC structure. In that instance, it would be for the Court to balance the needs of the policyholders against each other, and I cannot speculate on whether any individual policyholders would be materially affected compared to the protection of the PCC regime. The financial position of ALI after the implementation of the Scheme 3.15 The management of PAG and ALI have carried out projections to consider the effects of the Scheme from a financial perspective. Some key statistics from these projections are given in Section 7 of the Scheme Report and show that the financial strength of ALI is expected to continue to improve following the implementation of the Scheme, based on figures as at 31 December The forecasts of the management of PAG and ALI are that the projected solvency of ALI will be enhanced by the transfer and will also compare favourably to the projected solvency of ALI and PAG assuming that the transfer did not occur. At the end of 2013 the projected solvency coverage ratio of ALI after the transfer is 159% compared to pre transfer solvency coverage ratios of 125% for ALI and 150% for PAG. The projected post transfer solvency coverage ratio of ALI is also higher than the projected pre transfer coverage ratios of ALI and PAG in each of the future years, out to 2016, included in the managements forecasts If the transfer did not happen then over the longer term, once the expense inefficiencies of operating a diminishing book begin to take effect, the level of solvency of PAG, absent any capital injections, would potentially reduce I am therefore satisfied that the implementation of the Scheme will not have a materially adverse effect on the capital available to ensure the security of benefits for the policyholders of PAG and ALI in the longer term. The change in the risk exposure of PAG and ALI policyholders as a result of the Scheme 3.19 PAG is an insurance company which writes primarily overseas unit linked business. It is therefore exposed principally to the risk that insurance claims (the additional 1% death benefit) and expenses exceed the charges that it collects. It is additionally exposed to operational risk in the management of the unit linked assets ALI is an insurance company which now primarily writes unit linked business. Prior to this, its business was largely whole of life without profit business, meaning its main risks were market risk and mortality risk. However having written a significant amount of overseas unit linked business in 2011, and resuming to do so in 2013 (having experienced distribution issues in 2012) its risk profile is now aligned with that of PAG. 4

6 3.21 Following the implementation of the Scheme, PAG policyholders will be directly exposed to the risks of ALI, including the external market risks to which they are not currently directly exposed. For this purpose, external market risks are risks other than those inherent in an individual policyholder s selection of unit fund. These risks arise from the guaranteed benefits of the non-profit policies, which do not change with market movements However, the CBI requires insurers to hold capital in respect of all of market risks, and test its reserves against market falls. The minimum capital that the regulations require ALI to hold is the minimum of an underpin of 3.7 million (currently) and a calculation based on the amount of business in force. Currently, the underpin is higher than the calculated amount, and, consequently, ALI has a large capital cushion against the underlying risks based on the business in force Therefore I am satisfied that although the PAG policyholders will be exposed to a wider range of risks in ALI following the implementation of the Scheme, the overall level of risk exposure in ALI will not be to the material detriment of current PAG policyholders due to the capital buffer which already exists within ALI and will be increased by the transfer From the point of view of the current ALI policyholders, the transferring PAG business is significant relative to the overall size of ALI. However the resulting minimum regulatory capital requirement calculation also falls short of the Minimum Guarantee Fund which the insurer must hold and ALI therefore has some cushion against the underlying risks Therefore I am satisfied that the transfer of the PAG business into ALI will not materially adversely change the risk exposure of ALI policyholders. 4. EFFECT OF THE SCHEME ON POLICYHOLDERS REASONABLE EXPECTATIONS 4.1 In Section 7 of the Scheme Report I also consider the effect of the Scheme on the reasonable expectations of policyholders, and I include a summary of my key findings in this section. 4.2 The key issues around policyholders reasonable expectations are: Changes in policy terms and conditions as a result of the Scheme; Changes to the application of discretion following the implementation of the Scheme; and Changes in service standards and policy administration as a result of the Scheme. 4.3 I cover each of these, in summary, below. Changes to policy terms and conditions 4.4 Management has informed me that there will be no changes to the terms and conditions of any policies as a result of the implementation of the Scheme. Of particular relevance to policyholders benefit expectations is that the same investment funds shall be available to them after the transfer. Therefore I am satisfied that no PAG policyholders will be materially adversely affected by policy terms and conditions as a result of the implementation of the Scheme. ALI s policyholders terms and conditions will be unaffected by the Scheme. Changes to the application of discretion 4.5 Currently PAG has a level of discretion over the level of administration charges it levies to the majority of its products. At present it has no specific policy on how a review of the expenses would be carried out, but the policy terms and conditions allow it to review the administration charges in the light of its reasonable expenses incurred and market conditions. 4.6 Therefore if the Scheme were not to occur and PAG ultimately were to become a closed fund with business volumes steadily declining,, it would seem more likely that administration charges for the existing PAG business may eventually be reviewed upwards in PAG than it would be in ALI, which would be able to operate with better economies of scale. 4.7 I am therefore satisfied that no PAG policyholders will be materially adversely affected by changes in the application of discretion as a result of the implementation of the Scheme. Likewise, I am satisfied that no ALI 5

7 policyholders will be materially adversely affected by changes in the application of discretion as a result of the implementation of the Scheme. Changes in service standards and policy administration 4.8 The management of PAG has informed me that the range and level of services available for policyholders will be unchanged after the Scheme. The servicing and administration of PAG s policies will in practice continue to be carried within NPG after the transfer as before the transfer. 4.9 The servicing and administration of ALI s current policies will remain unchanged following the implementation of the Scheme As such, I am satisfied that no PAG or ALI policyholders will be materially adversely affected by changes in service standards or policy administration as a result of the implementation of the Scheme. 5. SUMMARY OF OVERALL CONCLUSIONS 5.1 In summary, in my opinion: the security of the benefits of the holders of PAG and ALI policies will not be materially adversely affected by the implementation of the Scheme on the Effective Date; the reasonable expectations of the holders of PAG and ALI policies will not be materially adversely affected by the implementation of the Scheme on the Effective Date; and there are no other matters which will result in a materially adverse effect on the holders of PAG and ALI policies as a result of the implementation of the Scheme. 6

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