Monument Life Insurance dac Supplementary Report of the Head … · 2020-07-08 · Monument Life Insurance dac Developments since my Main Report 2.1. Introduction This section outlines

Monument Life Insurance dac

Supplementary Report of the Head of Actuarial Function On the proposed transfer of annuity policies from Rothesay Life PLC to Monument Life Insurance dac

Dated: 7th July 2020

Prepared for:

Board of Directors


Prepared by:

Gareth McQuillan, FSAI, Head of Actuarial Function, Monument Life Insurance dac


Contents

Contents

Introduction ....................................................................................................................... 3

1.1. Context & Purpose………………………………………………………………………………………………………….3

1.2. Compliance with Actuarial Standards……………………………………………………………………………..4

Developments since my Main Report .................................................................................. 5

2.1. Introduction……………………………………………………………………………………………………………………5

2.2. Changes to the Scheme…………………………………………………………………………………………………..5

2.3. Changes to the MLID Business Plan…………………………………………………………………………………5

2.4. Changes in the External Environment……………………………………………………………………………..6

Updated Financial Analysis ................................................................................................. 9

3.1. Introduction……………………………………………………………………………………………………………………9

3.2. Impact of the Scheme as at 31 Dec 2019………………………………………………………………………..9

3.3. Impact of the Scheme as at 31 March 2020……………………………………………………………………9

Conclusion .........................................................................................................................12

Report by the Head of Actuarial Function Page 2 of 12


Introduction

1.1. Context & Purpose

This report has been prepared for the Board of Directors of Monument Life Insurance dac (“MLID” or the “Company”) in my capacity as the Head of Actuarial Function (“HoAF”) of MLID.

I previously prepared a report dated 27th March 2020 (“the Main Report”) to describe my understanding of

is a pre-approval controlled function) had not been confirmed by the Central Bank of Ireland, but that this approval has subsequently been received.

The purpose of this Supplementary Report is to document and consider the impact of any developments that have occurred since I prepared my Main Report. In particular I focus on the following areas:

• Changes to the Scheme

• Changes to the MLID business plans

• Changes in the external environment

• Updated financial information as at 31/12/2019 and 31/3/2020

Finally, the report considers whether any of the developments would lead me to change my opinion on the impact of the Scheme.

This Supplementary Report does not contain a full description of the scheme or my opinion on its impact, and should therefore only be read in conjunction with the Main Report.

While this report is addressed to the Board of Directors of MLID, it will also be provided to the Court, the Independent Expert (“IE”), the Prudential Regulation Authority (“PRA”), the Financial Conduct Authority (“FCA”) and the Central Bank of Ireland (“CBI”) in order to assist them with their considerations in relation to the proposed Scheme.

I note that the Chief Actuary of Rothesay has also produced a supplementary report on the Scheme and I have been provided with a copy of this report.

I also note that the IE has produced a supplementary report on the Scheme and I have been provided with a copy of this report.

I note that to date the Company has not received any objections from any of its Policyholders in relation to the proposed scheme.

In this report, I have considered only those effects which I believe are material. In this context I have taken into account both the possible impact and the likelihood of it occurring. Material means that there is either a realistic possibility of an effect materialising, or that the effect, while unlikely to occur, would be large. Where the effect is highly unlikely to occur or would have a negligible impact upon the security and benefit expectations of policyholders, I consider it to be immaterial. However, it is not possible to be certain about the future and therefore it is not possible to be certain about the effects of the Scheme for all policyholders.


the proposed transfer of a portfolio of policyholder liabilities from Rothesay Life PLC (“Rothesay” or “RL”) to MLID. The Main Report considered in detail the implications of the proposed Scheme on the security and benefit expectations of existing MLID policyholders, including the principles being applied to treat customers fairly and to manage conflicts of interest fairly, before and after the proposed transfer.

I note that at the time of writing my Main Report, my approval as Head of Actuarial Function for MLID (which


1.2. Compliance with Actuarial Standards

There are no specific standards that need to be met in respect of this report, but I would note that there is a SAI standard that applies to the Independent Actuary’s assessment of schemes, Actuarial Standard Practice (“ASP”) LA-6 “Transfer of long-term business of an authorised insurance company – role of the independent actuary”.

In compiling this Supplementary Report, I have consulted and complied with relevant actuarial standards issued by the Society of Actuaries in Ireland, in particular; ASP-PA2 “General Actuarial Practice”.


https://web.actuaries.ie/standards/asp/asp-la-6

https://web.actuaries.ie/standards/asp/asp-la-6


Developments since my Main Report

2.1. Introduction

This section outlines the relevant changes to the proposed Scheme, the MLID Business Plan, and the external environment that have occurred since I finalised my Main Report on 27th March 2020.

2.2. Changes to the Scheme

same as I set out in my Main Report.

I note that the project to plan and prepare for the operational transfer of the administration of the transferring policies has progressed considerably since my Main Report, and based on latest information from the administration workstream, is on track to complete successfully in time for the expected scheme effective date.

I also note that the status of the Company’s future plans regarding a potential 3rd country branch application for the UK remains as described in my Main Report.

Impact on opinion

As a result of the above, there is no reason to alter my opinion arising from changes to the Scheme itself, or the preparation and planning for its implementation.

2.3. Changes to the MLID Business Plan

There have been some changes to the sequencing and timing of MLID’s planned project activity since I completed my Main Report. These changes are outlined below.

Project Trinity

Project Trinity is an internal re-structuring project which has the primary objective of transferring the liabilities (including the policies) of two other Monument Group Companies (MIDAC and MADAC) into MLID.

Following a review of the transfer process it was decided that whilst the liability transfer would go ahead as planned, the company re-structure (and financial implications thereof) will be pursued at a later stage.

Project Trinity completed on the 30th of June 2020, with MLID remaining under the ownership of MADAC rather than owned directly by Monument Re as originally intended.

Carp Residual Policy Transfer

The Main Report noted that a small portfolio of unit-linked policies relating to Project Carp were intended to transfer into MLID by the end of Q2 2020. The estimated completion date of the transfer of these policies is now Q3 2020.

Project Puma


I have been informed that there have been no substantive changes to the underlying Scheme since I completed my Main Report, and no further changes are expected in advance of the Sanction hearing.

There has been a small reduction in the number of transferring policies due to deaths (400 policies at 31 December2019 v 406 at 30 June 2019), but otherwise the portfolio details are substantially the

As a precursor to this transfer, it was intended that MLID would move to become a direct subsidiary of Monument Re, and that certain dividends and loans would be issued as part of this wider re-structure.


As noted in the Main Report, Project Puma is a transaction aimed at transferring a portfolio of unit-linked policies from another Irish insurer to MLID. In my previous report, May 2020 was given as the indicative date of transfer - the estimated completion date of this transfer is now Q4 2020.

Volatility Adjustment

In Q4 2019, MLID made an application to the CBI to use the Volatility Adjustment for its Euro denominated liabilities going forward. At the time of writing the Main Report, no decision had been made by the CBI on this application, but the impact of the application being approved was included in the pro-forma balance sheet analysis.

Impact on opinion

2.4. Changes in the External Environment

Covid-19

At the time of writing of my Main Report, the Covid-19 pandemic was very much in its early stages in Ireland and as such the potential impacts of the pandemic were uncertain.

Whilst the impact remains uncertain, we do have more information now in relation to Covid-19 and its potential impact on markets, the economy and on likely insurance experience.

MLID has participated in a group-wide assessment of the impact of the pandemic on its business. In the remainder of this section I consider the financial impacts, operational impacts and specifically the impact with respect to Project Trinity.

Financial Impact

Covid-19 has had a negative impact on the economy and on the financial markets. The key market exposures that are impacted for MLID are:

1. MLID has a small equity exposure through the future management charges on its unit linked policies;falling equity markets have reduced the value of the future management charges

- I note that the value of future management charges is small on a net of reinsurance basis and as such the impact of falling equity markets was immaterial

2. MLID has a significant exposure to credit spreads through its direct holdings in government and corporatebonds

- While the value of MLID’s bond holdings has reduced, the fact that the company holds asignificant amount of government bonds and due to the use of the Solvency II VolatilityAdjustment, the impact on the balance sheet has not been as material as would otherwise havebeen the case

- I note that rating agencies typically take some time to review their assessment of bond issuers,and that potential downgrades in credit ratings may increase the level of capital required to beheld for spread risk. The Monument Investment team have performed a name by name reviewof the bond portfolio and have indicated that they do not expect a material level of downgradingat this time


While the timing and sequencing of some of the items above has changed, none of these changes give rise to a reason for me to alter my opinion that the Scheme will not have an adverse impact on the existing MLID policyholders. The rationale for this is covered in more detail in the Financial Analysis (Section 3).

This application has now been approved by the CBI, effective from 31st March 2020.


While Covid-19 is expected to have a material impact on certain insurance risks such as mortality and morbidity, there is no evidence of a direct impact on the insurance risks on MLID’s balance sheet as yet

- I note that MLID’s exposure to mortality and morbidity risk is substantially mitigated through the useof reinsurance and I also note that MLID also has a material exposure to longevity risk which wouldhelp absorb any potential worsening of mortality experience

- Therefore I consider it unlikely that Covid-19 will result in a deterioration of solvency due toworsening insurance experience

- I note that there has been close monitoring of lapse experience since the start of the Covid-19pandemic, and the evidence to date suggests a positive rather than negative balance sheet impact

- I note that the impact of Covid-19 on the insurance risks which transferred to MLID as part of ProjectTrinity is covered separately under Project Trinity below

The financial impact of the items above are covered in quantitative terms in section 3.

Impact on Liquidity The Company continues to monitor its liquidity position and the latest test performed 22nd of May 2020 shows that it continues to hold a sufficient buffer to deal with stressed requirements.

Operational Impact

MLID outsources much of its policy administration activity to third party Outsource Service Providers (“OSPs”). Most other activities are performed in-house.

The key operational response to Covid-19 has been:

1. Implementation of MLID’s Business Continuity Plans – this has ensured that the business hascontinued to operate as normal during the pandemic to date

2. Additional oversight of OSPs to ensure that service levels remain of the required standard forpolicyholders

I have reviewed a number of service metrics over the period and I am satisfied that the service being provided to the MLID policyholders has not materially deteriorated as a result of Covid-19.

MIDAC liabilities (Project Trinity)

The MIDAC business that transferred to MLID as part of Project Trinity includes products that provide Involuntary Unemployment (IU) cover and Accidental Sickness (AS) cover for policyholders in the UK. We expect that claim rates will increase on these product lines as a result of the Covid-19 pandemic and data on registered claims indicates increased activity since mid-March.

At Q1 an additional reserve of was established in MIDAC to reflect the potential increase in claims arising in these business lines from Covid-19. This reserve is calibrated to reflect a level of incremental claims that is higher than the increase in registered claims to date, and also considers the offsetting impact from a profit- sharing arrangement in place in respect of this business.

Under the terms of Project Trinity, MLID was insulated from changes to the liabilities that happened up to that scheme’s transfer date, since the consideration payable to MLID for taking on the liabilities was based on the liability valuation on the scheme effective date.


I also note that we have seen no marked deterioration in the credit quality of MLID’s reinsurance counterparties to date and where applicable, collateral levels continue to be adjusted as normal. Therefore I do not anticipate any deterioration in the protection provided by MLID’s reinsurers as a result of Covid-19.


Whilst MLID was protected against increases to the value of the liabilities prior to the Trinity effective date, it does have an exposure through:

1. The risk that the additional reserve established at Q1 turns out to be insufficient to cover future claims.

I note that MLID has potential mitigants in this scenario, including the contractual ability to increasepremium levels and cancel coverage for these products at 1 months’ notice.

An exercise is underway to consider if an increase in premiums is required based on emerging experience;if the exercise determines that the current premium rates are unprofitable then steps will be taken toaddress this issue

2. The second order impact of an increase in non-life outstanding claim provisions on the SCR. The impactof the additional reserve at Q1 is estimated to increase the post-transfer MLID SCR by €0.5-€1.0m. I notethe financial analysis performed in the next section which examines the impact of the varioustransactions on the MLID solvency position using Q1 as a starting point

Monument Group purchase of Greycastle

MLID has a material reliance on Monument Re through a number of reinsurance arrangements in place between the two companies. The reinsurance arrangements are fully collateralised and MLID holds capital in order to protect its policyholder obligations against an extreme market default event.

On 27th March 2020, Monument Re announced that it had reached agreement (subject to regulatory approval, which was received on 27 May 2020) to purchase the Bermuda based reinsurer Greycastle.

Monument Re have provided me with details of the impact of the transaction on their solvency ratio, and I note that (a) the post transaction solvency coverage remains well in excess of Monument Re’s internal capital target, and (b) the transaction resulted in an increase in the nominal surplus of own funds over that target.

I note that the same impact assessment was provided to the Bermuda Regulatory Authority (BMA) as part of the transaction approval process.

Impact on opinion

Based on the above, I have no reason to alter my opinion that the Scheme will not have an adverse impact on the existing MLID policies.



Updated Financial Analysis

3.1. Introduction

My Main Report provided a financial analysis as at 30th June 2019.

This section of the Supplementary Report provides an update of that analysis, reflecting audited accounts and regulatory returns as at 31st December 2019. In order to show the impact of Covid-19 this section also includes an analysis of the position at 31st March 2020. Both sets of analysis take account of changes arising from MLID’s equity shareholding in Inora Life dac.

I note that the basis that will be used for the calculation of transfer values and commutation of benefits on deferred policies has not changed since my Main Report. As a result, and considering the very small number of relevant policies and their low materiality in the context of MLI’s overall balance sheet, I have not addressed this topic any further in this report.

3.2. Impact of the Scheme as at 31 December 2019

The following table provides a pro-forma view of the MLID Own Funds and SCR as at 31 December 2019:

Item €m (i) (ii) (iii) Solvency II net assets (net of foreseeable dividends) 85.3 96.8 113.6 Technical Provisions (net of reinsurance) 57.0 68.5 83.8 Own Funds (A) 28.2 28.3 29.8 Solvency Capital Requirement (B) 10.0 14.6 16.1 Surplus (=A-B) 18.2 13.7 13.7 SCR cover ratio (%) (=A/B) 282% 194% 185%

• (i) = Position as at 31 December 2019 as per audited accounts and regulatory returns

• (ii) = (i) and both Trinity transfer and Carp HNW transfer completed

• (iii) = (ii) with Project Boris transfer completed

As demonstrated in the table, the pro-forma solvency coverage at 31 December 2019 remains strong after allowing for the planned activity including the transfer of the Project Boris annuity liabilities. In particular the surplus over the SCR remains strong:

- Own Funds are c €1.9m in excess of MLID’s target capital level of 140% of SCR + €5.4m

- Own Funds are c €0.3m in excess of MLID’s surplus capital level of 150% of SCR + €5.4m (note this is thelevel at which dividends are payable)

For comparison, the equivalent surplus levels shown in the Main Report were €6.9m and €5.4m respectively.

3.3. Impact of the Scheme as at 31 March 2020

The following table provides a pro-forma view of the MLID Own Funds and SCR as at 31 March 2020:

Item €m (i) (ii) (iii) Solvency II net assets (net of foreseeable dividends) 80.2 93.0 108.9 Technical Provisions (net of reinsurance) 52.3 65.0 79.8 Own Funds (A) 27.9 28.0 29.1 Solvency Capital Requirement (B) 8.8 14.3 15.6



Surplus (=A-B) 19.1 13.7 13.5 SCR cover ratio (%) (=A/B) 317% 196% 186%

• (i) = Position as at 31 March 2020 as per Q1 regulatory return

• (ii) = (i) with both Trinity transfer and Carp HNW transfer completed

• (iii) = (ii) with Project Boris transfer completed

As demonstrated in the table, the pro-forma solvency coverage at 31 March 2020 remains strong after allowing for the planned activity including the transfer of the Project Boris annuity liabilities. In particular the surplus over the SCR remains strong:

- Own Funds are c €1.8m in excess of MLID’s target capital level of 140% of SCR + €5.4m

- Own Funds are c €0.3m in excess of MLID’s surplus capital level of 150% of SCR + €5.4m (note this is thelevel at which dividends are payable)

As also shown in section 3.2.2, for comparison, the equivalent surplus levels shown in the Main Report were €6.9m and €5.4m respectively.

I note for information that the following table summarises the MLID’s capital risk appetite, and that this has not changed since my Main Report:

Description of measure Risk Tolerance Action Required

Greater than Surplus Level = 150% of Max (SCR, MCR) + buffer in respect of IGR

Within Tolerance

Expectation that surplus capital is paid as a dividend, subject to criteria set out in the Company’s Capital Management and Dividend Policy being met. After a dividend payment, solvency coverage must remain at or above the Surplus Level.

Between Surplus and Target Level = 140% of Max (SCR, MCR) + buffer in respect of IGR

Within Tolerance No action. Regular monitoring of solvency coverage ratio.

Between the Target Level and the Minimum Operating Level = 130% of Max (SCR, MCR) + buffer in respect of IGR

Within Tolerance if target Level Achievable within timeframe

A Capital Plan should be agreed with the Board. The Capital Plan must clearly show the proposed actions in order to achieve Target Range within 12 months. More frequent monitoring of solvency coverage ratio

Between the Minimum Operating Level and the Recovery Level = 105% of Max (SCR, MCR)

Outside Tolerance. Materially outside Tolerance if Minimum Operating Level not achievable within timeframe

A Capital Plan should be agreed with the Board. The Capital Plan must clearly show the proposed actions in order to achieve the Minimum Operating Level within 6 months. Frequent monitoring of solvency coverage ratio. Recovery Plan approved by the Board within 6 months and prepared for implementation should solvency coverage ratio fall to Recovery Level

Recovery Level = 105% of Max (SCR, MCR)

Materially outside Tolerance

Notify the regulator. The Recovery Plan should be reviewed and then agreed with the board and shared with the regulator within 2 months. Implement recovery plan aimed at complying with the 100% of SCR within 6 months.

Note: The acronym “IGR” above refers to Inter Group Reinsurance

Impact on opinion

While I note that the updated level of pro-forma surplus own funds above MLID’s target level is lower than that indicated in my Main Report, the coverage remains strong, and continues to be above the tolerance range. I note that the changes to that position have arisen as a result of other developments, and do not



relate to Project Boris. The company’s capital management policy also remains unchanged, and Monument Re Group’s financial strength and capacity to support this policy also remain strong.

As a result, the assessment above gives me no reason to alter my opinion that the Scheme will not have an adverse impact on the existing MLID policyholders.



Conclusion

In this report I have set out the relevant external and internal developments which have taken place since I prepared my Main Report on 27th March. It also contains an updated analysis of the likely impact of the transaction on MLID’s balance sheet, reflecting those developments.

Specifically, the report considers the latest available information regarding the potential impact of Covid-19 on MLID, both operational and financial.

Having considered these developments, I conclude that the opinion set out in that Main Report remain valid. For ease of reference, that opinion contained the following conclusions:

The security of the current policyholders of MLID is not likely to be adversely affected as a result of the proposed transfer;

The reasonable benefit expectations of the current policyholders of MLID are not likely to be adversely affected as a result of the proposed transfer;

The administrative arrangements applicable to the policyholders of MLID are not likely to be adversely affected as a result of the proposed transfer;

There are no features of the proposed Scheme that appear to me to breach either of the principles to treat customers fairly or to manage conflicts of interest fairly; and

There are no features of the proposed Scheme that appear to me likely to prejudice Court approval of the Scheme.

Gareth McQuillan Fellow of the Society of Actuaries in Ireland Actuarial Director & Head of Actuarial Function for MLID

Dublin, Ireland 7th July 2020


Monument Life Insurance dac Supplementary Report of the Head … · 2020-07-08 · Monument Life Insurance dac Developments since my Main Report 2.1. Introduction This section outlines

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