Report of Independent Expert into
the transfer of insurance business from
Financial Insurance Company Limited to
Financial Assurance Company Limited
Prepared by
David Lechmere
Head of Insurance Consulting
Contents
1.
Introduction
1
2.
Information on which the report is based
4
3.
Summary of the Scheme
6
4.
The Effect of the Scheme - Security
9
5.
The Effect of the Scheme – Benefit Expectations
13
6.
Conclusion
14
Appendix 1 – Structure Chart
15
Appendix 2 – Business to be transferred
16
Appendix 3 – Type of business
17
Appendix 4 – Reserving Methodology for FACL and FICL
18
Appendix 5 – Financial Strength
20
Appendix 6 – Documents Reviewed
21
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1. Introduction
1.1. I have been instructed by Financial Insurance Company Limited (FICL) and Financial Assurance Company Limited (FACL) to report in the capacity of Independent Expert pursuant to Section 109(1) of the Financial Services and Markets Act (FSMA) on a Scheme of Transfer.
1.2. The purpose of the Scheme is to transfer the long term insurance elements of certain payment protection insurance policies (the Relevant Policies) with a term of exactly 60 months and which were underwritten by FICL from FICL to FACL (the Transfer).
1.3. The Prudential Regulation Authority (PRA), having considered the skills needed to make a proper report, have approved my appointment as independent expert. This report has been prepared in a form which complies with the applicable rules on expert evidence and the Rules and Guidance made by the PRA and the Rules and Guidance made by the Financial Conduct Authority (FCA) and, in particular, the Guidance in paragraphs 18.2.31 to 18.2.41 of the Supervision Manual of the PRA Handbook and paragraphs 18.2.31 to 18.2.41 of the Supervision Manual of the FCA Handbook.
1.4. I am a Fellow of the Institute of Actuaries and I hold a current life practising certificate (including with profits).
1.5. I have no financial interest in, nor have I previously advised in a professional capacity, FICL, FACL, or any company with the same ultimate parent.
1.6. I understand that it is the intention of FICL and FACL to make an application to the High Court under Section 107 of the FSMA for an Order under Section 111 sanctioning the Scheme and making provision under Section 112 for its implementation.
1.7. I understand that as an Independent Expert appointed pursuant to Section 109(1) of FSMA my duty is to the Court and that duty overrides any obligation to the party who has engaged me. As an Independent Expert reporting to the Court I am required to act in accordance with Part 35 of the Civil Procedure Rules, its practice direction and the Civil Justice Council’s Protocol for the Instruction of Experts to give evidence in Civil Claims.
1.8. My Expert Declaration is included in Section 6 of this Report.
1.9. I understand that a copy of this Report will accompany the application to the High Court for the Scheme to be sanctioned and will be sent to the PRA and the FCA. I am aware that in accordance with the relevant applicable legislation, copies of this Report may be made available to policyholders and all other parties affected by the Transfer.
1.10. I have been engaged by FICL and FACL, who have contracted with my employer, OAC plc, for me to fill this role. The conclusions described in this Report are mine.
1.11. As the Independent Expert I must consider the consequences and potential consequences of the Transfer.
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1.12. The scope of my report is to review the Scheme as it has been drafted. I am to reviewthe effect on the security and benefit expectations of the policyholders and the beneficiaries under the policies. I have not considered any alternative proposals. 1.13. The Transfer is between two companies in the same group and therefore the key
considerations are whether the Transfer has an adverse effect on either the security or the benefit expectations of the policyholders and the beneficiaries (the Beneficiaries) under the policies in the two companies.
1.14. My approach to assessing the likely effect of the proposed Transfer has been to: 1.14.1. Identify the groups of policyholders affected;
1.14.2. Understand the effect of the proposed Transfer on FICL and FACL in order to assist in assessing the effect on policyholders;
1.14.3. Consider the likely effect of the Transfer on the security and benefit expectations of each group of policyholders and the Beneficiaries by comparing their position if the Transfer were or were not sanctioned; and
1.14.4. Consider other aspects of the likely effects of the proposed Transfer.
1.15. In particular, I have taken into account the security and benefit expectations of the following groups:
1.15.1. The policyholders of FICL with a Relevant Policy, the long term insurance elements of which will transfer to FACL under the terms of the proposed Transfer;
1.15.2. The Beneficiaries under a Relevant Policy which was entered into between FICL and a financial institution (e.g. a bank or other affinity group) for the purposes of assigning benefits under the policy to its customers; and
1.15.3. The policyholders of FACL (including those who become policyholders of FACL between the date of this Report and the Effective Date).
1.15.4. The policyholders of FICL other than those with a Relevant Policy.
1.16. I also need to consider whether there should be any formal undertakings other than those given in or pursuant to the Scheme between FICL and FACL as a condition of the sanction by the Court of the Scheme and, if so, the form of those undertakings.
1.17. In preparing this report I have had full access to documents held by FICL and FACL. I have been provided with all the information which I have requested and had all my questions answered. In addition I have had access to, and discussions with, the management teams of the two firms and their professional advisers.
1.18. I have relied on the accuracy of the information which has been supplied to me, particularly where that information was in published documents such as the statutory returns. I have reviewed the calculations in workbooks supplied to me to ensure that the numbers are suitable for the purpose for which they are being used. I am satisfied
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with the reasonableness of the information and the calculations. This includes relianceon the data, opinions and conclusions in the report of the Actuarial Function Holder. The Actuarial Function Holder holds a UK practising certificate and his report is prepared in accordance with relevant professional standards. I therefore believe it is reasonable to rely on the information it contains.
1.19. The proposed Transfer is within the Scope and Authority of the Technical Actuarial Standards published by the Financial Reporting Council and therefore my report is required to comply with those standards. The relevant standards are the Transformations TAS, and the generic TAS’s, TAS(D) – Data, TAS(M) – Modelling and TAS(R) – Reporting.
1.20. In terms of Data and Modelling I have relied on the information provided to me. I am satisfied that both data and models are suitable for the use to which they have been put.
1.21. I believe that this report is compliant with the Transformations TAS and the requirements of TAS(R).
1.22. The Effective Date is the Effective Date as defined in the Scheme and is proposed to be 1st May, 2015.
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2. Information on which the report is based
FICL
2.1. FICL is a company incorporated in England and Wales with registered number 01515187. The registered office of FICL is situated at Building 11, Chiswick Park, 566 Chiswick High Road, London W4 5XR.
2.2. FICL is an authorised person for the purposes of FSMA and has Part 4A permission under FSMA to carry on General Insurance Business in the United Kingdom in classes 1, 2, 3, 7, 8, 9, 13, 14, 16, 17 and 18 as set out in Part I of Schedule 1 to the Regulated Activities Order (RAO). and permission under FSMA to carry out long term reinsurance business in classes I, III and IV as set out in Part II of Schedule 1 to the RAO.
2.3. FICL is a wholly-owned subsidiary of Consolidated Insurance Group Limited which, in turn is a wholly-owned subsidiary of FACL. A structure chart is included as Appendix 1. FICL’s principal activity is the transacting of general insurance business.
FACL
2.4. FACL is a company incorporated in England and Wales with registered number 04873014. The registered office of FACL is situated at Building 11, Chiswick Park, 566 Chiswick High Road, London W4 5XR.
2.5. FACL is an authorised person for the purposes of FSMA and has Part 4A permission under FSMA to carry on Insurance Business in the United Kingdom in classes 1 and 2 as set out in Part I of Schedule 1 to the RAO and in classes I, III and IV as set out in Part II of Schedule 1 to the RAO.
2.6. FACL is a wholly owned subsidiary of Genworth Financial UK Holdings Limited (Genworth). Its principal activity is writing long term insurance business in Europe. It also operates in Turkey and South Korea.
Other Information
2.7. FICL and FACL are both subsidiary companies of Genworth Financial UK Holdings Limited. A structure chart showing the relationship of the companies is included in Appendix 1.
2.8. A list of the documents supplied to me and which I have considered is shown in Appendix 6.
Policies
2.9. FICL and FACL are complementary in their operations and both operate under the Genworth Financial brand. The Genworth Lifestyle protection division of Genworth Financial sells policies which provide cover against losses arising from accident, sickness or unemployment (which include the Relevant Policies). Accident and sickness benefits
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arising under an insurance policy with a term of 60 months or more and which is notterminable by the insurer or only terminable in special circumstances are classified as long term insurance business and are underwritten by FACL. Other insured benefits available under the policy are classified as general insurance business and are underwritten by FICL.
2.10. To the person insured the cover is presented as a single policy covering all risks and the administration of the policy reflects this.
2.11. In most cases the policy is issued under a group arrangement. This means that a financial institution (Group Policyholder) will have a group policy underwritten by FACL and FICL (trading as Genworth Financial) and will assign benefits arising under that policy to individuals to protect their transactions (for example, mortgage payments) with the financial institution. This means that in most cases the ultimate beneficiary will have no direct contact with FICL or FACL and will deal only with the financial institution which in turn will deal with FICL and FACL.
2.12. A description of the types of contract written is shown in Appendix 3. A summary of the long term insurance business and assets of FACL is set out in Appendix 5.
Options
2.13. The Relevant Policies do not contain any particular options, and there will be no changes to any benefits under the Relevant Policies as a result of the Transfer.
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3. Summary of the Scheme
Transferring Long Term Business
3.1. The business to be transferred consists of the long term elements of various policies written within FICL with a term of exactly 60 months. Schedule 1 to The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 prescribes that if a policy providing accident or sickness benefits has a term of five years or more it shall be classified as long term business.
3.2. Genworth had been allocating the sickness elements of policies to FACL if the term was more than 60 months and to FICL if the term was 60 months or less. There is therefore a block of business within FICL with a term of exactly 60 months of which the sickness elements are long term business according to the Regulated Activities Order and FICL is not authorised to underwrite these sickness elements.
3.3. The purpose of the Scheme is to transfer the long term elements of the Relevant Policies from FICL to FACL. The Transfer will not create a new policy but will simply result in the
continuation of the existing policy, with certain elements of cover being provided by FICL and other elements of cover provided by FACL.
Jurisdiction of Policyholders
3.4. The Relevant Policies are issued in a number of European countries. A list is included in Appendix 2. There are no Relevant Policies in the UK. The Relevant Policies were either underwritten through a branch of FICL in the relevant country, or on a “freedom of services” basis.
Effect of the Transfer
3.5. I have been provided with a copy of the Scheme in respect of the proposed Transfer. 3.6. Under the Scheme, the long term insurance elements of the Relevant Policies will
transfer from FICL to FACL at the Effective Date.
3.7. An amount of assets defined in the Scheme as the “Transferred Long Term Assets” will be transferred from FICL to FACL to cover the increase in technical provisions caused by the Transfer. The calculation of this amount is covered later in this section.
3.8. All premiums and other sums payable to FICL in respect of the long term elements of the Relevant Policies will, from the Effective Date, become payable to FACL.
3.9. FACL will assume all the liabilities in respect of the long term business elements of the Relevant Policies, including the responsibility to pay claims.
3.10. Table 1 in Appendix 2 shows the number of Beneficiaries whose policies are being transferred by the Scheme, the technical provisions established for them in FICL and the technical provisions which will be required in FACL.
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3.11. To put this transfer into context the technical provisions of £1.7m in FICL for thesepolicies represent less than 1% of the total technical provisions in FICL.
Assets Transferred in respect of the Transferring Long Term
Business
3.12. The amount of assets to be transferred has been calculated separately for each territory. 3.13. For each territory the starting figure for the amount of assets to be transferred is the amount needed to cover the technical provisions required in FACL less Deferred Acquisition Costs (DAC). This amount is defined in the Scheme as the “Total FACL Territory Assets”.
3.14. A similar calculation is made in FICL and the amount is defined in the Scheme as the “Total FICL Territory Assets”.
3.15. Where the Total FACL Territory Assets amount is less than the Total FICL Territory Assets amount then an additional amount equal to 50% of the difference between the two will be added to the amount to be transferred. This is defined in the Scheme as the “FICL Remainder”.
3.16. The purpose of this calculation is to ensure that a fair price is paid for the business being transferred so that it can be regarded as being on an “arms length” basis for tax purposes.
3.17. The amount to be transferred, “The Transferred Long Term Assets” is the sum of the Total FACL Territory Assets and The FICL Remainder and is shown in Table 2 in Appendix 2. The amount to be transferred is calculated as £1.7m based on the business in force at 31 December 2013. This is less than 1% of the total technical provisions in either FICL or FACL.
Reinsurance Arrangements
3.18. There are a number of external reinsurance treaties in place for the business of FICL and FACL. These treaties are on a quota share basis and are issued at a portfolio level. I have been informed by the management team of FICL and FACL that the only Relevant Policy subject to such external reinsurance arrangements is an Italian Group policy. However the cover under this treaty is calculated at the level of the portfolio including the covers provided by both FICL and FACL. This means that the Transfer will have no practical effect on the amount of reinsurance cover provided and will have no impact at all on the group policyholder, as the reinsurance agreement represents protection for the combined FICL and FACL covers under this policy.
3.19. There are also internal reinsurance arrangements in place between FICL and Financial Insurance Guernsey PCC Limited (“FIG”) and between FACL and FIG. Under these arrangements, FICL and FACL reinsure elements of their business to FIG including the cover under some of the Relevant Policies. FIG is a wholly owned subsidiary of the wider Genworth group. On the completion of the Transfer, the cover under those Relevant
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Policies which are currently reinsured by FICL to FIG under these arrangements will betransferred to FACL and reinsured by it to FIG on the same terms.
3.20. In the event of a claim under a Relevant Policy FICL (or FACL) will remain liable to pay the full amount of the claim to the Beneficiary, regardless of whether or not the policy is covered by a reinsurance agreement. This means that there will be no impact on the security afforded to the policyholders or the Beneficiaries of these Relevant Policies or on the FACL policyholders as a result of the Transfer.
3.21. I have been informed by the management team of FICL and FACL that there are no other internal reinsurance arrangements which have an impact on the Relevant Policies.
Circularisation of policyholders
3.22. Notification of the Scheme will be published in national newspapers and Group Policyholders will be contacted directly. Although there is no intention for FICL or FACL to notify the beneficiaries under the Group policies, the Group policyholders will be requested to do so. The main reasons for not notifying Beneficiaries directly are as follows:
3.22.1. There will be no change to the administration or claims handling of the policies as a result of the Transfer.
3.22.2. These policies are held under a group arrangement and FICL does not have access to details of individual Beneficiaries.
3.22.3. The exercise would be disproportionately expensive given that there is no practical impact on the Beneficiaries.
Costs of the Scheme
3.23. The costs of the Scheme and in particular this Report and any supplemental reports will be met by FACL.
Transfer
3.24. The rights under the contracts will not be changed as a result of the Transfer. 3.25. It is proposed that the transfer will take place on 1 May 2015.
Reserving and Regulatory Capital
3.26. The amount being transferred from FICL to FACL is intended to cover the amount of the technical provisions that will be established in FACL. The regulatory capital requirements in respect of the transferred long term business will be met by assets already within FACL.
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4. The Effect of the Scheme - Security
4.1. In this section I consider the Scheme as it affects the policyholders of FICL and FACL and the Beneficiaries under those policies, with particular regard to their security. The effect on benefit expectations and other contractual conditions is considered in Section 5.
4.2. The current security of the policyholders relies on the margins which exist in the reserving bases adopted, in the capital required by the PRA Rules, and in the free reserves or shareholders’ capital of FACL and FICL.
4.3. In accordance with the requirements of the Prudential Sourcebook for Insurers (INSPRU) FACL and FICL have set up reserves using prudent assumptions. I have reviewed the report produced by the Actuarial Function Holder on the valuation of FICL and FACL at 31 December 2013. This describes the various prudential margins included in the assumptions, compared with the actual experience and I am satisfied that the methods and assumptions adopted by FACL and FICL in calculating the technical provisions are sufficiently prudent. A description of the approach to calculating provisions is included in Appendix 4.
4.4. In addition to technical provisions calculated on a prudent basis every insurer that writes long term business is required to calculate and hold a long term insurance capital requirement (LTICR). This is an amount calculated in proportion to the mathematical reserves and sums at risk and is intended as protection against adverse experience or other adverse circumstances.
4.5. Firms transacting long term insurance business are also required to test the resilience of their portfolio to changes in the value of the assets backing the mathematical reserves, and to hold additional capital if necessary. This is known as the resilience capital requirement (RCR) and is in addition to the LTICR.
4.6. For insurance companies such as FACL the total Capital Resources Requirement (CRR) is equal to the LTICR plus the RCR. However it is also subject to a fixed minimum amount, the Base Capital Resources Requirement (BCCR) regardless of the size of the insurer.
4.7. An insurer which writes general insurance business is also required to hold solvency capital, but the calculation is different. The calculation method requires that the insurer calculates a CRR based either on a percentage or premiums received or of claims incurred, whichever gives the higher result.
4.8. The requirements for calculating the CRR are known as the Pillar 1 basis calculations. 4.9. In addition the PRA requires all insurance firms to carry out an Individual Capital
Assessment which assesses all the specific risks of the business and requires firms to demonstrate that they are sufficiently well capitalised to provide the capital needed to cover those risks. This is known as the Pillar 2 calculation.
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4.10. The PRA is empowered to give Individual Capital Guidance if it considers that a firm’sPillar 2 calculations may not have provided sufficiently for all the risks to which it is subject. FICL has been given such guidance.
4.11. The table in Appendix 5 shows that both insurers are strongly capitalised on a Pillar 1 basis. FACL on its own has more than three times the required amount of capital and, when FICL is consolidated, the combined companies have available capital of more than four times the regulatory requirements, and therefore the security of the policyholders and the Beneficiaries is not in question.
4.12. The top half of the table in Appendix 5 shows the capital position at 31 December 2013 and the bottom half shows the capital position assuming the Transfer took place at that date. This demonstrates that the available capital is reduced by a small amount as a result of the Transfer. The reason for this is that the basis for calculating technical provisions in FACL differs from that in FICL and requires slightly higher amounts. In addition, deferred acquisition costs can be counted as an asset in FICL but are not an admissible asset for solvency purposes in FACL.
4.13. While the actual amount of excess capital in FACL on a Pillar 1 basis is slightly smaller after the Transfer, the overall capital situation remains very strong with excess capital equal to 320% of the statutory requirement based on figures at 31 December 2013 compared to 322% without the Transfer. It can be seen that the difference is very small.
4.14. On the Pillar 2 basis the excess capital in FACL after the Transfer reduces slightly, however FACL will still be strongly capitalised, and the excess capital in FICL is also slightly reduced, but both companies remain strongly capitalised on both the Pillar 1 and the Pillar 2 basis.
4.15. The business being transferred represents a small percentage (less than 1%) of each portfolio. In my opinion the Transfer of the long term insurance elements of the Relevant Policies from FICL to FACL will have no impact on the security of the policyholders and the Beneficiaries because the effect of the Transfer on the capital position is negligible and both firms will still be strongly capitalised.
4.16. This applies to all the groups of policyholders identified in Paragraph 1.15.
4.17. It should also be noted that while there will be a slight temporary reduction in free capital in FACL as a result of the inadmissibility of deferred acquisition costs as an asset in a long term business fund, there will be no change to the ultimate financial strength and profitability of the group of companies. This is because the actual cash flows will not be changed as a result of the Transfer and therefore the eventual profitability of the transferred business will remain the same.
4.18. The current regulatory capital regime for insurers is due to be replaced by a new European Directive, referred to as Solvency II. This is expected to be implemented no earlier than 2016. The Directive framework has been agreed and the implementing
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measures are in the draft stage, but the precise rules for assessing solvency have notbeen finalised.
4.19. The Solvency II implementation activities are being coordinated across FICL and FACL and as such, this Scheme will not affect the readiness of either FICL or FACL in meeting the Solvency II requirements.
4.20. While it is likely that the new requirements of Solvency II will have an impact on the capital position of FICL and FACL the impact will be virtually the same whether or not the Transfer takes place as the amount of business being transferred is such a small part of the total business transacted. I therefore do not consider that the Transfer will make a material difference to the relative financial strength of the two firms under the Solvency II regime.
4.21. I have consulted the actuarial function holder of FACL and I consider that there are no material operational risks arising from this Transfer which would affect the security of either set of policyholders or the Beneficiaries. This is because, as explained in paragraph 5.3, there will be no change to the operational and administrative arrangements as a result of the Transfer.
4.22. My conclusion is that the proposed scheme has no adverse effects on the security of the policyholders of FICL and FACL and the Beneficiaries, as the reduction in free capital is immaterial in the context of the free capital available in the companies and both companies remain strongly capitalised.
4.23. This report was drafted based on the data used for the valuation at 31 December 2013. Since that date Genworth Financial Incorporated (GFI), the ultimate parent of FICL and FACL has published its results for the third quarter of 2014 which showed substantial losses. As a result of this publication various rating agencies have reviewed their assessment of GFI and some have downgraded their ratings.
4.24. The losses in GFI arise from a review of claims reserves on existing claims, where an increase in available company data has shown that previous assumptions based on industry data may not have been sufficiently strong, so GFI has strengthened its reserving basis for its long term care insurance business, particularly in respect of longstanding claims. In addition GFI has written down the amount of goodwill it shows as an asset in the light of wanting to move away from certain types of product with low potential profitability.
4.25. It should be noted that even after posting a loss in Q3 GFI still has $17bn of equity capital and total assets of £110bn.
4.26. The only rating agency to comment on FICL and FACL (as subsidiaries of GFI) is Standard and Poor’s (S&P). It has left the current rating (A-) unchanged but has placed the rating on “Creditwatch negative”. This is because S&P is assessing the extent to which FACL and FICL are insulated from the results of GFI. The normal S&P policy is that a subsidiary cannot have a higher rating than the parent unless the subsidiary is
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insulated. If S&P consider that FACL and FICL are insulated from the Genworth core USlife entities then the existing ratings will stand with a negative outlook. Otherwise the ratings will be reduced to BBB+ in line with the rating of GFI’s U.S. based life insurance entities. The BBB rating is defined as “adequate capacity to meet financial commitments” and FACL and FICL will be one notch above that.
4.27. Both FACL and FICL are required to abide by the Rules in the PRA Handbook which prevent funds from being transferred out which would impair the security of policyholders. They are also both subject to the PRA’s capital requirements. I understand there are no plans to remove capital from FACL or FICL without the agreement of the PRA.
4.28. The transfer of the covers under the Relevant Policies is from one company within the Genworth group to another and, as I have stated above, there is no change in the security level of the policyholders and Beneficiaries because both companies are subsidiaries of the same parent. A reduction in the credit rating of the parent or other entities in the Genworth group does not directly affect the amount of capital in FACL or FICL and therefore I do not consider that the downgrading of the credit rating of GFI or other entities in the Genworth group has a material effect on the Transfer.
4.29. The final Court hearing is scheduled for April next year. Before that hearing I expect to issue an update of this report which will include financial information as at 31 December 2014 and this will demonstrate whether there is any significant impact on the capital position of FACL and FICL arising out of recent events, which I should consider in terms of my report and conclusions.
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5. The Effect of the Scheme – Benefit Expectations
Benefits, Guarantees and Options
5.1. The contractual benefit expectations of the policyholders and of the Beneficiaries under the Relevant Policies remain unchanged by the Scheme.
Management Charges
5.2. The terms of the policy are fixed at outset and there is no discretion to vary them. Therefore the Transfer will have no effect on the terms and conditions of the Relevant Policies, or on the charges included in the premiums.
Administration
5.3. The administration of the Relevant Policies is undertaken either by the distributor or by companies within the Genworth group. Claim handling is undertaken by companies within the Genworth group. The precise company will vary according to the country in which the business is written.
5.4. In each case the policy is treated as a single policy comprising general and long term elements, and therefore the administration and claims handling will remain unchanged after the Transfer. This means that the proposed Transfer will make no difference at all to the administration of these policies.
Summary
5.5. I consider that the benefit expectations of the Beneficiaries of the Relevant Policies will not be affected in any way by the proposed Transfer. I also consider that the benefit expectations of the long term policyholders and beneficiaries of policies underwritten by FACL will not be adversely affected as a result of the Scheme. The benefit expectations of the existing policyholders of FICL will not be affected in any way as a result of the Scheme.
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6. Conclusion
6.1. It is my opinion that the proposed Transfer does not have any adverse impact on the policyholders or the Beneficiaries under the Relevant Policies. This is because their contractual benefits and premiums payable remain unchanged.
6.2. It is my opinion that the proposed Transfer does not have any adverse impact on the policyholders in FICL or the policyholders in FACL.
6.3. It is my opinion that the Transfer does not introduce any significant additional operational risks into FACL.
6.4. It is my opinion that as the administration of the Relevant Policies will be unchanged there will not be any adverse effect on administration as a result of the Scheme.
6.5. I therefore conclude that there is no reason, in terms of maintaining the interests of policyholders and Beneficiaries, why the Transfer should not proceed.
6.6. I consider that there is no need for any additional covenants or undertakings from FACL or FICL other than those given in, or pursuant to, the terms of the Scheme.
6.7. I have stated in paragraph 1.7 above that I understand my duty is to the Court and I confirm that I believe I have acted in compliance with that duty in producing this report. 6.8. I confirm that I have made clear which facts and matters referred to in this report are within my own knowledge and which are not. Those that are within my own knowledge I confirm to be true. The opinions I have expressed represent my true and complete professional opinions on the matters to which they refer.
David Lechmere FIA
Head of Insurance Consulting OAC Actuaries and Consultants
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Appendix 1 – Structure Chart
Genworth Financial International Holdings, Inc (US)
Genworth Financial European Group Holdings Limited
Genworth Financial UK Holdings Limited Financial Insurance Group Services Limited Financial Assurance Company Limited Consolidated Insurance Group Limited Financial Insurance Company Limited Genworth Financial, Inc. (US)
Regulated by PRA and FCA as insurance company Regulated by FCA as insurance intermediary
Brookfield Life Assurance Company Limited (Bermuda)
Brookfield Life and Annuity Insurance Company Limited (Bermuda) Genworth Holdings, Inc. (US)
All shareholdings 100% unless stated otherwise
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Appendix 2 – Business to be transferred
Table 1 - Technical provisions for the long term insurance elements of
the Relevant Policies
The amounts shown are calculated as at 31 December 2013.
Country Beneficiaries
Transferred to FACL
Policy Liabilities (£000’s) FICL reserving basis
for relevant policies
FACL reserving basis for relevant policies
France 18,792 365 576 Germany 6,229 42 141 Greece 460 7 21 Ireland 1,963 462 811 Italy 8,750 350 499 Poland 1,184 10 14 Spain 14,153 510 732 TOTAL 51,531 1,746 2,794
This table shows the number of beneficiaries being transferred to FACL. It also shows the amount of technical provisions for the transferring long term insurance elements in FICL and the corresponding technical provisions that will be required in FACL.
Table 2 - Amount of Assets being transferred
The amounts shown are calculated as at 31 December 2013. All figures are in £’000s.
Country Reserve in FICL
(less DAC) Reserve in FACL (less DAC) Amount to be transferred France 366 576 576 Germany 31 64 64 Greece 2 20 20 Ireland 383 296 339 Italy 111 321 321 Poland 4 2 3 Spain 245 398 398 TOTAL 1,142 1,677 1,721
This table shows the amount that will be transferred based on the business in force at 31 December 2013.
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Appendix 3 – Type of business
Summary of the nature of the business
Genworth Financial Lifestyle Protection ("Genworth") provides lifestyle protection insurance ("LPI") products to individuals via a variety of banks and other financial institutions across a number of European markets and in Turkey. LPI utilises two UK regulated insurance companies, Financial Assurance Company Limited (“FACL”), a life insurance company, and Financial Insurance Company Limited (“FICL”), a general insurance company, to underwrite its products via branches and freedom of service establishments. The products provide cover against involuntary unemployment, life and accident and sickness.
The contracts are either funded by a single premium payable at outset or by a series of regular premiums. They are normally taken out in conjunction with a loan and are designed to repay the loan instalments in the event that the borrower is unable to work as a result of unemployment, sickness, an accident causing loss of a limb, or death.
The cover will last for the period of the loan which is why the cover can be for periods of five or more years. Life cover and sickness cover where the contract term is five years or more is classified as long term business in the UK and must be written in a company authorised to transact such business, which FACL is.
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Appendix 4 – Reserving Methodology for FACL and FICL
Reserving Approach for UK Statutory Reserves and DAC
The reserving approach and the approach to the establishment of technical provisions are set out in sections 1.1.12R (for general insurance business) and 1.1.16R (for long-term insurance business) of the Insurance Prudential Source Book (INSPRU). It includes the establishment of a premium reserve, a claims reserve and deferred acquisition costs (DAC). DAC is inadmissible for FACL for the purposes of determining the solvency requirements.
Reserving Methodology for FACL’s premium reserves
Premium reserving for FACL is determined by the requirements of International Financial Reporting Standard 27 and the Rules in INSPRU. The reserves are calculated on a prudential basis using a prospective actuarial valuation methodology. This methodology is based on prudent assumptions that are used to determine future cash flows expected to arise for each of its long-term contracts. The cash flows are discounted to the valuation date and subject to a guaranteed surrender value floor.
Reserving Methodology for FICL’s premium reserves
Premium reserves for single premium business are calculated using an unearned premium reserve methodology. The provision for unearned premiums is computed separately for each insurance contract.
FICL’s standard premium earning rules for single premium business is Rule of 12 (i.e. earned uniformly over the term of the contract) for Involuntary Unemployment (IU) and Rule of 45 (where more is earned up front) for Disability businesses. However, special earnings patterns were introduced in 2008 to reflect the recession and the forecast emergence of claims cost, and have been updated annually thereafter for each underwriting year cohort.
Methodology and approach for determining Claim Reserves
FACL and FICL use identical claim reserving platforms and approaches to determine claims reserves. Therefore, the claim reserving impact of the 60 month reallocated business from FICL to FACL is expected to be nil.
The Chain Ladder reserving method, which relies principally on continuing stable claim development patterns, is considered to be particularly suited for the determination of claims reserves. The results produced by the chain ladder method are not adjusted on an ad hoc basis nor is any discounting allowed for, resulting in an implicit margin in the reserve estimates. There are a number of stages involved in estimating the claims reserves:
In Course Of Payment (ICOP) reserves are estimated by looking at the probabilities of one or more subsequent payments being made on each existing in-force claim.
Registered But Not Paid (RBNP) reserves are estimated by looking at the probability of any payment being made on any pending claims and the probabilities of one or more subsequent payments being made.
The Chain Ladder Method based on incurred claims is used to calculate ultimate claims costs by month of accident.
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Incurred But Not Reported (IBNR) reserves represent the difference between projected ultimate claims and the claims payments to date, ICOP and RBNP.
For new countries where there is little historic data or few claims, a loss ratio approach to claims reserving is taken, initially based on the pricing assumptions.
Claims reserves are calculated one month in arrears for financial reporting purposes due to time constraints. This one month delay is not considered to have a material impact on the claims reserves. Claim payments are up-to-date for reporting purposes, so monthly timing differences can sometimes arise if large movements occur, though these are broadly smoothed out over a 12 month period.
Deferred Acquisition Costs (DAC)
For FICL, commission and other related acquisition expenses are deferred over the same period and in the same proportion as the related earned premiums.
For FACL, the DAC is calculated as the lower of the unearned commission and the discounted value of future margins (including the impact of any guaranteed refunds) in the valuation basis.
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Appendix 5 – Financial Strength
Individual and potential combined capital positions
Pillar 1 Basis as at 31 December 2013
Figures are in £’m.
Capital Position before Transfer FACL Solo FICL Solo FACL(Group)
Capital Resources 179.6 226.0 406.1
Capital Resources Requirement 56.6 39.6 96.3
Excess of Capital Resources over Capital
Requirement 123.0 186.3 309.8
Excess Capital as a percentage of
Capital Requirement 217.25% 470.00% 321.90%
Capital Position after Transfer
Capital Resources 178.5 225.4 404.4
Capital Resources Requirement 56.6 39.6 96.3
Excess of Capital Resources over Capital
Requirement 121.9 185.8 308.2
Excess Capital as a percentage of
Capital Requirement 215.28% 468.63% 320.19%
The figures for FACL are shown both as a solo entity and with the consolidation of its subsidiary FICL. It can be seen that for both FACL and FICL the change in excess capital is insignificant in relation to the amount of free capital available.
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Appendix 6 – Documents Reviewed
I have been provided with the following documents in respect of FICL:
The Memorandum and Articles of Association
The Annual reports and Accounts as at 31 December 2011, 2012 and 2013
The Annual Regulatory Returns as at 31 December 2011, 2012 and 2013
The Individual Capital Assessment performed at 31 December 2012 and 31 December 2013.
Reports by the Actuarial Function Holder to the Directors on the valuation at 31 December 2012 and 31 December 2013.
I have been provided with the following documents in respect of FACL:
The Memorandum and Articles of Association
The Annual reports and Accounts as at 31 December 2011, 2012 and 2013
The Annual Regulatory Returns as at 31 December 2011, 2012 and 2013
The Individual Capital Assessments performed at 31 December 2011, 2012 and 2013
Reports by the Actuarial Function Holder to the Directors on the valuation at 31 December 2011, 31 December 2012 and 31 December 2013.
I have also been provided with:
A copy of the Scheme and the accompanying witness statements.
A report prepared by the Actuarial Function Holder of FACL setting out the financial implications of the scheme.
A workbook which shows the calculation of the technical provisions for the transferring policies on the basis used in FICL and the basis which will be used in FACL.
A workbook which calculates the Pillar 1 and Pillar 2 capital requirements for FICL and FACL at 31 December 2013
Specimen literature for the product lines of which the Relevant Policies are part. (Most of the literature is in the local language of the state of commitment, and I have been provided with literature relating to Ireland and received assurances that this is a fair representation of the Relevant Policies.)
