Proposed Transfer of the Life Insurance Business of BT Life Limited to Westpac Life Insurance Services Limited

Transcription

1 KPMG Actuarial Pty Ltd ABN: Australian Financial Services Licence No Telephone: Shelley Street Facsimile: Sydney NSW 2000 DX: 1056 Sydney PO Box H67 Australia Square NSW 1215 Australia Proposed Transfer of the Life Insurance Business of BT Life Limited to Westpac Life Insurance Services Limited 9 August 2011

2 KPMG Actuarial Pty Ltd ABN: Australian Financial Services Licence No Telephone: Shelley Street Facsimile: Sydney NSW 2000 DX: 1056 Sydney PO Box H67 Australia Square NSW 1215 Australia 9 August 2011 Board of Directors BT Life Limited 275 Kent St SYDNEY 2000 Board of Directors Westpac Life Insurance Services Limited 275 Kent St SYDNEY 2000 Proposed Transfer of the Life Insurance Business of BT Life Limited to Westpac Life Insurance Services Limited Please find attached my report on the proposed transfer of policies from BT Life Limited to Westpac Life Insurance Services Limited. Yours sincerely 2

3 1 1 Introduction Proposed Transfer of Life Insurance Business 1.1 Scope of Report I refer to the report titled Actuarial Report on the Proposed Transfer of Life Insurance Business from BT Life Limited to Westpac Life Insurance Services Limited pursuant to a scheme under Part 9 of the Life Insurance Act 1995 (Cth) by David Su, dated 8 August 2011 (the Actuarial Report ), which describes a proposed scheme of transfer ( Scheme Transfer ) of life insurance business and provides an analysis of the impact on the policyholders terms and benefit security. Owners of policies issued by BT Life Limited ( BT Life ) which are to be transferred under the scheme are referred to as Scheme Policyholders and their policies as Scheme Policies. I have been engaged to review the proposed Scheme Transfer of the life insurance business of BT Life to Westpac Life Insurance Services Limited ( Westpac Life ). Both BT Life and Westpac Life are life companies registered under the Life Insurance Act 1995 (the Act) and both are currently part of the Westpac Group. In conducting this review consideration has been given to the impact on Scheme Policyholders and Westpac Life Policyholders of the proposed Scheme Transfer on: The policyholders contractual rights and benefits; The policyholders reasonable expectations with respect to discretionary elements of their benefits and policies operation; and The security of policyholders benefits. In forming my opinion I have relied upon the following information, some of which is confidential to BT Life and/or Westpac Life: The detail set out in the Actuarial Report; Discussions and correspondence with Westpac Life, BT Life and its advisors, in particular, David Su (Appointed Actuary for BT Life and Westpac Life); Westpac Life s Capital Management Policy, dated June 2009; and Review of key elements of analysis underlying the Actuarial Report. In considering this material, my review did not extend to independent verification of the underlying data or quoted facts, nor recalculation of values or analysis. In particular I have not independently verified the reinsurance, tax or legal implications of the Scheme Transfer. 3

4 Proposed Transfer of Life Insurance Business I note that any projections of future financial position and estimates of insurance liabilities are generally subject to inherent uncertainties. The actual financial position of Westpac Life and BT Life at the Scheme Transfer date (expected to be 30 September 2011) is subject to the outcome of events that have not yet occurred. Actual experience could vary considerably from the estimates contained within this report and the Actuarial Report. Deviations are normal and are to be expected. The outcome of insurance business and ongoing solvency of Westpac Life cannot be guaranteed. I note that no absolute guarantee can be provided given the inherent uncertainty in insurance outcomes. I note that my firm, KPMG, has previously provided consulting services to the Westpac Group. I also have a mortgage, offset account and credit card with Westpac Bank. 1.2 Recent Events As at 31 March 2011 all superannuation investment linked life insurance policies issued by BT Life s Statutory Fund No. 3 were transferred by a successor fund transfer ( SFT ). The SFT was part of a broad project within the BT Financial Group to rationalise the number of superannuation funds and was not related to the Scheme Transfer. The financial positions set out in this report are as at 31 March 2011 and are shown after the SFT. 1.3 Proposed Dividends and Transfers There are no capital transfers or dividend payments currently proposed for BT Life or Westpac Life prior to the expected Scheme Transfer date (30 September 2011). 1.4 High Level Observations The key aspect of the Scheme Transfer involves the transfer of Scheme Policies from BT Life into Westpac Life. In this context it is noted that: The BT Life Scheme Policies liabilities represent less than 4% of Westpac Life s Life insurance liabilities; and There is no change being proposed to any of Westpac Life s structure, management or policy terms and conditions. Consequently, the key focus of this report is upon the impact of the proposed Scheme Transfer on the BT Life Scheme Policyholders. 4

5 2 Proposed Transfer of Life Insurance Business 2 Impact on BT Life Policyholders 2.1 Overview of BT Life BT Life has two statutory funds and a shareholders fund: Statutory Fund No.3 currently has no policies (as noted in Section 1, on 31 March 2011 the policies in this fund were transferred out by the SFT. Statutory Fund No.4 contains superannuation policies including a term annuity product known as the Complying Income Plan, CIP and an account based pension product known as the Flexible Pension Plan, FPP. The FPP policy provides account based benefits linked to the performance of the underlying assets, which may be positive or negative. This benefit design feature is similar to other account based pension policies within Westpac Life Statutory Fund No. 2. The policy liabilities for the FPP are currently approximately $231.2 million. The benefits for CIP are determined differently to those for the FPP as they are based on a fixed rate of return set at policy commencement. These payments are fully backed by and subject to the performance of a master annuity policy issued by AIA Australia Limited ( AIA ). The AIA policy provides a precisely matched annuity payment stream to BT Life. The policy liabilities for the CIP are currently $21.8 million. BT Life has no reinsurance arrangements. 2.2 Proposed Transfer All life insurance business remaining within BT Life s Statutory Fund No.4, comprising the the CIP and FPP policies, will be transferred to Westpac Life Statutory Fund No.2. The assets explicitly backing the Scheme Policies, assets supporting the regulatory capital requirements as well as any additional assets or liabilities within BT Life s Statutory Fund No. 4 will be transferred or assigned to Westpac Life s Statutory Fund No. 2. The additional net assets (estimated as at 31 March to be $5.6 million) will ensure that the capital within Westpac Life is not diluted due to the Scheme Transfer. AIA has agreed to the transfer of the AIA policy to Westpac Life. I am advised that there are no proposed changes to the business operations of BT Life prior to the Scheme Transfer. 5

6 Proposed Transfer of Life Insurance Business All costs associated with the proposed Scheme will be borne by the shareholders of BT Financial Group ( BTFG ) and hence will not impact BT Life Policyholders. 2.3 Changes to Scheme Policies The proposed Scheme Transfer does not involve any proposed changes to benefit terms or rules, premium rates or policy charges under the Scheme Policies. Other than the technical change involving amending the policy documents to refer to Westpac Life rather than BT Life and the relevant new statutory fund, there are no changes to policy terms and conditions being proposed. 2.4 Impact on Contractual Rights and Benefits The potential impact on Scheme Policyholders contractual rights and benefits has two components: Impact on maximum fees chargeable; and Impact on benefits and terms and conditions. In terms of the proposed Scheme Transfer, it should be noted that: There are no proposed changes to Scheme Policy premium rates or fee rates; and There are no proposed changes to Scheme Policy benefits, terms or conditions. The proposed Scheme Transfer is not regarded as adverse to the contractual rights and benefits of the Scheme Policyholders. 2.5 Reasonable Expectations The key reasonable expectations of Scheme Policyholders relate to the exercise of the discretions available to BT Life and Westpac Life under the policy terms and conditions. The principal discretions associated with the CIP Plan are: The ability to commute the plan if tax or regulatory changes occur which the life company considers materially impact their ability to pay the benefits. The ability to change provider of the annuity (currently AIA Australia) at any time. General operational discretions, e.g. timely payment of benefits. The principal discretions associated with the Pension Plan are: 6

7 Proposed Transfer of Life Insurance Business The ability to vary fees and charges; The ability to change unit price and asset value calculations; The ability (with the consent of APRA) to suspend processing of withdrawal requests, where such payments would prejudice the interests of remaining investors; and General operational discretions, e.g. treatment of backdated transactions. As both BT Life and Westpac Life are part of the same Westpac Group there is no prima facie basis to infer that there is likely to be any difference in philosophy as to commutation, fees and charges, unit price and asset value calculations, or other policy administration aspects applicable in future. None of the Scheme Policies are participating under the Act or involve material discretionary elements such as investment account crediting or bonus rates. Consequently, considerations of bonus rate or crediting rate philosophies do not arise under the proposed Scheme Transfer. No adverse impact on Scheme Policyholder reasonable expectations has been identified. 2.6 Security of Policyholder Benefits A high level summary of the key elements of the financial position of the BT Life affected statutory funds, after the SFT as at 31 March 2011 is shown in the following table: BT Life Statutory Funds SF 3 SF 4 Shareholder Fund Total Policy Liabilities Other Liabilities Capital Adequacy Requirement Total Assets Excess Assets A high level summary of the key elements of the financial position of the Westpac Life affected statutory funds, allowing for the effect of the proposed Scheme Transfer as at 31 March 2011 is shown in the following table (i.e. the position of Westpac Life statutory funds as if the proposed Scheme Transfer had occurred as at 31 March 2011): 7

8 Proposed Transfer of Life Insurance Business Westpac Life Statutory Funds SF 2 Other Shareholder Fund Total Policy Liabilities 6, ,352.5 Other Liabilities (3.7) Capital Adequacy Requirement Total Assets 6, ,365.7 Excess Assets Observations and Comments The key aspects of a life insurer and its operations that provide and support the security of policyholders include: The risk management framework under which the business operates; The capital available within the business, and its management, to support adverse business experience and outcomes over time; and The overall viability and profitability of the business over the longer term. In considering these aspects the following observations are made: Both BT Life and Westpac Life are subject to the same legislation and the same Australian Prudential Regulatory Authority (APRA) requirements, standards and rules. These include requiring both to maintain: A suitable Board approved risk management framework and strategy, including suitable business plans, risk management processes and capital management plans; and Net asset amounts that exceed APRA s Solvency and Capital Adequacy Reserve requirements (noting Capital Adequacy is the greater requirement). The Capital Adequacy Requirements applicable to both BT Life and Westpac Life are risk based standards that require capital to be held that reflects the risk profile of the life insurer, including its assets and credit risks, insurance risks, financial viability, and projected net capital needs over the next three years (so as to be expected to satisfy APRA Solvency requirements). The minimum Capital Adequacy Requirements (which both BT Life and Westpac Life exceed) are based on probabilities of adequacy (set out in the APRA Standards) that are higher than those typically associated with an 8

9 Proposed Transfer of Life Insurance Business investment grade rating by a rating agency (e.g. higher than a Standard and Poors BBB level). Westpac Life has a capital management plan which has been reviewed by APRA. The capital management plan provides a level of security to policyholders beyond the minimum required by the APRA Capital Adequacy Standard; Westpac Life has historically been profitable and is expected to generate profits beyond the Scheme Transfer date; and Westpac Life has an S&P rating of AA- and both insurers are part of the overall Westpac Group that is AA- rated by S&P. 2.7 Conclusions The impact of the proposed Scheme Transfer on the interests of Scheme Policyholders is as follows: The proposed transfer is not regarded as adverse to the contractual rights and benefits of the Scheme Policyholders; No adverse impact on Scheme Policyholder reasonable expectations has been identified; and After the transfer Scheme Policyholders benefits will be supported by a life insurer with a strong credit rating and capital and risk management practices that satisfy APRA requirements. Upon transfer of the Scheme Policies with the Westpac Life business: Westpac Life will continue to have assets in excess of APRA s Capital Adequacy Requirements as at the transfer date; and The security of Scheme Policyholder benefits as at that date will be adequate. 9

10 3 Proposed Transfer of Life Insurance Business 3 Impact on Westpac Life Policyholders 3.1 Observations There are no changes proposed under the Scheme to the terms or conditions of any Westpac Life Policies; There are no changes proposed under the Scheme to the management of any Westpac Life Policies; The reasonable benefit expectations of Westpac Life Policyholders will not be adversely impacted by the proposed Scheme; and BT Life s liabilities are 4% of Westpac Life s liabilities for Statutory Fund No. 2 and less than 4% of Westpac Life s liabilities in total. All costs associated with the proposed Scheme will be borne by the shareholders of BT Financial Group ( BTFG ) and hence will not impact Westpac Life Policyholders. 3.2 Transfer of CIP Policies into Westpac Life Statutory Fund No. 2 The CIP policies are classified under the Life Insurance Act (1995) as investment linked by BT Life and will continue to be classified as investment linked by Westpac Life. The policies include a guarantee, which is a guarantee made by AIA, the issuer of the master annuity policy, which backs the CIP policies. When considering this guarantee it should be noted that: The guarantee within the CIP policies is limited and subject to the performance of the AIA master annuity policy; BT Life s Policy Disclosure Statement for the CIP states that BT Life does not guarantee the performance of the AIA master annuity policy; AIA, as an Australian registered life insurer, is required to meet APRA s regulatory capital requirements; The current policy liabilities for the CIP product are approximately $21.8 million. The product is closed to new policies and consequently this relatively small pool of business will reduce in size over time; and After the Scheme Transfer Westpac Life Statutory Fund No. 2 will have assets in excess of regulatory capital requirements of $42 million (comprising target buffer capital of approximately $17 million and assets in excess of regulatory and buffer capital of $25 million); I note that even in the highly unlikely event that AIA defaulted, a 100% loss of the policy value is extremely remote (a significant recovery of the policy value is 10

11 Proposed Transfer of Life Insurance Business likely). Therefore even if Westpac Life continued the fixed payments to policyholders after a default by AIA, Westpac Life Statutory Fund No. 2 would continue to have assets in excess of regulatory capital. It is reasonable therefore to conclude that the adequacy of the security of Westpac Life Policyholder benefits will not be impacted by the transfer of the CIP policies. 3.3 Conclusions The proposed Scheme Transfer involves no change to Westpac Life Policy terms or conditions and no adverse impact on Westpac Life Policyholder reasonable expectations. Upon transfer of the Scheme Policies with the Westpac Life business: Westpac Life will continue to have assets in excess of APRA s Capital Adequacy Requirements as at the transfer date; and The security of Westpac Life Policyholder benefits as at that date will be adequate. 11

12 4 4 Conclusion Proposed Transfer of Life Insurance Business The following summarised the key conclusions set out in this report in respect of the scope, general uncertainties and assumptions described in Section 1: In respect of the Scheme Policyholders benefit terms and conditions, and reasonable expectations: There are no proposed changes to Scheme Policy benefits, fee rates or policy terms or conditions; and No adverse impact on Scheme Policyholder reasonable expectations has been identified. In respect of the Westpac Life Policyholders benefit terms and conditions, and reasonable expectations: The proposed Scheme Transfer involves no change to Westpac Life Policy terms or conditions and no adverse impact on Westpac Life Policyholder reasonable expectations. In respect of Scheme Policyholder and Westpac Life Policyholder benefit security: Upon the proposed Scheme Transfer, Westpac Life will continue to have assets in excess of APRA s Capital Adequacy Requirements as at the transfer date; and The security of Scheme Policyholder and Westpac Life Policyholder benefits as at that date will be adequate. 12