OFFSHORE LIFE OFFICE - prudential-international.com · Please contact AKG in this regard or with any questions: [email protected], Tel +44 (0) 1306 876439. AKG has made every effort to

JULY 2012

OFFSHORE LIFE OFFICEWITH PROFITS BOND REPORT

OFFSHORE LIFE OFFICE WITH PROFITS BOND REPORT

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© AKG Actuaries & Consultants Ltd (AKG) 2012

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© AKG Actuaries & Consultants Ltd Page 1 July 2012


Contents

Contents Page

Introduction

Purpose and Scope of Report

2

Availability of Information

2

With Profits Glossary

3

Company Analysis

4

Guide to AKG’s Rating System

4

AKG With Profits Fund Ratings

7

About AKG

8

Companies AEGON Ireland plc

Aviva Life International Ltd

AXA Isle of Man Ltd

CMI Insurance Company Ltd

Friends Provident International Ltd

LCL International Life Assurance Company Ltd

Prudential International Assurance plc

Scottish Mutual International Ltd

9

15

23

33

46

54

60

69



Introduction

Purpose and Scope of Report

This is a new volume focusing on offshore Sterling with profits bond business, in response to

market demand to consider this type of business using the same robust AKG framework and data

set as onshore with profits business / variants. It is therefore intended as a companion to AKG’s

UK Life Office With Profits Reports, which remain AKG’s most extensive reference resource in

the context of with profits business.

For the purposes of this report, AKG’s definition of ‘offshore’ business is business marketed

within the UK by life companies situated outside the UK.

In the 1990’s and early 2000’s the market for such offshore with profits bond business was

substantial. AKG has identified eight current companies that contain such business - four

domiciled in the Republic of Ireland and four in the Isle of Man*. In most instances, however, this

type of business was designed to be reinsured back to an associated UK life company. The only

exception being that part of the business written by Scottish Mutual International Ltd is retained

offshore.

The main reason for investing offshore has always been the ability to benefit from a gross roll up

of assets.

A significant proportion of the business originally written has now been surrendered, and only

Prudential International Assurance plc continues to write new offshore with profits bond business

in any material volume.

The volume of offshore with profits bonds remaining in force is still quite large, though, and the

business has now been in force long enough for AKG to enquire about past performance

achievements for a variety of durations up to 15 years in force.

*The Isle of Man is an internally self-governing dependency of the British Crown and its people are British citizens, and although it is part of the British Islands, it is not part of the United Kingdom.

Availability of Information

AKG has attempted to obtain as much detailed information (particularly of a product and

financial nature) as possible about each of the companies profiled in this report. However, despite

an overall improvement in recent years, the depth of information available to AKG in respect of

offshore business varies quite a lot from one company to another, for the following reasons:

the depth of information about offshore life companies which is available within the public

domain varies greatly from one territory to another. In particular, the Isle of Man regime is

less open than that in the Republic of Ireland.

the extent of additional information made available to commentators such as AKG (on a

voluntary basis) varies greatly from one company to another.

some companies have disclosed information to AKG, but on a confidential basis, so that

AKG are unable to publish it within the report.

This situation remains far from satisfactory as far as AKG's objective of providing informed

commentary on financial strength issues is concerned, but it reflects the current status of the

offshore market. In fact, it is fair to say that the privacy laws that operate in some jurisdictions

form part of the appeal of the overall proposition for some investors.

The existence of reinsurance arrangements for offshore with profits bond business with UK life

companies has helped AKG obtain some relevant information from those reinsurers, which are

subject to a higher level of disclosure. Indeed it is the position of the reinsurer that is of primary

importance in many respects for the business under consideration.

AKG's aim is to publish comparable information, presented in a consistent manner, for each

company. AKG's approach to rating companies which do not supply relevant information is

naturally much more cautious than for those that do.



Introduction

With Profits Glossary

The glossary below defines a number of abbreviations which are used in explaining with profits

business. Some are specific to with profits, but we have also included some wider abbreviations

either related to with profits or often used in its broader insurance context.

This list does not purport to be exhaustive, but AKG hopes it contains the majority of

abbreviations used within or related to with a profits context.

Conventional With Profits: Products characterised by a guaranteed sum assured to which

regular (annual) bonuses, and possibly a terminal (final) bonus, are added. Few offices now offer

conventional with profits, these having been superceded during the 1980's by unitised with profits

products.

Unitised With Profits: The relevant part of the with profits fund is divided into units (similar to a

unit linked fund) and the unit value is used to define individual policy values. Surplus is

distributed by allocation of additional units or by incrementing the unit value.

Asset Share: The premiums paid by the policyholder, less deductions for expenses, tax and other

charges, plus allocations of business profits, accumulated at the rate of investment return

achieved. [Note: In practice, there is some variability as to which of the above elements are

included, depending upon profit sharing philosophy].

Common Abbreviations A-Z:

CFPPFM Consumer Friendly Principles and Practices of Financial Management

CMA Contractual Minimum Addition

CPPI Constant Proportion Portfolio Insurance

CRR Capital Resources Requirement

CWP Conventional With Profits

DA Deposit Administration

EBR Equity Backing Ratio (including Property)

FAR Free Asset Ratio

FSA Financial Services Authority

GAO Guaranteed Annuity Option

GAR Guaranteed Annuity Rate

GMP Guaranteed Minimum Pension

IB Industrial Branch

ICA Individual Capital Assessment

ICG Individual Capital Guidance

LTA Long Term Assets

LTBF Long Term Business Fund

MCR Minimum Capital Requirement

MVR/MVA Market Value Reduction/Market Value Adjuster

NPSF Non Profit Sub Fund

OB Ordinary Branch

PPFM Principles and Practices of Financial Management

PRE Policyholder Reasonable Expectations

RBS Realistic Balance Sheet

RCM Risk Capital Margin

RMM Required Minimum Margin

TCF Treating Customers Fairly

UWP Unitised With Profits

WCR Working Capital Ratio

WP With Profits

WPB With Profits Bond

WPC With Profits Committee

WPFAR With Profits Free Asset Ratio

WPICC With Profits Insurance Capital Component



Introduction

Company Analysis

The analysis provided for each company (and any relevant reinsurance company) is based on

information collated from a number of sources, including meetings with a number of the offices, a

questionnaire completed by some of the companies, statutory accounts, statutory insurance

company returns, PPFMs, CFPPFMs, reports to with profits policyholders, websites and any

other available material, including AKG’s own company research archives.

Figures are shown for each of the last three years where possible.

AKG is grateful for the co-operation provided by many of the companies in the compilation of

this report.

Guide to AKG’s Rating System

With Profits Financial Strength Ratings

The objective is to assess the overall strength of the with profits fund of the issuing company

and/or the relevant reinsurer. The initial concern is the company's ability to meet its ongoing

guaranteed, or promised, commitments, i.e. existing sum assured and bonuses. However, the

company's ability to continue to compete successfully in the with profits market is also

particularly relevant, given that closed funds are sometimes bad news for policyholders. In such

situations, overall expenses tend to increase as a proportion of the fund and investment

performance may well deteriorate. These, together with other factors, may make it difficult for

companies in such situations to maintain competitive bonus rates at future declarations, although

existing declared bonuses are not affected (other than possibly by MVRs).

The main criteria taken into account are:

Capital base and free asset position;

With Profits Realistic Balance Sheet position;

The amount of with profits business in-force;

Parental strength (and likely attitude towards supporting the company);

Image and strategy.

With Profits Future Performance Ratings

The potential for future performance is made up of a variety of different factors. The major

factors are:

Past performance as a guide to potential future performance - It should be noted

however that not all current leaders in past performance have always been top

performers.

Current investment philosophy - With profits funds with high equity and property

investments are likely to perform better over the longer term than, for instance, funds

with a high proportion of fixed interest securities. It should be noted that this may not

always be the case, but provided the policyholder accepts the basic premise that equities

will, over the long term, out-perform fixed interest securities, this will be an important

factor (i.e. funds with high equity ratios will perform better than funds with lower equity

ratios).

Company free asset position (and valuation strength), together with the relevant With

Profits Realistic Balance Sheet position - This will enable overall investment flexibility

and give an investment return on those free assets that may be available to with profits

policyholders.

Overall size of the company, its with profits fund and its capital base - The brand name

(and ownership) and reputation of the company will indicate the company's ability to

stay in the with profits market and sell new business at a profitable rate for the benefit of

policyholders and shareholders.

Distribution efficiency - A sales distribution network, which will enable products to be

sold profitably and in adequate volumes, is clearly important.



Introduction

Bonus philosophy - with respect to reversionary and terminal bonuses, is relevant, allied

with the impact of future stock market growth. Terminal bonuses are not only dependent

on the company's attitude to withholding (or otherwise) capital gain, but also the market

potential (for equities and property) for on-going growth. Companies with a high

terminal bonus ratio (as a percentage of payout) may find this 'high' payment difficult to

maintain and, consequently, future performance may be affected.

Miscellaneous surplus - Some companies have with profits funds benefiting only from

investment returns. However, in other with profits funds there is a contribution from

other lines of business (e.g. non-profit and unit-linked surplus).

Estate distribution - A key element for closed funds that are running-off is the size of the

fund's inherited estate, and the company's policy as to how it will be distributed over

time.

Mutual or Proprietary status - There has been much debate on the 'strength' of mutual

companies because of their potential inability to raise capital, should this be required.

Most mutuals would contend that this is, in practical terms, not relevant. However, it has

to be conceded that the public perception (of this constraint) does cause mutual

companies some problems. A number of mutuals have now demutualised, often to the

benefit of their policyholders. The big advantage that mutuals have, as far as

policyholders are concerned, is that they pay 100% of all surplus back to policyholders

so that bonuses are enhanced compared to their proprietary rivals. This is certainly true

in some cases, though in general, actual results for mutual and proprietary companies

are similar.

It must also be remembered that assessment of on-going performance is subjective, as the

company's actual performance in 20 years, say, will be dependent on factors which cannot be

accurately forecast, such as:

Whether or not the company has stayed in business, and in what form

Its ability to adapt to new market forces

Its investment results

Its overall profitability during that period

Nevertheless, those companies with good performance potential (as determined by the with

profits factors above) have to start as favourites. Indeed, all Independent Financial Advisers must

consider these factors (or their equivalent rating) when recommending a specific with profits

contract to a potential policyholder.

AKG has therefore, using its judgement and experience, produced a single rating that combines,

to a greater or lesser extent, the various factors outlined above.

With Profits Transparency Ratings

Transparency has become a significant issue, as a result of the breakdown of trust following

general concerns about the opaqueness of the with profits market as it had traditionally grown up.

Increasingly, policyholders and their advisers seek reassurance that they will be able to rely on a

provider acting fairly in all circumstances, and that the provider's scope to apply discretion is

clearly delineated and reasonable.

Nowadays, UK companies are required to produce PPFMs (and CFPPFMs) for each of their with

profits funds. Some offshore companies voluntarily produce their own PPFMs and CFPPFMs,

and in some cases a UK reinsurer’s publication covers the offshore business.

Much of the information contained within these PPFMs has, in the past, been made available by

the more transparent companies, in their desire to develop a more consumer focused approach.

For other companies, less at the forefront of any drive to greater transparency, the PPFM ensures

at least a degree of compulsory disclosure.

The purpose of the AKG Transparency Rating is to give a simple quantitative rating for

transparency, consistent with AKG's other industry measures.

Considerations of transparency feature prominently in the context of 'new-style' with profits

products, where it is explicitly addressed in the product design and marketing material. Even with

'old-style' products, however, the degree of openness about the conduct of a provider's with

profits funds is seen as a vital factor in provider selection.



Introduction

In evaluating transparency and openness, and recognising that there is no current industry wide

definition, AKG takes the following main criteria into account:

How open the mechanics of the fund are, and the extent of any discretion retained by the

provider regarding key decisions about investment mix/bonus allocations/unit prices etc

from day to day throughout the life of a policy.

The degree of discretion retained by the provider to change charges or other important

contract terms.

The degree of discretion retained by the provider to make final adjustments to policy

proceeds at the point of payout.

The amount, quality and timeliness of relevant information, about the operation of the

fund and the company, made available to policyholders, advisers, and commentators.

This particularly includes consideration of the depth, quality and clarity of information

presented in PPFMs and on the company's website; as well as the extent of the

provider's commitment to maintaining good standards of communication.

The extent to which a provider's with profits fund operations will be subject to

independent review and challenge; in particular the makeup and role of its WPC.

For closed funds, the company's approach to run-off; in particular governance issues

and whether its communication strategy enables policyholders to make informed

decisions.

As levels of transparency develop within the industry, these criteria evolve and benchmarks are

adjusted.

It is clear that there is a very wide spectrum of performance within the market at present, a fact

borne out by the FSA With Profits Regime Review Report in June 2010. On the one hand, this

identified a significant number of firms where with profits funds were being operated with due

regard to the interests of policyholders and with appropriate practices in most aspects of their

operation. On the other hand, though, it reported sector-wide weaknesses in governance and

policyholder communications, involving both open and closed funds. Particular issues were how

independent challenge is provided by with profits committees, and what firms are doing to ensure

that policyholders receive sufficiently comprehensive, timely and clear information so they can

take a reasonable view of the risk and reward balance of their policies.

Explanation of AKG's Fund Ratings

The main purpose of AKG's Fund Ratings is to show AKG's opinion of the relative merits of each

Fund against its competitors. For each of the 3 categories of Fund Rating, AKG's aim is to

sub-divide the whole market into 5 separate groups, each containing the funds that are deemed to

be broadly comparable with each other. In each case, a rating of 5 represents the highest ranking

group, whilst a rating of 1 represents the lowest ranking group.

It must be stressed that in arriving at each of the Fund Ratings published in this report, AKG has

considered the full range of criteria detailed above. Considerable judgment is often required to

assess the appropriate rating for a fund, particularly in situations where a fund exhibits a mixture

of characteristics, some strong and some weak.





AKG Rating (out of 5)

Company

Fund

Financial

Strength

Future

Performance

Transparency

AEGON Ireland plc With-Profits Growth Fund 3 5 5

With-Profits Cautious Fund 3 3 5

Aviva Life International Ltd Sterling With-Profit Fund 4 5 4

Sterling With-Profit Guarantee Fund 4 4 4

Sterling With-Profit Inflation Protected

Guarantee Fund 4 4 4

AXA Isle of Man Ltd International With Profits Bond Series 1 4 3 3

International With Profits Bond Series 2 4 3 3

International With Profits Bond Series 3 4 4 3

CMI Insurance Company Ltd Sterling OWP Funds 3 3 2

Sterling Guaranteed Growth Funds 1-6 3 3 2

Sterling Guaranteed Growth Fund 7 3 2 2

Friends Provident International Ltd With Profits Bond Series 1 3 3 3

With Profits Bond Series 2 3 3 3




LCL International Life Assurance

Company Ltd

With-Profits Fund 3 4 2

Prudential International Assurance plc PAC Sterling With-Profits Fund 5 4 5

PruFund Growth (Sterling) Fund 5 4 5

PruFund Protected Growth (Sterling) Fund 5 3 5

PruFund Cautious (Sterling) Fund 5 3 5

PruFund Protected Cautious (Sterling)

Fund

5 2 5

Scottish Mutual International Ltd With Profit Series 1 Fund 2 2 2

SMI With Profits Sterling Fund Series 1 2 2 1





About AKG

About AKG

AKG is an actuarially based consultancy specialising in the provision of ratings,

information and market assistance to the financial services industry.

Assistance to Provider Companies

AKG assists Providers in:

Financial Strength analysis, ratings and presentation

Data and information provision

Actuarial consultancy

Distribution consultancy

Assistance to Financial Intermediaries

AKG assists Intermediaries in:

Financial Strength analysis

Best Advice panel services

Data and information provision

Actuarial and technical support

Regular Reports

AKG publishes the following additional reports to assist Providers and Intermediaries:

AKG Company Profile & Financial Strength Reports

Covering UK long term Insurers/Providers.

AKG Offshore Profile & Financial Strength Reports

Covering offshore life assurance companies.

AKG Platform Profile & Financial Strength Reports

Covering platform operations.

AKG UK Life Office With Profits Reports

Designed to provide further depth in the assessment of with profits funds.

For futher details on any of the above please contact AKG:

AKG Actuaries & Consultants Ltd

Anderton House

92 South Street

Dorking

Surrey RH4 2EW

Tel: +44 (0)1306 876439 or email [email protected].



AEGON Ireland plc

Company

AEGON Ireland plc [Registered in Ireland]

Ownership

AEGON NV [Registered in the Netherlands]

Group Background

AEGON NV is one of the world's largest listed insurance groups, with assets of €404bn and

around 26,000 employees worldwide at 30 September 2011. Its core business focus is on life,

pensions and asset management, and profitably growing its business in existing and developing

markets. It is also involved in accident and health insurance, general insurance and limited

banking activities. Its three major markets are the US, Netherlands and UK, but in recent years it

has expanded into new growth markets in Asia, Central & Eastern Europe and Latin America. In

July 2008, AEGON announced its "Unlocking the Global Potential" strategy, which has three

strategic priorities: to reallocate capital toward businesses with higher growth and return

prospects; to improve growth and returns from existing business; and to manage AEGON as an

international group. AEGON's ambition is to be a leader in its chosen markets by 2015.

Impacted by the global credit crunch, AEGON NV received a capital injection of €3bn from the

Dutch government in October 2008. Having successfully raised €1bn through a rights issue in

July 2009, it repaid €1bn in December 2009, €0.5bn in August 2010, fully repaying the debt,

including interest of €1.1bn, on 15 June 2011. Transamerica Reinsurance was sold to SCOR in

August 2011. In September 2011, AEGON announced plans to restructure in Holland.

In January 2010 the remaining business in Scottish Equitable (Managed Funds) Ltd was

transferred into Scottish Equitable plc. In the UK, AEGON now operates in the At Retirement

and Workplace Savings markets, augmented by offshore investment through AEGON Ireland

under the AEGON brand. Guardian Financial Services was sold to Cinven in November 2011

for £275m. In June 2010, as part of a decision to focus on core areas, the group announced a

major re-structure and cost-cutting for the UK operation. This has since been followed, in

September 2010, by the announced closure of six regional offices and, in September 2011, by

further restructuring, including the closure of AEGON Direct. AEGON HS Admin, a specialist

third party administrator of occupational pension schemes was sold and AEGON Benefit

Solutions Ltd was closed in 2011. Other group entities include AEGON UK Distribution

Holdings, which owns and invests in IFA firms such as Positive Solutions and Origen. Kames

Capital (rebranded from AEGON Asset Management UK in September 2011) is a sister company

of AEGON UK and one of the UK's largest providers of institutional and retail fund services.

Company Background

Scottish Equitable International (Dublin) plc, based in Dublin was launched in 2002 to

complement its already established Luxembourg based sister company, Scottish Equitable

International S.A., thereby expanding the investment opportunities and solutions that Scottish

Equitable International could offer, particularly to investors in the UK. Following a decision to

focus on the UK intermediary market, it became the main life company within the offshore

division when Scottish Equitable International S.A. closed to new business in 2004. In 2006 the

Luxembourg company was subsequently sold to La Mondiale Europartner (in which AEGON NV

has a 35% shareholding).

Having changed its name to AEGON Scottish Equitable International plc in April 2007, it was

changed to AEGON Ireland plc in December 2009 as the group refocused on its global AEGON

brand. In 2010, the company's reporting line was changed from being through the UK to a direct

relationship with AEGON NV.



AEGON Ireland plc

The company plans to expand into other EU countries, whilst continuing to write substantial

volumes of Variable Annuity and International Bond new business in the UK and Dutch markets.

The volume of with profits bond business in force is very small, though. The company technically

remains open to new with profits sales, but 2011 premiums amounted to only £59,000.

Company Financial Strength

The company continues to receive capital support from the parent group as required. Solvency

levels reduced in 2010 but remained satisfactory. The company has seen its Board significantly

strengthened whilst at the same time continuing to establish and develop its operation with

substantially less reliance on the UK. AKG would expect further explicit parental support as the

company develops is presence not just in the UK but also within a wider European context.

With Profits Bond Products Marketed

Product Available from/to Open to New Business?

Flexible Investment Plan 28th February 2003-Present Nominally, but not

seriously promoted

With Profits Fund Links Available (Sterling denominated)

Two fund choices were made available on the company’s Flexible Investment Plan: the

With-Profits Growth Fund and the With-Profits Cautious Fund.

Reinsurance of With Profits Business

All of the company’s with profits bonds are wholly reinsured into the With Profits Sub-Fund

(WPSF) of the sister company, Scottish Equitable plc.

Reinsurance Company

Scottish Equitable plc [Registered in Scotland]

Reinsurance Company Background

Scottish Equitable plc (SE plc), which commenced trading in January 1994, was formed as a

result of a joint-venture between the mutual office Scottish Equitable Life Assurance Society

(SELAS), whose origins date back to 1831, and AEGON NV. SE plc's operation is governed by

a Scheme of Transfer, under which all the assets and liabilities of SELAS were transferred to SE

plc on 31 December 1993. In 1999, AEGON's stake in the company increased to 100%. The

company had a unit linked subsidiary, Scottish Equitable (Managed Funds) Ltd, to which it

reinsured its unit linked life business. This business was transferred to the company in January

2010, following which Scottish Equitable (Managed Funds) Ltd was deregulated.

Reinsurance Company Financial Strength

The company continues to operate with a low level of statutory Pillar 1 solvency position, albeit

with parental support, in the form of a £50m capital injection in December 2010 and £200m in

2011 together with an, as yet unutilised, £200m contingent loan agreement. At the parental

level, the AEGON group has been under significant pressure in the last two years but, having

repaid the Dutch Government, does now appear to be through the worst of this and is more

advanced in identifying the risks and problem areas within its spread of constituents. In part, as a



AEGON Ireland plc

result of this, the UK business has belatedly adopted a more focused approach, concentrating on a

tighter set of product niche competencies, albeit in a competitive sector of the market, together

with an ambitious cost reduction programme. This refocusing represents something of a risk,

but, having rejected the option of either selling up or closing down, the group now needs to make

it work. Continued disposals of specific business blocks as part of this refocusing cannot be

ruled out.

Flexible Investment Plan Product Outline

The company started marketing Flexible Investment Plans on 28th February 2003, linked to the

With-Profits Growth Fund and the With-Profits Cautious Fund.

Both these funds mirror internal linked ‘New Generation’ funds in Scottish Equitable plc. The

unit liability under the business written into the funds below is wholly reinsured into Scottish

Equitable plc, and is linked to the value of the assets in the Scottish Equitable plc funds. The death

benefit for contracts investing in the fund is also reinsured, subject to a maximum of 1% of the

unit liability reinsured for each contract.

Both funds invest in all major asset classes and regions. The Growth Fund has a greater

proportion invested in equities than the Cautious Fund.

Investment gains and losses in the above funds are smoothed over time. An expected growth rate

for each fund is set by the company. The smoothed value of the fund is determined on each

business day by increasing the previous smoothed value by an average of the expected growth

rate and the actual growth rate for each fund.

The unit price is determined by dividing the smoothed value of the fund by the total number of

units in force. This is then adjusted by a proportion of any smoothing profits and losses arising in

the funds as a result of the cancellation of units. Such profits or losses would arise where the

smoothed value of the fund differs from the value of the assets to which the fund is linked, and

where cancellations are made at the unit price.

However, the company reserves the right at its absolute discretion to apply a smoothing

adjustment on any cancellation of units. Such an adjustment would not exceed the difference

between the cancellation value calculated using the unit price, and the value of the assets to which

the cancelled units are linked.

There are no investment guarantees for the funds and all investment and smoothing gains or

losses are allocated to the policyholders investing in the funds. Thus the unit liability is set equal

to the value of the assets to which the fund is linked.

Both funds have an ongoing annual management charge of 1.00%. There are no initial charges

associated with investment in the funds. Any investment expenses associated with the funds may

be deducted from the value of the funds from time to time.

Current Bonus Scales - Flexible Investment Plan

There is no concept of bonuses under the New Generation funds and a smoothed unit price is

calculated on a daily basis, which depends on the actual return achieved relative to a published

expected return plus the daily smoothing profits and / or losses that arise on claims.

The unit price can fall as well as rise. Expected long term growth rates are agreed for the fund.

These can be varied prospectively but are currently 4% p.a., (Growth) and 3.5% p.a. (Cautious)

(reduced with effect from 1st July 2012 from 8% and 7% p.a. respectively) before the deduction of

any annual management charge. These rates are then converted to daily equivalent rates and

compared with the actual earned rate on each day. The unit price then increases / decreases on a

daily basis by the expected daily growth plus / minus 50% of the difference between the actual

and expected growth less the daily equivalent rate of the annual management charge. The figure

of 50% can be varied prospectively.



AEGON Ireland plc

MVRs

The company states that no MVRs apply to this contract but claim values may be adjusted by

‘smoothing increases’ or ‘smoothing reductions’ in certain circumstances.

No smoothing adjustments will currently be made provided that the ratio of smoothed unit values

to the unsmoothed unit values is in the range 80% to 130% (NB no claims fell outside this range

during 2009 or 2010).

The company states that this is necessary to maintain fund stability and to ensure that payouts to

policyholders are fair in all circumstances.

Guarantees

There are no investment guarantees on this bond.

Investment

With-Profits Growth Fund

This fund aims to achieve long-term growth by investing mainly in UK and overseas equities, but

also in fixed interest securities.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 53.5% 69.2% 68.3% 67.1%

Overseas Equities 20.4% 17.7% 16.8% 15.7%

Property 0.0% 0.0% 0.0% 0.0%

Fixed Interest 14.7% 12.3% 13.0% 13.7%

Cash 3.4% 0.4% 1.6% 3.5%

Other 8.1% 0.4% 0.4% 0.0%

With-Profits Cautious Fund

This fund aims to achieve capital growth by investing mainly in a wide range of UK and overseas

fixed interest securities but can also invest up to 50% in equities.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 25.5% 35.1% 33.4% 30.9%


Property 0.0% 0.0% 0.0% 0.0%

Fixed Interest 58.9% 54.9% 56.1% 59.3%

Cash 2.1% 0.8% 2.2% 2.6%

Other 3.8% 0.2% 0.2% 0.0%

Past Performance - Flexible Investment Plan

Payouts on Surrender Values at 1 April 2012

Fund Term (yrs) Freq Premium Payout

With-Profits Growth Fund 2 Single £10,000 £10,200







AEGON Ireland plc

Investment Returns

Fund 2007 2008 2009 2010 2011

With-Profits Growth Fund 6.7% -10.1% 13.1% 10.7% 2.3%

With-Profits Cautious Fund 4.8% -4.9% 9.5% 8.9% 3.7% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

AEGON and Scottish Equitable generally provide a good range of information to policyholders.

The annual report to policyholders on compliance with the PPFM is good and the company

generally provides detailed quarterly factsheets for each of the with profits sub-funds on its

website.

Scottish Equitable’s PPFM document is surprisingly concise, given the complexity of the

sub-fund arrangements within the WPSF. This probably reflects the high degree of discretion

retained by the company on the older series of with profits sub-funds. The New Generation With

Profits Funds were designed with transparency very much in mind. Quarterly factsheets ensure

that performance can be closely monitored.

The Scottish Equitable Policyholders Trust Ltd, which effectively acts as a corporate With Profits

Committee, provides an element of independent review of Scottish Equitable’s with profits

activities, and its membership no longer includes any current AEGON UK executives.

AEGON co-operated fully with AKG in the production of this report.

With-Profits Growth Fund 5

With-Profits Cautious Fund 5

Future Performance

With-Profits Growth Fund 5

The future performance of the fund is largely dependent on the investment return on the assets

backing the liabilities.

Whilst the offshore variant of the fund is very small, AKG feels that the future performance

potential is good, given the substantial proportion of equities backing the fund.

With-Profits Cautious Fund 3

The future performance of the fund is largely dependent on the investment return behind the

assets backing the liabilities. The main objective of this fund is to provide income and stable and

predictable returns. The offshore variant of the fund is very small.



AEGON Ireland plc

With Profits Financial Strength

3

AEGON Ireland only has a very small volume of with profits business in force, and, whilst

nominally open to new with profits business, it is not seriously promoted and hence hardly any

new business is currently being written.

The notes to the realistic balance sheet for the Scottish Equitable With Profits Sub-Fund as at 31

December 2011 reveal that, if the estate were not recognised as a realistic liability (as required by

current actuarial guidance), working capital within the fund would have been £284m [2010:

£358m, 2009 £413m, 2008: £378m; 2007: £389m], whilst the RCM would have been £nil [2010:

£89m, 2009: £174m, 2008: £285m; 2007: £153m]. The working capital ratio would have been

4.3% [2010: 5.4%, 2009: 6.2%, 2008: 5.3%, 2007: 4.9%]

Scottish Equitable plc has carried out a de-risking exercise in the estate in recent years, which is

reflected in the decrease in the RCM. This involved selling equities and corporate bonds and

replacing them with gilts. Additionally, the fund has put in place a range of derivative

protections. The fund remains secure and the company continues to manage the various risks and

guarantees appropriately, distributing the estate as the fund runs off. Surrenders remained

relatively high (and increased) and may dictate the pace of this distribution.

Assets in the Scottish Equitable plc NPSF and shareholder's fund are available to support WPSF

solvency should there be insufficient assets within the fund to cover its liabilities and vice versa.




Company

Aviva Life International Ltd [Registered in Ireland]

Ownership

Aviva plc [Registered in England and Wales]

Group Background

Aviva, one of the world's largest insurance groups, operates in 21 countries in Europe, Asia

Pacific and North America with the provision of long term savings, fund management and general

insurance. Funds under management worldwide totalled £337bn at the end of 2011 [2010:

£402bn]. Life insurance currently accounts for around 69% of the group's operating profits.

The UK operation rebranded itself Aviva, from Norwich Union, in June 2009, following a

programme which had seen the Aviva brand already adopted in most other countries. A number

of UK operating companies also took the Aviva name.

In March 2007 Aviva announced an administration outsourcing agreement with Swiss Re, under

which 220 systems were decommissioned, with migration taking place between 2007 and 2010.

2009 also saw policyholder approval for the reattribution of the inherited estate of the with profits

funds of CGNU Life Assurance Ltd (CGNU) and Commercial Union Life Assurance Company

Ltd (CULAC) and this was followed, in October 2009, by the transfer of business of CGNU,

CULAC and Norwich Union Life (RBS) Ltd into Aviva Life and Pensions UK Ltd (AVLAP).

At a global level, Aviva has made various disposals in recent years including the sale of its

Australian business (including Navigator, its Australian wrap business), a partial IPO of Delta

Lloyd (which raised €1.1bn), and the RAC (raising a further £1bn). It exited from 6 markets in

2011 (Australia, the UAE, Hungary, Romania, the Czech Republic and Slovakia).

These disposals reflect the group’s focus on investing its capital where it believes it can grow and

earn the highest returns. In 2011 it allocated capital to what it deemed to be more profitable areas,

such as unit linked and term assurance, and away from more capital intensive products such as

with-profits in Europe.

Reported IGD solvency surplus fell back noticeably in 2011 to £2.2bn [2010: £3.8bn], although it

had recovered to £3.2bn by the end of March 2012, as a result of market movements and actions

taken in 2012.

The Group is currently searching for a new CEO, and in July 2012 it announced the results of a

strategic review of all its businesses, with three main objectives – to narrow focus, build financial

strength and to improve financial performance. It announced plans to dispose of 16 non-core

segments out of the current 58 business segments it has – being those ‘that are currently

producing or will prospectively produce returns below the group’s required return’. It is not yet

clear whether Aviva Life International is one of the 16 planned disposals.

Company Background

The company was launched as Norwich Union International Ltd in 2000 by Norwich Union, prior

to its merger with CGU, to provide investment products and services to investors who wished to

have the tax benefits of international offshore investment. The merger of Norwich Union and

CGU resulted in the formation of CGNU. In July 2002, CGNU plc was renamed Aviva plc.

The company wrote business in the UK, Italy and Spain on a freedom of services basis, and




through intermediaries in the Isle of Man and Channel Islands, and to expatriates in the Middle

East. In 2001, its funds were made available in Ireland via a reinsurance link with Hibernian Life

& Pensions Ltd, it decided to limit its presence in Spain, and it withdrew from the Middle East.

In 2002, the company decided to focus on the UK offshore market and it discontinued writing

new business in Italy and Spain. It launched a sterling with profits bond to the UK offshore

market, reinsured into Aviva’s UK with profits funds.

In 2003, the company added Euro and US Dollar variants of its with profits bond. In 2004 it

launched Sterling, Euro and US Dollar versions of a new product called the Core Funds Bond,

which allowed access to both unitised with profits and unit linked funds in the same policy.

In June 2009, when the UK operation rebranded itself as Aviva, the company was renamed as

Aviva Life International Ltd.

Following a severe downturn in the offshore life market in 2009, and a significant decrease in

sales, the company was closed to new business from 26 February 2010 and administration of the

closed book was outsourced to Capita Life & Pensions (Ireland) Ltd, with systems migration

being completed early in 2011.


As a result of the severe downturn in its chosen market the company remained sub-scale in terms

of its parent's aspirations for size and competitive position in each of its chosen markets. The

company is therefore now in run-off mode, with a drastically pruned infrastructure. Presumably

there is a high probability that it is one of the 16 non-core operations earmarked for disposal by

Aviva following its July 2012 strategic review announcement.

AKG has not yet been able to obtain copies of the 2011 accounts for the company. Despite a

capital contribution of €14.3m in 2009, shareholders’ funds reduced from €41.5m at the end of

2008 to €12.6m at the end of 2010, following losses incurred in both 2009 and 2010. The position

should however have become more stable following the completion of the migration of systems

to Capita in early 2011. Around 50% of the company’s business is reinsured to AVLAP.

A €50m contingent loan facility from Aviva specifically to fund new business strain was in place

and as at December 2010 the amount outstanding stood at €17.2m.


Product Available from/to Open to New

Business?

International With-Profit Bond 30 Sep 2002 - 28 Feb 2010 No* * Ignoring top ups by existing customers


Fund Available from/to Open to New

Business?

Sterling With-Profit Fund 30 Sep 2002 - 28 Feb 2010 No*

Sterling With-Profit Guarantee Fund 7 Feb 2005 - 29 Jan 2006 No*


Guarantee Fund

30 Jan 2006 - 30 Apr 2009 No*

* Ignoring top ups by existing customers


All of Aviva Life International Ltd’s with profits policies are reinsured into the UK sister

company, Aviva Life & Pensions UK Ltd. The returns on the business are therefore determined

entirely by the terms of this reinsurance agreement.




On 1 October 2009, the insurance businesses of CGNU and CULAC (which previously reinsured

the business) were transferred into Aviva Life & Pensions UK Ltd. As a result, all of Aviva Life

International Ltd’s with profits policies are now reinsured into Aviva Life & Pensions UK Ltd.

As a result of the 2009 election:

Eligible bonds whose holders voted ‘yes’ are reinsured into the Aviva Life & Pensions New

With-Profits Sub Fund.

Eligible bonds whose holders voted ‘no’ are reinsured into the Aviva Life & Pensions Old

With-Profits Sub Fund.

Ineligible bonds, including bonds written after 1 October 2009, are reinsured to both the Old

and New With-Profits Sub Funds (in prescribed proportions).

Reinsurance Company

Aviva Life & Pensions UK Ltd [Registered in England and Wales]


Norwich Union Life Insurance Society was established as a mutual in 1808.

In 1997, the Society demutualised, the bulk of its business being transferred to Norwich Union

Life and Pensions Ltd - renamed Aviva Life & Pensions UK Ltd in June 2009. In 2000 Norwich

Union merged with CGU (itself the combination of Commercial Union and General Accident in

1998) to form CGNU.

In 2005, the non profit long term funds of Norwich Union Linked Life Assurance Ltd, Fidelity

Life Assurance Ltd, Tesco Personal Finance Ltd, CGU Insurance plc and Yorkshire Insurance

Company Ltd were transferred into AVLAP, together with PHI business from CGNU and

Commercial Union Life Assurance Company Ltd and former Provident Mutual business.

Further group restructuring saw, in October 2009, the business in both CGNU and CULAC

transfer to AVLAP, followed, in December 2009 by Hamilton Life and in September 2011, by the

business of National Westminster Life Assurance Ltd and Royal Scottish Assurance plc.


The consolidation of CGNU and CULAC into AVLAP resulted in a life office of considerable

size, with assets in excess of £89bn at the end of 2011. Financial reinsurance is running off and

the company is maintaining a good level of solvency. It is operating profitably and resumed

paying dividends in 2010 (£515m in 2010 and £235m in 2011).

Whilst the company and wider group face significant challenges stemming from both Solvency II

and the Retail Distribution Review (RDR), with the possibility that these are accentuated by the

scale and the complex historical evolution of the group, it retains a good degree of inherent

strength.

Further, whilst painful in the short term, these major regulatory and market changes may well, in

combination with the organisation's financial scale, position it positively for significant

opportunities in the medium to long term.

International With-Profit Bond Product Outline

The International With-Profit Bond is a medium to long term single premium unitised with profits

life assurance investment bond which offers the tax advantages of a Dublin-based bond combined

with a range of selected funds, including a choice of guarantee options.

Due to Aviva Life International's Dublin location, the underlying funds are subject only to




withholding tax. Investments therefore have the potential to grow faster than in an onshore bond.

The International With-Profit Bond offered a choice of fund links:

Three different funds with differing guarantee options - With-Profit Fund, With-Profit

Guarantee Fund and With-Profit Inflation Protected Guarantee Fund

Three different currencies - Sterling, Euro and US Dollar

The main features include:

Guarantee options – a 10 year spot guarantee on the With-Profit Fund; a 5 year spot

guarantee on the With-Profit Guarantee Fund and an inflation-linked guarantee at any time

after five years on the With-Profit Inflation Protected Guarantee Fund

Regular withdrawals of up to 7.5% of the original investment, free of any early cash-in

charges

One-off withdrawals permitted (minimum £1,000, €1,500 or US$1,500)

Death benefit 101% of surrender value (but with no MVR applied)

Minimum initial investment - £50,000, €75,000 or US$75,000

Top-ups not allowed

From 2004, the company also marketed an International Core Funds Bond, a single premium

unitised investment bond linked to a range of ‘Core Funds’ including Sterling, Euro and Dollar

With-Profit Funds. Its terms are virtually identical to those of the International With-Profit Bond,

apart from the wider range of fund links and the fact that, as well as the life assurance basis, it

offered a capital redemption option with a term of 99 years, suitable for trust investments. Where

relevant, therefore, the remainder of this report applies equally to the International Core Funds

Bond linked to the Sterling With-Profit Funds.

Current Bonus Scales - International With-Profit Bond

Annual Bonus Rates 1/1/2012 1/1/2011

Sterling International With-Profit Bond 2.75% 3.50%

Terminal Bonus Rates

Year of unit

purchase

Declared rate 1/1/12 Declared rate 1/7/11 Declared rate 1/1/11

2011 0% 1.75% 1.75%

2010 0% 5% 0%

2009 9% 16% 11%

2008 0% 2% 0%

2007 0% 0% 0%

2006 0% 0% 0%

2005 0% 4% 0%

2004 8% 15% 10%

2003 15% 22% 18%

2002 7% 14% 9%

MVRs

MVRs may be used to target payouts (after MVR) that represent 100% of the asset share less any

required deductions to protect the interests of remaining policyholders on average. Payouts for

individual policies may fall within the range 90% to 110% of asset share mainly as a result of

accommodating short term market fluctuation. The company will look to rebalance MVR rates

back to target payouts (after MVR) that represent 100% of asset share when there is a 5%

movement in underlying market indicators and some sign of stability at that new level.

However, payouts may lie outside these ranges on certain policies or in changing investment

conditions. MVRs are currently determined by calendar month of unit purchase for life

products.

In deciding on the application of an MVR, factors taken into account include:

The gap between the value of units (including final bonus).

The underlying value of investments supporting the plan.

The number and level of surrenders being experienced.




An element of smoothing, taking into account the cost or surplus to the fund.

PRE as established by policy literature, statements and other communications.

The policy conditions.

The amount of the adjustment.

Regulatory solvency positions/scenarios.

In June 2005, AVLAP announced that it would in future write to policyholders whose policy

includes an MVR free date, three months prior to that date. It also announced the facility

whereby policyholders could carry forward to a later date the value of any MVR free guarantee

until such time as they decide to cancel the policy.

MVRs are not applied on death or on regular withdrawals of up to 7.5% of the original

investment.

In 2011, MVRs were applied for certain years of entry throughout the year.

Guarantees

Sterling With-Profit Fund

The guarantee offered by this fund is a guarantee that on the tenth anniversary (or during the

following two weeks), the surrender value of a bond will be not less than the original investment.

Sterling With-Profit Guarantee Fund

The guarantee offered by this fund is a guarantee that on the fifth anniversary (or during the

following two weeks), the surrender value of a bond will be not less than the original investment.

Policies are subject to an additional 0.5% p.a. charge to asset shares for the first five years. Any

profit or loss accrues to the inherited estate.

Sterling With-Profit Inflation Protected Guarantee Fund

The guarantee offered by this fund is an inflation protected guarantee, guaranteeing at least the

initial investment increased in line with the RPI/CPI on surrender or death at any time after the

fifth anniversary.

Policies are subject to an additional 0.5% p.a. charge to asset shares for the first ten years. Any

profit or loss accrues to the inherited estate.

Investment

A single investment pool is maintained by AVLAP for the asset shares of UK and Channel

Islands business in the Old and New With-Profits Sub Funds and the Stakeholder With Profits

Sub Fund (including Sterling reinsurance business accepted from Aviva Life International Ltd).

The tables below shows the asset mix attributable to the asset shares of Sterling with profits

business (figures are for CGNU and CULAC prior to the transfer to AVLAP). At the end of

December 2011, the EBR was 63.7%, after falling to 55.7% at the end of 2008.

Sterling With-Profit Fund

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 24.2% 23.1% 32.2% 31.2%


Property 17.9% 17.6% 18.6% 18.3%

Fixed Interest 42.5% 34.2% 31.1% 32.0%

Cash 1.8% 8.5% 2.2% 4.3%

Other 0.0% 0.0% 0.0% 0.0%




Sterling With-Profit Guarantee Fund

This fund was launched in February 2005, since when it has shared the same asset allocation

as the other Sterling business in the parent fund. The company reserves the right to use a

different asset mix in the future, however. Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 24.2% 23.1% 32.2% 31.2%


Property 17.9% 17.6% 18.6% 18.3%

Fixed Interest 42.5% 34.2% 31.1% 32.0%

Cash 1.8% 8.5% 2.2% 4.3%

Other 0.0% 0.0% 0.0% 0.0%

Sterling With-Profit Inflation Protected Guarantee Fund

This fund was launched in February 2007, since when it has shared the same asset allocation as

the other Sterling business in the parent fund. The company reserves the right to use a different

asset mix in the future, however.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 24.2% 23.1% 32.2% 31.2%


Property 17.9% 17.6% 18.6% 18.3%

Fixed Interest 42.5% 34.2% 31.1% 32.0%

Cash 1.8% 8.5% 2.2% 4.3%

Other 0.0% 0.0% 0.0% 0.0%

Past Performance - International With-Profit Bond

The company declined to disclose any specimen past performance values to AKG.

Investment Returns

Fund 2007 2008 2009 2010 2011

Sterling With-Profit Fund 5.4% -16.1% 9.2% 12.6% -1%

Sterling With-Profit Guarantee Fund 5.4% -16.1% 9.2% 12.6% -1%


Guarantee Fund

5.4% -16.1% 9.2% 12.6% -1%

Note: Returns shown above are investment returns gross of tax (where applicable) and charges.2011 returns are

estimated.

Transparency

Aviva Life International Ltd issues PPFM and CFPPFM documents in its own right. The former

document highlights for the International business the small number of variations which apply

from the practices detailed in AVLAP’s PPFM for its Old and New With-Profits Sub Funds.

Aviva reissues its consumer friendly PPFMs to policyholders every year, including a detailed

investment report and performance analysis. It publishes a comprehensive audit trail of changes

to its PPFM documents, and its documents are written in a clear and concise style. Minor issues

are that the annual report to with profits policyholders on compliance with the PPFM is relatively

brief, and that the release of mid-year asset mix information is very patchy.

Aviva’s With Profits Committee now has a majority of completely independent members.




Whilst Aviva UK is generally very co-operative in providing information to AKG, Aviva

International declined to co-operate with AKG’s information survey in connection with the

preparation of this report.

Sterling With-Profit Fund 4

Sterling With-Profit Guarantee Fund 4

Sterling With-Profit Inflation Protected Guarantee Fund 4

Future Performance

Although Aviva Life International Ltd is now closed to all types of new business, its with profits

bond business should benefit from the fact that it is reinsured into AVLAP’s Old and New

With-Profits Sub Funds, which remain open to new business, as long as the same asset mix

continues to apply to all types of Sterling with profits business within these funds.

In view of the reinsurance arrangements in place, it is appropriate to ‘look-through’ to the

position within AVLAP’s Old and New With-Profits Sub Funds.

The future performance prospects for a policy reinsured to the Old With-Profits Sub Fund are

expected to be slightly better than that for an equivalent one reinsured to the New With-Profits

Sub Fund to the extent of any distribution of the Old With-Profits Sub Fund inherited estate - the

policyholder in the New With-Profits Sub Fund having already benefited from the reattribution

payment. However, the quantum and timing of any such distribution is unknown - other than not

being expected to happen in the short to medium term.

There has been a reduction in EBR in the last couple of years, but AKG would not anticipate any

further substantial reductions, assuming that the increased potential for conflict of interest (noted

in the reattribution scheme documentation) does not drive the Old and New With-Profits Sub

Funds to maintain a lower EBR.

Whilst AVLAP has remained fairly committed to the with profits concept in recent years, the

group’s focus on investing its capital where it believes it can grow and earn the highest returns has

led to a shift of capital away from more capital intensive products such as with-profits in Europe.

Sterling With-Profit Fund 5

Sterling With-Profit Guarantee Fund 4

The performance of the fund is likely to lag that of its parent fund, given the presence of the

additional 0.5% charge over the first five years.

Sterling With-Profit Inflation Protected Guarantee Fund 4

The performance of the fund is likely to lag that of its parent fund, given the presence of the

additional 0.5% charge over the first ten years.


4

Aviva Life International is closed to new business, and there is a big question mark over its future

within the Aviva group following Aviva’s July 2012 strategic review announcement.

In view of the reinsurance arrangements in place, though, it is appropriate to also ‘look-through’

to the position within AVLAP’s Old and New With-Profits Sub Funds.

The strength of AVLAP’s Old and New With-Profits Sub Funds derives from the strength of the

predecessor CGNU and CULAC with profit funds. Their strength had reduced substantially prior

to the reattribution, due to the impact of the group's £2.1bn Special Bonus declaration and the

significant investment market falls in 2008. Nevertheless, the realistic balance sheet for the Old

With-Profits Sub Fund at the end of 2011 reveals a working capital ratio of 7.5% [2010: 6.6%]

and an RCM coverage of 3.3 times [2010: 3.8 times] - both measures being slightly higher than




those of the NWPSF due to the retention of the appropriate proportion of the inherited estate

within this fund at the time of the reattribution exercise. The realistic balance sheet for the New

With-Profits Sub Fund at the end of 2011 reveals a working capital ratio of 4.8% [2010: 5.1%]

and an RCM coverage of 2.6 times [2010: 2.6 times].

AVLAP now has a very substantial presence in the UK with-profits market, and it remains an

active writer of new with profits business. Whilst the Old With-Profits Sub Fund is much smaller

than the New With-Profits Sub Fund, their fortunes are inextricably linked, due to the

arrangements for the sharing of new business and the intention to maintain the same investment

strategies. Hence both funds play an important part in Aviva's current strategy.

The part of the inherited estates of CGNU and CULAC which were transferred to AVLAP's Non

Profit Sub Fund (the RIEESA) is not immediately available for distribution to shareholders,

instead it is 'locked-in' to provide support for the transferring with profits policies in the Old and

New With-Profits Sub Funds. The funds make no recourse to capital outside the long-term fund.



AXA Isle of Man Ltd

Company

AXA Isle of Man Ltd [Registered in the Isle of Man]

Ownership

AXA SA [Registered in France]

Group Background

AXA is a worldwide insurance group operating in 57 countries with assets under management of

around €1trn at 31 December 2011. Its key markets are in Western Europe, North America and

Asia-Pacific. It now employs around 163,000 people including tied agents and salesforces.

AXA originates from the amalgamation of several French regional mutual insurance companies

and it has operated under the AXA name since 1985. Following a series of acquisitions, its 1997

merger with UAP saw it significantly increase in size. The group has continued to regularly

acquire and sell off subsidiary companies, including financial advisory networks, banking, health

and insurance operations. Having recently strengthened its position in Central and Eastern

Europe, AXA is looking to do the same in Asia-Pacific.

In 2006, AXA acquired the Swiss financial services group Winterthur (which had its own highly

regarded UK subsidiary operation). Winterthur Swiss Insurance purchased 25% of Provident

Life in 1969 (100% from 1981) and renamed it Winterthur Life UK Ltd in 1995. In 1997 the

Winterthur Group merged with Credit Suisse Group and in June 2000 Winterthur Life UK Ltd

acquired the UK business of the Australian insurer Colonial Life, comprising Colonial Life (UK)

Ltd and Colonial Pension Funds (UK) Ltd.

July 2008 saw the bringing together of the AXA and Winterthur Wealth Management operations

under the AXA Winterthur Wealth Management brand. In November 2006 AXA acquired a

controlling interest in IFA Thinc Group Ltd and in 2008 it acquired the SBJ Group. These

organisations were brought together and re-branded as Bluefin during 2009.

On 16 September 2010, AXA Sun Life Holdings Ltd was acquired by Resolution Ltd which also

acquired Winterthur Life UK Ltd in late 2011, following a post-completion reorganisation. The

deal, costing around £2.75bn, involved most of AXA's UK Life Insurance business and the

transfer of around 2,200 staff.

AXA now operates in the UK as a much smaller but more focused entity, trading as AXA Wealth,

complemented by AXA Bancassurance and Sun Life Direct. Winterthur Pension Funds UK Ltd

was renamed as AXA Wealth Ltd in September 2010 and it became AXA's sole UK life company

in late 2011, when it received a transfer of unit linked Wealth business from Winterthur Life UK

Ltd (i.e. the with profits and other legacy business of Winterthur Life UK Ltd was transferred to

Resolution).

AXA Isle of Man Limited is part of the AXA Wealth Division. Its target market is high net

worth UK residents and UK ex-pats serviced by fully regulated IFAs in the UK, Channel Islands

and the Isle of Man. It operates alongside its Dublin based sister company, AXA Life Europe

Ltd.

Company Background

The company was established in 1991 and commenced business in 1992 as Sun Life International

(IOM) Limited. In 2000, a review of operations following the merger of AXA Equity and Law

with Sun Life in the UK led to the company ceasing to operate through 'international' IFAs, and

only selling via IFAs in the UK, Channel Islands and the Isle of Man.



AXA Isle of Man Ltd

In 2001, the company was renamed AXA Isle of Man Limited. Sales commenced through

carefully selected representatives of AXA’s UK direct sales force in 2002, although these have

remained a small proportion of the business.

When established, the company was owned 80% by the Long Term Business Fund of Sun Life

Assurance Society (in effect the With Profits policyholders) and 20% by PanEuroLife. In 1998,

AXA sold PanEuroLife, and ownership became 100% by the SLAS Long Term Business Fund.

On 1 January 2004, the AXA shareholders bought the company from the SLAS Long Term

Business Fund.


The company is well established, with long term assets of over £7.5bn at the end of 2011, and a

leading market position. It sits as an integral component of AXA's future plans, in the UK and

wider markets, within the recently restructured and re-invigorated AXA Wealth brand. It

operates profitably, maintains a good level of solvency and has recently commenced paying

dividends to its parent. It continues to enjoy a good level of parental support and AKG would

expect this to continue.



Business?

International With Profits Bond Series 1 2 Jul 1998 – 17 Jul 2001 No*

International With Profits Bond Series 2 12 Jul 1999 – 3 Sep 2001 No*

International With Profits Bond Series 3 23 May 2001 – 2 Aug 2002 No* * Ignoring sales to/top ups by existing customers


Series 1 & 2: Reinsured to Friends Life Assurance Society Ltd With Profit Fund

Series 3: Reinsured to Friends Life Company Ltd Old/New With Profits Funds*

*The New With Profits Fund was established in April 2001, in connection with the financial reorganisation of AXA

Sun Life and AXA Equity & Law, and the consequential reattribution of the inherited estate.

Existing policyholders who had eligible with profits policies were able to elect to have their policies allocated to the

New With Profits Fund. Policyholders who chose not to elect their policies from 1 April 2001 were offered a further

opportunity to elect them from 1 January 2002.

Following both election opportunities, with profits policies that were in force on 1 April 2001 and were not elected

policies were allocated to the Old With Profits Fund.

New with profits business written since April 2001 has been allocated to the New With Profits Fund, with around

13% being reinsured to the Old With Profits Fund.


All of AXA Isle of Man’s with profits business is reinsured 100% to either Friends Life

Assurance Society Ltd (FLAS) - previously called Sun Life Assurance Society - or Friends Life

Company Ltd (FLC) - previously called AXA Sun Life – which now are both owned by

Resolution.

In general, business written before the 2001 transfer of AXA Equity & Law Life Assurance

Society’s business into AXA Sun Life is reinsured to FLAS. Business post this transfer is

reinsured into FLC, apart from capital redemption business, which is reinsured into FLAS.



AXA Isle of Man Ltd

Reinsurance Company

Series 1 & 2: Friends Life Assurance Society Ltd; Series 3: Friends Life Company Ltd

[Both registered in England and Wales]

Reinsurance Company Background - Friends Life Assurance Society Ltd

The company was established as Sun Life Assurance Society Ltd in 1810 and in 1900 it was the

first company to offer contracts without medical examination. It has achieved several other

notable firsts, for example in 1977 it was the first established office to offer unit linked business,

in 1979 the first office to launch a Distribution Fund and in 1984 the first office to offer unitised

with profits for both life and pension contracts.

In 1995, it became a member of the UAP Group, which in turn became part of the AXA Group in

1997. The company remained the main writer of annuity new business in the AXA group until

July 2004, when AXA Sun Life (now Friends Life Company Ltd - FLC) started to provide all

vesting pensions annuities. The company continues to accept incremental new business on

in-force business including new members to group schemes.

The company reinsures the bulk of its unit linked business (£7.3bn) to FLC, in addition to 100%

of all life annuities and 50% of most pension annuities. A further 47.5% of pension annuity

liabilities were reinsured external to the group in July 2010.

In August 2009 the company announced the closure of its with profits fund to new business.

The company became a wholly owned subsidiary of Friends Provident Life and Pensions Ltd in

March 2011 when it was acquired by Resolution. It subsequently changed its name to Friends

Life Assurance Society Ltd.

Reinsurance Company Financial Strength – Friends Life Assurance Society Ltd

Solvency coverage reduced slightly in 2011, with reduced free assets (although less reliance on

financial engineering), and CRR coverage also fell back slightly. The company had earlier

reported that conditions during 2008 led to it failing to cover its Pillar 2 ICA position as at 31

December 2008. However, following a period of extensive de-risking, including a reduction in

equities, a data cleanse of its annuity business, a loan restructuring and the annuity reinsurance

introduced in 2010, the position was restored by June 2009 and has been maintained thereafter.

The year saw a transfer of £17.2m [2010: £16.5m] from the Long Term Fund to the Shareholder

Fund.

The company reported an after-tax profit in 2011 of £22m [2010: £22m]. An interim dividend of

£30m was paid [2010: £30m], with a further interim dividend of £30m declared in March 2011.

Total assets increased by 1.2% despite the company continuing to experience a net outflow of

business of £587m [2010: £518m]. Gross premiums fell 8%, to £316m. Some or all of the

business in FLAS is expected to transfer to either Friends Life Ltd or Friends Life and Pensions

Ltd in 2012 and AKG regards this business as secure.

Reinsurance Company Background - Friends Life Company Ltd

The company started trading as AXA Sun Life plc (ASL) in 1997, following the merger of the

AXA and UAP insurance groups, as the main vehicle for AXA’s new life business in the UK. In

its early days, the company was inextricably linked with AXA Equity & Law Life Assurance

Society (AEL), whose origins dated back to 1844.

In 1987, Equity & Law Life had been acquired by Compagnie du Midi (which then merged with

AXA in 1988). Initially, all ASL new with profits business was reinsured into AEL but in April

2001 all of AEL’s assets and liabilities were transferred into ASL, following a high profile court

case concerning the attribution of the inherited estate. ASL wrote virtually all of AXA’s UK

new long-term business and in January 2007 AXA transferred the business of Sun Life Unit

Assurance, Sun Life Pensions Management and PPP lifetime care into ASL.



AXA Isle of Man Ltd

September 2008 saw ASL take ownership of AXA Annuity Company Ltd (AAC - which

converted to an ISPV in October 2008), a vehicle into which it reinsures £3.6bn of its annuity

liabilities. Legacy business was outsourced to Capita in 2008.

In September 2010, the company was acquired by Resolution and in March 2011 it was renamed

Friends Life Company Ltd, becoming a wholly owned subsidiary of Friends Provident Life and

Pensions Ltd. (At the same time, AAC was renamed Friends Annuities Ltd).

Two blocks of business (involving assets of £1.1bn) within the company were transferred back to

the AXA Group during 2011.

Reinsurance Company Financial Strength – Friends Life Company Ltd

2011 saw pre-tax profit in the company increase from £37m in 2010 to £336m, largely driven by

the gain on the transfer of business back to AXA Wealth together with a change in methodology

to recognise negative reserves on protection business. Following the acquisition by Resolution

the group rationalised its funding structures and the company paid dividends of £985m in 2011

[2010: £598m]. The company also repaid £77m against its outstanding contingent loan. Free

assets improved, albeit CRR coverage fell slightly following a reduced reliance on financial

engineering. The year also saw the transfer of £500m [2010: £1bn] from the Long Term Fund to

the Shareholder Fund as a result of a five year test required under the 2001 Re-attribution Scheme.

AKG would expect the company to receive any necessary support from its new parent, albeit

some or all of the business in FLC is expected to transfer to either Friends Life Ltd or Friends Life

and Pensions Ltd in 2012 in 2012.

International With Profits Bond (Series 1 or 2) Product Outline

The International With Profits Bond Series 1 or 2 is a single premium unitised with profits 99 year

capital redemption investment bond, issued in Sterling.

A percentage of the single premium received is invested in a unitised with profits fund. The

percentage invested varies with the size of the single premium.

The unit offer price is increased by any regular bonuses added by the company.

On death or on surrender a terminal bonus may be added to the bid value of units to reflect the

smoothed actual investment return achieved on the assets backing the plan. An MVR reduction

may be made on surrenders.

On maturity after 99 years, the value payable is the bid value of units, with a guaranteed minimum

of twice the original premium reduced by any withdrawals.

The main features of the Sterling version include:

Each plan comprises up to 100 policies.

For earlier versions, from the 6th year and annually thereafter, a loyalty bonus is added to the

bond in the form of additional units.

Guarantees – On maturity after 99 years, the value payable is guaranteed to be at least twice

the original premium reduced by any withdrawals. The surrender value basis is not

guaranteed.

The benefit payable on surrender is the bid value of units allocated at the time, less, during

the first 5 years, a discontinuance charge.


charges (except in year 1).

Death benefit 101% of the bid value of units

Minimum initial investment - £15,000

Additional single premium top-ups allowed.



AXA Isle of Man Ltd

International With Profits Bond (Series 3) Product Outline

The International With Profits Bond Series 3 is a single premium unitised with profits life

assurance investment bond, issued in three different currencies - Sterling, Euro and US Dollar.

A percentage of the single premium received is invested in a unitised with profits fund. The

percentage invested varies with the size of the single premium.

The unit offer price is increased by any regular bonuses added by the company.

On death or on surrender a terminal bonus may be added to the bid value of units to reflect the

smoothed actual investment return achieved on the assets backing the plan. An MVR reduction

may be made on surrenders.

The main features of the Sterling version include:

Each plan comprises up to 100 policies.

For earlier versions, from the 6th year and annually thereafter, a loyalty bonus is added to the

bond in the form of additional units.

Guarantees – on later versions, the MVR may be restricted on the 5th and 10th anniversaries

to guarantee policyholders their original investment. Otherwise, the surrender value basis is

not guaranteed.

The benefit payable on surrender is the bid value of units allocated at the time, less, during

the first 5 years, a discontinuance charge.


charges (except in year 1).

Death benefit 100% of surrender value + £1 per segment

Minimum initial investment - £25,000


Current Bonus Scales - International With Profits Bond

Annual Bonus Rates 2012 2011

Series 1 2.00% 2.00%

Series 2 2.75% 2.75%

Series 3 3.00% 3.00%

Terminal Bonus Rates – Series 1

Bonds effected Current TB rate

1998 40%

1999 35%

2000 25%



Q1 2001 20%

Q2 2001 25%

Q3 2001 25%

Q4 2001 30%

Q1 2002 30%

Q2 2002 30%

Q3 2002 40%

Q4 2002 40%

2003 40%

2004 30%



AXA Isle of Man Ltd


Bonds effected Current TB rate Bonds effected Current TB rate

Q1 2005 15%

Q2 2001 15% Q2 2005 15%

Q3 2001 15% Q3 2005 10%

Q4 2001 25% Q4 2005 10%

Q1 2002 25% Q1 2006 5%

Q2 2002 25% Q2 2006 5%

Q3 2002 35% Q3 2006 5%

Q4 2002 40% Q4 2006 5%

Q1 2003 45% Q1 2007 0%

Q2 2003 45% Q2 2007 0%

Q3 2003 40% Q3 2007 0%

Q4 2003 35% Q4 2007 0%

Q1 2004 30% Q1 2008 5%

Q2 2004 25% Q2 2008 5%

Q3 2004 25% Q3 2008 10%

Q4 2004 20% Q4 2008 10%

MVRs

International With Profits Bond Series 1 and 2

An MVR is permitted if investment performance is lower than that reflected in the regular bonus

already added. MVRs are applied on surrender and switches, but not on deaths or on regular

withdrawals up to 7.5%. MVRs are worked on a case by case basis and depend on the difference

between the surrender value and the asset share.

MVRs are not applied where either the value of the policy (before applying the MVR) is below a

certain limit, or where the amount of the MVR is less than a certain limit.

MVR scales are not normally changed unless the amounts payable on surrender for a group of

policies differs from the total asset share for that group by more than 2%. Large adjustments

may be reflected in a series of small adjustments consistent with the smoothing policy.

In 2011, no MVRs were applied on Sterling International With Profits Bonds.

International With Profits Bond Series 3


already added. MVRs are applied on surrender and switches, but not on deaths or regular

withdrawals up to 7.5%. MVRs are calculated on a case by case basis and depend on the

difference between the surrender value and the asset share.






For later versions, the MVR may be restricted on the 5th and 10th anniversaries to guarantee

policyholders their original investment.

In 2011, no MVRs were applied on Sterling International With Profits Bonds.



AXA Isle of Man Ltd

Guarantees


On maturity after 99 years, the value payable is guaranteed to be at least twice the original

premium reduced by any withdrawals. The surrender value basis is not guaranteed.

Friends Life Assurance Society Ltd aims to control the risks relating to guarantees by ensuring

that a substantial proportion of the assets backing with profits are invested in fixed interest

securities. Guarantees are not currently explicitly charged for, effectively being charged to the

estate, with any profits being distributed via uplifts.


On later versions, the MVR may be restricted on the 5th and 10th anniversaries to guarantee

policyholders their original investment, the cost of which is charged to asset shares for such

policies. Otherwise, the surrender value basis is not guaranteed.

Investment


For most types of policy within Friends Life Assurance Society Ltd, a common asset mix is

assumed applicable in respect of asset shares, but policies with higher levels of guarantees have a

lower (or zero in some cases) EBR.

The table below shows the average mix for assets backing asset shares for the whole FLAS

With Profit Fund.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 28.9% 35.2% 38.7% 37.4%


Property 8.6% 9.2% 7.4% 7.4%

Fixed Interest 47.0% 33.6% 41.5% 46.8%

Cash 6.3% 12.8% 4.9% 1.2%

Other 0.0% 1.7% 0.0% 0.0%


Friends Life Company Ltd adopts different asset mixes for different types of with profits

business.

The table below shows the asset mix applicable to unitised with profits policies with no

maturity date, including the Series 3 bonds.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 47.0% 53.7% 50.7% 49.3%


Property 16.0% 15.6% 15.5% 16.5%

Fixed Interest 19.6% 12.9% 14.2% 15.6%

Cash 2.4% 3.3% 0.1% 0.4%

Other 0.0% 0.5% 0.1% 0.0%



AXA Isle of Man Ltd

Past Performance - International With Profits Bond


Bond Type Term (yrs) Freq Premium Payout

Series 3 10 Single £10,000 £17,352

Series 2 13.75 Single £10,000 £21,693

Series 1 13.75 Single £10,000 £21,667

Investment Returns

Fund 2007 2008 2009 2010 2011

Series 1 and 2 3.1% -12.6% 10.8% 10.9% 0.9%

Series 3 4.8% -20.3% 15.3% 14.5% -1.5% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

AXA Isle of Man does not routinely publish much information about with profits business on its

website, but the company co-operated fully with AKG in the preparation of this report.

However, much of the information about the management of this business derives from the

reinsurance companies involved, and hence we comment below on the transparency of their with

profits funds.

International With Profits Bond Series 1 Fund 3


Since announcing the fund's closure to new business, Friends Life Assurance Society Ltd has not

disclosed details of its formal run-off plan.

The annual report to policyholders does not contain a great deal of useful information at a detailed

level, and the company somewhat glosses over the differential asset mixes applied to different

types of business within the fund. The company does however publish asset mix information for

the fund on a quarterly basis.

There is now some common ground in the make-up of the With Profits Committee with that of the

other Resolution subsidiaries, and the extent of independent representation has increased. AKG

would hope to see the standards of disclosure rise in due course to mirror the approach in those

other companies.


Compared with best practice, Friends Life Company Ltd does not publish a great deal of

supplementary details in respect of its with profits business in the public domain. The annual

report to policyholders is somewhat lacking in useful detail, and is symptomatic of most of the

company’s documentation by making little distinction between the Old and New Funds, or

between unitised and conventional business.

AKG believes that there is scope for improving the overall transparency of the company’s with

profits business. There is now some common ground in the make-up of the With Profits

Committee with that of the other Resolution subsidiaries, and the extent of independent

representation has improved. AKG would hope to see the standards of disclosure rise in due

course to mirror the approach in those other companies. The activities of the fund continue to be

reviewed by the Monitoring Board and the Monitoring Actuary in accordance with the 2001

Reorganisation Scheme.



AXA Isle of Man Ltd

Future Performance



Recent payouts on Friends Life Assurance Society Ltd’s onshore UK with profits policies seem to

have improved slightly relative to others in the market, but they are far from market leading, and

the fund does not have a particularly high EBR. The company has indicated that uplifts from

surplus funds and from miscellaneous profits in the future are likely to be modest. Policies with

high guarantees (which are backed by higher than average fixed interest investments) have

commensurately lower future performance prospects.


The unitised business is substantially the larger part of the overall Friends Life Company Ltd fund and it has retained a very high EBR for the with profits bond business (84% at the end of

2011). Its performance for maturity values in recent years, particularly for policies written under

the AXA Sun Life brand, has been improving, although rankings of specimen surrender values

for onshore UK business are mixed.

If the company’s commitment to maintaining a high EBR is maintained, it is hoped that future

prospects for policyholders will be quite rosy, particularly since the company states 'that it is

likely in the long term we will be able to continue to pay significant uplifts on maturing policies'

in respect of surplus assets and miscellaneous profits.

Policyholders in the Old With Profits Fund stand to benefit from Special Bonuses to a higher

degree than those in the New With Profits Fund.


4

Whilst with profits products are no longer offered by AXA Isle of Man, its in force with profits

business enjoys the security of the company into which it is reinsured.

Ownership of the reinsurers has moved away from the AXA group, but their positioning within

the Resolution stable provides a degree of comfort, although a degree of future restructuring

seems likely.

International With Profits Bond Series 1 & 2 Funds

Given the decline in new with profits business, Friends Life Assurance Society Ltd closed the

fund to new business at the end of July 2009. Previously primarily a with profits office, non profit

business now outweighs with profits business within the overall portfolio.

Since closing to new business, the fund has showed no realistic excess available capital and no

RCM, since it is assumed that planned enhancements could be sufficiently reduced so that no

RCM is required.

Some or all of the business in the fund may transfer to either Friends Life Ltd or Friends Life and

Pensions Ltd in 2012, and AKG has no concerns as to the security of the company’s with profits

business.

International With Profits Bond Series 3 Fund

Under the terms of the 2001 Reorganisation Scheme Friends Life Company Ltd’s New With

Profits Fund is prevented from building up an inherited estate, and much of the working capital of

the fund comes from support assets held outside the fund. At the end of 2010, following the

second five yearly test in accordance with the Reorganisation Scheme, £1.01bn of these support

assets were transferred to the shareholders’ fund. At the same time, it was also announced that

further amounts may be transferred to shareholders in future years up to the end of 2015 if certain

other tests are passed. A further £0.5bn was duly earmarked for transfer at the end of 2011.

As a result of the 2010 and 2011 transfers, the New With Profits Fund’s working capital has

reduced from £1.5bn to £76m and the working capital ratio reduced from 28% (one of the highest

in the market) to 1.4%. Realistic Excess Capital reduced to -£0.15bn from just over £0.1bn, and

the ratio of realistic excess available capital to assets fell to -1.5% from 25% (also one of the



AXA Isle of Man Ltd

highest in the market). The RCM, as a percentage of liabilities, reduced to 2.9% from 3.5%.

Whilst the Old With Profits Fund does not directly write any new business, it accepts reinsurance

of a proportion of the new business written by the New With Profits Fund. The company states

that both funds are fully aligned in terms of asset allocation and that bonus rates should be the

same. Unlike the New Fund, the Old Fund does not rely on support assets outside the fund.

Following the second five yearly test under the Reorganisation Scheme, Special Bonuses totalling

£157m were distributed from the Old With Profits Fund at the end of 2010. The fund's working

capital has reduced from £269m at the end of 2009 to £17m at the end of 2011 and the working

capital ratio reduced from 20% (one of the highest in the market) to 1.2%. Realistic Excess

Capital fell significantly from £223m to -£15m, and the ratio of realistic excess available capital

to assets fell to -1.1% from 16.6%. The RCM, as a percentage of liabilities, reduced from 4.3% to

2.4%.

Friends Life Company Ltd made various undertakings as part of its 2001 Reorganisation

Scheme. Given the current strength of the company in its own right, the court-approved schemes

relating to both the April 2001 reorganisation and the January 2007 bulk transfers (which protect

the with profits funds), and the degree of parental support potentially available, AKG has no

significant concerns as to the security of the company’s with profits business. In the past, the

company was the main vehicle for with profits funds within AXA UK, although its future position

within the Resolution group is less clear until the dust settles after the acquisition. The volume of

with profits business in force is declining insofar as exits far outweigh new business nowadays.




Company

CMI Insurance Company Ltd [Registered in the Isle of Man]

Ownership

Lloyds Banking Group plc [Registered in England and Wales]

Group Background

Lloyds TSB Group plc was renamed Lloyds Banking Group plc (LBG) in January 2009. This

followed the acquisition of HBOS plc, which created the largest retail bank in the UK, part owned

(43%) by HM Treasury. Within this, the Insurance Division encompasses all the insurance

companies that previously operated within the two banks. Scottish Widows, acquired by Lloyds

TSB plc in March 2000, distributed through the Lloyds branch network, IFAs and directly via the

telephone and the internet, with four UK life subsidiaries - the main company Scottish Widows

plc, together with the specialist subsidiaries Scottish Widows Unit Funds Ltd (linked pensions

business), Scottish Widows Annuities Ltd (non-profit pension annuities), and Pensions

Management (SWF) Ltd (managed pension fund business).

HBOS operated a multi-brand, multi-channel approach, with Clerical Medical Investment Group

(CMIG), Halifax Life, St. James’s Place and St Andrew's Life. CMIG was the primary HBOS

intermediary product provider, together with Clerical Medical Managed Funds Ltd, CMI

Insurance Company Ltd (CMIIC - an Isle of Man based company now closed to new business)

and HBOS Investment Fund Managers Ltd. CMIG remains the main product provider to the

Clerical Medical Europe business, which writes business, including with profits, in several

mainland European countries.

With effect from December 2010, the LBG Insurance Division has distributed all its intermediary

life, pensions and investment business, through a combined salesforce operating under the

Scottish Widows brand.

In November 2009 LBG sold Insight Investment Management Ltd to BNY Mellon for £235m.

The management of Clerical Medical funds, previously managed by Insight, switched to Scottish

Widows Investment Partnership.

In July 2011, a corporate restructuring led to the formation, with the exception of St James's

Place, of one insurance group, under the ownership of Scottish Widows Group Ltd. Further

integration of component companies may follow.

Company Background

The company, based on the Isle of Man, was established in 1987 by Clerical Medical & General

Life Assurance Society to operate in the offshore market. At the end of 1996, the Society

converted to limited company status and joined the Halifax, with the Society’s business being

transferred to the newly formed Clerical Medical Investment Group Ltd.

Historically, the company operated primarily as a with profits company, reinsuring the business

to CMIG and retaining little in the way of liabilities. This changed in 2002 (a move reflecting

what was happening in CMIG), when a change in marketing emphasis followed the withdrawal of

its pooled bond, replacing it with an open architecture portfolio bond.

The company, whilst retaining its name following the acquisition of HBOS plc by Lloyds

Banking Group plc in January 2009, now operates (since 22 November 2010) under the Scottish

Widows brand. The company announced its closure to new business in February 2012,

following a review.




With profits business has historically represented the majority of business written by the

company. Whilst this position had changed in recent years (effectively closed to new with

profits business from the UK in 2002, although additional investment to existing products

continues to be allowed) it remains significant.

With profits business has been written in CMIIC in three currencies, namely Sterling, US Dollar

and Euro.


CMIIC was one of the first international operations to be established by a UK life company. It is

well capitalised (solvency levels increased a little in 2010) for a primarily unit linked operation.

Following activity which appeared to bolster the security of the company's position within LBG,

the decision to cease new business activity now brings this into question.


Product Available from/to Open to New Business?

CMI Premier Bond II Jan 1998-31 Jul 01 No*

CMI Premier Bond III 2001 – Feb 2012 No*

CMI Capital Investor 2001 – Feb 2012 No*

CMI Global Investor 2002 – Feb 2012 No*

CMI UK Premier Bond ? – 2005 No*

CMI Passport Series – Wealthmaster Choice ? – Feb 2003 No*

CMI Passport Series – Lifetime Choice ? – 2003? No*

CMI Passport Series – Retirement Choice ? – 2003? No* * Ignoring sales to/top ups by existing customers


Fund Available from/to

Offshore With Profits (OWP) Series 1 Jan 1998- Feb 1999

Offshore With Profits (OWP) Series 2 Mar 1999 – Aug 1999

Offshore With Profits (OWP) Series 3 Sep 1999 – Feb 2000

Offshore With Profits (OWP) Series 4 Mar 2000 – May 2001

Offshore With Profits (OWP) Series 5 May 2001 - ?

Offshore With Profits (OWP) Series 6 ? – Feb 2012

Guaranteed Growth Fund (GGF) Series 1 Jan 1998 – Dec 1998

Guaranteed Growth Fund (GGF) Series 2 Dec 1998 – Mar 1999

Guaranteed Growth Fund (GGF) Series 3 May 1999 - Mar 2000

Guaranteed Growth Fund (GGF) Series 4 May 1999 – Feb 2001

Guaranteed Growth Fund (GGF) Series 5 May 1999 – Feb 2001

Guaranteed Growth Fund (GGF) Series 6 Mar 2000 – Feb 2001

Guaranteed Growth Fund (GGF) Series 7 Aug 2003 – present


All of CMIIC’s with profits policies are 100% reinsured into the with profits fund of the sister

company, Clerical Medical Investment Group Ltd. The funds reinsured at the end of 2011

amounted to £327m in total.

Reinsurance Company

Clerical Medical Investment Group Ltd [Registered in England and Wales]





The Clerical, Medical & General Life Assurance Society was established in 1824 to cater for the

insurance needs of the professionals of the day - the clergy and medics, subsequently broadening

its target market to all types of professions and beyond this to a wider target market. At the end

of 1996, the Society demutualised, becoming part of the Halifax, and its business was transferred

into the newly formed Clerical Medical Investment Group Ltd (CMIG). In May 2006, much of

Halifax Life's (HLL) with profits business (previously reinsured with CMIG) transferred to

CMIG.

Historically a with profits company, most new business is now written on a unit linked basis.

Unit linked pensions business (reserves of £8bn as at 31 December 2011) is reinsured to its

subsidiary CMMF. On 31 December 2009, CMIG recaptured the annuity business previously

reinsured to CMMF. This involved assets of £2bn and a loss of £112.2m. In January 2009, the

company began accepting reinsured protection business from Scottish Widows plc, accounting

for premiums of £153m and reserves of £173.5m in 2011. In July 2009, CMIG ceased writing

new pensions business.

The 2011 insurance business restructuring saw CMIG become a direct subsidiary of Scottish

Widows plc.


Notwithstanding a fall in CMIG’s capital resources, back to 2009 levels, solvency levels remain

reasonable, albeit both solvency ratios fell back slightly in 2011.

The company reported a pre-tax profit of £7m [2010: £136m loss, reflecting a net transfer of

£110m to the With Profits Fund, primarily in respect of the reassessment of historical

management charges]. The 2011 result was impacted by the setting of a provision of £175m in

respect of ongoing litigation concerning policies issued in Germany. The company also received

dividends from its subsidiaries: £184m from CMMF and £150m from Halifax Life Ltd, offset by

a £194m impairment in the value of CMMF following receipt of the dividend. No dividend was

paid [2010: nil]. CMIG's GAO reserve amounted to £490m [2010: £400m]. Net premium

income fell almost 15% despite single premiums being unchanged from 2010. The company

again saw net outflows: at £1.5bn a marked increase on £1bn in 2010. Total long term assets also

fell, down from £17.8bn to £16.7bn.

As an integral part of the Insurance Division of LBG, AKG believes that CMIG would receive

any further necessary financial support from its parent.

With Profits Bond Product Outline – CMI Premier Bond II

The Premier Bond II is a single premium unit-linked whole life assurance policy, with a unitised

with profits fund choice via the Offshore With Profits Funds Series 1-4 (denominated in Sterling,

Euros or US Dollars).

100% of the single premium received is invested in a unitised with profits fund at bid price.

An annual dividend (bonus) rate is declared annually in advance and added to the unit price on a

daily basis. The rates reflect the company’s conservative expectations of medium term returns,

and may vary by currency and by series.

A final bonus (terminal bonus) may be added at the time of a death claim, depending upon

duration, currency and series.

The surrender value is the bid value of OWP Fund units, possibly plus a final bonus (terminal

bonus) or reduced by an MVR (except at an MVR-free date), reduced by a discontinuance charge

during the first 5 years.

The main features of the Sterling version of the bond include:

Minimum premium: £10,000.

Bonus units at the end of Year 1: Between 1% and 2.5% (depending on premium size) extra




units added to all investments, except for Offshore With Profits Funds qualifying for a first

year guaranteed growth rate.

Loyalty bonus: 1% of the value of the fund is paid at the end of 10 years.

Annual management charge of 1% (OWP Series 1-3), 0.5% (OWP Series 4).

Establishment Charge: 1.44% per annum of the fund deducted monthly for the first five

years.

Death benefit: 101% of the bid value of units.

On surrender during the first 5 years, a discontinuance charge applies: 9% in Year 1,

reducing by 1.8% p.a. to nil in the sixth year.

Regular or one-off withdrawals up to 10% of the total invested allowed free of penalty

subject to a minimum of £1,000 remaining in each fund.

Switches into any of the other available funds normally allowed at any time.


With Profits Bond Product Outline – CMI Premier Bond III

The Premier Bond III is a single premium unit-linked whole life assurance policy, with a unitised

with profits fund choice via the Offshore With Profits Funds Series 1-6 (denominated in Sterling,

Euros or US Dollars).

A percentage of the single premium received is invested in a unitised with profits fund at bid price

(98% - 102.5% depending upon premium size).




A final bonus (terminal bonus) may be added at the time of a death claim, depending upon

duration, currency and series.







Annual management charge of 1% (OWP Series 1-3), 0.5% (OWP Series 4), 1.3% (OWP

Series 5-6).

Establishment Charge: 1.44% per annum of the fund deducted monthly for the first five

years.





subject to a minimum of £1,000 remaining in each fund.



With Profits Bond Product Outline – CMI Capital Investor

The Capital Investor is a single premium unit-linked corporate 99 year term capital redemption

policy, with a unitised with profits fund choice via the Offshore With Profits Funds Series 1-6

(denominated in Sterling, Euros or US Dollars).





(98% - 102.5% depending upon premium size).




A final bonus (terminal bonus) may be added at the time of a death or maturity claim, depending

upon duration, currency and series.








Series 5-6).

Establishment Charge: Five-year Option: 1.44% per annum of the fund deducted monthly for

the first five years; Initial Option: 7% of the initial fund value.

Guaranteed Minimum Maturity benefit: 101% of the initial premium (subject to

withdrawals).

On surrender during the first 5 years, a discontinuance charge applies: Five-year Option: 9%

in Year 1, reducing by 1.8% p.a. to nil in the sixth year; Initial Option: Flat 2% charge.


subject to a minimum of £1,000 remaining in the fund and at least £5,000 remaining in the

bond.



With Profits Bond Product Outline – CMI Global Investor

The Global Investor is a single premium unit-linked whole life policy, with a unitised with profits

fund choice via the Offshore With Profits Funds (denominated in Sterling, Euros or US Dollars).


(100% except for Charging Basis G, where the allocation rate is 107% for a nil commission

policy. The allocation rate reduces by 1% for each percent of initial commission taken).




A final bonus (terminal bonus) may be added at the time of a death or maturity claim, depending

upon duration, currency and series.


bonus) or reduced by an MVR (except at an MVR-free date), possibly reduced by a surrender

charge.




Series 5-6).


Initial Charge: Depends upon Charging Basis selected at outset.

o Basis E: 8%.

o Basis F – initial charge: 3%.

o Other Bases: Nil charge.




Establishment charge: Depends upon Charging Basis selected at outset.

o Basis F – establishment charge: 0.286% per quarter during first 3 years.

o Other Bases: Nil charge.

Surrender charge: Depends upon Charging Basis selected at outset. Specimens for a

premium of £100,000 where maximum commission taken are:

o Basis A: 9.536% in Quarter 1, reducing by 0.298% p.q. to nil in the ninth year.

o Basis B: 6% in Quarter 1, reducing by 0.3% p.q. to nil in the sixth year.

o Basis C: 9.82% in Quarter 1, reducing by 0.491% p.q. to nil in the sixth year.

o Basis E: No charge.

o Basis F – initial charge: No charge.

o Basis F – establishment charge: A charge during the first 3 years equal to the

remaining establishment charges.

o Basis G: 9% (of the greater of the underlying value and the enhanced investment

into the contract) in Quarter 1, reducing by 0.45% p.q. to nil in the ninth year.

Up to 20 free switches per year allowed into any of the other available investment choices.

With Profits Bond Product Outline – CMI UK Premier Bond

The UK Premier Bond is a single premium unit-linked whole life assurance policy, with a

unitised with profits fund choice via a Guaranteed Growth Fund with a specified term

(denominated in Sterling, Euros, US Dollars or [in the case of Guaranteed Growth Fund 1 only]

International Currency Units, or ICUs). At the end of the GGF term, policies can be surrendered,

switched or they can remain invested in a GGF (currently via GGF7).


(100.5% - 101% depending upon premium size).




A claim bonus dividend (terminal bonus) may be added on death or on surrender at an MVR-free

date at the time of a claim, depending upon duration, currency and series. There is a guaranteed

minimum claim value. For GGF 1, the guarantee is that the value of units will not be less than if

the declared annual dividend each year had been 4%. For the other GGF series, the guarantee is

that the unit price, taking account of annual dividends and before any claim bonus dividend or

MVR, will not fall.

When not at an MVR-free date, the surrender value is the bid value of Guaranteed Growth Fund

units, possibly plus a surrender bonus dividend (terminal bonus) or reduced by an MVR, reduced

by a discontinuance charge during the first 5 years.



Annual management charge of 1% (1.3% for GGF 7; 1.5% for GGF 2.003 and 2.004).

Establishment Charge: 1.5% per annum of the fund deducted monthly for the first five years.

Death benefit: 101% of the bid value of units, reduced to 100% if age next birthday at outset

is greater than 65.

On surrender during the first 5 years, a discontinuance charge applies: 7.5% in Year 1,



subject to a minimum of £200 and a minimum of £7,500 (or 10% of the initial investment if

lower) remaining in the fund.

Switches into any of the other available funds normally allowed at any time. Up to 12 free

switches allowed per year.




With Profits Bond Product Outline – CMI Passport Series (Single Premium variant)

The Passport Series is a unit-linked life assurance policy, with a unitised with profits fund choice

via a Guaranteed Growth Fund with a specified term (denominated in Sterling, Euros, US Dollars

or [in the case of Guaranteed Growth Fund 1 only] ICUs). At the end of the GGF term, policies

can be surrendered, switched or they can remain invested in a GGF (currently via GGF7).

The Wealthmaster Choice and Retirement Choice are single premium endowment variants and

the Lifetime Choice is a single premium whole of life variant. There are also 3 equivalent regular

premium variants.

100% of the single premium received is invested in a unitised with profits fund at offer price.




A claim bonus dividend (terminal bonus) may be added on death, surrender at an MVR-free date,

or maturity (for the endowment versions) at the time of a claim, depending upon duration,

currency and series. There is a guaranteed minimum claim value. For GGF 1, the guarantee is that

the value of units will not be less than if the declared annual dividend each year had been 4%. For

the other GGF series, the guarantee is that the unit price, taking account of annual dividends and

before any claim bonus dividend or MVR, will not fall.

When not at an MVR-free date, the surrender value is the bid value of Guaranteed Growth Fund

units, possibly plus a surrender bonus dividend (terminal bonus) or reduced by an MVR, reduced

by a discontinuance charge during the first 5 years.


Initial charge: 7% of the allocated premium, plus rounding of no more than 1%.

Annual management charge of 1% (1.3% for GGF 7; 1.5% for GGF 2.003 and 2.004).

Optional Protection Benefits: A range of benefits such as additional life cover, critical illness

and disability benefits can be added, paid for by unit encashment.

Death benefit: is a minimum of 101% of the bid value of units, unless a Life Cover benefit

has been selected, in which case a minimum of 100% of the bid value is payable.

Regular withdrawals typically up to 7.5% of the original premium allowed free of MVR on

GGF1/2/5 & 7 bonds. There were quite a number of variations around this theme, however,

for different tranches.


Current Bonus Scales – Sterling Funds

Annual Bonus Rates Feb 2012 Feb 2011

OWP Series 1-4 0.5% 0.5%

OWP Series 5-6 0.7% 0.7%

OWP Global Investor Fund 1.0% 1.0%

GGF Series 1-6 1.0% 1.0%

GGF Series 7 0.7% 0.7%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond II


1998 16% to 20%

1999 11% to 14%

2000 9% to 11%

2001 12% to 22%




Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond II (additional investments

up to 10 November 2003)


1998 17% to 22%

1999 12% to 16%

2000 10% to 12%

2001 13% to 23%

2002 28% to 39%

2003 42% to 44%

2004 35% to 42%

2005 23% to 32%

2006 13% to 21%

2007 12% to 14%

2008 16% to 24%

2009 25% to 27%

2010 14% to 25%

2011 2% to 10%

2012 0%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond II (additional investments

after 10 November 2003)


2003 34%

2004 26% to 32%

2005 16% to 23%

2006 8% to 14%

2007 6% to 9%

2008 11% to 20%

2009 22% to 25%

2010 13% to 24%

2011 2% to 9%

2012 0%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond III and CMI Capital

Investor (Initial investments up to 1 August 2003 and additional investments up to 10

November 2003)


2001 13% to 23%

2002 28% to 39%

2003 42% to 44%

2004 35% to 42%

2005 23% to 32%

2006 13% to 21%

2007 12% to 14%

2008 16% to 24%

2009 25% to 27%

2010 14% to 25%

2011 2% to 10%

2012 0%




Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond III and CMI Capital

Investor (Initial investments after 1 August 2003 and additional investments after 10

November 2003)


2003 34%

2004 26% to 32%

2005 16% to 23%

2006 8% to 14%

2007 6% to 9%

2008 11% to 20%

2009 22% to 25%

2010 13% to 24%

2011 2% to 9%

2012 0%

Terminal Bonus Rates at 1 February 2012 – CMI Global Investor


2002 28% to 39%

2003 42% to 44%

2004 35% to 42%

2005 23% to 32%

2006 13% to 21%

2007 12% to 14%

2008 16% to 24%

2009 25% to 27%

2010 14% to 25%

2011 2% to 10%

2012 0%

Terminal Bonus Rates at 1 February 2012 – Guaranteed Growth Funds

Not disclosed.

MVRs

MVRs may be employed to protect the interests of continuing investors. The aim is to continue

to pay out a fair share of investment performance to each investor, and MVR levels are kept under

regular review.

CMIG MVR rates are currently capped at 35% (increased from 25% in September 2009), but this

may change.

Sterling OWP Funds

Bonds were issued with an MVR-free date, which varied according to issue date – before 21/8/98:

5 years+; from 21/8/98: 7 years+; from 23/4/99: 12 years+.

During 2011, MVRs were applied to all funds for bonds effected between January and June 2000,

and for bonds linked to funds 5 & 6 effected between July 2006 and December 2007.

Sterling Guaranteed Growth Funds

GGF bonds can be surrendered free of any MVR or surrender charge at the end of the specified

term of the GGF concerned.

GGF3 bonds were issued with an MVR-free date on the 7th anniversary.






GGF1/2/5 & 7 bonds were issued with MVR-free withdrawal options, whereby typically up to

7.5% of the original premium could be withdrawn each year free of MVR. There were quite a

number of variations around this theme, however, for different tranches.

MVRs were applied to all GGF funds during 2011, except for GGF funds 3.10, 4.01, 4.02, 5.01

and 6.01.

Guarantees

The costs of any investment guarantees on the with profits policies in CMIG’s With-Profits Fund

are borne within the fund. Currently, deductions from asset shares are made for the cost of

guarantees on with profits policies as the costs arise.

Guarantee costs are spread equally across all with profits policies, except for bonus classes where

deductions for guarantee costs have already been made (e.g. CWP policies). Whilst CMIG states

that the level of future deductions is uncertain, it does not expect the average cost to exceed 1%

p.a. over the next ten years or 2% in any one year, although in very adverse conditions, it may

need to deduct more.

For CWP life policies started before 1997, 2% was deducted from premiums paid before 1997 to

pay for guarantees. No further charges are being made for guarantees from the asset shares in

respect of these policies.

The total charges deducted from with profits reserves by CMIG in 2011 in respect of guarantees

was £86m [2010: £72m].

Sterling OWP Funds

There are no investment guarantees applicable, but bonds were issued with specified MVR-free

dates (see MVR section above).


Bonds contain a range of different MVR-free guarantees, according to tranche (see MVR section

above).

On death, surrender at an MVR-free date, or on maturity for endowment/capital redemption

bonds, there is a guaranteed minimum claim value. For GGF 1, the guarantee is that the value of

units will not be less than if the declared annual dividend each year had been 4%. For the other

GGF series, the guarantee is that the unit price, taking account of annual dividends and before any

claim bonus dividend or MVR, will not fall.

On certain products GGF1 policyholders have the option of a 5 year continuation at the end of

their original term.

Investment

Subject to helping to ensure the solvency of the company and its ability to meet the guarantees it

provides on with profits policies, CMIG’s aim is to achieve growth on the assets backing asset

shares over the longer term, and the policy for those assets is to have a significant proportion in

higher-risk assets, such as company shares and property. The investment strategy takes account of

assets outside the CMIG With-Profits Fund, to allow the fund to invest a significant proportion in

higher-risk assets.

CMIG’s investment strategy for assets backing asset shares depends upon the company’s view of

investment markets, the surplus in the fund and guarantees in force. The company manages

separate pools of assets for various different groups of policies within the fund.




CMIG’s investment strategy for the estate provides protection to help safeguard the future growth

potential of the assets backing asset shares, reducing the likelihood that the EBR would need to be

significantly reduced in the event of a significant stock market fall.

The CMIG fund sometimes uses derivatives, for example to effect a change in asset allocation

quickly. The performance of the derivatives may differ from the corresponding assets and the

effective exposure to different assets whilst the derivatives are held may differ from the published

exposures.

At the end of 2011 CMIG introduced a revised strategic asset mix designed to increase expected

return without increasing risk. This includes a reallocation between different regional share

markets, and a reallocation between sovereign and corporate bonds.

Sterling OWP Funds

The asset mix for the Sterling OWP Funds is the same as for the remainder of CMIG’s Sterling

with profits business.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 26.2% 31.3% 34.9% 30.7%


Property 14.2% 12.0% 13.4% 12.3%

Fixed Interest 36.6% 37.4% 37.7% 33.2%

Cash 10.1% 3.9% 2.0% 5.7%

Other 5.8% 6.9% 3.7% 8.9%


CMIIC states that the asset mix for the Guaranteed Growth Funds differs from that of the OWP

funds, and that ‘further information is available on request’. However, AKG was unable to obtain

any further information from the company in time for the publication of this report.

Past Performance

The company declined to disclose any specimen past performance values as at 1st April 2012 to

AKG. However the following specimen value can be deduced from CMIIC’s fund performance

leaflet

Payouts on Surrender Values at 1 February 2012

Bond Type Term (yrs) Freq Premium Payout (£)

CMI Premier Bond 5 Single £10,000 10,836

Investment Returns

Fund 2007 2008 2009 2010 2011

Sterling OWP Funds 1.9% -12.4% 8.6% 10.2% 3.1%

Sterling Guaranteed Growth Funds 1.5% -7.8% 3.7% 9.8% 3.9% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.




Transparency

2

Whilst the LBG insurance companies are generally very co-operative in providing AKG with

information on their businesses, AKG was unable to obtain any of the information it requested in

respect of CMIIC for the publication of this report.

CMIIC’s website does, however, contain a reasonable amount of regularly updated information

about the company’s with profits business.

Whilst no longer offering new with profits products in the UK, CMIG generally produces well

written literature, although the design of its PPFM is a little confusing, and rather different than

those of other companies. The regular updating of a graph illustrating the operation of smoothing

for a with profits bond within the PPFM and CFPPFM is a good feature, however.

Information published on CMIG's and CMIIC’s websites has somewhat fallen behind that of

other leading companies, with no historical versions of documents available, and no clear trail of

PPFM changes. The annual report to with profits policyholders incorporates a series of

Frequently Asked Questions (FAQs), but lacks detail in some areas. The company retains a high

level of discretion in respect of most of its business.

CMIG's With Profits Committee has in the past comprised only non-executive directors, although

two independent members joined it in February 2012 in response to the FSA’s evolving

requirements. Its findings have not been published in the past.

Future Performance

CMIG's stated intention is to maintain a 'significant' EBR for the main blocks of Sterling business.

However, this needs to be set against the fact that the fund is now effectively closed in the UK.

Payouts on domestic UK policies recently have not been spectacular and some appear to have

been deteriorating in relative terms.

CMIG started estate distribution from the With-Profits Fund from February 2010, which should

enhance payouts for policies started before 2011, but the quantum of such distributions has not

been published.

The future performance prospects of the various CMIIC with profits bond versions differ slightly

on account of the variations in underlying guarantees and charging structures. Whether or not a

particular bond has any MVR-free dates remaining will also be an important aspect.

Sterling OWP Funds 1-4 3

Bonds are subject to a management charge of 1% p.a. (OWP Series 1-3), 0.5% (OWP Series 4).

Sterling OWP Funds 5-6 3

Bonds are subject to an annual management charge of 1.3%, but recent regular bonus rates have

been higher than for Funds 1-4.

Sterling Guaranteed Growth Fund 1 3

GGF1 is subject to a 4% underlying bonus rate guarantee. Bonds are subject to an annual

management charge of 1%. It is unclear to AKG what the underlying asset mix for this fund is.

Sterling Guaranteed Growth Funds 2-6 3

Bonds are subject to an annual management charge of 1% (1.5% for GGF 2.003 and 2.004). It is

unclear to AKG what the underlying asset mixes for these funds are.

Sterling Guaranteed Growth Fund 7 2

GGF7 is the only GGF fund currently open to switches and new investments, and it is subject to a

1.3% p.a. annual management charge. It is unclear to AKG what the underlying asset mix for this

fund is.





3

New with profits products are not offered by CMIIC, and the strength of its significant block of in

force with profits business depends very largely upon the security of the company into which it is

reinsured - CMIG.

Working capital in the CMIG fund (before zeroisation) fell substantially from £307m to £56m in

2011, mainly due to unexplained 'other' movements of £317m [2010: £648m]. The working

capital ratio decreased from 2.7% to 0.6% (before zeroisation).

The CMIG fund is now effectively closed to UK new business and overseas new business has

declined. Whilst the fund is judged secure it remains unclear as to the future of the fund given

the ongoing consolidation within LBG and the possibility that parts of the group may be disposed

of.




Company

Friends Provident International Ltd [Registered in the Isle of Man]

Ownership

Resolution Ltd [Registered in Guernsey]

Group Background

Resolution Ltd, incorporated in Guernsey, and formed to acquire businesses in the life assurance,

asset management, general insurance, banking and general financial sectors in the UK and

Western Europe, acquired the Friends Provident Group plc in November 2009.

Friends Provident, originally a mutual tracing its roots back to its Quaker origins in 1832, floated

on the stockmarket in 2001. In the UK it operated via three main life companies, Friends

Provident Life and Pensions Ltd (renamed Friends Life Ltd - FLL), Friends Provident Pensions

Ltd (renamed Friends Life and Pensions Ltd) and Friends Provident Life Assurance Ltd

(FPLAL), whilst operating internationally through Friends Provident International Ltd and

Lombard International Assurance S.A. It also owns a number of intermediary companies, having

acquired Sesame in 2007 and Bankhall in 2009.

On 16 September 2010, Resolution acquired AXA Sun Life Holdings Ltd (renamed Friends

ASLH Ltd), including AXA Sun Life plc (renamed Friends Life Company Ltd (FLC)), Sun Life

Assurance Society (Friends Life Assurance Society Ltd (FLAS)) and AXA Annuity Company

Ltd (Friends Annuities Ltd (FAL)) - an Insurance Special Purpose Vehicle (ISPV). An

additional company, Winterthur Life UK Ltd (WLUK), also moved to Resolution in November

2011 when a number of Part VII transfers of various blocks of business also took place. The

businesses of Sun Life Unit Assurance, Sun Life Pensions Management and PPP Lifetime were

transferred into AXA Sun Life plc in January 2007. January 2011 saw Resolution also acquire

Bupa Health Assurance Ltd (BHA).

The enlarged Friends Life Group, with an estimated IGCA surplus of £1.9bn as at March 2012,

was rebranded Friends Life in March 2011. FPLAL and BHA were transferred into FLL in

2011. In August 2011 the Group announced the establishment of a new business unit, UK

Heritage Business, administering products no longer open to new business.

Friends Provident’s International operations comprise three elements: Lombard, which has

maintained its brand, AmLife (having taken a 30% stake in November 2008 in a joint venture

with AmBank of Malaysia) and Friends Provident International (FPI). Most of FPI’s business is

written by Friends Provident International Ltd (FPIL) in the Isle of Man. FPIL also has offices in

Hong Kong, Singapore and Dubai. The remainder - mainly into the EU - is now written from the

UK by Friends Life Ltd.

Company Background

Friends Provident International Limited (FPIL), based on the Isle of Man, was previously known

as Royal & SunAlliance International Financial Services Ltd and has been trading since 1978.

Friends Life purchased the company in 2002 from Royal & SunAlliance. The company is part of

the Friends Provident International division and writes the majority of FPI's business. In

addition to the Isle of Man, the company also has offices in Hong Kong, Dubai and Singapore.

Friends Provident International also writes business in Europe from the UK - now through

Friends Life Ltd (OLAB business).




International business was confirmed as a core element of Friends Life's strategy following a

strategic review in 2008. This remains the case following the acquisition by Resolution.


The company is well established and reasonably large for an offshore company. Solvency levels

remained adequate for what is primarily a unit linked operation. Parental support, which

remains key to the operation, was emphasised in, and indeed confirmed by, the group's strategic

review of 2008 and the subsequent acquisition by Resolution.

The deal with Resolution has positioned Friends Life at the centre of an ambitious 2 to 4 year life

assurance and asset management consolidation strategy, one which has been substantially

bolstered by the acquisition of the business from AXA. Whilst this did not directly involve the

offshore operation, the success of FPI, together with its potential, recognised both internally and

externally, remain encouraging factors.


Product Available only on Open to New

Business?

With Profits Bond Series 1 31 Dec 92 No*

With Profits Bond Series 2 30 Apr 93 No*

With Profits Bond Series 3 31 Aug 93 No*

With Profits Bond Series 4 30 Nov 93 No

With Profits Bond Series 5 30 Sep 96 No*

With Profits Bond Series 6 18 Dec 98 No* * Ignoring sales to/top ups by existing customers


Series 1-6: Reinsured to the Phoenix With-Profits Fund of Phoenix Life Ltd


All of FPIL’s with profits policies are reinsured into the Phoenix With Profit Fund of Phoenix

Life Ltd. The total liabilities reinsured at the end of 2010 amounted to £4.6m.

Reinsurance Company

Phoenix Life Ltd [Registered in England and Wales]


Founded in 1971 as Lloyd's Life Assurance Ltd, the company was renamed Royal Heritage Life

Assurance Ltd in 1986 following its acquisition by Royal Insurance. It was renamed Royal &

Sun Alliance Linked Insurances Ltd in 1998 following the merger of Royal with Sun Alliance and

business from various companies in the enlarged group was transferred in.

The company closed to new business in September 2002 and was acquired by Resolution Life in

September 2004. In December 2005, the company, now called Phoenix Life Ltd, received

business transfers in from Phoenix Assurance Ltd, Swiss Life (UK) plc and Bradford Insurance

Company Ltd, followed in December 2006 by the long-term business of Alba Life Ltd, Britannic

Assurance plc, Britannic Retirement Solutions Ltd, Britannic Unit Linked Assurance Ltd,

Century Life plc and Phoenix Life & Pensions Ltd.




In May 2008, Impala Holdings Ltd, a 75% subsidiary of Pearl Group, acquired Resolution plc.

The long term business and some of the shareholders' funds of Scottish Mutual Assurance Ltd and

Scottish Provident Ltd were transferred into the company in January 2009 for a nil consideration.

The transfer to PLL of the long term business and the majority of the shareholders' funds of

PALAL was effective on 1 January 2011, and the long-term business of NPI Ltd (& some of the

business of National Provident Life Ltd) was transferred to the company effective from January

2012.

Phoenix With Profit Fund

The Phoenix With Profit Fund was established on 31 December 2006 to receive all the business

transferred from Phoenix Life & Pensions Ltd ('PLP'), both with profits and non profit.

PLP traces its history back to Royal Life Insurance Ltd ('RLI'), which was created in 1981 to

receive the UK life insurance businesses of Royal Insurance Company Ltd. This included

business from Law Union and Rock Insurance Company Ltd, and Liverpool and London and

Globe Insurance Company Ltd which was transferred into Royal Insurance Company Limited in

1964.

RLI was a company within the Royal Insurance Group, which merged with the Sun Alliance and

London Insurance Group in 1996. In 1998, RLI was renamed Royal & Sun Alliance Life and

Pensions ('RSALP'). RSALP was bought by the (former) Resolution Life Group (which is not

directly connected with the current Resolution Group) in 2004. RSALP changed its name to PLP

in 2005.

PLP closed to new business in 2002, although the fund continues to write incremental new

business.

The with profits contracts in the fund mainly fall into the following categories:

• traditional endowments and whole life policies

• traditional pension policies funding for cash, most of which have GAOs

• single premium unitised with profits whole life bonds

• unitised with profits pension policies

In September 2005, PLP sold, subject to court approval, a substantial part of the non profit

pension annuity business that was in force at 1 January 2005 to Prudential. Initially this involved

payment of a reinsurance premium of £1.5bn, but the business was finally transferred to

Prudential Retirement Income Ltd in June 2006. This transaction substantially reduced the

volume of non profit business in the fund. It led to a one-off reduction in asset shares of up to

1.4%, offset subsequently by an estimated 0.4% reduction the company would have made if the

polices had not been reinsured.


The Phoenix Group has stabilised since the rather public difficulties of the parent group in 2008

and early 2009.

Phoenix Life Ltd is a key part of the Phoenix Group's consolidation strategy, with business being

transferred directly into it or its annuity subsidiary (PPL). Long term assets grew to £48bn by the

end of 2011 [2010: £33bn], boosted by the transfer of business from PALAL.

The company’s free asset ratio reduced slightly in 2011, however, although there was an

improvement in the company's CRR coverage.

With Profits Bond Product Outline

The With Profits Bond is a single premium unitised with profits life assurance investment bond,

denominated in Sterling.

A percentage of the single premium received is invested in a unitised with profits fund (100% for

Series 1-4, 103.5% for Series 5 and 103% for Series 6).




The bonds are not eligible for terminal bonuses.

Annual bonuses are set at a level which, using realistic assumptions, will bring the projected asset

share and the value of projected policy benefits broadly in line over a five year period. If at any

time the fund is targeting payouts at a higher proportion of asset share than 100% on account of

distributable estate, then this will be allowed for in the projected asset share used for the purpose

of calculating annual bonus rates, and such distributable estate will therefore be gradually

reflected in payouts over a five year period.

A minimum annual bonus rate is set each year and the actual bonus rate set at the policy

anniversary in 12 months time cannot be less than this. Other than at times when the value of the

allocated assets are changing rapidly, bonus rates do not change by more than 2% (such as from

3% to less than 1% or more than 5%) in any 12 month period.

Surrender values are not guaranteed (except at the tenth anniversary for Series 5 and 6 bonds).

The surrender value is 100% of the original amount allocated together with all bonuses previously

declared, less the following:

(a) A sum equal to all annual withdrawals previously taken.

(b) A surrender reduction during the first 5 years (7.5% in Year 1, reducing by 1.5% p.a.)

(c) Any MVR applicable.

The main features of the bond include:

Establishment Charge: Series 1-4: 0.5% of premium per quarter for first six quarters. Series

5-6: Nil.

Death benefit: 101% of the premium together with all previously declared bonuses less all

sums taken previously by way of annual withdrawals and less a fixed percentage of this total

amount depending on the policy year in which death occurs as follows: 7.5%% in Year 1,


On surrender during the first 5 years, a discontinuance charge applies (7.5%% in Year 1,

reducing by 1.5% p.a. to nil in the sixth year).

Regular or one-off withdrawals allowed.

Switches not allowed.


Current Bonus Scales - With Profits Bond

Annual Bonus Rates – Series 1

Anniversary date each year: 31 December

Year Minimum bonus

was:

Declared bonus is: Next year’s minimum

bonus is:

2011 2.75% 4.00% 2.75%

2012 2.75%


Anniversary date each year: 30 April

Year Minimum bonus

was:


bonus is:

2011 2.75% 4.75% 2.75%

2012 2.75% 5.75% 2.75%

2013 2.75%


Anniversary date each year: 31 August

Year Minimum bonus

was:


bonus is:

2011 2.75% 3.75% 2.75%

2012 2.75%




Annual Bonus Rates – Series 4 – Closed in April 2004


Anniversary date each year: 30 September

Year Minimum bonus

was:


bonus is:

2011 2.75% 3.50% 2.75%

2012 2.75%


Anniversary date each year: 18 December

Year Minimum bonus

was:


bonus is:

2011 1.25% 1.75% 1.75%

2012 1.75%

Terminal Bonus Rates:

There are no terminal bonuses on the bond.

MVRs

The company’s policy is to apply an MVR if circumstances warrant (where no guarantees apply).

The purpose of such an adjustment is to ensure continuing policyholders are protected when

individual policyholders choose to surrender their policies.

During 2011, MVRs were applied throughout the year in respect of bonds sold in December 1998,

and at various points in the year for top-ups sold between April 2007 and November 2010.

In May 2012, no MVRs were applicable, apart from an MVR of 1% on Series 6 bonds.

Guarantees

Series 1 – 3

There is a guarantee that no MVR applies on the 10th anniversary.

Series 5 – 6

On surrender on the 10th anniversary, there is a guaranteed return of the original premium less any

withdrawals.

Investment

Since January 2004 the asset mix backing a with profits policy depends on the year of

commencement and outstanding term as well as underlying guarantees. Some types of policy do

not have any equities or property backing them. The company publishes extensive tables to

policyholders each year, setting out in some detail the various asset proportions applying to their

policy type.

The target EBR for with-profits policies is currently approximately 70%, subject to following

variations:

If there are less than 9 years of term remaining, then the mixes are changed proportionately

as the term remaining reduces until the EBR is 35% with one year or less of term remaining.

If the rate of return required from equity shares and commercial property for the asset share




to grow over the term remaining, after the deduction of retentions and charges, to equal the

projected guaranteed benefits at the maturity date is more than 5% p.a. gross, then the EBR is

reduced as follows: Rate of return required 5% to 7.5%, reduction applied 33%; 7.5% to

10%, 67%; 10% or more, 100%.

For the purpose of determining the exposure to growth investments, the term remaining for a with

profits bond is taken as:

for bonds with a future guarantee date upon which no MVR will apply on surrender, the time

to that guarantee date; or

for bonds with no such guarantee, or which have passed the date upon which such a

guarantee applied, 10 years.

The table below shows the average asset mix within the fund for all business.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 11.0% 17.6% 9.0% 7.3%


Property 9.0% 9.1% 8.4% 7.3%

Fixed Interest 67.1% 60.4% 43.9% 35.9%

Cash 6.9% 6.4% % %

Other 0.0% 0.0% 30.9% 43.0%

Past Performance – With Profits Bond

Note: The payouts shown in the tables below are not directly comparable with those shown for

other companies within this series of reports, since they are based on specific start dates, rather

than being values for surrenders on 1st April 2012, which was AKG’s general target date to

publish.

Payouts on Surrender Values for a bond commencing on 31 Dec 1992


With Profits Bond - Series 1 2 Single £10,000 £11,091





Payouts on Surrender Values for a bond commencing on 30 Apr 1993







Payouts on Surrender Values for a bond commencing on 31 Aug 1993







Payouts on Surrender Values for a bond commencing on 30 Nov 1993






With Profits Bond - Series 4 15 Single £10,000 n/a




Payouts on Surrender Values for a bond commencing on 30 Sep 1996







Payouts on Surrender Values at 1 April 2012 for a bond commencing on 30 Sep 1996


With Profits Bond - Series 5 15.5 Single £10,000 £20,835

Payouts on Surrender Values for a bond commencing on 18 Dec 1998






With Profits Bond - Series 6 15 Single £10,000 n/a

Investment Returns

The rate of investment return attributed to the with profits benefit reserve of a policy in Phoenix

Life Ltd’s Phoenix With Profit Fund depends on the asset mix for it, which depends upon the

outstanding term and the level of guarantees under the policy.

The table below shows the average rates of investment return added for unitised with profits

bonds within the fund. It is understood that there may be some quite significant variations from

these averages for some bonds, though, because of the fund’s approach to determining asset mix.

Fund 2007 2008 2009 2010 2011

Series 1-6 Funds 1.7% -3.0% 11.9% 12.5% -1.9% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

3

FPIL does not publish any significant information about its small block of with profits business

on its website, but the company co-operated fully with AKG in the preparation of this report.

Much of the information about the management of this business derives from the reinsurance

company involved, and hence AKG comments below on the transparency of Phoenix Life Ltd’s

Phoenix With Profit Fund:

Whilst this is essentially an old style fund, with all that this entails, Phoenix Life has shown a

willingness to increase the volume of information available to policyholders, partly as a response

to regulatory requirements but also as a result of its overall approach to policyholder

communication. However, it is often very difficult to see the wood for the trees, because simple

overall average statistics are often omitted. The group advises policyholders of approaching

MVR-free dates.

Whilst the Phoenix Life PPFM is relatively detailed, the company retains significant discretion

and this, coupled with the complexity of the asset allocation methodology, makes the overall

position less than clear. The report to policyholders is reasonably detailed.

There is now a majority of independent representation on the Phoenix Life With Profits

Committee.




Future Performance

Notwithstanding the relatively high headline EBR quoted for Phoenix Life Ltd’s Phoenix With

Profit Fund, in aggregate the fund had only some 25% of its assets in equities and property at the

end of 2010 (although over 30% were also classified as 'other'). This reflects the impact of the

staggered investment policy.

The fund retains a significant exposure to guarantees, and the imposition of an explicit charge for

guarantees can only depress longer term returns.

Current maturity and surrender payouts on the UK business in the fund are generally

disappointing relative to others in the market, despite the current asset share enhancement from

the estate.

The rates of bonus declared on the FPIL bonds has varied quite a lot from one series to another,

with the Series 6 rates being noticeably lower than the others.

Series 1 Fund 3

Series 2 Fund 3

Series 3 Fund 3

Series 5 Fund 2

Series 6 Fund 1


3

New with profits products are not offered by FPIL, and the strength of its small block of in force

with profits business depends very largely upon the security of the company into which it is

reinsured.

The Phoenix With Profit Fund within Phoenix Life Ltd remains quite sizeable, being one of the

largest of the company's nine with profits funds, but it cannot be considered as exceptionally

strong. The PLP shareholder provided financial support to the fund in 2006 by way of loans, but

this loan support was repaid by the end of 2006, and the fund does not currently need to rely on

any capital support from the Non-Profit Fund or Shareholder Fund.

The notes to the realistic balance sheet of Phoenix Life Ltd show that, before zeroisation, the fund

had working capital of £373.4m at the end of 2011 (a working capital ratio of 6.8%), substantially

increased from the 2010 level of £250.5m.




Company

LCL International Life Assurance Company Ltd [Registered in the Isle of Man]

Ownership

Charles Taylor plc [Registered in England and Wales]

Group Background

Charles Taylor & Co was founded around 1840 in the north-east of England, and its early activity

was as a coal merchant. In 1885, the Standard Steamship Owners' Protection and Indemnity

Association Ltd was founded and engaged Charles Taylor as its managers.

Management of the Standard Club continued as Charles Taylor's principal activity until the

1960s, when Charles Taylor began to develop other mutuals. Over the next few decades, new

mutuals included SMISBA for Italian shipowners, SCALA for Canadian shipowners and

SIGNAL for US stevedore employers.

In 1996, the company was listed on the London Stock Exchange under Charles Taylor Group plc

and has more recently traded as Charles Taylor plc.

The group’s core focus is on offering services to the insurance market, principally on a fee-based

model and it operates through three Professional Services businesses – Management, Adjusting

and Insurance Support Services. It also has a Run-off business that owns insurance companies

which are closed to new business, including LCL. It has 900 staff in 47 offices spread across 23

counties in the UK, the Americas, Asia Pacific, Europe and the Middle East.

The group’s vision is to become the professional services provider of choice to the global

insurance market. However it also continues to seek opportunities to acquire further closed

offshore life companies.

Company Background

The company became a subsidiary of the Charles Taylor group in November 2005.

Originally launched in 1985 as Equity & Law International Life Assurance Co Ltd, the company

became successively AXA Equity & Law International Life Assurance Co Ltd (1993), Old

Mutual International (Isle of Man) Ltd (1997) and Aberdeen International (IoM) Life Assurance

Ltd (2002) before becoming LCL International Life Assurance Company Ltd (LCL) in 2005.

Transfers into the company include:

March 2006 - Aberdeen International Ltd (formerly Abtrust International Ltd, Century Life

International Ltd, N.E.L. Britannia International Ltd and N.E.L. International Ltd) -

including business formerly written by Cornhill Insurance (Guernsey) Ltd, M&G Trust

Assurance (Channel Islands) Ltd and M&G Insurance (Cayman) Ltd.

March 2006 Aberdeen International Assurance (Isle of Man) Ltd (formerly Abtrust

International Insurance (Isle of Man) Ltd, Century International Insurance (Isle of Man) Ltd,

Aetna International Insurance (Isle of Man) Ltd and Tyndall Assurance (Isle of Man) Ltd).

December 2006 - Premium Life International Ltd.

December 2010 - Finistere Life Assurance Ltd (formerly NM Life Assurance International

Ltd, NM Schroder Life Assurance International Ltd and Schroder Life Assurance

International Ltd).

In November 2011 the group acquired Alico Isle of Man Ltd, with transfer to the company

expected to complete in 2012.




The bulk of the company’s business is unit-linked in nature, but there is a small amount (£13m of

mathematical reserves) of Amulet With Profits Bond business in force, written by Aberdeen

International Assurance (Isle of Man) Ltd / Abtrust International Insurance (Isle of Man) Ltd.


Whilst quite small and not core to its parent's primary business focus, the company is part of a

multi-national insurance sector service provider. There are signs of turbulence at the group's

non-life subsidiaries, but LCL appears to be continuing to trade profitably, albeit AKG does not

have access to the detailed position. It continues to acquire closed books of life assurance

business, the latest being in November 2011.



Business?

Amulet With Profits Bond 7 Sep 1995 – Mar 1997 No


LCL International Life Assurance Company Ltd’s With-Profits Fund


All of LCL’s with profits business is reinsured 100% into Friends Life Company Ltd’s Old and

New With Profits Funds*.

*The New With Profits Fund was established in April 2001, in connection with the financial reorganisation of AXA Sun Life and AXA Equity & Law, and the consequential reattribution of the inherited estate.

Existing policyholders who had eligible with profits policies were able to elect to have their policies allocated to the New With Profits Fund. Policyholders who chose not to elect their policies from 1 April 2001 were offered a further

opportunity to elect them from 1 January 2002.

Following both election opportunities, with profits policies that were in force on 1 April 2001 and were not elected

policies were allocated to the Old With Profits Fund.

New with profits business written since April 2001 has been allocated to the New With Profits Fund, with around

13% being reinsured to the Old With Profits Fund.

Reinsurance Company

Friends Life Company Ltd

[Registered in England and Wales]


Friends Life Company Ltd started trading as AXA Sun Life plc (ASL) in 1997, following the

merger of the AXA and UAP insurance groups, as the main vehicle for AXA’s new life business

in the UK. In its early days, the company was inextricably linked with AXA Equity & Law Life

Assurance Society (AEL), whose origins dated back to 1844.

In 1987, Equity & Law Life had been acquired by Compagnie du Midi (which then merged with

AXA in 1988). Initially, all ASL new with profits business was reinsured into AEL but in April

2001 all of AEL’s assets and liabilities were transferred into ASL, following a high profile court

case concerning the attribution of the inherited estate. ASL wrote virtually all of AXA’s UK

new long-term business and in January 2007 AXA transferred the business of Sun Life Unit




Assurance, Sun Life Pensions Management and PPP lifetime care into ASL.

September 2008 saw ASL take ownership of AXA Annuity Company Ltd (AAC - which

converted to an ISPV in October 2008), a vehicle into which it reinsures £3.6bn of its annuity

liabilities. Legacy business was outsourced to Capita in 2008.

In September 2010, the company was acquired by Resolution and in March 2011 it was renamed

Friends Life Company Ltd, becoming a wholly owned subsidiary of Friends Life Ltd. (At the

same time, AAC was renamed Friends Annuities Ltd).

Two blocks of business (involving assets of £1.1bn) within the company were transferred back to

the AXA Group during 2011.


2011 saw pre-tax profit in the company increase from £37m in 2010 to £336m, largely driven by

the gain on the transfer of business back to AXA Wealth together with a change in methodology

to recognise negative reserves on protection business. Following the acquisition by Resolution

the group rationalised its funding structures and the company paid dividends of £985m in 2011

[2010: £598m]. The company also repaid £77m against its outstanding contingent loan. Free

assets improved, albeit CRR coverage fell slightly following a reduced reliance on financial

engineering. The year also saw the transfer of £500m [2010: £1bn] from the Long Term Fund to

the Shareholder Fund as a result of a five year test required under the 2001 Re-attribution Scheme.

AKG would expect the company to receive any necessary support from its new parent, albeit

some or all of the business in FLC is expected to transfer to either Friends Life Ltd or Friends Life

and Pensions Ltd in 2012.

Amulet With Profits Bond Product Outline

The Amulet With Profits Bond is a single premium unitised with profits life assurance investment

bond, issued in two different currencies - Sterling and US Dollars.

A percentage of the single premium received is invested at offer price in a unitised with profits

fund (100% for premiums under £50,000, 101% for higher premiums).

The unit price is increased daily by addition of Regular Bonuses, net of the annual management

charge. A smoothed approach is adopted whereby the unit price is gradually increased by the

Regular Bonus rate which is altered infrequently, typically once a year. Regular Bonus rates are

set to reflect actual and expected future investment returns. In particularly volatile markets the

Regular Bonus rate may be adjusted more often.

As the Regular Bonus rate cannot be negative, the unit price grows over time increasing the

current value of the fund. This smoothed approach means that in times of high investment return

the unit price may not fully reflect the underlying value of the assets but, conversely, the

smoothing effect does provide a degree of buffering from the worst effects of market declines.

When a claim is made the company calculates for that policy the return after charges on the

underlying assets over the period – the calculated value. It then compares this with the current bid

value. If the calculated value is significantly above or below the current value then the claim

amount may be adjusted. In normal conditions smoothing again applies. If the calculated value

is within a band 5% either side of the current value no adjustment is made.

If the amount that should be payable is more than the current value of the units the amount

payable is the current value plus a Terminal Bonus.

If the amount that should be payable is less than the current value the amount payable is the

current value less an MVR. The company guarantees that an MVR will not apply on a death

claim.

The main features of the bond include:

Minimum initial investment - £15,000 or $22,500




Each bond comprises up to 20 policies.

Management charge: 1.6% of the initial investment per annum taken by way of unit

deduction.

Optional life cover benefit.

Death benefit: The greater of the sum assured, if any, or any additional life cover, or the bid

price value of the units held.

On surrender during the first 5 years, a discontinuance charge applies.

Regular or one-off withdrawals not allowed.


Additional single premium top-ups not allowed.

Current Bonus Scales - Amulet With Profits Bond

Annual Bonus Rate (since 23 February 2009) 3.50%


No information has been supplied by the company regarding current terminal bonus scales.

MVRs


already added. MVRs are applied on surrender, but not on deaths. MVRs are calculated on a

case by case basis and depend on the difference between the surrender value and the asset share.






MVR have been applied in the past during periods of significantly reduced market values.

However, as at the end of February 2012 there were no cases where an MVR would apply (and a

Terminal Bonus would be paid in many cases).

Guarantees

There are no guarantees apart from any optional life cover element included and the guarantee

that no MVR will be applied on death claims.

Investment

Friends Life Company Ltd adopts different asset mixes for different types of with profits

business.

The table below shows the asset mix applicable to unitised with profits policies with no

maturity date, including the Amulet bonds.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

UK Equities 47.0% 53.7% 50.7% 49.3%


Property 16.0% 15.6% 15.5% 16.5%

Fixed Interest 19.6% 12.9% 14.2% 15.6%

Cash 2.4% 3.3% 0.1% 0.4%

Other 0.0% 0.5% 0.1% 0.0%




Past Performance - Amulet With Profits Bond


Investment Returns

Fund 2007 2008 2009 2010 2011

With Profits Fund 4.8% -20.3% 15.3% 14.5% -1.5% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

2

LCL declined to co-operate with AKG in the preparation of this report, but it does routinely

publish selected information about its with profits business on its website.

Much of the information about the management of this business derives from the reinsurance

company involved, and hence AKG comments below on the transparency of FLC’s with profits

funds.

Compared with best practice, Friends Life Company Ltd does not publish a great deal of

supplementary details in respect of its with profits business in the public domain. The annual

report to policyholders is somewhat lacking in useful detail, and is symptomatic of most of the

company’s documentation by making little distinction between the Old and New Funds, or

between unitised and conventional business.

AKG believes that there is scope for improving the overall transparency of FLC’s with profits

business. There is now some common ground in the make-up of the With Profits Committee with

that of the other Resolution subsidiaries, and the extent of independent representation has

improved. AKG would hope to see the standards of disclosure rise in due course to mirror the

approach in those other companies. The activities of the fund continue to be reviewed by the

Monitoring Board and the Monitoring Actuary in accordance with the 2001 Reorganisation

Scheme.

Future Performance

4

Unitised with profits business is substantially the larger part of the overall Friends Life Company

Ltd fund and it has retained a very high EBR for the with profits bond business (84% at the end of

2011). Its performance for onshore maturity values in recent years, particularly under the AXA

Sun Life brand, has been improving, although rankings of specimen surrender values for onshore

UK business are mixed.

Given the continued commitment to maintaining a high EBR, it is to be hoped that future

prospects for policyholders will be quite rosy, particularly since the company states 'that it is

likely in the long term we will be able to continue to pay significant uplifts on maturing policies'

in respect of surplus assets and miscellaneous profits.

Policyholders in the Old With Profits Fund stand to benefit from Special Bonuses to a higher

degree than those in the New With Profits Fund.


3

Whilst new with profits products are not offered by LCL, its small block of in force with profits

business enjoys the security of the company into which it is reinsured. Whilst ownership of the

reinsurer has moved away from the AXA group, its positioning within the Resolution stable

provides a degree of comfort, although a degree of future restructuring seems likely.




Friends Life Company Ltd

Under the terms of the 2001 Reorganisation Scheme Friends Life Company Ltd’s New With

Profits Fund is prevented from building up an inherited estate, and much of the working capital of

the fund comes from support assets held outside the fund. At the end of 2010, following the

second five yearly test in accordance with the Reorganisation Scheme, £1.01bn of these support

assets were transferred to the shareholders’ fund. At the same time, it was also announced that

further amounts may be transferred to shareholders in future years up to the end of 2015 if certain

other tests are passed. A further £0.5bn was duly earmarked for transfer at the end of 2011.

As a result of the 2010 and 2011 transfers, the New With Profits Fund’s working capital has

reduced from £1.5bn to £76m and the working capital ratio reduced from 28% (one of the highest

in the market) to 1.4%. Realistic Excess Capital reduced to -£0.15bn from just over £0.1bn, and

the ratio of realistic excess available capital to assets fell to -1.5% from 25% (also one of the

highest in the market). The RCM, as a percentage of liabilities, reduced to 2.9% from 3.5%.

Whilst the Old With Profits Fund does not directly write any new business, it accepts reinsurance

of a proportion of the new business written by the New With Profits Fund. The company states

that both funds are fully aligned in terms of asset allocation and that bonus rates should be the

same. Unlike the New Fund, the Old Fund does not rely on support assets outside the fund.

Following the second five yearly test under the Reorganisation Scheme, Special Bonuses totalling

£157m were distributed from the Old With Profits Fund at the end of 2010. The fund's working

capital has reduced from £269m at the end of 2009 to £17m at the end of 2011 and the working

capital ratio reduced from 20% (one of the highest in the market) to 1.2%. Realistic Excess

Capital fell significantly from £223m to -£15m, and the ratio of realistic excess available capital

to assets fell to -1.1% from 16.6%. The RCM, as a percentage of liabilities, reduced from 4.3% to

2.4%.

Friends Life Company Ltd made various undertakings as part of its 2001 Reorganisation

Scheme. Given the current strength of the company in its own right, the court-approved schemes

relating to both the April 2001 reorganisation and the January 2007 bulk transfers (which protect

the with profits funds), and the degree of parental support potentially available, AKG has no

significant concerns as to the security of the company’s with profits business. In the past, the

company was the main vehicle for with profits funds within AXA UK, although its future position

within the Resolution group is less clear until the dust settles after the acquisition. The volume of

with profits business in force is declining insofar as exits far outweigh new business nowadays.




Company

Prudential International Assurance plc [Registered in Ireland]

Ownership

Prudential plc [Registered in England and Wales]

Group Background

Prudential is an international financial services group with operations in the UK and Europe, Asia

and the United States. Its strategy is to build sustainable, profitable businesses in each of these

three markets. The main operations are Prudential UK & Europe (life and pensions), M&G

Investments (the group’s UK and European fund manager, acquired in 1999), Jackson National

Life Insurance Co (a leading US life company, acquired in 1986) and Prudential Corporation Asia

(which now has life insurance and fund management operations in 13 markets in Asia). The

group has a 25% (previously 50%) share in PruHealth, a joint venture with Discovery Holdings of

South Africa, launched in 2004. Offshore business is marketed through the Dublin subsidiary

Prudential International Assurance plc.

Prudential began its Asian operations in India in 1923, and it has focussed significant attention on

expansion in Asia in recent years, most recently via a 2003 joint venture operation in Beijing. In

1999, Prudential Europe was formed as the group expanded into France and Germany. However,

in 2003, the group sold its German operation to Canada Life and ceased writing business in

France. The group sold its holdings in Mercantile and General Re-insurance to Swiss Re in 1996

and Egg, the internet bank, in 2007.

The group now has over 26,000 staff worldwide, plus over 365,000 agents in Asia. Whilst the

group has come under regular speculative pressure in the UK to consider a break-up, particularly

given that the bulk of its new business (76%) is written overseas, the group has reiterated its

commitment to the UK market - it produces 18% of new business profit, 29% of group IFRS

profit and substantially supports the overall credit rating of the group.

In 2007 the group acquired Equitable Life's with profits annuity book, containing approximately

50,000 annuitants and assets of £1.74bn. In 2008, Prudential UK outsourced a large proportion

of its in-force and new business policy administration to Capita Group plc (Capita). In June

2010 the group abandoned its plans to acquire AIA from AIG after being unable to negotiate a

lower price for the deal.

As at 31 March 2012, the group had an IGD surplus of £3.8 bn after deducting the 2011 final

dividend (31 December 2011: £4.0 billion, before deducting the 2011 final dividend of £0.4 bn].

Company Background

Prudential International Assurance plc (PIA) is owned by the Shareholders Fund of Prudential

Assurance Company Ltd (PAC).

The company was established in Dublin by J Rothschild in 1992 and renamed Scottish Amicable

Life International plc (SALI) when Scottish Amicable acquired the management services

company in 1994. SALI commenced writing business in the UK in 1994 and in Germany in

1995, becoming part of the Prudential group following the acquisition of Scottish Amicable in

1997.

In 1999, Prudential rebranded its European operations as Prudential Europe but continued to

market its products as Scottish Amicable European in the UK and SALI in Germany. The first

French product, Prudential Europe Vie (a with profits product), was launched in 2001 via a




branch of PAC (closed January 2004). In 2002, SALI was renamed PIA and the International

Prudence Bond was launched in the UK. The company recently launched in to France and

Spain.

In November 2003, the company outsourced its administration, for both new and existing

business, to Capita.


The company sits within the wider, and very strong, Prudential proposition. It follows a clear,

focused strategy, one that has seen steady UK new business levels, with a bias towards with

profits. Solvency is good and parental support is strong in terms of capital, if required,

operational support and brand strength.



Business?

International Prudence Bond 1 Apr 2002 - present Yes


Fund Available from/to Open to New

Business?

PAC Sterling With-Profits Fund 1 Apr 2002 - present Yes

PruFund Growth (Sterling) Fund 25 Nov 2008 - present Yes

PruFund Protected Growth (Sterling) Fund 25 Nov 2008 - 9 Oct 2009,

11 Apr 2011 - present

Yes

PruFund Cautious (Sterling) Fund 25 Nov 2009 - present Yes

PruFund Protected Cautious (Sterling) Fund 25 Nov 2009 - present Yes


All of PIA’s with profits policies are reinsured into the immediate parent company, Prudential

Assurance Company Ltd. The volume of business reinsured as at the end of 2011 amounted to

£1.5bn.

The investment content of the reinsured business is invested in PAC’s Defined Contribution

Participating Sub Fund (DCPSF).

PIA pays an annual charge to the PAC inherited estate within PAC’s With Profits Sub Fund for

the use of the economic capital.

Reinsurance Company

Prudential Assurance Company Ltd [Registered in England and Wales]


Prudential began life in 1848 as the Prudential Mutual Assurance Investment and Loan

Association. It became the Prudential Assurance Company ('PAC') in 1867, and for many years it

was the UK’s largest life company. Originally a composite office with a large home service

operation, the company stopped writing IB business in 1995, and in 2001 the company closed its

direct sales force and exited from general business in the UK by selling its book to Churchill

(although a small run-off liability still exists). At the same time, it dropped the Scottish




Amicable brand (it had acquired Scottish Amicable in 1997) and all remaining Scottish Amicable

business was transferred into Prudential at the end of 2002.

In December 2007 the company accepted a transfer of £1.8bn of with profits annuities liabilities

(60,000 policies) from Equitable Life Assurance Society.

In 2008, the company decided not to proceed with a reattribution of its Inherited Estate.

At the end of October 2010 the businesses of Prudential (AN) Ltd and Prudential Holborn Life

Ltd were transferred into the company, to simplify the group structure. Prudential (AN) Ltd

contained a closed block of with profits bonds written in 2003 and 2004 via the sales force of

Abbey National plc. That block of business, with reserves of £43m as at December 2009, had

been wholly reinsured to Prudential Assurance prior to the transfer.

Prudential distributes life products through 4 channels within the UK: Intermediaries (distribution

via financial advisers), Business to Business (corporate pensions business primarily with

consulting actuaries and benefit consultants), Partnerships (arrangements with banks, insurers

and other distributors), Direct to Customer (the sale of annuities to individual pension customers).

Intermediaries are seen as a key component in the distribution strategy.

Sales of with profits products in the intermediary market are now limited mainly to pensions and

with profits bonds. However, the company remains by far the biggest writer of new with profits

business in the UK market, being almost alone in achieving significant growth in new business

volumes compared to 2006 levels, reflecting a renewed focus on the with profits market.


As one of the UK's largest and strongest life companies, PAC continues to show significant

resilience in the wake of very challenging economic conditions. It has retained focus and

increased its market share, whilst continuing to demonstrate its commitment to the UK market,

specifically the Pre- and Post-Retirement space. Statutory solvency in PAC has proved resilient,

as has cash generation and group IGD surplus remains significant.

Despite the failed attempt to acquire AIA in 2010, AKG believes that the group remains

financially strong and that its strategy towards the UK, which is an important generator of cash,

based on its brand and financial strength, is a sensible one.

International Prudence Bond Product Outline

The International Prudence Bond was launched on 1st April 2002.

The International Prudence Bond is a medium to long term single premium unitised with profits

investment bond which offers the tax advantages of a Dublin-based bond combined with a range

of selected funds, including a choice of guarantee options.

Due to PIA's location in Dublin, the underlying funds are subject only to withholding tax. As a

result, investments have the potential to grow faster than in an onshore bond.

International Prudence Bond offers a choice of fund links:

Equity and managed multi-asset funds from the Prudential Group

Specialist equity and international funds from other leading fund managers

PruFund Range of Funds including guarantee options - Sterling, Euro and US Dollar

Three PAC With-Profits funds - Sterling, Euro and US Dollar

Dynamic Portfolios range - five 'fund of funds' portfolios combining the expertise of

Prudential's Portfolio Management Group and Old Broad Street Research

The main features include:

Whole life or 99 year capital redemption options available.

Tax-efficient and flexible withdrawals - so clients can take out money when they need it,

without necessarily adding to their immediate tax bill

Loyalty bonus: an extra 0.1% of the bond value is added from the end of year one, where no

regular or partial withdrawals are made




Annual Management Charge 1.2% p.a.

Establishment Charge: 1.2% per annum of the fund deducted quarterly for the first five

years. (Alternatively an initial charge version is available).

Death benefit:

o 101% of the full value of the units relating to the investment, if the relevant life

assured (i.e. the oldest life for a joint life first death bond, the youngest life for a

joint life second death bond) was 75 or under at entry; or

o 100.1% of the cash-in value of the bond, if the relevant life assured was 76 or over

at entry.

Guaranteed minimum maturity benefit (capital redemption version): 101% of the initial

investment less any withdrawals.


reducing by 2% p.a. to nil in the sixth year.

Minimum initial investment - £20,000, Euro €25,000 or US$35,000

Top-up facility from £15,000, Euro €20,000 or US$25,000

Minimum allocation rate of 100%

Regular withdrawals allowed (up to a maximum in any 12 month period of 5% of the greater

of the total invested and the value of the bond when withdrawals start).

Bonds linked to the PruFund funds have a number of special features:

Investment into the funds takes place only at quarter dates (25th of February, May, August

and November). In the interim, monies are invested in an interest bearing PruFund Account.

Guarantee options - 7, 8, 9 and 10 year spot guarantees on the PruFund Protected Cautious

Funds and a 10 year spot guarantee on the PruFund Protected Growth Funds

The International Prudence Bond is available in the UK, Jersey, Guernsey, Isle of Man, Cyprus,

Malta, Gibraltar and France, and a specially designed variant is available in Spain.

Current Bonus Scales - PAC Sterling With-Profits Fund

Annual Bonus Rates Mar 2012 Mar 2011

International Prudence Bond 3.00% 3.50%


For surrendering bonds, the company publishes a table of compounded annual yields applicable

over the term invested. This represents the combined effect of annual and terminal bonuses

(ignoring charges) and hence drives the amount of terminal bonus added in each case. The

effective terminal bonus rates for the four specimen past performance figures supplied as at 1st

April 2012 varied between 2.7% and 23.8%. The table of yields applicable from 1st March 2012 is

as follows:

Date of investment

Compound Yield p.a.

From 01/03/2012 6.50%

01/03/2011 – 29/02/2012 5.50%

01/03/2010 – 28/02/2011 5.50%

01/03/2009 – 28/02/2010 6.75%

01/03/2008 – 28/02/2009 4.50%

01/03/2007 – 29/02/2008 4.20%

01/03/2006 – 28/02/2007 4.30%

01/03/2005 – 28/02/2006 4.75%

01/03/2004 – 28/02/2005 6.00%

01/03/2003 – 29/02/2004 6.50%

01/03/2002 – 28/02/2003 6.00%




Current Bonus Scales - PruFund Funds

There is no concept of bonuses under the PruFund funds, and bonds participate in profits by

means of an increase in the unit price of the fund. The unit price increases at the Expected Growth

Rate which is published on each quarter date (the current rates being 7.9% p.a. for the Growth

Funds - having been 8% p.a. from launch until 25 November 2009 - and 7.5% p.a. for the

Cautious Funds) unless the unit price moves outside specified limits:

On a quarter date, if the net asset value per unit is more than 5% above/below the unit price,

the unit price is adjusted by half the difference between the unit price and the net asset value

per unit. [NB No such adjustments have yet been made in either of the Sterling International

Prudence Bond PruFund Cautious Funds. Adjustments have been made on five quarter dates

for the corresponding Growth Funds – 25 February 2009: minus 2.55%; 25 August 2009:

plus 8.15%; 25 November 2009: plus 3.55%; 25 November 2010: plus 3.54%; 25 February

2011: plus 2.57% ].

Between quarter dates, the net asset value per unit is averaged over the previous 5 working

days to give the average net asset value per unit. If the net asset value per unit and the average

net asset value per unit are both 10% (or more) above/below the unit price, the unit price will

be increased/decreased so that it is 2.5% below/above the net asset value per unit.[NB No

such adjustments have yet been made in any of the four Sterling International Prudence

Bond PruFund Funds].

If aggregate net flows of business into or out of an investment fund exceed limits specified within

the policy provisions, the company may suspend the smoothing of the unit price, in which case

the unit price will be the net asset value per unit.

MVRs

PAC Sterling With-Profits Fund

MVRs may be imposed where the value of the underlying assets is less than the value of the

policy including bonuses.

MVRs are guaranteed not to apply on death claims, and the company’s current practice is to not

apply MVRs on regular withdrawals of up to 5% of the value of the bond per annum (up to a

maximum in any 12 month period of 5% of the greater of the total invested and the value of the

with-profits portion of the bond when withdrawals start).

MVRs were applied throughout 2011 on some bonds within all years of entry.

PruFund Funds

PruFund funds are not subject to MVRs as such. The mechanism for determining policy payouts

when markets are volatile, or depressed, is pre-defined as part of a systematic smoothing process.

The only discretion the company has is whether to suspend smoothing or not. The fund's

performance is not a deciding factor in whether the smoothing process is applied, or not. Large

values of investments coming into or out of the fund could mean that investments would not be

smoothed by the pre-defined process.

Guarantees


The long-term expected cost of smoothing and guarantees for each type of product is deducted in

calculating asset shares and credited to the WPSF inherited estate, which bears the costs of

smoothing and guarantees as they emerge.

On policies other than those invested in the PruFund range of funds, the total deduction over the

lifetime of each policy is currently not more than 2% of any payment made from the fund, with




the deduction building up to this level over the first few years of the policy.

PruFund Growth (Sterling) Fund

There are no guarantees relating to returns under this fund.

PruFund Protected Growth (Sterling) Fund

Policies in this fund contain a guarantee at the tenth anniversary. The company guarantees to

restore the value of the fund at the guarantee date to the amount of the original investment

(reduced for any withdrawals), if necessary.

The charge for this option is fixed at the point of issue, the charge on current new policies being

0.5% pa [increased from 0.35% pa on 8 November 2011].

Immediately after the guarantee date, all units are switched to the PruFund Growth (Sterling)

Fund, and the charge for the guarantee ceases.

PruFund Cautious (Sterling) Fund

There are no guarantees relating to returns under this fund.

PruFund Protected Cautious (Sterling) Fund

Policies in this fund contain a guarantee at the seventh, eighth, ninth or tenth anniversary (as

selected by the bondholder at outset). The company guarantees to restore the value of the fund at

the guarantee date to the amount of the original investment (reduced for any withdrawals), if

necessary.

The charge for this option is fixed at the point of issue, the charge on current new policies being

1.25% pa (7 year guarantee), 0.75% pa (8 year guarantee), 0.5% pa (9 year guarantee), or 0.3% pa

(10 year guarantee) [increased from 0.55% pa, 0.35% pa, 0.25% pa and 0.15% pa respectively on

8 November 2011].

Immediately after the guarantee date, all units are switched to the PruFund Cautious (Sterling)

Fund, and the charge for the guarantee ceases.

Investment


In 2009 the EBR fell quite noticeably as a result of the decision to reduce the fund's equity

content. At the end of March 2012, the EBR was 51.6% (including alternative assets held).

Asset type Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

Actual

31 Mar 2012

UK Equities 25.0% 25.6% 23.8% 17.1%


Property 11.7% 12.0% 12.8% 12.2%

Fixed Interest 39.5% 42.1% 44.1% 42.9%

Cash 6.6% 2.3% 3.0% 5.5%

Other 4.8% 5.4% 5.8% 5.5%

PruFund Growth (Sterling) Fund / Protected Growth (Sterling) Fund

The investment mix currently follows that of the main part of PAC’s With-Profits Sub-Fund. In




2009 the EBR fell quite noticeably as a result of the decision to reduce the fund's equity content.

At the end of March 2012, the EBR was 51.6% (including alternative assets held).

Asset type Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

Actual

31 Mar 2012

UK Equities 25.0% 25.6% 23.8% 17.1%


Property 11.7% 12.0% 12.8% 12.2%

Fixed Interest 39.5% 42.1% 44.1% 42.9%

Cash 6.6% 2.3% 3.0% 5.5%

Other 4.8% 5.4% 5.8% 5.5%

PruFund Cautious (Sterling) Fund / Protected Cautious (Sterling) Fund

The fund has been marketed with a much more cautious approach than from the main part of the

WPSF, with a current target of a 30% EBR.

Asset type Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

Actual

31 Mar 2012

UK Equities 13.9% 13.8% 12.8% 9.1%


Property 6.5% 6.5% 7.1% 7.4%

Fixed Interest 60.1% 66.3% 64.9% 63.5%

Cash 9.9% 3.7% 6.9% 8.6%

Other 2.6% 2.9% 2.5% 2.5%

Past Performance - International Prudence Bond



PAC Sterling With-Profits Fund 2 Single £10,000 £10,213






PruFund Growth (Sterling) Fund 2 Single £10,000 £11,071

PruFund Growth (Sterling) Fund 3 Single £10,000 £13,338



PruFund Protected Growth (Sterling)

Fund

2 Single £10,000 £10,785


Fund

3 Single £10,000 £12,961



PruFund Cautious (Sterling) Fund 2 Single £10,000 £10,352




Fund

2 Single £10,000 £10,094




Investment Returns

Fund 2007 2008 2009 2010 2011

PAC Sterling With-Profits Fund 7.2% -19.7% 18.7% 12.7% 2.1%

PruFund Growth (Sterling) Fund n/a n/a 18.7% 12.7% 2.1%


Fund

n/a n/a 18.7% 12.7% 2.1%

PruFund Cautious (Sterling) Fund n/a n/a n/a 11.0% 5.5%


Fund

n/a n/a n/a 11.0% 5.5%

Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

In a number of ways the Prudential has set the standard for others to follow in terms of improving

transparency. For example, it was the first company to establish a fully independent with profits

committee (whose remit includes PIA’s with profits business), and it allows it to have a

significant involvement in the management of the company’s with profits business. It also tends

to define intended maximum charges for smoothing and guarantees at the start of a policy.

The general quality of Prudential’s literature is high, although the PPFM is slightly difficult to

follow because of the wide range of different types of business in force, which entails a large

number of departures in practice from the norm. A wide range of different publications on with

profits issues are available, but occasionally some are difficult to track down online. The annual

report to policyholders on compliance with the PPFM covers a lot of ground.

The ‘new-style’ PruFund funds are inherently more transparent than the Prudential’s older with

profits funds, but their mechanics are fairly complex to understand. Policyholders receive a

six-monthly statement along the lines of a bank statement.

PAC Sterling With-Profits Fund 5

PruFund Growth (Sterling) Fund 5

PruFund Protected Growth (Sterling) Fund 5

PruFund Cautious (Sterling) Fund 5

PruFund Protected Cautious (Sterling) Fund 5

Future Performance

Prudential remains highly committed to with profits and the philosophy that equities offer the best

prospect of longer term returns. The strength and scale of Prudential also contribute to boost

future performance prospects.

PAC Sterling With-Profits Fund 4

The equity backing ratio has fallen from its level of a few years ago, but there must be a

reasonable expectation that it may revert to a higher level in the future. It is difficult to compare

payouts in the offshore market, due to the lack of published data. Recent payouts on onshore UK

business with the same asset mix have been fairly respectable, but have perhaps slipped relative to

others in the market, and there are charges for smoothing and guarantees.

PruFund Growth (Sterling) Fund 4

This fund benefits from the same asset mix, and hence investment performance, as the PAC

Sterling With-Profits Fund. Charges are pre-defined, and those for smoothing and guarantees are

contained within the annual management charge.




PruFund Protected Growth (Sterling) Fund 3

This fund benefits from the same asset mix, and hence investment performance, as the PAC

Sterling With-Profits Fund. Charges are pre-defined, and those for smoothing and guarantees are


The additional charge for guarantees on the PruFund Protected funds reduces the Future

Performance Rating, relative to the PruFund Growth Fund.

PruFund Cautious (Sterling) Fund 3

Long-term growth prospects are lower than those in the company's more traditional equity based

with profits funds, because of the intentionally cautious target EBR. Charges are pre-defined, and

those for smoothing and guarantees are contained within the annual management charge.

PruFund Protected Cautious (Sterling) Fund 2

Long-term growth prospects are lower than those in the company's more traditional equity based

with profits funds, because of the intentionally cautious target EBR. Also, the additional charge

for guarantees on the PruFund Protected funds reduces the Future Performance Rating, relative to

the PruFund Cautious Fund. Charges are pre-defined, and those for smoothing and guarantees are



5

PIA (like its parent, Prudential Assurance Company Ltd, in the UK) continues to buck the general trend

and write significant volumes of with profits new business (in 2010, €168.4m worth of new business

was with profits, over 58% of the total). Thus with profits clearly remains strategically important to the

company.

At the parental level, and particularly in the UK, an excellent level of financial strength is maintained

and Prudential retains its acknowledged position as one of the leaders in the with profits arena.

The investment element of with profits business written by PIA is reinsured 100% to PAC. More

specifically it is reinsured into the Defined Charge Participating Sub-Fund (DCPSF), one of three with

profits sub funds within PAC. At 31 December 2011 the DCPSF had total assets of £3.0bn, whilst with

profits assets in PAC totalled some £94.4bn (2010: £87.1bn).

On a standalone basis, the DCPSF maintains no free assets on a realistic basis. However, support

is provided to the DCPSF by the very strong With-Profits Sub-Fund in return for a yearly charge

(for PIA’s PAC Sterling With-Profits Fund business the charge was at the rate of 0.2% p.a. in

2009, 2010 and 2011).



Scottish Mutual International plc

Company

Scottish Mutual International plc [Registered in Ireland]

Ownership

Phoenix Group Holdings [Registered in Cayman Islands]

Group Background

Phoenix Group is the largest closed consolidator of life companies in the UK with around £70bn

of funds under management. It was formed by the merger, in 2008, of Pearl Group and

Resolution. Pearl Group, companies that traded under the Pearl, NPI and London Life brands,

was acquired in 2005 by Life Company Investor Group Ltd (subsequently renamed Pearl Group

Ltd (PGL)) from Henderson Group plc (previously HHG plc and formed following the

withdrawal from the UK of AMP Ltd).

The group was simplified in 2006 with the transfer of business from Pearl Assurance (Unit

Linked Pensions) Ltd, Pearl Assurance (Unit Funds) Ltd and London Life Linked Assurances Ltd

into NPI Ltd.

Resolution plc was formed in September 2005 from the merger of Resolution Life Group Ltd and

Britannic Group plc, including the life business of Alba Life (previously Britannia Life), the life

operations of Allianz Cornhill and the Century group (itself the result of numerous previous

consolidations).

In December 2005, the funds of Swiss Life (UK) plc, Phoenix Assurance Ltd and Bradford

Insurance Company Ltd were transferred into Royal & SunAlliance Linked Insurances Ltd

(renamed Phoenix Life Ltd (PLL)).

In August 2006, Resolution plc acquired the life businesses of Abbey National plc: Scottish

Mutual Assurance Ltd (SMAL), Scottish Mutual International Ltd (SMI), Scottish Provident Ltd

(SPL) and Abbey National Life plc (re-named Phoenix Life Assurance Ltd (PLAL)).

In May 2008, Impala Holdings Ltd, a 75% subsidiary of PGL, acquired Resolution plc. Royal

London acquired Scottish Provident International Life Assurance Ltd in June 2008 and PLAL and

the new business capability of SMAL and SPL in August 2008.

In September 2009, PGL was acquired by Liberty Acquisitions Holdings (International) of the

Cayman Islands, which then renamed itself PGL. Following extensive capital restructuring, the

group changed its name to Phoenix Group in March 2010.

In January 2011, the business of Phoenix & London Assurance Ltd (PALAL) was transferred into

PLL. The business of NPI Ltd (and some of the business of National Provident Life Ltd) was

transferred into PLL effective from January 2012.

Company background

The company was established in 1996 as the offshore life assurance arm of Abbey National plc.

Throughout 1996 to 1998 SMI concentrated on the UK market, but it has also written business in

Ireland and Hong Kong (via a branch operation).

Initially, SMI wrote with profits business under which the policy benefits were reinsured to the

Overseas Life Assurance Business Fund of the With Profit Sub-Fund of its then sister company

Scottish Mutual Assurance Ltd. In 2009, this business along with the rest of SMAL’s business

was transferred to Phoenix Life Limited and the reinsurance is now to the Scottish Mutual




With-Profits fund of PLL.

From April 2000, with profits business was written and retained in the long-term fund of SMI.

In March 2003, the Abbey National Group announced that its international businesses were no

longer considered key, and SMI was closed to new business in April 2003, although it still accepts

increments on certain existing policies.

The company’s business comprises predominantly single premium investment products,

incorporating single premium unit-linked bonds, portfolio bond type investments and unitised

with profits bonds.

With regard to its Irish domestic business, the company now sits alongside Phoenix Life Ltd’s

Irish branch business (including that in the SPI With Profits Fund), together branded as Phoenix

Ireland. From the end of 2009, the company entered into an outsourcing agreement with Percana

Ltd, to give certainty of future costs.


The company’s business is running off quite quickly now, with long term assets reducing from

£1.9bn at the end of 2006 to £358m at the end of 2010. However, capital resources in excess of

capital requirements increased from £42.1m to £46.3m in 2010, when a pre-tax profit of £623,000

was achieved, following a loss of £6.5m in 2009.

The parent group is the UK’s largest closed life and pension fund consolidator, with £72bn of

assets under management at the end of 2011. The Group's estimated IGD surplus was £1.3bn as at

31 March 2012.



Business?

With Profit Investment Bond Jan 1999-May 2001 No*

Guaranteed Investment Bond May 2001-April 2003 No* * Ignoring sales to/top ups by existing customers


Fund Product Available from/to

With Profit Series 1 Fund With Profit Investment

Bond

Jan 1999-Apr 2000

SMI With Profits Sterling Fund (Series 1) With Profit Investment

Bond

Apr 2000-May 2001

SMI With Profits Sterling Fund (Series 2) Guaranteed Investment

Bond

May 2001-Jun 2002

SMI With Profits Sterling Fund (Series 3) Guaranteed Investment

Bond

Jun 2002-Apr 2003


The With Profit Series 1 Fund is fully reinsured into the Scottish Mutual With-Profits Fund of the

sister company, Phoenix Life Ltd. Reserves for this business amounted to less than £18m at the

end of 2011, including only £1.6m denominated in Sterling.

The SMI With Profits Sterling Funds, also known as the ‘Dublin Funds’, are retained within SMI.




Reinsurance Company

Phoenix Life Ltd [Registered in England and Wales]


Founded in 1971 as Lloyd's Life Assurance Ltd, the company was renamed Royal Heritage Life

Assurance Ltd in 1986 following its acquisition by Royal Insurance. It was renamed Royal &

Sun Alliance Linked Insurances Ltd in 1998 following the merger of Royal with Sun Alliance and

business from various companies in the enlarged group was transferred in.

The company closed to new business in September 2002 and was acquired by Resolution Life in

September 2004. In December 2005, the company, now called Phoenix Life Ltd, received

business transfers in from Phoenix Assurance Ltd, Swiss Life (UK) plc and Bradford Insurance

Company Ltd, followed in December 2006 by the long-term business of Alba Life Ltd, Britannic

Assurance plc, Britannic Retirement Solutions Ltd, Britannic Unit Linked Assurance Ltd,

Century Life plc and Phoenix Life & Pensions Ltd.

In May 2008, Impala Holdings Ltd, a 75% subsidiary of Pearl Group, acquired Resolution plc.

The long term business and some of the shareholders' funds of Scottish Mutual Assurance Ltd and

Scottish Provident Ltd were transferred into the company in January 2009 for a nil consideration.

The transfer to PLL of the long term business and the majority of the shareholders' funds of

PALAL was effective on 1 January 2011, and the long-term business of NPI Ltd (& some of the

business of National Provident Life Ltd) was transferred to the company effective from January

2012.

Scottish Mutual With-Profits Fund

The Scottish Mutual With-Profits Fund (SMWPF) contains the with profits business transferred

to Phoenix Life Ltd in January 2009 from the With Profits Sub-Fund (WPSF) of Scottish Mutual

Assurance Ltd 'SMAL). It also includes the new-style with profits Smoothed Investment Fund

business transferred to the Phoenix Life Ltd Non-Profit Fund at the same time from SMAL’s

Other Business Sub-Fund (OBSF), and then subsequently reinsured to the SMWPF.

Scottish Mutual's origins date back to 1883, when The Scottish Temperance Life Assurance

Company Ltd was founded. It became a mutual in 1952 on the formation of The Scottish Mutual

Assurance Society. The Scottish Mutual Assurance Society demutualised on 1 January 1992 and

its business was transferred to Scottish Mutual Assurance plc, which was subsequently renamed

Scottish Mutual Assurance Ltd. From 1991 to 2006, SMAL was owned by Abbey National plc,

but in September 2006, it was acquired by Resolution plc.

When Scottish Mutual demutualised, the WPSF received all the CWP business, and the with

profits investment element of UWP business. From 1992 until 2002, all further new Scottish

Mutual with profits business was written in the WPSF, with the exception of the Triple Bonus

Bond. In December 2002, Scottish Mutual withdrew the then current with profits option for all

new life and pensions business.

SMAL launched two new-style with profits funds in April 2003, the Smoothed Income and

Smoothed Growth Funds, which were ring-fenced funds within the OBSF. Both funds were

closed in 2008 and they are quite small, so they are not generally considered in more detail in this

report.

In June 2004, following extensive discussion with the FSA, the company announced a

'stabilisation' exercise designed to ensure the future solvency of the fund post the introduction of

realistic reporting. This involved five steps:

(i) Asset shares were reduced by £351m

(ii) The injection of £460m of capital into the WPSF from the OBSF

(iii) The repayment of the outstanding contingent loan (totalling £591m)

(iv) The establishment of a Risk Based Capital (RBC) capital support facility external to the fund

(v) The implementation of a hedging strategy, referred to as project OPAL.




Whilst SMAL latterly focussed on its protection speciality (much of which was sold to Royal

London), a large proportion of its liabilities related to the older legacy portfolio of other business,

and the majority of its reserves were with-profits in nature, including within the WPSF

approximately £1bn of with profits bonds reinsured in from Phoenix Life Assurance Ltd (which

was recaptured in August 2008).

The fund is generally no longer actively seeking new business, but it continues to write a small

amount of incremental new business.

Where appropriate, historic data is shown in this report in respect of the business transferred into

the fund, using the data from SMAL’s WPSF fund.


The Phoenix Group has stabilised since the rather public difficulties of the parent group in 2008

and early 2009.

Phoenix Life Ltd is a key part of the Phoenix Group's consolidation strategy, with business being

transferred directly into it or its annuity subsidiary (PPL). Long term assets grew to £48bn by the

end of 2011 [2010: £33bn], boosted by the transfer of business from PALAL.

The company’s free asset ratio reduced slightly in 2011, however, although there was an

improvement in the company's CRR coverage.

With Profit Investment Bond Product Outline

The With Profit Investment Bond is a single premium unitised with profits whole life assurance

investment bond, denominated in Sterling, Euros or US Dollars.

A percentage of the single premium received is invested in a unitised with profits fund (100% for

ages under 80 at entry, 98% for ages over 80 or over).

Policies purchase notional units in a unitised with profits fund. Benefit payments are dependent

on unit prices at the time of a claim, although charges may be applied. The unit price is typically

guaranteed not to fall and increases in line with any discretionary bonus payments.

The bonuses are designed to distribute to policyholders a fair share of the return on assets in the

with profits funds together with other elements of the experience of the fund. The owners of the

company are entitled to receive 15% of the cost of the bonuses declared.

With Profits Series 1 policyholders share only in the investment experience of the fund, with

other sources of profit and loss falling to the shareholders. For this series, no annual bonuses have

been added since the end of 2002.

SMI With Profits Sterling Fund policyholders are entitled to 100% of the profits remaining after

the annual management charges have been deducted. To date, the company has maintained a

positive bonus rate each year, although the rate fell to 1% at the end of 2008.

Surrender values are not guaranteed (except at the special Guaranteed Dates). The surrender

value is the value of units increased by any terminal bonus, reduced by any MVR and reduced by

a discontinuance charge during the first 5 years.



For premiums of £25,000 or over, additional units were added to the plan at the end of the

first year (1% - 2% depending on premium size).

Establishment Charge: 1% per annum of the fund deducted quarterly in arrears for the first

five years.

Annual management charge of 1.1% to cover fund management and administration fees.

Additional charge on With Profits Series 1 Fund units: 0.5% per annum payable to the




Scottish Mutual With-Profits Fund of PLL.

Death benefit: 101% (100.1% at age 75 or over) of the value of units, adjusted for any

terminal bonus and early surrender charge.

On surrender during the first 5 years, a discontinuance charge applies (9% in Year 1,

reducing by 2% p.a. to nil in the sixth year).

Regular or one-off withdrawals allowed subject to a minimum of £500 and at least £10,000

remaining in the bond.



Tax – SMI Sterling With Profits Fund: no tax is allocated to units, except tax deducted at

source on investment proceeds.

Guaranteed With Profit Bond Product Outline

The Guaranteed With Profit Bond is a single premium unitised with profits investment bond,

denominated in Sterling, Euros or US Dollars (originally there was a Hong Kong Dollar version

as well, but that fund is now closed). The bond was available on two different bases: whole life

assurance or capital redemption (with an 80 year term).

A percentage of the single premium received is invested in a unitised with profits fund (capital

redemption: 100%; whole life: 100% for ages under 80 at entry, 98% for ages over 80 or over).

Policies purchase notional units in a unitised with profits fund. Benefit payments are dependent

on unit prices at the time of a claim, although charges may be applied. The unit price is typically

guaranteed not to fall and increases in line with any discretionary bonus payments.

The bonuses are designed to distribute to policyholders a fair share of the return on assets in the

with profits funds together with other elements of the experience of the fund. Policyholders are

entitled to 100% of the profits remaining after the annual management charges have been

deducted. The owners of the company are entitled to receive 15% of the cost of the bonuses

declared.

Surrender values are not guaranteed (except at the two special Guaranteed Dates). The surrender

value is the value of units increased by any terminal bonus, reduced by any MVR and reduced by

a discontinuance charge during the first 5 years.



For premiums of £50,000 or over, additional units were added to the plan at the outset (0.5%

- 2% depending on premium size).

Establishment Charge: 1.3% per annum of the fund deducted quarterly in arrears for the first

five years.

An annual distribution charge is taken daily, equivalent to (15/85)% of the current annual

bonus rate, and a charge of (15/85)% of the amount of any terminal bonus. When an MVR is

applied to an encashment of units, an amount equal to 15/85ths of the MVR is added to the

With Profits Fund. For policies invested in Series 5 units, the amount added back is restricted

to a maximum of the annual charges deducted to that date.

Death benefit at ages under 75 – life assurance version: the greater of 101% of the surrender

value and the original premium increased at the rate of 2% per annum from the start date.

Death benefit at age 75 or over – life assurance version: 100.1% of the surrender value.

Maturity benefit – capital redemption version: The greater of the surrender value of the bond

and the Guaranteed Maturity Value (twice the original premium, if no withdrawals).

On surrender during the first 5 years, a discontinuance charge applies (a percentage of the

units, based on the number of outstanding establishment charges and the size of the plan)

Regular or one-off withdrawals allowed subject to a minimum of £200 and a maximum of

7.%% of the bond value at the start of the policy year.

Switches not allowed (except to one of the other currency funds).





Tax: no tax is allocated to units, except tax deducted at source on investment proceeds.

Current Bonus Scales

Annual Bonus Rates In 2011 In 2010

With Profit Series 1 Fund 0% 0%

SMI With Profit Sterling Fund (Series 1,2 and 5) 1% 1%

Terminal Bonus Rates at 1 June 2012 – With Profit Series 1 Fund


1999 19.7%

2000 20.3%

2001 34.7%

2002 52.0%

2003 60.0%

MVR/Terminal Bonus Rates at 1 June 2012 – SMI With Profit Sterling Fund (Series 1)


2000 -23% to -15%

2001 -15% to +6%

2002 0% to +19%

2003 +15% to +20%



2001 -2% to +13%

2002 0% to +22%



2002 0% to +26%

2003 0% to +27%

MVRs

With Profit Investment Bond

MVRs may be applied on surrenders, except that an amount up to the Charge Free Withdrawal

Allowance may be withdrawn from the bond each year free from any MVR or surrender penalty.

The Charge Free Withdrawal Allowance is the current annual bonus rate applied to the value of

units.

As at 1st June 2012, MVRs (of up to 23%) were only being applied for SMI With Profits Sterling

Fund (Series 1) bonds effected between April 2000 and August 2001.

Guaranteed With Profit Bond

MVRs may be applied on surrenders, subject to the guarantees applicable at the two special

Guaranteed Dates (see section on Guarantees below).

As at 1st June 2012, MVRs (of 2%) were only being applied for Sterling Series 2 bonds effected in

May 2001.




Guarantees

A substantial proportion of the company’s original guarantees expired between 2009 and 2011.

With Profit Investment Bond

There are special Guaranteed Dates which fall on the 8th

anniversary (or any later anniversary

chosen at outset) and every five years thereafter. This guarantee allows the plan to be surrendered

in full, or in part, free from any MVR.

The With Profit Series 1 bonds are subject to a reduction in the investment return credited to asset

shares in respect of the cost of rebalancing the hedge assets held within the Scottish Mutual

With-Profits Fund in respect of the fund’s extensive guarantees. In 2010, this cost was more than

offset by the effect of estate distributions from the fund and there was a net increase in asset

shares of 3.21%. In 2001, however, there was no net charge or enhancement.

Guaranteed With Profit Bond

There are two special Guaranteed Dates which fall on an anniversary selected at outset (between

the 8th and the 13

th) and the 15

th anniversary.

This guarantee allows the plan to be surrendered in full, or in part, for a minimum value equal to

the premium multiplied by the appropriate Guarantee %. The guarantee reduces in line with any

withdrawals. The Guarantee % is 117.5% on the 8th anniversary, 120% on the 9

th anniversary,

122% on the 10th anniversary, 125% on the 11

th anniversary, 127% on the 12

th anniversary, 130%

on the 13th anniversary, and 140% on the 15

th anniversary.

The company operates a hedging strategy to protect against guarantee costs.

Investment

With Profit Series 1 Fund

There has been a marked shift away from equities in the Scottish Mutual With-Profits Fund since

1999, with the EBR reducing from around 77%. The investment strategy now includes an explicit

and regularly rebalanced hedging strategy using a series of structured derivatives comprising

equity put options, equity futures, interest rate swaps and interest rate swaptions. At December

2011 the value of the derivatives held was £333m. Hedging is limited to 5% of the fund.

PLL changed the investment strategy for with profits asset shares in 2010, announcing an

intention to: reduce the UK equity content; increase the overseas equity content; introduce a

property element and a small proportion of alternative assets, such as hedge funds; reduce the

proportion in cash and increase the proportion in gilts.

Until 2010, there had been a single asset mix for the asset shares of all sterling denominated

business (excluding the Smoothed Funds), with a maximum guideline holding of 45% in equities

(increased from 40% in September 2006). Similarly there had been a single mix of asset held for

euro denominated business and a single mix of asset held for US dollar denominated business.

Now, the asset mix varies by policy type. Compared with the previous status quo, policies with

low guarantees have a higher EBR, whilst those with high guarantees have a lower EBR.

The tables below shows the asset mix for UWP business without guaranteed minimum bonuses.

The current guideline range for equities and property for this block of business (excluding assets

backing guarantee costs) is 55%-65%.

Asset type Actual

31 Dec 2008

Actual

31 Dec 2009

Actual

31 Dec 2010

Actual

31 Dec 2011

Equities 36.0% 39.0% 52.0% 49.0%

Property 0.0% 0.0% 5.0% 6.0%

Fixed Interest 64.0% 50.0% 40.0% 41.0%

Cash 10.0% 11.0% 0.0% 1.0%

Other 0.0% 0.0% 3.0% 3.0%




SMI With Profits Sterling Fund (Series 1, 2 and 5)

The investment strategy and risk profile of SMI’s Dublin With Profits Fund for each of the

notional currency sub-funds is assessed at a total fund level rather than at sub-fund level, although

there may be future circumstances when such consideration is desirable at sub-fund level (for

example if assets to hedge the guarantees were to be held within the fund).

The table below shows the target asset allocations within the fund. Actual asset mix may vary by

a few (typically less than 5) percentage points.

Asset type Target

1 Sep 2006

Target

1 May 2008

Target

1 May 2011

Target

30 Apr 2012

UK Equities 32.0% 50.0% 50.0% 50.0%

Overseas Equities 8.0% (inc above) (inc above) (inc above)

Property 0.0% 0.0% 0.0% 0.0%

Fixed Interest 45.0% 38.0% 37.5% 37.5%

Cash 15.0% 12.0% 12.5% 12.5%

Other 0.0% 0.0% 0.0% 0.0%

Past Performance


Investment Returns

SMI does not currently make any distinctions between different classes of policy, in recognising

the gross investment return to use in its calculation of asset share models other than by reference

to the currency sub-funds. In particular there are units denominated in three different currencies

(£, $ and €) with premiums in each currency being applied to four distinct currency sub-funds.

Each currency sub-fund is separately maintained and has its own notionally allocated assets, with

the performance of those notionally allocated assets driving the calculation of the specific

investment return of each sub-fund. The actual calculations use gross of tax investment returns as

no policyholder tax is currently applicable.

Fund 2007 2008 2009 2010 2011

With Profit Series 1 5.3% -8.8% 12.2% 13.0% 0.0%

SMI With Profits Sterling Fund (Series

1, 2 and 5)

5.1% -8.6% Not disclosed to AKG

Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

SMI declined to co-operate with AKG in the preparation of this report.

SMI does routinely publish some current and historic information about its with profits business

on its website, including illustrative scales of terminal bonus and MVRs which are published each

month. However, there are clear indications that the breadth of the material published has

diminished.

With Profit Series 1 Fund 2

Phoenix Life Ltd’s Scottish Mutual With-Profits Fund is essentially an old style fund, with all that

this entails. Phoenix Life's annual reports to with profits policyholders are fairly detailed,

although this partly reflects the increased complexity of the company's funds. There is now a

majority of independent representation on PLL’s WPC.




SMI With Profits Sterling Fund (Series 1, 2 and 5) 1

AKG has been unable to locate any information about many key aspects of the fund’s operation in

recent years, for example: costs of rebalancing hedge assets, actual asset mix, and investment

returns.

SMI does not operate a With Profits Committee and does not appear to provide policyholders

with much feedback about compliance with the terms of the PPFM.

Future Performance

Actual payout levels for all of the company’s with profits bonds are very much an unknown

quantity, so it is impossible to judge how competitive the company has been.


For this reinsured bonus series, no annual bonuses have been added since the end of 2002,

although the company is currently adding terminal bonuses for all dates of entry.

Distributions from the estate of the Scottish Mutual With-Profits Fund have now commenced,

albeit potentially offset by charges for rebalancing the hedge assets. Future prospects for this

block of business are improved as a result of the differential asset mix strategy introduced in

2010. This has led to an increased EBR and hence the possibility of improved returns.

SMI With Profits Sterling Fund (Series 1) 2



For these non-reinsured bonus series, annual bonuses have continued to be added each year, albeit

at a much reduced rate, and MVRs are applied in some instances. Terminal bonus rates vary quite

a lot between these three series, for any given month of entry.



New with profits products are not offered by SMI, and the strength of its small block of in force

with profits business reinsured to PLL depends very largely upon that company’s security.

SMAL carried out a number of actions to stabilise the Scottish Mutual With-Profits Fund, the

most apparent being a capital injection in 2004 and the explicit hedging strategy. The fund is

subject to PLL's company-wide support mechanism, which is reassuring, but policyholders in this

fund are likely to suffer through, in particular, lower EBRs and other penalties before it would

come into play.

The fund has not currently drawn down a loan from the Non-Profit Fund or the Shareholder Fund,

but it does rely on surplus assets in the Non-Profit Fund to cover its ICA. The company does

expect the solvency position to improve as the fund runs down. The working capital in the fund

(before zeroisation) increased from £243m to £253m in 2011, a working capital ratio of 6.6%.

SMI With Profits Sterling Fund (Series 1, 2 and 5) 2

New with profits products are not offered by SMI, and the volume of business in force is

diminishing rapidly. The company’s profits for shareholders have fluctuated widely in recent

years.

The company operates a hedging strategy to protect against guarantee costs. A substantial

proportion of the company’s original guarantees expired between 2009 and 2011.

AKG Actuaries & Consultants LtdAnderton House, 92 South StreetDorking, Surrey RH4 2EW

Tel No: +44 (0) 1306 876439Fax No: +44 (0) 1306 885325

e-mail: [email protected]

www.akg.co.uk

AKG is an actuarially based consultancy specialising in the provision of information andmarket assistance to the financial services industry

© AKG Actuaries & Consultants Ltd

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