Actuarial Report. On the Proposed Transfer of the Life Insurance Business from. Asteron Life Limited. Suncorp Life & Superannuation Limited

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1 Actuarial Report On the Proposed Transfer of the Life Insurance Business from Asteron Life Limited to Suncorp Life & Superannuation Limited Actuarial Report Page 1 of 47

2 1. Executive Summary 1.1 Background to the Proposed Transfer The Suncorp group of companies (Suncorp Group) includes two Australian life insurance entities, namely Suncorp Life & Superannuation Limited ABN (SLSL), and Asteron Life Limited ABN (ALL). SLSL and ALL both issue a range of insurance policies and investment policies, including Participating business. Management has identified that simplified governance, and scale and efficiency benefits would be realised if there was only one Australian life insurance entity within the Suncorp Group. This is also consistent with management s desire to continue to simplify the business within the Suncorp Group. Accordingly, SLSL and ALL are proposing to transfer the ALL life insurance business to SLSL, pursuant to a scheme under Part 9 of the Life Insurance Act 1995 (Cth) (Life Act), which is subject to confirmation by the Federal Court of Australia (Federal Court). This transaction is referred to as the Scheme in this report. The Scheme has been formulated by management common to SLSL and ALL and has been endorsed by their respective Boards. If the Scheme is confirmed by the Federal Court, it is proposed that the Scheme will take effect on and from 1 January 2012 (Effective Date). 1.2 Purpose and Scope of the Report This report has been prepared by Mr Michael Lubke, the Appointed Actuary of both SLSL and ALL. This report forms the actuarial report upon which the Scheme, to be presented to the Federal Court for confirmation, is based. The Scheme proposes that all of the policies issued by ALL (ALL Policies) will be transferred from ALL to SLSL. The purpose and scope of this report is to review the basis and terms of the Scheme and comment on the effect of the Scheme on the contractual benefits and rights, reasonable benefit expectations, and benefit security for both the SLSL policy owners and the ALL policy owners. In addressing this scope, I have focussed on the changes that arise as a result of the Scheme, rather than changes that might arise in the ordinary course of business irrespective of the proposed transfer. 1.3 Summary of the Scheme Under the Scheme, all existing ALL Policies will be transferred from ALL to SLSL, along with all the assets and liabilities of the ALL Statutory Funds. The details of the Scheme are more fully described in section 5. All contractual benefits and rights under the existing policies of both ALL and SLSL will remain unchanged. 1.4 Effect of the Scheme on SLSL Policy owners In respect of the effect of the Scheme on SLSL policy owners, it is my opinion that: There will be no adverse effect on the contractual benefits and rights or benefit expectations of existing SLSL policy owners; Each of the Statutory Funds of SLSL, and SLSL as a whole, will be in a sound financial position; and There will be no adverse effects on the benefit security of existing SLSL policy owners in any material respect. Actuarial Report Page 2 of 47

3 1.5 Effect of the Scheme on ALL Policy owners In respect of the effect of the Scheme on ALL policy owners, it is my opinion that: There will be no adverse effect on the contractual benefits and rights or benefit expectations of ALL policy owners; Each of the Statutory Funds of SLSL to which ALL policy owners will be transferred, and SLSL as a whole, will be in a sound financial position; and There will be no adverse effects on the benefit security of ALL policy owners in any material respect. Actuarial Report Page 3 of 47

4 2. Introduction 2.1 Purpose of Report I have prepared this report as Appointed Actuary of SLSL and of ALL to advise the Directors of the respective companies on the proposed basis for the transfer of the assets and the assumption of the liabilities, as provided for by the Scheme, and to comment on the arrangements of the Scheme. This report forms the actuarial report upon which the Scheme, to be presented to the Federal Court for confirmation, is based. I am conscious of the responsibility of the Directors to give priority to the interests of policy owners in accordance with Section 48 of the Life Act. In particular, in providing this advice I have had regard to: The present security of the benefits provided under the life insurance policies issued by SLSL and ALL; The reasonable benefit expectations of SLSL and ALL policy owners; and The effect of the Scheme on SLSL and ALL policy owners' security of benefits and reasonable benefit expectations. I have prepared this report on the basis that it can also be used by policy owners, the Australian Prudential Regulation Authority (APRA) and the Federal Court to enable each of those parties to consider the Scheme. 2.2 Scope of Report The scope of this report is to review the basis and terms of the Scheme, and to identify and comment upon the effect of the Scheme on: The contractual benefits and rights, reasonable benefit expectations, and benefit security of the existing SLSL policy owners; and The contractual benefits and rights, reasonable benefit expectations, and benefit security of the transferring ALL policy owners. In addressing the above scope I have focussed on the changes that arise as a consequence of the Scheme, rather than changes that might arise in the ordinary course of business. In particular, I note that each of the companies has Board policies to follow if the excess capital position of their respective Statutory Funds falls below certain thresholds, and the efficacy of those policies is unaffected by the Scheme. This report has been prepared in accordance with the professional requirements of the Institute of Actuaries of Australia, specifically: The Code of Professional Conduct; and Professional Standard 200: Actuarial Advice to a Life Insurance Company or Friendly Society (PS200). 2.3 Interpretation In considering the effect of the Scheme on SLSL and ALL policy owners, I have considered not only the actual owners of the policies, but in the case of 'group' policies (e.g. a policy owned by a Trustee of a superannuation fund for the benefit of its members), I have extended my consideration to include the underlying beneficiaries of such policies. For the purpose of this report, I regard a matter as not being material if, in my view, that matter has such a small effect (or potential effect) that it is inconsequential or not relevant for any individual policy owner. Amounts in the tables may not appear to add to the totals shown, and the assets and liabilities in the tables may marginally differ from those in the audited financial statements of ALL and SLSL, due to rounding conventions. Actuarial Report Page 4 of 47

5 2.4 Background ALL became part of the Suncorp Group in 2007 following the acquisition of all the shares in Promina Group Ltd by Suncorp Metway Ltd. SLSL and ALL both issue a range of insurance policies and investment policies, including some Participating business. The Scheme proposes to transfer the life insurance business in the Statutory Funds of ALL to SLSL. The purpose of the proposed transfer as provided for by the Scheme is to reduce complexity, simplify the governance of the business, and obtain operational efficiency and cost savings. The Scheme has been formulated by management common to SLSL and ALL and has been endorsed by their respective Boards. 2.5 Author This report has been prepared by Mr Michael Lubke, FIAA, the Appointed Actuary of both SLSL and of ALL. I am a Fellow of the Institute of Actuaries of Australia and an employee of Suncorp Staff Pty Ltd ABN , one of the subsidiaries of the Suncorp Group. I have the following interests in the Suncorp Group: Remuneration paid as an employee of Suncorp Staff Pty Ltd; Superannuation invested in the SLSL No 2 Statutory Fund; Ordinary shares in Suncorp Group Limited ABN ; and A potential for a bonus, the value of which may depend on the performance of the Suncorp Group, as well as the share price of Suncorp Group Limited. 2.6 Structure of the Report The remainder of this report is structured as follows: Section 3 Overview of SLSL Section 4 Overview of ALL Section 5 Overview of the Scheme Section 6 Effect of the Scheme on Existing SLSL Policy owners Section 7 Effect of the Scheme on ALL Transferring Policy owners Section 8 Summary of Conclusions 2.7 Glossary, Reliances and Assumptions A glossary of terms used in this report is included in Appendix A. In preparing this report I have relied on certain data and information provided by SLSL and ALL. I have also made certain assumptions which are identified in the discussion of the report. Appendix B contains a list of data relied upon and assumptions I have made. Appendix C summarises the life insurance business that is proposed to be transferred under the Scheme. Actuarial Report Page 5 of 47

6 3. Overview of SLSL 3.1 Background SLSL is a wholly owned subsidiary of Suncorp Group Limited, a company listed on the Australian stock exchange. SLSL is registered under the Life Act to transact life insurance business in Australia. It operates only in Australia and all policies are issued in Australian currency. SLSL currently writes a range of life insurance products, including risk insurance and life investment products, and has a significant book of in-force Participating capital guaranteed business. 3.2 Statutory Funds and Shareholders Fund The fund structure of SLSL currently comprises two Statutory Funds and a Shareholders Fund. The two Statutory Funds maintain all the life insurance business of SLSL. SLSL Shareholders Fund Statutory Fund No. 1 Statutory Fund No. 2 SLSL Statutory Fund No. 1 SLSL s Statutory Fund No. 1 contains the following product types: A substantial book of Participating business, including traditional whole of life, endowment and investment account policies. This is the SLSL Participating Business referred to in section 1.3 above. This business is currently closed to new business, other than the capital guaranteed investment option being an open option to new members of the Suncorp Staff Superannuation Plan, and also for some additional contributions for existing group investment policies. A relatively small book of risk insurance business, including term, total and permanent disability, trauma and disability income protection policies. These are non-participating and consist of both individual and group policies. 1 A small closed book of non-participating immediate annuity business, and a very small book of nonparticipating traditional whole of life business. The SLSL Participating Business is maintained separately from the rest of the business in Statutory Fund No. 1, with separate investment mandates to meet the benefit expectations of the owners of the SLSL Participating Policies, and separate sub funds to account for the different books of liabilities within the Participating Business portion of the Statutory Fund. There is a component of the SLSL Participating Business portion of the Statutory Fund representing policy owners' retained profits, which are retained profits attributable to Participating policy owners that are yet to be distributed. These profits are being managed for the benefit of Participating policy owners in accordance with a Board approved framework and the Life Act. 1 No new individual intermediated business is written in SLSL currently, although new direct marketed business is written. Actuarial Report Page 6 of 47

7 SLSL Statutory Fund No. 2 SLSL s Statutory Fund No. 2 contains non-participating investment linked business, including both Superannuation and Ordinary business. SLSL Shareholders Fund The Shareholders Fund of SLSL is maintained separately from the SLSL Statutory Funds as required by the Life Act. The SLSL Shareholders Fund holds the minimum amount of capital that is required by APRA to be held outside the Statutory Funds, and eligible asset amounts as required by APRA Prudential Standard No. 3: Prudential Capital Requirement. The Shareholders Fund of SLSL also promotes an investor directed portfolio service that provides a managed investment vehicle with access to a range of underlying wholesale investment options (EasyInvest). Macquarie Investment Management Limited ABN operates this business, which is not classified as life insurance business, and Asteron Pty Limited ABN undertakes some administration activities. Operational risk, in relation to unit pricing and/or administration errors, is retained by Asteron Pty Limited and not SLSL. Summary of the Life Insurance Business in the SLSL Statutory Funds The following table shows a summary of the in-force life insurance business in the SLSL Statutory Funds, as at 30 June Table 1: SLSL Statutory Fund In-Force Life Insurance Business as at 30 June 2011 Annual Premium In-Force Sum Insured Number of Policies Funds Under Administration Statutory Product Line Fund No. Individual Term & TPD , ,210 na Individual Trauma , ,545 na Individual Disability Income ,957 na Group Risk , na Direct Risk , ,544 na Conventional - Par , Conventional - Non Par Investment Account PAR WealthSmart Investment Account PAR Managed Funds Investment Account PAR Other , Immediate Annuities 1 na na Total Statutory Fund No , ,999 1,756.2 Investment Linked - WealthSmart 2 na na Investment Linked Managed Funds 2 na na Investment Linked Other 2 na na 2, Total Statutory Fund No. 2 2,017 1,484.0 Overall Total , ,016 3,240.2 Notes to Table 1: For Group Risk, WealthSmart and Managed Funds, the policy count does not reflect the number of members insured. The Investment Account PAR Other product line includes the WealthSmart pension business. The number of policies shown includes members for the group policy supporting that business and held by Suncorp Portfolio Services Limited ABN as trustee for the Suncorp Master Trust. Where an insurance policy has multiple covers, the data reflects the one policy and all the premium and sum insured for the included covers. The sum insured for Conventional Par includes any bonuses declared on the policies prior to 30 June Funds under administration reflects the account balance for that product line, the surrender value for Conventional Par and the policy liability for Immediate Annuities. na means the item is not applicable for that product line. Actuarial Report Page 7 of 47

8 Some of the business of SLSL, i.e. the SLSL Participating Business, is 'participating', as defined by sections 15(2) and 15(3) of the Life Act. The owners of SLSL Participating Policies are entitled to share in the profitability of these policies. As a result, issues concerning Participating policy owner benefit rights, reasonable benefit expectations, and interests in policy owner retained profits within SLSL are an important consideration under this proposed transfer. These issues are discussed in more detail in section 6 of this report. 3.3 Government and Policy Guarantees Government Some of the business of SLSL is subject to a guarantee provided by the Queensland Government, as summarised below. Following the merger on 1 December 1996 of the life insurance business owned by the Queensland Government (Suncorp and QIDC entities) with the listed company Metway Bank Ltd, the Queensland Government provided certain guarantees to policy owners under the then existing policies. The legislation relating to this guarantee was clarified by the Queensland Government recently, to only relate to the amounts that were in existence as at 30 November The effect of the Scheme on this guarantee is relevant, and is discussed in section 6.2 of this report. Other SLSL Guarantees The following points summarise the other guarantees and options provided by SLSL in relation to respective policies it issues: Sums insured and declared reversionary bonuses for Participating conventional business are guaranteed payable on death. While surrender values are not guaranteed they are subject to a minimum pursuant to the Life Act. Annuity payments are guaranteed payable in line with the terms and conditions of the policy, either for a term certain or for the life of the annuitant. The total policy liability of this annuity business was $32m at 30 June For insurance products, the sum insured is guaranteed payable on death, total and permanent disablement, temporary disablement, or major trauma subject to policy terms and conditions including definitions of disablement or trauma. Some benefits also provide certain guarantees, such as guaranteed future insurability. For personal investment account business, there is a guarantee that the account balance less relevant surrender charges is payable on exit for any cause. This business is significant and had a total policy liability at 30 June 2011 of $981m. For group investment policies with corporate clients (total policy liability $489m at 30 June 2011), the total account value may be subject to more stringent termination conditions due to the significant size that individual accounts can attain. This would apply, at SLSL's discretion, where the financial stability of the Statutory Fund or the interests of other policy owners would otherwise be prejudiced. Actuarial Report Page 8 of 47

9 3.4 Financial Performance The following table provides a three year history of shareholder profits of SLSL. Table 2: SLSL Shareholder Profit (net of tax)* 12 months to 30 June months to 30 June months to 30 June 2011 Statutory Fund No Statutory Fund No Shareholders Fund (1.2) TOTAL * Profit shown is for the entity, and excludes the consolidation of any subsidiaries SLSL has reported an annual operating profit over each of the last three years. The profit of SLSL provides internal funding for future capital requirements. 3.5 Capital Position The following two metrics are used in this report to analyse the capital position of SLSL: Excess Assets Ratio % this measures the relative size of the excess assets over the Capital Adequacy Requirement (CAR). It is calculated as the Total Assets (gross of reinsurance) less CAR, divided by CAR (Gross Policy Liabilities plus Other Liabilities plus Capital Adequacy Margin). Target Surplus Ratio % this measures the extent to which the excess assets above CAR is meeting the Target Surplus Requirement (TSR). It is calculated as Total Assets (gross of reinsurance) less CAR, divided by TSR. The capital position of SLSL is shown below, based on audited information, as at 30 June Total Assets (gross of reinsurance) Table 3: SLSL Capital Position as at 30 June 2011* Statutory Fund No. 1 Non- Participating Participating Statutory Fund No. 2 Non- Participating Shareholders Fund Non- Participating 2, , Gross Policy Liabilities 1, , Other Liabilities # Capital Adequacy Margin (4.5) Capital Adequacy Requirement (CAR) 2, , Excess Assets above CAR Excess Assets Ratio % 4.3% 6.5% 0.6% 11.9% Target Surplus Requirement (TSR) Excess Assets above CAR and TSR Target Surplus Ratio % 101% 100% 105% 132% * Assets in this table reflect the transfers into or out of the funds processed in August 2011 following completion of the 30 June 2011 liability valuations, as recommended in my Financial Condition Report to the Board. # For the SLSL Participating Business in Statutory Fund No. 1, Other Liabilities includes policy owner retained profits. Actuarial Report Page 9 of 47

10 Capital Adequacy The total Capital Adequacy Margin as at 30 June 2011 was $204.7m. Comments on each fund are provided below: For SLSL Statutory Fund No. 1, the key driver of the Capital Adequacy Margin is the mismatch between the liabilities and the assets that can vary in value. There are two key sections to this Statutory Fund, and the target surplus policy considers them separately: o o SLSL Participating Business the liabilities for the SLSL Participating Business include some guarantees. The Capital Adequacy Margin is principally required to cover the risk of asset falls relative to the liabilities. The amount shown for this item in Table 3 is negative, as the sum of the Gross Policy Liabilities and Other Liabilities (including policy owner retained profits) is more than sufficient to meet the defined Capital Adequacy Requirement. Non-participating business these liabilities consist of both insurance and annuity liabilities. The Capital Adequacy Margin is required to meet potentially higher than expected insurance claims, the risk of asset falls relative to the liabilities, and a component to cover the minimum termination value. The margin is fully met from the capital and retained profits in the nonparticipating portion of the Statutory Fund, meaning there is no cross financing of regulatory capital between the Participating and non-participating sections of the Statutory Fund. For SLSL Statutory Fund No. 2, the Capital Adequacy Margin is a small proportion of the Statutory Fund, reflecting the nature of the investment linked liabilities that vary with asset values. For the SLSL Shareholders Fund, the Capital Adequacy Margin reflects the minimum capital requirement set by APRA. As at 30 June 2011, all of the SLSL funds had an Excess Assets Ratio exceeding zero. This means that each of the SLSL Statutory Funds met APRA Prudential Standard LPS3.04: Capital Adequacy Standard, and the SLSL Shareholders Fund met APRA Prudential Standard LPS6.03: Management Capital Standard. Solvency Each of the SLSL Statutory Funds are required to meet APRA Prudential Standard LPS2.04: Solvency Standard. The asset requirement under LPS2.04 is termed the Solvency Requirement (SR), and the SR acts as a minimum to the CAR. As at 30 June 2011, SLSL s Statutory Funds had assets in excess of the SR of $383m. Target Surplus Requirement The Target Surplus Requirement provides added benefit security to policy owners by targeting an additional buffer above the Capital Adequacy Requirement. The basis used by SLSL to calculate the Target Surplus Requirement is provided in a target surplus policy determined by the SLSL Board, which is reviewed annually and was last updated in May The Target Surplus Requirement provides additional capital for identified risks to a certain risk tolerance, and provides an additional capital buffer to allow the company reasonable time to implement remedial action in the event of significant adverse experience emerging, without breaching its Capital Adequacy Requirement. The risks considered in calibrating the Target Surplus Requirement include investment risk relative to the liabilities, insurance risk, and operational risk. At 30 June 2011, the Target Surplus Requirement across SLSL totalled $125.5m above the Capital Adequacy Requirement, with additional assets of $1.7m in excess of the Target Surplus Requirement. The nature of the excess assets position in each of the Statutory Funds and the Shareholders Fund is that it may vary above and below the Target Surplus Requirement over time, depending on the experience in each of those funds. The target surplus policy contains trigger points for management actions, including points at which: Actuarial Report Page 10 of 47

11 an injection of shareholder money into the Statutory Fund or Shareholders Fund is considered appropriate to increase the excess assets, where the Target Surplus Ratio is below 75%; and a withdrawal of shareholder money out of the Statutory Fund or Shareholders Fund may be considered appropriate, where the Target Surplus Ratio exceeds 110% 2. The amounts shown in the table include the effect of any transfers made into, or out of, each of these funds in accordance with the target surplus policy, as a result of the 30 June 2011 liability valuations. As at 30 June 2011, both of the SLSL Statutory Funds (considering the non-participating section of Statutory Fund No. 1 separately for this purpose) and the Shareholders Fund had a Target Surplus Ratio above 100%, and had excess assets well above the level at which the target surplus policy envisages any specific management action as necessary. Overall Capital Position Overall, I regard the capital position of SLSL and the benefit security that this provides to its policy owners as sound. In particular: The amount of capital at 30 June 2011 is in excess of that required in the context of the current regulatory environment and the risks of the business. The existing capital protects the financial position of the business against a wide range of foreseeable adverse circumstances over an extended timeframe. Further, the Board's target surplus policy, and the Suncorp Group's capital management policies, include a framework specifying management actions required to restore assets to satisfy the Target Surplus Requirement in the event of assets falling to certain levels below target; I do not believe there are any issues, including the effects of investment market volatility, which would be expected, under reasonable circumstances, to materially affect the viability of SLSL in the short term; and Although sustained adverse scenarios are always possible, based on SLSL s current management practices and business plans, I have no concern about the long term financial condition of SLSL. All funds meet the regulatory minimum capital requirements, and are expected to do so in the foreseeable future. 3.6 Company Administration The following points summarise the key administrative arrangements for SLSL: Policy Administration Policy records are currently maintained on four administration platforms. In addition, for risk management and capital efficiency purposes, SLSL reinsures a portion of its mortality and morbidity risk, which for new business is in accordance with a Board Risk Committee (under delegation from the Board) approved Reinsurance Management Strategy, and is common to SLSL and ALL. Investments A number of investment portfolios are maintained which are split by tax class and which, for investment business, cater for the variety of investment expectations of policy owners. Each investment portfolio has its own investment rules relating to the following where appropriate: permitted investments, and ranges for the mix of assets and the quality of those assets. 2 As at June 2011 the Target Surplus Ratio for the Shareholders Fund exceeded the 110% trigger point, although only by $0.2m. Actuarial Report Page 11 of 47

12 Investment Management In relation to the governance of investment management, Suncorp Group has established a Life Asset & Liability Committee (Life ALCO). A primary function of Life ALCO is to oversee the management of specified risks (related to both assets and liabilities) arising from the insurance and investment activities of SLSL and ALL, within Board approved delegations and having regard to the respective strategy and business plans. Life ALCO is also responsible for approving investment rules or endorsing investment rules for subsequent approval by the Board Risk Committee. Asset management is outsourced to external asset managers and managed in accordance with investment management agreements. Investment Structure The SLSL management group is currently undertaking some simplification of the investment structure, including the approach used to obtain the defined investment exposures, to allow a smaller number of larger asset pools to be formed across SLSL (and ALL) thereby enhancing the efficiency of the investment process. These amendments do not form part of the terms of the Scheme. The consideration of these changes is a normal part of the ongoing management of the business in accordance with the terms of the SLSL policies and having regards to the interests of policy owners. SLSL Participating Business The ongoing management of the SLSL Participating Business requires regular declarations of crediting rates to Participating investment account policies and declarations of bonus rates to Participating whole of life and endowment policies. Some discretions also exist in relation to the values payable on surrender of a policy. The Board of SLSL has approved a framework for the management of policy owner retained profits and the distribution of profits to policy owners, and receives annual advice from me in this regard. Unit Pricing Unit pricing is the mechanism used to calculate the value of an individual unit within a fund, for the purpose of attributing investment performance to the unit holders, which are ultimately the policy owners. SLSL maintains a unit pricing policy to apply to all unit linked investment options, which is consistent with the policy adopted for ALL. The current unit pricing policy has been established by a dedicated unit pricing management committee. The format of the unit pricing policy has been revised, and is expected to be presented to the Board of SLSL (and ALL) for approval in September Regular review of unit pricing policy is a usual company activity which is unaffected by the Scheme. Capital Management The capital management framework includes a Board approved capital management plan and target surplus policy. These documents are reviewed annually and were most recently updated in May/June 2011, and are the same for SLSL and ALL. Risk Management The risk management framework for SLSL is outlined in a Board approved risk management strategy document. This document is common to SLSL and ALL, and describes the policies, procedures and controls that the companies have in place to manage risk. The document also satisfies the requirements of APRA under its Prudential Standards to maintain a risk framework that includes a documented risk management strategy, sound risk management policies and procedures, clearly defined managerial responsibilities and controls, and a documented business plan. Actuarial Report Page 12 of 47

13 SLSL Company Policies As at and from the Effective Date of the Scheme, SLSL will maintain its then current company policies and practices, including those noted above. In accordance with normal practice, SLSL reviews its policies and practices periodically and may amend them in the future consistent with its contractual and legal obligations. 3.7 Events Subsequent to 30 June 2011 Since 30 June 2011, equity market and fixed interest yield falls caused the Target Surplus Ratio in Statutory Fund No 1. to fall to a level of approximately 75% in early August. As a result, the SLSL Board approved the injection of an additional $21m of capital into this Statutory Fund (in addition to the $4m transfer recommended as part of the 30 June 2011 liability valuations) to restore the estimated Target Surplus Ratio to 100% at the time of that transfer. There have been further equity market and interest rate falls since the time of the above additional capital injections. The position of the Statutory Funds is being monitored and the target surplus policy, designed to deal with these circumstances, is being followed. Actuarial Report Page 13 of 47

14 4. Overview of ALL 4.1 Background Like SLSL, ALL is also a wholly owned subsidiary of Suncorp Group Limited. ALL is registered under the Life Act to transact life insurance business in Australia. It operates only in Australia and all policies are issued in Australian currency. ALL currently writes a range of life insurance products, including risk insurance and life investment products, and has some in-force Participating business. 4.2 Statutory Funds and Shareholders Fund The fund structure of ALL comprises five Statutory Funds and a Shareholders Fund. The five Statutory Funds maintain all the life insurance business of ALL. ALL Shareholders Fund Statutory Fund No. 1 Statutory Fund No. 2 Statutory Fund No. 3 Statutory Fund No. 4 Statutory Fund No. 5 ALL Statutory Fund No. 1 ALL s Statutory Fund No. 1 contains the following non-participating product types: Risk insurance business, including term, total and permanent disability, trauma and disability income protection. These are sold on both an individual and group basis. A closed book of immediate annuity business and a very small amount of non-participating traditional business. ALL Statutory Fund No. 5 ALL s Statutory Fund No. 5 contains a closed book of traditional Participating business and some Participating investment account business. The Statutory Fund also contains an amount of non-participating retained profits. The Participating business is managed with separate sub-funds to account for the different books of liabilities within the Participating portion of the Statutory Fund. The sub-funds include the policy owners retained profits, which are retained profits attributable to policy owners that are yet to be distributed, and which are being managed for the benefit of Participating policy owners. Other ALL Statutory Funds ALL s Statutory Fund No. 2 contains non-participating Ordinary investment linked business. ALL s Statutory Fund No. 3 contains non-participating investment account business. ALL s Statutory Fund No. 4 contains non-participating Superannuation investment linked business. Actuarial Report Page 14 of 47

15 ALL Shareholders Fund The ALL Shareholders Fund is maintained separately from the Statutory Funds as required by the Life Act, and holds the minimum amount of capital that is required by APRA to be held outside the Statutory Funds, and eligible asset amounts as required by APRA Prudential Standard No. 3: Prudential Capital Requirement. No business is conducted from this fund. Under the proposed transfer, the assets and liabilities of this fund (net assets of $10.9m as at 30 June 2011) would remain with ALL rather than being transferred to SLSL, allowing ALL to apply to APRA for the life insurance license of ALL to be cancelled. Summary of Life Insurance Business in the ALL Statutory Funds The following table shows a summary of the in-force life insurance business in the ALL Statutory Funds, as at 30 June Table 4: ALL Statutory Fund In-Force Business as at 30 June 2011 Annual Premium In-Force Sum Insured Funds Under Administration Product Line Statutory Fund No. Number of Policies Conventional - Non Par , Direct Conventional - Non Par , Agency Term & TPD , ,858 na Agency Trauma , ,786 na Agency Defence Health , ,631 na Direct Term & Trauma , ,186 na Direct Accident & Cash Back ,399 na Direct Personal Accident , ,832 na Direct Consumer Credit & Mortgage Protection na Agency Individual Disability , ,798 na Direct Individual Disability na Group Lump Sum , na Group Disability na Immediate Annuities 1 na na Total Statutory Fund No , , Investment Linked - Ordinary 2 na na 4, Total Statutory Fund No. 2 na na 4, Investment Account - Non Par 3 na na 1, Longevity Income Stream 3 na na Total Statutory Fund No. 3 na na 1, Investment Linked - Super 4 na na 11,000 1,884.2 Total Statutory Fund No. 4 na na 11,000 1,884.2 Conventional - Par , Investment Account - Par Total Statutory Fund No , Overall Total , ,875 2,146.3 Notes to Table 4: For Group Lump Sum and Group Disability, the number of policies does not reflect the number of members insured. Where an insurance policy has multiple covers, the data reflects the one policy and all the premium and sum insured for the included covers. The sum insured for Conventional Par includes any bonuses declared on the policies prior to 30 June Funds Under Administration reflects the account balance for that product line, or the policy liability for Conventional Par and Immediate Annuities. na means the item is not applicable for that product line. Actuarial Report Page 15 of 47

16 Some of the business of ALL is participating, as defined by Sections 15(2) and 15(3) of the Life Act. Participating policy owners are entitled to share in the profitability of these policies. As a result, issues concerning Participating policy owner benefit rights, reasonable benefit expectations, and interests in policy owner retained profits within ALL do arise for consideration under this proposed transfer. These issues are discussed in more detail in Section 7 of this report. 4.3 Policy Guarantees Under the terms and conditions of its policies, ALL provides its policy owners with a variety of guarantees and options. The extent of guarantees in ALL s in-force portfolio is not significant compared to some other Australian life insurers. Most guarantees are managed so that the guarantee poses little residual risk to the company, by the re-rating of premiums in line with experience, matching assets to liability guarantees, or explicit reserving. The guarantees and options provided relate to: Premium rates, fees and charges; Benefits on death, survival or policy termination; Minimum rates of return on investments; Indexation of policy sizes (i.e. sums assured or monthly benefit payments); Options to renew or repurchase cover after a lump sum disability claim, or in some cases, maturity. The key guarantees for ALL are: Guaranteed monthly payments and longevity risk in respect of immediate annuities. The monthly payment guarantee is primarily managed by asset-liability matching. The total policy liability of this annuity business was $88m at 30 June 2011; A minimum crediting rate guarantee of 4.5%pa on a small book of investment account business, with policy liabilities of less than $7m at 30 June 2011; The guarantee for the non-participating business in ALL Statutory Fund No. 3 (with policy liability of $19m at 30 June 2011) implies a minimum crediting rate of zero; and For the capital guaranteed investment options in ALL Statutory Funds No. 2 and No. 4 the unit price is guaranteed not to reduce. The total policy liability of this business was $79m at 30 June 2011, and the risk is mitigated by investing into low risk cash investments. 4.4 Financial Performance The following table provides a three year history of shareholder profits of ALL. Table 5: ALL Shareholder Profit (net of tax) 12 months to 30 June months to 30 June months to 30 June 2011 Statutory Fund No Statutory Fund No. 2 (0.2) (0.2) 0.2 Statutory Fund No Statutory Fund No Statutory Fund No. 5 (1.5) Shareholders Fund (0.1) TOTAL Actuarial Report Page 16 of 47

17 ALL has reported an annual operating profit over each of the last three years. The profit of ALL provides internal funding for future capital requirements. 4.5 Capital Position Two metrics have been used to analyse the capital position of ALL: Excess Assets Ratio % this measures the relative size of the excess assets over the Capital Adequacy Requirement (CAR), as defined in section 3.5 above. Target Surplus Ratio % this measures the extent to which the excess assets above CAR is meeting the Target Surplus Requirement, as defined in section 3.5 above. The capital position of ALL is shown below, based on audited information, as at 30 June Table 6: ALL Capital Position as at 30 June 2011* Total Assets (gross of reinsurance) Statutory Fund No. 1 Statutory Fund No. 2 Statutory Fund No. 3 Statutory Fund No. 4 Statutory Fund No. 5 Shareholders Fund 1, , Gross Policy Liabilities (37.0) , Other Liabilities # Capital Adequacy Margin Capital Adequacy Requirement (CAR) 1, , Excess Assets above CAR Excess Assets Ratio % 8.8% 2.0% 13.2% 0.7% 11.5% 6.5% Target Surplus Requirement (TSR) Excess Assets above CAR and TSR Target Surplus Ratio % 110% 346% 203% 113% 132% 279% * Assets in this table reflect the transfers into or out of the funds processed in August 2011 following completion of the 30 June 2011 liability valuations, as recommended in my Financial Condition Report to the Board. For Statutory Fund No. 1, assets differ slightly to the statutory accounts which include the net deferred tax asset as an asset, whereas I have recorded the deferred tax asset and the deferred tax liability as an asset and other liability respectively. # For the Participating business in Statutory Fund No. 5, Other Liabilities includes policy owner retained profits. Capital Adequacy The total Capital Adequacy Margin as at 30 June 2011 was $976.2m. Comments on each fund are provided below: For ALL Statutory Fund No. 1, the key driver of the Capital Adequacy Margin is the mismatch between the variation in liability and asset values for defined movements in economic conditions, the allowance for adverse claims experience, and a component to cover the minimum termination value. For ALL Statutory Funds No. 2 and No. 4, the Capital Adequacy Margin is a small proportion of the Statutory Fund, reflecting the nature of the investment linked liabilities that vary with asset values. For ALL Statutory Fund No. 3, the key driver of Capital Adequacy Margin is the (relatively minor) mismatch between the fixed liabilities and the assets that can vary in value. Actuarial Report Page 17 of 47

18 For ALL Statutory Fund No. 5, the business in this Statutory Fund is Participating in nature and the liabilities include some guarantees. The key driver of Capital Adequacy Margin is the mismatch between the guaranteed liabilities and the assets that can vary in value. For the ALL Shareholders Fund, the Capital Adequacy Margin reflects the minimum capital requirement set by APRA. As at 30 June 2011, all of the ALL funds had an Excess Assets Ratio exceeding nil. This means that all of the ALL Statutory Funds met APRA Prudential Standard LPS3.04: Capital Adequacy Standard, and the ALL Shareholders Fund met APRA Prudential Standard LPS6.03: Management Capital Standard. Solvency Each of the ALL Statutory Funds are required to meet APRA Prudential Standard LPS2.04: Solvency Standard. The asset requirement under LPS2.04 is termed the Solvency Requirement (SR), and the SR acts as a minimum to the CAR. As at 30 June 2011, ALL s Statutory Funds had assets in excess of the SR of $136m. Target Surplus Requirement The Target Surplus Requirement provides added benefit security to policy owners by targeting an additional buffer above the Capital Adequacy Requirement. The basis used by ALL to calculate the Target Surplus Requirement is provided in a target surplus policy determined by the ALL Board, which is reviewed annually and was last updated in May The Target Surplus Requirement provides additional capital for identified risks to a certain risk tolerance, and provides an additional capital buffer to allow the company reasonable time to implement remedial action in the event of significant adverse experience emerging, without breaching its Capital Adequacy Requirement. The risks considered in calibrating the Target Surplus Requirement include investment risk relative to the liabilities, insurance risk, and operational risk. At 30 June 2011, the Target Surplus Requirement across ALL totalled $108.5m above the Capital Adequacy Requirement, with additional assets of $16.0m in excess of the Target Surplus Requirement. The nature of the excess assets position in each of the funds is that it may vary above and below the Target Surplus Requirement over time, depending on the experience in each of the funds. The target surplus policy contains trigger points for management actions, including points at which: an injection of shareholder money into the fund is considered appropriate to increase the excess assets, where the Target Surplus Ratio is below 75%; and a withdrawal of shareholder money out of the fund may be considered appropriate, where the Target Surplus Ratio exceeds 110% 3. The amounts shown in the table include the effect of any transfers into, or out of, each of these funds in accordance with the target surplus policy, as a result of the 30 June 2011 liability valuations. Allowing for these transfers as at 30 June 2011, all of the ALL funds had a Target Surplus Ratio above 100%, and had excess assets well above the level at which the target surplus policy envisages any specific management action as necessary. Overall Capital Position Overall, I regard the capital position of ALL and the benefit security that this provides to its policy owners as sound. In particular: 3 As at June 2011 some of the Target Surplus Ratios were at or above the 110% trigger point, but by small absolute amounts, which were retained in the funds. Actuarial Report Page 18 of 47

19 The amount of capital at 30 June 2011 is in excess of that required in the context of the current regulatory environment and the risks of the business. The existing capital protects the financial position of the business against a wide range of foreseeable adverse circumstances over an extended timeframe. Further, the Board s target surplus policy, and the Suncorp Group s capital management policies, includes a framework specifying management actions required to restore assets to satisfy the Target Surplus Requirement in the event of assets falling to certain levels below target; I do not believe there are any issues, including the effects of investment market volatility, which would be expected, under reasonable circumstances, to materially impact the viability of ALL in the short term; and Although sustained adverse scenarios are always possible, based on ALL s current management practices and business plans, I have no concern about the long term financial condition of ALL. All of ALL s funds meet the regulatory minimum capital requirements, and are expected to do so in the foreseeable future. 4.6 Company Administration The following points summarise the key administrative arrangements for ALL: Policy Administration Policy records are currently maintained on three administration platforms. In addition, for risk management and capital efficiency purposes, ALL reinsures a portion of its mortality and morbidity risk, which for new business is in accordance with a Board approved reinsurance management strategy, and is common to SLSL and ALL. Investments A number of investment portfolios are maintained which are split by tax class and which, for investment business, cater for the variety of investment expectations of policy owners. Each investment portfolio has its own investment rules relating to the following where appropriate: permitted investments, and ranges for the mix of assets and the quality of those assets. Investment Management In relation to the governance of investment management, Suncorp Group has established a Life Asset & Liability Committee (Life ALCO). A primary function of Life ALCO is to oversee the management of specified risks (related to both assets and liabilities) arising from the insurance and investment activities of SLSL and ALL, within Board approved delegations and having regard to the respective strategy and business plans. Life ALCO is also responsible for approving investment rules or endorsing investment rules for subsequent approval by the Board Risk Committee. Asset management is outsourced to external asset managers and managed in accordance with investment management agreements. Investment Structure The ALL management group is currently undertaking some amendments to the investment structure, including the approach used to obtain the defined investment exposures, to allow a smaller number of larger asset pools to be formed across SLSL and ALL thereby enhancing the efficiency of the investment process. These amendments do not form part of the Scheme. The consideration of these changes is a normal part of the ongoing management of the business in accordance with the terms of the policies and having regards to the interests of policy owners. Actuarial Report Page 19 of 47

20 ALL Participating Business The ongoing management of the Participating business requires regular declarations of crediting rates to Participating investment account policies, regular declarations of bonus rates to Participating traditional whole of life and endowment policies, and the exercise of discretions related to the values payable on surrender of a policy. Unit Pricing Unit pricing is the mechanism used to calculate the value of an individual unit within a fund, for the purpose of attributing investment performance to the unit holders, which are ultimately the policy owners. ALL maintains a unit pricing policy to apply to all unit linked investment options, which is consistent with the policy adopted for SLSL. The current unit pricing policy has been established by a specific unit pricing management committee. The format of the unit pricing policy has been revised, and is expected to be presented to the Board of ALL (and SLSL) for approval in September Regular review of unit pricing policy is a usual company activity which is unaffected by the Scheme. Capital Management The capital management framework includes a Board approved capital management plan and target surplus policy. These documents are reviewed annually and were most recently updated in May/June Risk Management The risk management framework for ALL is outlined in a Board approved risk management strategy document. This document is common to SLSL and ALL, and describes the policies, procedures and controls that those companies have in place to manage risk. The document also satisfies the requirements of APRA under its Prudential Standards to maintain a risk framework that includes a documented risk management strategy, sound risk management policies and procedures, clearly defined managerial responsibilities and controls, and a documented business plan. ALL Company Policies The current company policies and practices applying to the ALL Policies immediately prior to the Effective Date of the Scheme, including those noted above, will continue to apply to those policies once they are transferred to SLSL on the Effective Date of the Scheme. In accordance with normal practice, SLSL will review its policies and practices periodically and may amend them in the future consistent with its contractual and legal obligations. 4.7 Events Subsequent to 30 June 2011 Since 30 June 2011, fixed interest yield falls caused the Target Surplus Ratio in Statutory Fund No. 1 to fall to below 75% in early August. As a result, the ALL Board approved the injection of an additional $20m of capital into this Statutory Fund (in addition to the $7m transfer recommended as part of the 30 June 2011 liability valuations) to restore the estimated Target Surplus Ratio to 100% at the time of that transfer. There have been further equity market and interest rate falls since the time of the above additional capital injections. The position of the Statutory Funds is being monitored and the target surplus policy, designed to deal with these circumstances, is being followed. Actuarial Report Page 20 of 47

21 5. Overview of the Scheme 5.1 Background to the Scheme During 2007 Suncorp Metway Ltd merged with the Promina Group Ltd. This merger resulted in the two life companies, SLSL and ALL, becoming part of the same group through a common ultimate parent company. Management has identified that simplified governance, and scale and efficiency benefits would be realised if the Scheme proceeds. The Scheme is also consistent with management s desire to continue to simplify the businesses within the Suncorp Group. 5.2 Description of the Scheme The policies to be transferred to SLSL under the Scheme represent all of the Australian registered life insurance business of ALL. The assets and liabilities of the ALL Shareholders Fund will remain with ALL and not be transferred to SLSL, allowing ALL to apply to APRA for the life insurance license of ALL to be cancelled. All of the business of ALL Statutory Fund No. 5 will be transferred to SLSL Statutory Fund No. 1. Each of the existing ALL Participating sub-funds will be kept separate so that existing equity for the respective ALL and SLSL policy owners is maintained. The following table summarises the existing Statutory Fund structure of ALL, and the destination of ALL Policies under the proposed transfer to an SLSL Statutory Fund. Existing Fund No. 1 Class of Business Ordinary and Superannuation Table 7: ALL Statutory Funds Benefit Type Non-Participating Key Product Groups Term and Disability Insurance, Annuities, Traditional Transfer to SLSL Statutory Fund No. 2 Ordinary Non-Participating Investment Linked 2 3 Ordinary and Superannuation Non-Participating Investment Account 1 4 Superannuation Non-Participating Investment Linked 2 5 Ordinary and Superannuation Participating Traditional, Investment Account 1 1 Actuarial Report Page 21 of 47

22 The final structure of SLSL is shown diagrammatically below as New SLSL Structure. The Scheme is illustrated by the movement of life insurance business from the Existing ALL Structure (on the left) to the New SLSL Structure (in the middle). The existing structure of SLSL is shown (on the right) for completeness. Existing ALL Structure New SLSL Structure Existing SLSL Structure ALL Statutory Fund No. 1 Term and Disability Insurance Annuities Traditional non-par SLSL Statutory Fund No. 1 SLSL Statutory Fund No. 1 Term and Disability Insurance Term and Disability Insurance ALL Statutory Fund No. 2 Annuities Annuities Investment Linked (Ordinary) Traditional non-par Traditional non-par Investment Account non-par ALL Statutory Fund No. 3 Participating - ex ALL Investment Account non-par Participating - ex SLSL Participating ALL Statutory Fund No. 4 Investment Linked (Superannuation) SLSL Statutory Fund No. 2 SLSL Statutory Fund No. 2 Investment Linked Investment Linked ALL Statutory Fund No. 5 Participating The following sections provide more detail on the Scheme for each of the ALL Statutory Funds. 5.3 Transfer of Policies from ALL Statutory Fund No. 1 This Statutory Fund contains non-participating risk insurance policies, both Ordinary and Superannuation. Each of these two classes of business is maintained in ALL Statutory Fund No. 1. These non-participating policies consist of: a) Term life, total and permanent disability, and trauma insurances; b) Disability income insurance; c) Immediate annuities; and d) Traditional whole of life and endowment insurances. These policies will be transferred to SLSL Statutory Fund No. 1 which contains a similar set of nonparticipating products (in addition to Participating products). The policies will be maintained in the existing SLSL Ordinary or Superannuation non-participating sub-funds as appropriate and invested in accordance with the existing SLSL investment policy for this business, which was crafted for the nature of the liabilities and, as such, is consistent with the policy applying in ALL. It is noted that a minor change will be made to the mandate in the last quarter of 2011 to accommodate the small amount of equity investments required to support some ALL annuities. The mandate is updated each quarter to take account of the then updated liability profile, and this will occur in the first quarter of 2012 using the combined liability profile. The combined portfolio will enable the policies to benefit from being invested in a larger Statutory Fund. The existing charging structures, terms and conditions of the SLSL and ALL policies as contained in their respective policy documents will be maintained at and from the Effective Date of the Scheme. Assets equal to the total assets of ALL Statutory Fund No. 1, and liabilities equal to the total liabilities of ALL Statutory Fund No. 1, will be transferred to SLSL Statutory Fund No. 1. By virtue of these transfers, the existing capital and retained profits in ALL Statutory Fund No. 1 will be transferred in the same form and become part of the capital and retained profits in SLSL Statutory Fund No. 1. Actuarial Report Page 22 of 47

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