retirement advantage group - canada life financial · group does not sponsor a defined benefit...

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Retirement Advantage Group (including MGM Advantage Life Limited)

Solvency and Financial Condition Report For the year ended

31 December 2016

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Table Of Contents

Summary ..................................................................................................................... 3

A Business & Performance .............................................................................................. 5

A.1 Business .............................................................................................................. 5

A.2 Underwriting performance ........................................................................................ 9

A.3 Investment performance ......................................................................................... 10

A.4 Performance of other activities .................................................................................. 10

A.5 Any other information ............................................................................................ 10

B System of governance ............................................................................................... 11

B.1 General information on the system of governance ............................................................ 11

B.2 Fit and Proper Requirements .................................................................................... 18

B.3 Risk management system including the own risk and solvency assessment ............................... 20

B.4 Internal control system ........................................................................................... 24

B.5 Internal audit function ............................................................................................ 25

B.6 Actuarial function ................................................................................................. 26

B.7 Outsourcing ........................................................................................................ 27

B.8 Any other information ............................................................................................ 28

C Risk Profile ............................................................................................................ 29

C.1 Underwriting risk ................................................................................................. 29

C.2 Market risk ......................................................................................................... 31

C.3 Credit risk ......................................................................................................... 36

C.4 Liquidity risk ...................................................................................................... 37

C.5 Operational risk ................................................................................................... 38

C.6 Other material risks .............................................................................................. 39

C.7 Any other information ........................................................................................... 39

D Valuation for Solvency Purposes ................................................................................... 40

D.1 Assets ............................................................................................................... 40

D.2 Technical provisions ............................................................................................. 42

D.3 Other liabilities .................................................................................................... 48

D.4 Alternative methods for valuation .............................................................................. 49

D.5 Any other information ............................................................................................ 50

E Capital Management ................................................................................................. 51

E.1 Own Funds ......................................................................................................... 51

E.2 Solvency Capital Requirement and Minimum Capital Requirement ......................................... 54

E.3 Use of the duration-based equity risk sub-module in the calculation of the Solvency Capital Requirement (unaudited) ................................................................................................................. 55

E.4 Differences between the standard formula and any internal model used.................................. 55

E.5 Non-compliance with the Minimum Capital Requirements and non- compliance with the Solvency Capital Requirements ..................................................................................................... 55

E.6 Any other information ............................................................................................ 55

F. Templates .......................................................................................................... 56

G. Statement of Directors’ Responsibilities ........................................................................ 57

H. Audit Report ....................................................................................................... 58

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Summary

MGM Advantage Life Limited (“MGMA”) is a UK based insurance company which provides a range of insurance solutions for individuals planning their retirement. It operates under the brand of Retirement Advantage. Its ultimate parent company is ICE Acquisitions S.à r.l. (“LuxCo”), a Luxembourg based holding company. The Retirement Advantage group (the “Group”) comprises LuxCo and its subsidiary companies, including MGMA. The purpose of this report is to satisfy the public disclosure requirements under the Solvency II Directive 2009/138/EC and its delegated regulations of the European Parliament (“the Solvency II regulations”) for both MGMA and the Group. Disclosures relate to business performance, systems of governance, risk profile, valuation for solvency purposes and capital management. This is the first report under the Solvency II regime which took effect on 1 January 2016 and covers the period to 31 December 2016. Governance framework The Boards of LuxCo and MGMA have developed a robust corporate governance framework, covering all legal entities in the Group, which had been strengthened in readiness for the Solvency II regime. The Group operates a three lines of defence model whereby the first line is responsible for management of risk, the second line (the Risk function and Compliance) ensure an appropriate governance framework and provides oversight and challenge, with Internal Audit (third line) providing independent assurance. The governance and risk frameworks are detailed further in this report. Business performance 2016 has been another challenging but successful year for Retirement Advantage. Both MGMA and the Group have responded well to the changing regulatory and competitive environment, further developing the Retirement Account proposition and obtaining PRA approval to operate a Partial Internal Model (“PIM”). The business is now very well positioned going forward into 2017 as a challenger to the larger insurers in a growing retirement income solutions market within the United Kingdom.

During 2016 the Solvency II Own Funds of MGMA and the Group increased by £33.7m and £28.8m respectively.

Capital Position

MGMA and the Group have maintained capital sufficient to meet their Minimum Capital Requirements and Solvency Capital Requirements throughout the period covered by this report. The Solvency Capital Requirement (“SCR”) and Own Funds (or capital available to meet the capital requirements), as at 31 December 2016, are shown below for both MGMA and the Group:

Solvency coverage MGMA Group

£’000 £’000

Own Funds 225,115 223,872

SCR 160,435 163,107

Surplus over SCR 64,680 60,765

Own Funds as a % of SCR 140% 137%

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The key risks to the balance sheet of MGMA and the Group are dominated by market risk (in particular credit spread risk) and underwriting risk (materially longevity risk). In addition there is some interest rate exposure which largely arises from the Risk Margin and SCR, but with potential mitigation for material changes through a recalculation of the Transitional Measures on Technical Provisions.

As a relatively new business, formed in 2013 MGMA has limited exposures to legacy products. The Group does not sponsor a defined benefit pension scheme.

Like many other insurers MGMA received regulatory approval in 2015 to operate a matching adjustment (“MA”) portfolio. The MA allows MGMA and the Group to increase the discount rate to be used in valuing annuity policies allocated to that portfolio. MGMA and the Group also received approval to use transitional measures on its technical provisions with effect from 1 January 2016. The impact of the transitional measures is to reduce the technical provisions at 31 December 2016 by £313m. This amount reflects the difference and strengthening in reserving requirements between the Solvency I and Solvency II regimes, principally a reduction in the discount rate used to calculate future liabilities and also an additional risk margin specifically prescribed under Solvency II. From 1 January 2017 the amount of the transitional measure, and hence the amount of the Own Funds, reduced by £19.5m. The transitional adjustment will reduce to nil over a 16 year period. MGMA has prepared a phasing-in plan as required by Solvency II which demonstrates that sufficient surplus arises from the underlying portfolio so that the Own Funds continue to exceed the SCR as the transitional measure runs off. As indicated above MGMA and the Group were successful in 2016 in their application for a Partial Internal Model (“PIM”) in respect of spread risk. This has allowed MGMA to extend its Matching Adjustment Portfolio (“MAP”) to incorporate restructured Equity Release Mortgage assets. Approval of the PIM and extended MAP was received from the PRA on 21 December 2016. This report reflects those approvals received. MGMA also received approval for a recalculation of Transitional Measures on Technical Provisions on 21 December 2016. MGMA and the Group continue to work with the PRA to enhance the PIM during 2017.

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A Business & Performance

A.1 Business

The principal and only insurance entity in the Group is MGM Advantage Life Limited (“MGMA” or “the Company”). ICE Acquisitions S.à r.l. (“LuxCo”), a Luxembourg based holding company, is the ultimate parent of MGMA.

A.1.1 Legal form

ICE Acquisitions S.à r.l. is a limited liability company incorporated under the laws of Luxembourg on 19 December 2012 for an unlimited period. The registered office of LuxCo is 20, rue Eugene Ruppert, L-2453 Luxembourg.

The main activity of LuxCo is to carry out transactions relating directly or indirectly to the acquisition and financing of participating interests in its group companies. The Group headed by LuxCo comprises its UK holding company MGM Advantage Holdings Limited (“HoldCo”) and includes wholly owned subsidiary undertakings, MGMA, MGM Advantage Life Trustees Limited (“TrustCo”), MGM Advantage Services Limited (“ServCo”) and Stonehaven UK Limited (“Stonehaven”).

MGMA is regulated by both the Financial Conduct Authority (“FCA”) and the Prudential Regulatory Authority (“PRA”) and is authorised by the Prudential Regulatory Authority. The Group is regulated by the PRA.

MGMA is a limited liability company incorporated and domiciled in England and Wales. The Company was registered in England and Wales on 8 February 2013 and commenced trading on 30 November 2013. The registered office address is 6th Floor, 110 Cannon Street, London, EC4N 6EU. TrustCo acts as a trustee for a bare trust that holds Equity Release Mortgage assets in which MGMA has the beneficial ownership. It is a wholly owned subsidiary of MGMA. ServCo is an administration services company, comprising of employees, operating assets and infrastructure. ServCo provides services to the rest of the Group. ServCo is regulated by the FCA.

Stonehaven is an equity release mortgage provider. Stonehaven originates and services equity release mortgages for a number of insurance companies including MGMA. Stonehaven is regulated by the FCA.

A.1.2 Supervisory authority The Prudential Regulatory Authority The Financial Conduct Authority

20 Moorgate 25 The North Colonade London Canary Wharf EC2R 6DA London E14 5HS

A.1.3 External auditor

The independent auditors of MGMA and the HoldCo group of companies: Grant Thornton UK LLP Chartered Accountants and Statutory Auditors 30 Finsbury Square London EC2P 2YU

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ICE Acquisitions S.à r.l is a Luxembourg incorporated company and therefore is not required to be audited. The highest level within the Group with audited financial statements is MGM Advantage Holdings Limited.

A.1.4 Qualifying holdings

There is no single entity which has ultimate control of the Group. Investment in LuxCo is through a number of limited partnerships. No investor in the limited partnerships owns 10% or more of Ice Acquisitions S.à r.l.. The limited partnerships are managed by TDR Capital LLP. TDR Capital LLP is FCA registered (registration number 216708).

Holders of qualifying holdings of the Group subsidiaries as at 31 December 2016 are as follows:

a. MGM Advantage Holdings Limited – A limited company incorporated in the United Kingdom,

86.8% ownership held by ICE Acquisitions S.à r.l. while 13.2% is owned by non-controlling

interests (“NCI”).

b. MGM Advantage Life Limited (“MGMA”) – A limited company incorporated in the United

Kingdom, 100% ownership held by MGM Advantage Holdings Limited.

c. MGM Advantage Life Trustee Limited – A limited company incorporated in the United Kingdom,

100% ownership held by MGMA.

d. MGM Advantage Services Limited – A limited company incorporated in the United Kingdom,

100% ownership held by MGM Advantage Holdings Limited.

e. Stonehaven UK Limited – A limited company incorporated in the United Kingdom, 100%

ownership held by MGM Holdings Limited.

f. ICE Nominee Company Limited - A limited company incorporated in the United Kingdom, 100%

ownership by ICE Acquisitions S.à r.l.. The company’s principal activity is to hold, as a nominee

company, ‘B’ shares (Management shares) issued by MGM Advantage Holdings Limited in

favour of Manager Shareholders.

A.1.5 Group structure

Limited Partnerships (managed by TDR Capital LLP)

ICE Acquisitions S.à r.l. ‘LuxCo’

ICE Nominee Company Limited

MGM Advantage Holdings Limited ‘HoldCo’

MGM Advantage Services Limited ‘ServCo’

MGM Advantage Life Limited “MGMA”

Stonehaven UK Limited “Stonehaven”

MGM Advantage Life Trustee Limited ‘TrustCo’

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A.1.6 Lines of business

The principal activity of the Group (trading as Retirement Advantage) in the United Kingdom is the provision of retirement income solutions including annuity and drawdown business through MGMA and the sourcing and provision of equity release lifetime mortgages through Stonehaven UK Limited. MGMA currently has three insurance products: the Retirement Account (“TRA”), the Enhanced Annuity (“EA”) and the Flexible Income Annuity (“FIA”). All annuity business is carried out within the United Kingdom. TRA is written under Pension Drawdown rules and consists of two components, a Retirement Guaranteed Annuity (“RGA”) and Retirement Pension Drawdown (“RPD”). The RGA component is an individually underwritten annuity and is similar to the EA product, providing fixed or escalating guaranteed income for life and with the option of providing a dependent’s income or lump sum on death. However, there are some differences to the features offered.

The RPD component offers flexible income and potential for growth. This is a unitised pension drawdown contract and offers no guarantees. Policyholders can select one or more unitised funds depending on their risk appetite. Switching is available between available investment funds and policyholders can use the monies available to buy new RGA tranches which will be separately underwritten. A charge is made for investment costs and administration costs which is deducted from the fund each month.

The EA is an individually underwritten annuity, providing policyholders with an income for life in exchange for a lump sum. Enhanced pension annuities are similar to standard annuities in most respects. The key difference is that an enhanced annuity is individually underwritten and typically pays a higher income because an allowance is made for certain medical, behavioural and environmental factors which allow for a better understanding of individual life expectancy. MGMA therefore underwrites (i.e. individually prices) across the full range of impaired and healthy lives. There are various options available for this product, including escalating income, spouse’s benefits, guaranteed periods and capital protection.

The FIA product is an investment annuity where income is determined by the performance of funds to which the policy is linked as well as the personal circumstances of the policyholder and their dependents and if any death benefit, guaranteed period or capital protection is chosen. At the point that the policy is underwritten a minimum and maximum income amount is calculated. These limits provide a range within which the policyholder can choose their income level. The product also includes a Minimum Income Guarantee (“MIG”) feature, such that if the maximum income is less than the MIG, the policy is converted to fixed income. Switching is available between available investment funds and a charge is made for investment costs and administration costs which are deducted from the fund each month. This product is closed to new business. MGMA reinsure inwards the unit liabilities of some FIA business that was transferred to Scottish Friendly under a Part VII transfer from Marine and General Mutual Insurance Society in 2015. These unit funds amounted to £460m at 31 December 2016.

A.1.7 Significant events

During 2016, both MGMA and the Group invested significant resource and effort in three key areas in order to set the business on course for its next period of growth.

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Firstly, as highlighted above, working closely with the PRA, MGMA and the Group developed a Partial Internal Model (“PIM”) for its corporate bond and equity release mortgage assets (“ERMA”). The PIM was approved in December 2016 and is now operational. This was a considerable achievement given the relative size of the Group and has removed a significant amount of uncertainty as to the ongoing impact of Solvency II on the business. As part of the implementation of the PIM, MGMA purchased 100% of the share capital of MGM Advantage Life Trustee Limited (formerly Onyx Servicing Limited) from Stonehaven UK Limited to act as a bare trustee for MGMA. Post PIM approval, the equity release assets held by MGMA were transferred into the bare trust, with MGMA receiving Senior and Junior note cash flows in return. This ensured compliance with the requirements of a MA portfolio, and allowed investment return from the ERMA portfolio to be reflected in establishing the overall capital position of MGMA, and therefore the Group. In the period leading up to the receipt of regulatory approval for the PIM the amount of new business written was limited by the Board of MGMA to ensure its continued capital strength in the event of an unfavourable regulatory outcome. However, with the PIM in place, MGMA has a stronger capital position underpinning new business written.

Secondly, the Group completed the sale of its Worthing office, which facilitated the comprehensive outsourcing of the Retirement Advantage Customer Services, Information Technology and Project Change functions to the Equiniti PLC group (“Equiniti”) in November 2016. Retirement Advantage’s customer services infrastructure and people are now the cornerstone of Equiniti’s life and pension new business administration capabilities, with the businesses co-located in Worthing, providing the Group with an infrastructure that is both scalable and builds on Equiniti’s strong capabilities.

In addition, in 2016 the Group entered into a new partnering arrangement with Mobius Life Administration Services Limited (“Mobius”), to provide investment accounting and unit pricing administration services. This allows the Company to focus on product development, pricing and excellent financial management to provide our customers with great financial solutions for their retirement. In addition to Equiniti and Mobius, the Group also partners with McCurrach UK Ltd in respect of sales and distribution, Deloitte LLP for internal audit, Insight Investment Management for investment management, Hannover Rückversicherung SE (“Hannover Re”) on longevity and mortality expertise and Willis Towers Watson Limited in respect of risk management services. Although the Group is a relatively small insurance business it leverages the skills and capabilities of these market-leading companies. In so doing the aim is also to minimise and manage the operational risks associated with running complex insurance operations.

Finally, during the year MGMA further invested in the development of its innovative Retirement Account product, combining a Guaranteed Annuity, a Pension Drawdown facility and a Cash Account, all held within a single tax-advantaged wrapper written under Drawdown rules.

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A.2 Underwriting performance

The premium, claims and expense performance of MGMA and the Group, split by lines of business for the year ending 31 December 2016 is set out below:

Underwriting Performance MGMA Group

Indexed- Linked &

Unit-linked Insurance

including life reinsurance

£’000

Other Life Insurance

£’000

Total £’000

Indexed- Linked &

Unit-linked Insurance

including life reinsurance

£’000

Other Life Insurance

£’000

Total £’000

Gross premiums 16,736 172,548 189,284 16,736 172,548 189,284

Reinsurer’s share of premiums - (6,609) (6,609) - (6,609) (6,609)

Gross claims (39,471) (82,214) (121,685) (39,471) (82,214) (121,685)

Reinsurer’s share of claims - 42,264 42,264 - 42,264 42,264

Underwriting Expenses (2,757) (28,506) (31,263) (2,757) (29,019) (31,776)

Total Underwriting (25,492) 97,483 71,991 (25,492) 96,970 71,478

Non-underwriting expenses Investment expenses (See A.3.1)

(38) (2,797) (2,835) (38) (2,797) (2,835)

Other expenses (See A.4) - - - - (21,553) (21,553)

Total * (25,530) 94,686 69,156 (25,530) 72,620 47,090

* Total premiums written, less claims, administrative and acquisition expenses per QRT S.05.01.

MGMA and Group gross premiums written in 2016 were impacted by the transition into the Solvency II regime as the Group deliberately constrained the new business written, to allow capital to be deployed under more favourable new business conditions post approval of the PIM. The gross premiums written were £189.3m with the mix of the Group’s business increasingly moving towards the Retirement Account product as intermediaries and customers become more familiar with this flexible and innovative tool for managing retirement income.

MGMA has two reinsurance arrangements with Hannover Re to transfer longevity risk. For business written up to 31 December 2015 reinsurance was written under a deposit back treaty on a 50% quota share. For business written after 1 January 2016 longevity is reinsured under a regular premium annuity transfer or “longevity swap” treaty with a quota share of 75%.

As the Group has grown, there has been further additions of equity release assets with £56.7m of new loans advanced in 2016. As set out above as part of the PIM approval, a restructure of the equity release mortgage assets has taken place in the Group, with all assets now being held in a bare trust managed by TrustCo on behalf of MGMA. Stonehaven UK Limited has established arrangements with non-Group funders in respect of the origination of equity release assets so diversifying its revenue base and ensuring continuing new business even when the Group needs to limit its own new business.

MGMA’s operating expenses in 2016 were £31.3m. These comprised £16.6m of costs relating to the administration and acquisition of policies, £11.8m of non-recurring costs and projects, and other costs of £2.8m including advisor fees and commissions. Non-recurring costs related to development costs associated with Solvency II, the continued development of the TRA product, and management fees payable to other group companies for specialist advice and services in the year.

Group operating expenses in 2016 were £44.8m and comprised business operation costs of £29.2m, advisor fees and commissions of £5.1m, and non-recurring and project costs of £10.5m which in addition to MGMA’s Solvency II and TRA development expenditure included costs for the Worthing

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office relocation and the establishment of new partnering agreements. Throughout the year management have continued to build a Group operating infrastructure that is both scalable with reduced fixed costs, including the commencement of comprehensive partnering agreements with Mobius and Equiniti in September and November 2016 respectively.

A.3 Investment performance

A.3.1 Income and expenses arising from investments by asset class

During 2016 the following investment returns were generated for MGMA and the Group:

Investment Performance MGMA

Investment Income

£’000

Realised Gains £’000

Unrealised

Gains £’000

Total £’000

Debt instruments 17,345 1,263 25,056 43,664

OEIC and Unit trust investments 4,167 6,296 61,866 72,329

Derivative instruments - 583 (40) 543

Equity release mortgage assets 10,400 2,684 53,305 66,389

Cash and cash equivalents 143 - - 143

Total Investment Performance Less: Investment expenses

32,055 -

10,826

-

140,187 -

183,068 (2,835)

Total 180,233

Investment Performance Group

Investment Income

£’000

Realised Gains £’000

Unrealised

Gains £’000

Total £’000

Debt instruments 17,413 1,263 25,056 43,732

OEIC and Unit trust investments 4,206 6,296 61,866 72,368

Derivative instruments - 583 (40) 543

Equity release mortgage assets 10,400 2,684 53,305 66,389

Cash and cash equivalents 276 - (3) 273

Total Investment Performance 32,295 10,826 140,184 183,305

Less: Investment expenses - - - (2,835)

Total 180,470

A.4 Performance of other activities

MGMA did not perform any other activity. The Group received £6.0m of other income in Stonehaven UK Limited in respect of providing equity release mortgage servicing arrangements and handling mortgage completions. Other Group expenses include operating expenses incurred by Stonehaven, debt financing and corporate advisory expenses and other administration expenses.

A.5 Any other information

There is no other material information relating to MGMA or the Group.

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B System of governance

B.1 General information on the system of governance

B.1.1 Governance Structure Overview

For Solvency II purposes, the calculation of the Group solvency position is determined to be at the level of LuxCo. However, since MGMA is the only life company within the Group it encompasses the major part of the Group balance sheet. The predominant risks face by the Group arise within LifeCo. LuxCo’s activities are restricted to investing in cash, liquid funds and in its subsidiary, HoldCo.

The dominance of MGMA is also reflected in the day-to-day business management with the main emphasis on MGMA. In particular, the operational management of the Group is largely performed by HoldCo, with LuxCo Board operating in a largely oversight capacity.

As at 31 December 2016 the Group Governance structure is set out below:

Key: LuxCo = ICE Acquisitions S.à r.l., HoldCo = MGM Advantage Holding Limited, ServCo = MGM Advantage Services Limited, MGMA = MGM Advantage Life Limited.

Each Committee’s full responsibilities and functions are set out in their respective Terms of Reference.

B.1.1.1 Board Committees

LuxCo Board

The LuxCo Board has ultimate ownership and responsibility for risk management in the Group. The LuxCo Board is responsible for ensuring the effectiveness of the risk management system, setting risk appetites and approving the risk management strategy and policies. The LuxCo Board delegates the day-to-day execution of these activities to the Chief Financial Officer, as a common Director of both HoldCo’s and LuxCo’s Boards. However, the responsibility remains with the LuxCo Board.

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The LuxCo Group Board considers the effectiveness of the risk governance structure at least on an annual basis through the review and approval of the Risk Management Policy and the Own Risk and Solvency Assessment (“ORSA”) Report.

HoldCo Board

The Holdco Board has delegated authority from the LuxCo Board to make Group decisions on a day to day basis. Matters considered by the Holdco Board are as follows:

Group strategy and management,

Group structure and capital,

Group financial reporting and controls,

Internal controls,

Contracts (in line with delegated authority),

Internal and external communications,

Board membership and other appointments,

Remuneration,

Delegations of authority,

Corporate governance matters and policies.

MGMA Board The MGMA Board provides leadership of MGMA within a framework of prudent and effective controls that enables risks to be assessed and managed. The MGMA Board also sets MGMA’s culture, values and standards and oversees the way in which culture is embedded by executive management. In particular, the MGMA Board recognises that a fundamental component of the Company’s governance is the obligation to treat customers fairly.

The MGMA Board has ultimate responsibility for:

Setting MGMA’s business strategy and risk appetite;

Ensuring that key goals in its strategy are within the agreed risk appetite;

Key personnel decisions;

Internal organisation and governance structure and practices;

Compliance with MGMA’s risk management and compliance obligations, including establishing and overseeing implementation of MGMA’s risk control framework;

Compliance with regulatory requirements implementing or supplementing the Solvency II Directive; and

Overseeing management performance in implementing MGMA’s strategy.

Oversight of critical outsourcing arrangements

B.1.1.2 Board Sub Committees and the Group Executive Committee

Remuneration and Nominations Committee (“RemCo”)

The RemCo‘s purpose, authority, and responsibilities are approved by the Board of HoldCo. RemCo is also accountable to the Board of MGMA, and assists it in matters relating to remuneration and nomination activities.

RemCo is comprised of at least three directors, appointed by the HoldCo Board, all of whom must be non-executive directors. RemCo meets as and when required – normally three to four times per annum.

Group Audit and Compliance Committee (“GroupACC”)

The GroupACC’s purpose, authority and responsibilities are approved by the HoldCo Board.

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The GroupACC is accountable to the HoldCo Board, and assists it in fulfilling its oversight responsibilities for financial reporting, internal control, internal and external audit, and monitoring compliance with applicable laws and regulations for the Group. This includes responsibility for providing independent assurance of the system of governance.

The GroupACC is comprised of at least three members, appointed by the HoldCo Board, all of whom must be non-executive directors. The Committee normally meets at least three times per annum. Group Risk, Capital and Investment Committee (“GroupRCIC”)

The GroupRCIC’s purpose, authority, and responsibilities are approved by the HoldCo Board.

The Committee is accountable to the HoldCo Board, and assists it in overseeing the Group’s risk management framework, its regulatory capital position, and investment activities for the Group. The Committee is comprised of at least three directors, appointed by the HoldCo Board, at least two of whom must be non-executive directors. The Committee meets at least quarterly, and currently around 10 times a year.

Group Executive Committee (“GroupCo”)

GroupCo manages the strategy and business plan for the Group. Furthermore it executes the business plan, monitors deliverables and manages associated risks. Responsibilities include:

Making recommendations on business strategy as well as oversight and execution of the business plan

Monitoring performance against corporate KPIs/objectives

Reviewing and making recommendations on all papers due for submission to the HoldCo and Subsidiary Boards and HoldCo and Subsidiary Board Committees and ensuring that HoldCo and Subsidiary Board resolutions and actions are implemented

Reviewing and, where appropriate, providing input and feedback on recommendations made by other Management Committees

Reviewing on-going capital and solvency position and ensuring management actions are implemented as required and monitoring the on-going appropriateness of the capital model

Managing the risk escalation process in line with its delegated authority

Review and challenge the bi-annual Risk and Control Self-Assessment (“RCSA”) and emerging risk processes.

GroupCo normally meets on a fortnightly basis but otherwise no less than 20 times per annum. The Committee is composed of all HoldCo and Subsidiary executive directors, plus other heads of department as appointed by the CEO, who is the Chairman of the Committee and reports to the HoldCo and MGMA Boards.

GroupCo may delegate items of work to sub-sets of this committee, who will develop and authorise proposals for submission to the HoldCo and Subsidiary Boards. These proposals will in all cases be issued to relevant GroupCo members prior to HoldCo or Subsidiary Board submission, affording them the opportunity for input. There are defined subsets for:

Financial matters (capital, reinsurance etc.)

MGMA and Stonehaven Product/marketing/distribution

Stonehaven/MGMA issues

Specific Stonehaven non-MGMA business

Employment policy

Infrastructure/Outsourcing.

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MGMA Audit and Compliance Committee (“MGMA ACC”) The MGMA ACC’s purpose, authority and responsibilities are approved by the MGMA Board.

The MGMA ACC is accountable to the MGMA Board, and assists it in fulfilling its oversight responsibilities for financial reporting, internal control, internal and external audit, and monitoring compliance with applicable laws and regulations. This includes responsibility for providing independent assurance of the system of governance.

The MGMA ACC is comprised of at least three members, appointed by the MGMA Board, all of whom must be non-executive directors. The MGMA ACC normally meets at least three times per annum.

MGMA Risk, Capital and Investment Committee (“MGMA RCIC”)

The MGMA RCIC’s purpose, authority, and responsibilities are approved by the MGMA Board.

The MGMA RCIC is accountable to the MGMA Board, and assists it in overseeing MGMA’s risk management framework, its regulatory capital position, and investment activities. The MGMA RCIC is comprised of at least three directors, appointed by the MGMA Board, at least two of whom must be non-executive directors. The MGMA RCIC meets at least quarterly, and currently around 10 times a year.

B.1.1.3 General Information on the Key functions

The organisational structure of the four key functions (Risk, Actuarial, Compliance and Internal Audit Functions) as at 31 December 2016 is set out below:

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However, on 1 May 2017 the above organisational structure was restructured as set out below:

The MGMA and LuxCo Boards are ultimately responsible for the four key control functions. Each function is required to report to the relevant Boards and, where appropriate, cooperate with the other functions in carrying out their roles. As indicated above day-to-day oversight of the four functions has been delegated to the HoldCo Board by LuxCo with the common director of LuxCo, HoldCo and MGMA covering executive authority to execute matters on behalf of LuxCo.

The Risk, Actuarial and Compliance functions attend twice monthly GroupCo meetings. In addition, all key functions attend the quarterly HoldCo and MGMA ACC meetings. At a more operational level the Risk, Compliance and Actuarial functions attend weekly Pricing Committee (“PriceCo”) meetings, monthly Executive Risk and Investment Committees (“ERIC”) meetings and Customer Advantage Steering Group (“CASG”) meetings.

Risk Function

The Risk Function has the following overall responsibilities:

Design and implementation of the risk management system including the Partial Internal Model (“PIM”);

Monitoring the risk management system;

Monitoring the risk profile of MGMA and the Group as a whole;

Advising on risk management matters, including strategic affairs such as corporate strategy, mergers and acquisitions and major projects and investments;

Identification and assessment of emerging risks. Throughout 2016 the Risk Function, including the role of CRO was outsourced to Willis Towers Watson (“WTW”), which provided a greater pool of expertise to the Group. With effect from 1 May 2017 (and subject to regulatory approval) the CRO has been brought back in-house with WTW providing ongoing risk management support to the CRO.

Internal Audit Function

The Internal Audit function provides independent and objective assurance on the effectiveness of internal controls aimed at managing the key risks impacting HoldCo’s operations. Internal Audit is responsible for the development of an annual risk based audit plan. This plan includes the rationale

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for the selection of the areas of review and the timescale for completion. The results of the audit reviews, together with recommendations for improvement, are submitted to the Group and MGMA ACCs for approval.

Internal Audit is outsourced to Deloitte to capitalise on the breadth of experience this brings to Retirement Advantage. Compliance Function

The Compliance Function is responsible for establishing and maintaining the internal control system. The internal control system includes the administrative and accounting procedures, internal control framework; and appropriate reporting arrangements at all levels in the Group.

The Compliance Function advises the LuxCo and MGMA Boards regarding compliance with laws and regulation; conducting an assessment of the possible impact of any significant changes in the legal environment on the Group’s operations. It also provides insights to the Risk Function in relation to the effectiveness of key process controls to mitigate operational, legal and conduct risks.

Actuarial Function

The Actuarial Function is headed by the Chief Actuary who reports in this regard directly to the LuxCo and MGMA Boards. On an annual basis, a plan of the proposed Actuarial activities over the coming year is presented to the MGMA and HoldCo Boards, followed by regular progress reports of the activity versus planned. In addition, an Actuarial Function Report is produced each year and presented to the HoldCo (operating under its delegation from LuxCo) and MGMA Boards, which includes the results of any activities undertaken, any deficiencies identified and recommendations to remedy those deficiencies.

The Actuarial Function is responsible for the following:

Coordination of the calculation of technical provisions and capital requirements for the Group and MGMA, including the PIM;

Ensuring the appropriateness of the methodologies and underlying models used, as well as the assumptions made in the calculation of technical provisions and capital requirements, including the PIM;

Assessing the sufficiency and quality of the data used in the calculation of technical provisions and capital requirements, including the PIM;

Comparing the best estimates against experience for the technical provisions, capital requirements;

Informing the MGMA and HoldCo Boards of the reliability and adequacy of the calculation of technical provisions, capital requirements and business planning;

Expressing an opinion on the overall underwriting policy and the adequacy of reinsurance arrangements;

Contributing to the effective implementation of the risk-management system, in particular with respect to the risk modelling underlying the calculation of the SCR and ORSA, for MGMA and the Group;

Distributing a comprehensive Monthly Management Information pack to the HoldCo and MGMA Boards, which includes any significant matters arising in respect of the Actuarial Function.

B.1.2 Material Changes

The responsibilities that were previously carried out by the MGMA Executive Management Committee and the Strategic Operational Risk Management Committee were reconstituted in 2016 into GroupCo.

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B.1.3 Remuneration Overview The Remuneration Policy forms part of the system of governance and control of the sound and effective risk management of the Group. The purpose of the policy is to set out the remuneration practices adopted by the HoldCo (under delegation from LuxCo) and MGMA Boards to avoid encouraging risk taking that exceeds the risk tolerance limits of the Group. The principles and parameters of all of the remuneration processes and schemes are overseen by the RemCo in accordance with its Terms of Reference.

B.1.3.1 Remuneration components

The remuneration components are:

fixed remuneration (basic salary);

performance-based remuneration (variable cash bonus and the management share scheme);

pension scheme, Group Life, Group Income Protection; and

other benefits in kind.

The fixed remuneration is determined on the basis of the role and position of the individual employee, including professional experience, responsibility, job complexity and local market conditions.

Performance-based remuneration, i.e. the cash bonus, motivates and rewards higher performers who significantly contribute to the organisation’s results, perform according to set KPIs, objectives and valued behaviours. The variable cash bonus scheme provides for a maximum percentage of performance-based remuneration relative to the fixed remuneration for each type of employee. This percentage varies according to the type of position held by the employee in accordance with the bonus scheme rules. In relation to the Group Executive Committee, the organisation continues to reserve the right to defer any element of the scheme for existing GroupCo members to ensure alignment of interests over the longer term. For new joiners to the organisation at this level the Executive Management variable cash bonus scheme includes a specified deferred element with a recommended deferral of 30% for 3 years.

The Management Share Scheme was put in place to enable the Executive Management Team, Senior Managers and employees to be aligned to the longer term interests of the organisation. The scheme itself provides the mechanism for deferral of a substantial proportion of flexible variable remuneration for the GroupCo as required by Solvency II. The share scheme benefit cannot be realised until a liquidation event occurs or the employee leaves, therefore the scheme is deferred in line with the requirements in the Regulations. In addition, the share scheme and the variable cash bonus also both demonstrate a flexible component as they are able to have the outcome adjusted based on the performance of the employee. This therefore ensures that GroupCo are aligned to ensuring the longer term sustainability of the organisation and the avoidance of short term risks that would have a negative impact on the future of the organisation.

The Pension scheme; MGM Advantage Retirement Saver (“MARS”) is a defined contribution plan with either age-related or double matched contributions through a group personal pension plan. The Group Life scheme provides cover in the event of the employee’s death. The Group Income Protection scheme provides up to 75% of salary in the event that the employee is unable to attend work due to critical or long term illness.

Other benefits are awarded on the basis of individual employment contracts.

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B.1.3.2 Remuneration of the Executive Directors and Other Senior Managers

The RemCo considers recommendations of remuneration of Executive Directors and Senior Managers (defined as those employees paid in excess of £100k), except in the case of the CEO which it recommends and submits for the approval of the HoldCo Board.

B.1.3.3 Remuneration of the non-executive directors Non-Executive members of the Board of Directors of LuxCo and its Subsidiaries receive a fixed fee. Non-Executive Board members are not covered by incentive programmes and do not receive performance-based remuneration. The fees are set at a level that is market aligned and reflects the qualifications and competencies required in view of the organisation’s size and complexity, together with the responsibilities and the time the relevant Board members are expected to allocate to fulfil their duties as Board members. No pension contributions are payable on Non-Executive fees.

B.1.4 Material Transactions

Directors Emoluments

The following aggregate emoluments were made by ServCo for the remuneration of the Directors, who are the key management personnel of MGMA and HoldCo, for their services as Directors of the Group entities:

Directors Ownership of B share capital in HoldCo

Chris Evans Nominal value: £1,000,000 60% Vested at 31 Dec 2016 Robert Craig Fazzini-Jones Nominal value: £800,000 60% Vested at 31 Dec 2016 John Simon Bertie Smith Nominal value: £800,000 60% Vested at 31 Dec 2016

Material transactions during the period

During the year, HoldCo paid TDR Capital LLP £2.4m for monitoring fees in respect of corporate and strategic advice.

LuxCo issued £20m in value of Series 2 PECs (Preferred Equity Certificates) to TDR Capital Nominees Limited and TDR Capital Ice Co-Investment L.P., in consideration for the reduction of £20m in loan value held by the subscribers against LuxCo. The Series 2 PECs have a maturity date of 24 June 2045 and yield a fixed return of 0.5% p.a. and carry the right to a variable return of 12% less a margin of 35 bps. Additional interest of £3.85m was capitalised and £1.74m was accrued, in favour of TDR Capital Nominees Limited and TDR Capital Ice Co-Investment L.P. in respect of the PPECs and PECs issued by the group to them.

B.2 Fit and Proper Requirements

B.2.1 Requirements for Skills, Knowledge and Expertise

The Fit and Proper policy sets out the Group’s process and governance for ensuring staff members regulated under the approved persons regime are fit and proper to carry out their roles. An

MGMA & Group

£’000

Aggregate emoluments including benefits

2,413

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‘approved person’ is an individual who is approved to do one or more activities for an authorised firm by the PRA or the FCA. For the Group, individuals who effectively run the Group or have other key functions are an approved person.

The Group requires that its approved persons possess sufficient professional qualifications, knowledge and experience in the relevant areas of the business to give adequate assurance that they are collectively able to provide sound and prudent management of the business. In addition, these individuals have to know and meet the regulatory requirements, as well as understand how they apply.

The requirements to be met in order to be judged ‘fit and proper’ will vary with the responsibilities of a particular role within the organisation.

B.2.2 Process for assessing fitness and propriety

In order to adhere to the requirements of the organisation (as discussed above) as well as the regulator, the Group follow the below processes.

Approved Persons recruitment procedure

In respect of roles identified under the fit and proper requirements the HR standard recruitment process is supplemented by HR implementing additional requirements. Key competencies that are assessed during the recruitment and interviewing process (including selecting/identifying candidates, referencing and background checks) for approved persons carrying out significant functions (“SIFs”) are as follows:

Market knowledge;

Business strategy and model;

Risk management and control;

Financial analysis and controls;

Governance oversight and controls; and

Regulatory framework and regulatory requirements. Authorisation with the appropriate regulator

Authorisation from the regulator will be sought for anyone recruited in to an approved person’s role.

Ongoing fitness and propriety procedure

All employees are subject to the following ongoing assessments:

Job descriptions/role profiles;

Learning and development training;

Appraisals; and

Training.

The Group also implement the following assessments of the Boards and members of the executive team:

Board skills assessment;

Annual Board skills training; and

Adequacy of skills of non-Board members who are approved persons.

Ongoing reference and credit checks All employees are required to reconfirm their propriety on an annual basis in respect of criminal

and financial record. Employees are also reminded that they must advise HR immediately of any

change in their circumstances (i.e. if an employee has had any CCJ’s (County Court Judgement’s)

recorded, been declared bankrupt, convicted of any offence or received a caution in relation to

any criminal offence).

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B.3 Risk management system including the own risk and solvency assessment

B.3.1 Risk management framework

The Group’s risk management framework comprises a range of elements which collectively ensure the risks to which the Group is exposed are effectively identified, assessed and managed within constraints set by the HoldCo Board under delegation from LuxCo. The key components of the framework are shown below.

Risk and capital management are embedded within the business and the decision making processes.

The business strategy of the Group is clearly defined and the risk strategy translates the business strategy into a risk perspective. It articulates the risks that the Group will actively seek out in a controlled manner; those risks that the Group will accept an inherent exposure to, in support of its business objectives; and those risks it seeks to avoid, either through risk mitigation or prohibition. Therefore, it provides a structured and coherent approach to identifying, assessing and managing risk.

Risk appetite The Group’s risk appetite framework is an articulation of the level of risk we believe to be acceptable for the Group. The risk appetite acknowledges the Group’s willingness to take on risk and is a key tool by which risk taking is aligned with the strategic objectives of the Group.

Risk appetite sets the boundaries within which the business operates and is integral to the overall risk management. The risk appetite framework translates stakeholder expectations into clear statements within which the business should operate.

Each statement explains the amount of risk the Group is able and willing to take. This statement is reviewed at least annually. The risk appetite informs the business planning process, providing a risk dimension to this process.

Risk Policies The Group has developed a suite of policies to set up standards for the management of risks, document the partial internal model and document the key control functions.

The risk policies are reviewed through the governance structure and approved by the LuxCo and MGMA Boards. These policies set out the approach that the Group takes in managing its risks,

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explain the risk limits and tolerances applicable to the risk category, and how the business identifies, assesses, manages and monitors these risks.

Governance

The Group operates a three lines of defence model whereby the first line is responsible for management of the risk, the second line (Risk Function and Compliance) ensure an appropriate framework and provides oversight and challenge, with Internal Audit (third line) providing independent assurance.

The LuxCo Board has ultimate ownership and oversight of risk management in the Group. The LuxCo Board is responsible for ensuring the effectiveness of the risk management system, setting risk appetites and approving the risk management strategy and policies. LuxCo Board has delegated ongoing operational responsibility to the HoldCo Board.

The MGMA Board has ultimate ownership of risk management in MGMA. The MGMA Board is responsible for ensuring the effectiveness of the risk management system, setting risk appetites and approving the risk management strategy and policies. The HoldCo and MGMA RCICs including its supporting sub-committees support the Boards in the deployment of its responsibilities.

The main role of the HoldCo and MGMA’s RCICs is to provide oversight of the risk management framework, regulatory capital position, investment activities and oversight of all PIM processes including validation.

At the executive level, the current risk governance model comprises of one risk committee, ERIC, reporting to the GroupCo and the MGMA and HoldCo RCIC’s, as appropriate. GroupCo is responsible for managing the implementation of the company’s strategy and business plan. ERIC is an executive risk committee aimed at managing market risk, credit risk, liquidity risk and insurance risk.

The roles of the key committees are detailed in section B1.1.1 above.

The Risk Function maintains regular attendance at all the committees, and some additional executive committees on pricing and customer outcomes in order to provide the ongoing oversight and challenge, and review the appropriateness of the risk management framework.

PIM governance The Group and MGMA Boards approved the application for a Partial Internal Model (“PIM”) for spread risk. The PIM received regulatory approval on 21 December 2016. The terms of reference for the LuxCo and MGMA Boards and relevant committees have been updated to reflect the responsibilities for the PIM.

The Group and MGMA Boards are responsible for approval of major changes to the PIM and its policies. The MGMA Board oversees the ongoing appropriateness of the PIM, including oversight of PIM validation. The MGMA Board is supported by the MGMA RCIC, which reviews all PIM major changes and policies, approves minor PIM changes and provides oversight and challenge of the PIM validation.

GroupCo is responsible for recommending all PIM related policies to the MGMA RCIC and the MGMA Board, including an annual review of the PIM Change Policy. It is also responsible for reviewing major and minor internal model changes and approving changes to PIM documentation, and changes to internal model calculation engines that do not materially alter internal model results and are not classified as major changes. In addition, GroupCo is responsible for providing oversight of PIM validation and for reviewing and challenging the PIM validation ahead of recommending these to the MGMA RCIC and the MGMA Board.

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The Risk Function is the owner of the PIM governance on behalf of the LuxCo and MGMA Boards. This includes responsibility for:

Governance of the PIM and ensuring the PIM remains appropriate to MGMA and LuxCo on an ongoing basis.

Ensuring the supporting documentation and PIM design is consistent with the risk profile of the business as it relates to the in scope risks.

Performing or providing oversight for the design and implementation of the PIM, testing and validation, documentation and analysis of the performance of the PIM.

Informing the LuxCo and MGMA Boards about the performance of the PIM, suggesting areas needing improvement, and up-dating the Board on the status of efforts to improve any previously identified weaknesses.

Details of the validation process are covered below.

Processes and reporting The key steps within the risk management cycle are the identification, assessment, management and monitoring.

Risk owners, from Line 1, are responsible for ensuring that the appropriate processes are in place for identifying risks across business operations and activities. The Group maintains a register of risks where all risks are documented. This is a key tool to record the nature of exposures across all risk types.

The Risk, Control and Self-Assessment (“RCSA”) process is conducted bi-annually, providing a bottom-up review and challenge of the content of the risk register across all risks.

Market, credit, insurance and liquidity risks are evaluated monthly by the risk owners. The assessment of all operational risk is performed as part of the RCSA; and involves the review of the current dimensions of the risk register including risk ratings, according to the risk assessment criteria and scoring methodology. Strategic risk and reputational risk are managed through a separate process through regular discussion at GroupCo.

Emerging risks are reported twice a year. A report is produced identifying new emerging risks as well as existing emerging risks that have crystallised or that are no longer deemed to be risks to the business.

Risk capital assessment is performed regularly on the regulatory basis, a risk appetite for capital at risk is monitored and regularly reported.

The Risk function advises on risk management matters, including strategic affairs such as corporate strategy, mergers and acquisitions and major projects and investments.

The Risk Function is responsible for the regular monitoring and oversight of risk management information (“MI”) in relation to the risks faced by MGMA and the Group. A monthly MI pack includes information on all key risks metrics: solvency, longevity, liquidity, investment, underwriting and operations.

The Risk Function also produce a quarterly CRO report, covering the key risks, which is submitted to the HoldCo and MGMA RCICs. Details of the content of the report include performance against risk appetite measures, summary of key emerging risks and summary of internal risk events reported by the business. Key tools The risk register, RCSA, emerging risk reports (as described above) and the monthly risk MI are key tools supporting the risk management framework.

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Risk and Compliance maintain and monitor a log of risk events. The log is open to all staff and training provided on the reporting of risk events. Risk Events are reported to HoldCo and MGMA Boards directly but also through monthly MI and through the CRO report.

As part of its risk-management system the Group conducts its Own Risk and Solvency Assessment (“ORSA”). This considers the risk profile, adequacy of risk management and solvency position. See section B.3.2 for more details.

PIM Validation process The validation process is a key tool for monitoring the performance and ongoing appropriateness of the PIM. MGMA and the Group consider the validation of the PIM as an ongoing activity. However, the annual validation cycle and the production of the annual report are considered significant milestones.

An overview of the process is shown below:

B.3.2 ORSA

A single ORSA report, covering the Group and MGMA, is produced annually. It assesses the risk profile, risk management, overall solvency needs, compliance on a continuous basis with technical provisions, and the significance with which the risk profile of the Group deviates from the assumptions underlying the Solvency Capital Requirement and includes stress and scenario testing. The ORSA reports the capital position on a regulatory basis using the approved PIM for spread risk, and on the firm’s own basis (where the firm’s own assessment differs from the regulatory basis).

The regular ORSA process draws together a number of activities performed at different times throughout the year. It considers the business plan and strategy, capital management and closure plans. It includes an assessment of the appropriateness of the standard formula and ongoing appropriateness of the PIM. In addition, aligned with the risk management framework, it takes into account findings from the RCSA and emerging risk processes, includes a review of the risk strategy and risk appetite.

In turn, the ORSA results inform key business processes such as business planning, product development and capital management.

The Group and MGMA Boards are ultimately responsible for the ORSA. The Boards and the supporting committees (the MGMA RCIC and GroupCo), play an active role over the year in reviewing and approving the ORSA report and supporting assessments. The Risk Function manages the ORSA process on behalf of the LuxCo and MGMA Boards and first line provides significant input

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including capital projections, stress and scenario testing and input on continuous compliance with technical provision and capital requirements.

B.4 Internal control system

B.4.1 Internal control system

The internal control process is implemented by the Boards of Directors, senior management and all levels of personnel within the Group. It is not solely a procedure or policy that is performed at a certain point in time, but it is continually operating at all levels within the Group. The Boards of Directors and senior management are responsible for establishing the appropriate culture to facilitate an effective internal control process and for monitoring its effectiveness on an ongoing basis. However, each individual within the Group must participate in the process.

The Group has a strong control culture, which is supported by a robust governance framework. The Boards of Directors provide governance, guidance and oversight to senior management. The respective Boards are responsible for approving and reviewing the overall business strategies and significant policies as well as the organisational structure. The LuxCo Board has the ultimate responsibility for ensuring that an adequate and effective system of internal controls is established and maintained.

The following diagram illustrates the components which together comprise the internal control system.

Whilst all 4 components are important, the focus is the internal control framework.

The internal control framework is composed of the following activities:

• Control environment • Risk assessment • Control activities • Communication • Monitoring.

B.4.2 Implementation of the Compliance function

The Compliance department is responsible for delivering the compliance function for the Group including MGMA and ServCo. It also includes group oversight of Stonehaven.

Stonehaven is a separate regulated entity, falling under the supervision of the FCA only.

Stonehaven maintains a separate compliance department, working closely with the Group function in order to provide expert oversight in the equity release market.

The annual compliance plan details how the compliance department ensures that the first line

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controls within the business are robust, identifies relevant regulatory changes and helps to manage regulatory risks. The compliance framework underpins the work of the Compliance function in order to give assurance to the HoldCo, MGMA and Stonehaven. Audit and Compliance Committee and the individual Boards that the Group is meeting its regulatory obligations as laid out by the PRA and the FCA.

The Stonehaven compliance department follows the same framework.

The objective of the compliance framework is to set out the involvement and responsibility of the governing body for the management of compliance risk. In order to maintain a robust second line of defence, the Group and MGMA has a Compliance Framework which consists of 4 elements:

Regulatory Change – This covers how changes in regulations across FCA and PRA, Financial Crime and Data Protection are identified and disseminated to the 1st line of defence. Regulators are monitored for proposed changes in legislation that would impact the Group. A summary output is prepared for GroupCo and presented with a plan of action for managing the changes. Regulatory change with significant impact is put through the Business Change process to determine if project support is required. The Regulatory Change procedure contains further information regarding this process. Regulatory Environment – This reflects how relationships with the regulator are managed. Regulatory relationships are managed through Compliance and through interaction by the regulator with Relevant Approved Persons (RAP’s). A log is kept of all regulatory correspondence and notes of all meetings with the regulator. All SIMR applications are processed through Compliance and records are held. Compliance MI contains an assessment of how this relationship is viewed by the second line. Compliance Culture – This deals with how the culture within the Group reflects the regulatory expectations of putting the customer at the heart of the decision making process. Compliance Controls – How 1st line compliance controls within the business are tested through Compliance monitoring, evidenced through breach management, complaints handling, and monitoring actions.

B.5 Internal audit function

B.5.1 Implementation of the Internal Audit Function

The Internal Audit function provides the Boards across the Group and senior management with an independent and objective assurance on the effectiveness of governance, risk management and internal controls aimed at managing the key risks impacting the Group’s operations. The Group’s

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‘Internal audit policy’ clearly sets out the audit process, detailing the responsibilities for pre, during and post the internal audit to ensure that the responsibilities of the internal auditor are clear.

The internal audit function is the third line of defence within the three lines defence model, which is currently outsourced to Deloitte. Deloitte produce an annual risk based audit plan (with input from the executive team and senior management) which is then reviewed and approved by the HoldCo ACC and separately the Stonehaven ACC. The plan sets out details of the audits that will be undertaken in the forthcoming 12 months, including the rationale for their selection and the timescale for the audits’ completion. A copy of the annual plan is sent to GroupCo as well as being placed on the Group’s intranet for reference.

The progress of the annual plan is monitored by the tracking of audit actions, updates through the monthly MI packs and ACC meetings and discussion at the Deloitte/MGMA liaison meetings. The annual plan documents the completion date for each internal audit and permission is sought from the relevant ACC where there are any changes to the plan. In the event that the completion of the audit is delayed the rationale for the delay is given and documented in the minutes of the ACC meeting.

The results of the audit reviews, together with recommendations for improvement, are submitted to the relevant ACC for approval. This function has direct access to the Group Board.

B.5.2 Independence and Objectivity

The regulatory authorities expect firms to have robust internal audit functions capable of providing genuine challenge to management and driving improved governance, risk management and internal controls. It is therefore essential that the remit of Internal Audit is unrestricted so that internal auditors can assess the management of any risk in any part of the business and assess if the Group’s processes and actions are in line with its values, ethics, risk appetite and other policies.

In order to maximise its independence and objectivity, the primary reporting line of internal audit is to the chair of the HoldCo and MGMA ACC, with the relationship being managed by a senior manager, currently the CEO. Having a direct reporting line to the Chair of the HoldCo ACC mitigates any possible conflict of the outsourcing relationship being managed by the CEO.

Outsourcing the Internal Audit function ensures that the Group operate a robust third line of defence. The staff performing an internal audit have no direct responsibility or any authority over the activities or operations that are subject to review, nor should Internal Audit develop and install procedures, prepare records, or engage in activities that would normally be subject to review. However, Internal Audit may be consulted when new systems or procedures are designed to ensure they adequately address internal controls.

In addition, Internal Audit employees are obligated by professional standards to act objectively, exercise due professional care, and collect sufficient, competent, relevant, and useful information to provide a sound basis for audit observations and recommendations. Deloitte, as part of their outsourced commitment, ensure that the staff used to perform internal audits are adequately resourced with the appropriate qualifications, skills, knowledge and experience.

B.6 Actuarial function

The Chief Actuary is responsible for the Actuarial Function and is an approved person under the Senior Insurance Management Function Regime (“SIMF20”). The current Chief Actuary is highly experienced and holds a practicing certificate from the Institute and Faculty of Actuaries.

The Chief Actuary is a member of the GroupCo and an attendee at the Group Board and all other Board and Committee meetings of MGMA, ServCo and HoldCo, ensuring that the committee members are kept fully informed of any material actuarial matters or changes. In addition, the

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MGMA Board is augmented by the appointment of a qualified independent Actuary to provide additional review and challenge capability of the Actuarial Function given that no MGMA Board Director is a qualified Actuary.

The Chief Actuary has overall responsibility for all actuarial activities undertaken in respect of MGMA and, by extension, the actuarial calculation of technical provisions and capital for the Group. These activities are further split over the Actuarial Reporting team, the Deputy Chief Actuary, the Reinsurance Team and the underwriting/pricing team. These teams include staff who are fellows and members of the Institute and Faculty of Actuaries as well as other professionals, all of whom are required to have the sufficient qualifications and/or experience to be able to competently fulfil their responsibilities.

The responsibilities of the Actuarial Function are discussed in section B.1.1.3.

B.7 Outsourcing

The Group’s outsourcing policy outlines the guidelines for appointment of outsourcing providers and their ongoing management including the governance of outsourced functions. The policy applies to all activities undertaken by the Group, but only applies when relying on a third party for the performance of functions that are critical for the performance of regulated activities (i.e. those which are listed under the Group’s permissions on the FCA register), listed activities or ancillary services on a continuous basis.

The Head of Compliance is responsible for maintaining and updating the outsourcing policy. They review and update the policy at least annually and more frequently as required to reflect business changes or in the light of regulatory or procedural change. An outsourcing director has been appointed to manage key outsourced relationships within the Group.

The Group will consider outsourcing a particular function when it is considered beneficial to the Group, policyholders or shareholders, and provided that the level of service is not adversely affected. The Head of Compliance must be notified of all prospective outsourcing arrangements in advance in order to decide if it is captured under the Group’s regulated activities.

The Group’s outsourcing policy is designed to ensure that all functions outsourced by the Group are set up in an appropriate manner, monitored on a regular basis, meet all regulatory requirements and ensure that the level of service is not diminished. The procedures are as follows: Assessment of outsourcing arrangements:

Due diligence is conducted on any prospective outsourcing providers

At least three providers are invited to tender to ensure the best deal is negotiated

Each outsourcer is assessed in terms of risk and materiality and included in the supplier matrix. Critical outsources are managed according to the outsourcing policy.

Completion of a contract checklist – contracts have to satisfy a number of conditions, which includes ensuring that the contract contains no ambiguity and that the rights of each company are clear. Contracts can only be signed by a Director and before agreeing to the new outsourcing arrangement the Director responsible for the function will confirm that the due diligence process and contract checklist have been satisfactorily completed.

Notification to Head of Compliance – details of the arrangement, together with the documentation that evidences that the outsourcing arrangement and contract requirements have been met, are provided to the Head of Compliance. If an existing arrangement is discontinued, this is also notified to the Head of Compliance.

Monitoring: o Outsourcing arrangements are “owned” by individuals within the business. The

relevant GroupCo member who is the primary user of the outsourcing or

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potential outsourcer must submit the contract to the GroupCo for sign-off to ensure that functions are only outsourced after appropriate checks have been conducted by the “owner” and that the contract is suitable.

o Governance and oversight is defined in the contract with the key outsourcer and managed by the contract owner. MI is reviewed on a regular basis and supplier meetings are conducted to discuss the arrangement.

o Compliance monitoring includes a review of key outsourcing arrangements in the annual monitoring plan.

The following table sets out those “material” functions which are outsourced.

Description of Service to MGMA Jurisdiction

Intergroup outsourcing, provision of staff United Kingdom

Information technology, Business Continuity, Business Change, Customer Service, HR Payroll, Office space

United Kingdom

Unit pricing and trades United Kingdom

Sales Distribution United Kingdom

Risk management United Kingdom

Internal audit United Kingdom

Investment management United Kingdom

Underwriting systems United Kingdom

Description of Service to Stonehaven UK Jurisdiction

Legal Services United Kingdom

IT Development United Kingdom

Property Valuations United Kingdom

B.8 Any other information

The Boards have attested to the PRA that MGMA and the Group is compliant with systems of governance requirements.

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C Risk Profile

The risk profile of the Group is primarily driven by the risks of MGMA. MGMA writes income retirement solutions in the UK including annuity and drawdown business.

The key risks to the balance sheet of MGMA and the Group are represented by the Solvency Capital Requirement (“SCR”). The breakdown of the SCR as at 31 December 2016, as shown in the charts below, demonstrates that these risks are dominated by market risk (credit spread risk, in particular) and underwriting risk (materially driven by longevity risk).

Note: SCR breakdown as shown above is pre-diversification and allowance for tax loss absorbency

Whilst the interest rate risk component of the SCR is relatively small, there is additional interest rate exposure to the overall solvency position arising from the Risk Margin and SCR with potential mitigation for material changes through a recalculation of the TMTP (see C.2.1.3).

MGMA is also exposed to counterparty risk, liquidity risk, expense risk, operational risk, reputational risk, strategic risk and conduct risk.

The risks carried within the remainder of the Group are relatively limited. These risks include expense risks within ServCo (although capital in respect of this risk is primarily held within MGMA), operational risks (including outsourcing risk) and reputational and conduct risks within Stonehaven. The Group does have some contagion risk which may arise from companies within the Group and may impact the Group.

C.1 Underwriting risk

C.1.1 Nature of Risk

Underwriting risk covers longevity, mortality, morbidity and customer behaviour risk. The principal underwriting risk for the Group is longevity risk arising from contracts providing guaranteed lifetime benefits sold by MGMA, i.e. the Group’s annuity business. The component of the Group’s SCR that relates to underwriting risk comprised 24% of the total undiversified risks at 31 December 2016. Longevity risk made up 87% of the SCR in respect of underwriting risk.

Longevity risk arises where expectations of longevity (in terms of the observable current levels of mortality and expectations of future trends) differs from the actual longevity experience of the book of business. The Group’s risk strategy in relation to longevity risk is to seek this risk, with the use of reinsurance to limit capital impacts.

Customer behaviour risk also arises from the Group’s drawdown business and medical underwriting risks could arise from the annuity business that has been medically underwritten. However, these

Breakdown of the MGMA SCR

UnderwritingRisk 24%

Market Risk 72%

CounterpartyRisk 1%

Operational 4%

Breakdown of the Group SCR

UnderwritingRisk 24%

Market Risk 72%

CounterpartyRisk 1%

Operational 4%

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risks and related SCR are currently immaterial. There is no significant catastrophe risk as death benefits are small.

In addition, the equity release mortgage assets held by the Group bring associated risks of voluntary redemption, involuntary redemption (due to death and/or move to long-term care) and interest cessation. These risks would impact the asset cash flows, and if significant, could impact the rating of the Trust Senior Note, which is described in more detail below, used to back the policy liabilities in the Matching Adjustment Portfolio (“MAP”).

Based on the materiality of the underwriting risks noted above, the rest of this section focuses on longevity risk. The other risks, including those relating to equity release, are regularly assessed, monitored and reported.

During 2016 the Group’s longevity experience has been broadly in line with the expected level.

C.1.2 Assessment and Risk Mitigation of Underwriting Risk

The Group’s longevity risk exposure arises in MGMA. MGMA’s exposure to longevity risk is assessed through the risk management process of identifying, measuring, managing, monitoring and reporting of underwriting risks.

Longevity risks are identified and assessed during product development, through the product pricing and charging analysis, the underwriting process, which includes for example, GP reports on medical disclosures and through in-force policy management, such as monitoring of longevity experience.

The Group and MGMA have reinsurance arrangements in place with Hannover Re to mitigate the longevity risks that are outside the Group and MGMA’s tolerances. The current reinsurance strategy is to share the longevity risks arising in respect of the annuity business with Hannover Re (50% for business in force pre 31 December 2015 and increased to 75% for new business from 1 January 2016 onwards). The reinsurance arrangements also allow MGMA to draw on the wealth of expertise and experience of the reinsurer, in setting the pricing and technical provision longevity assumptions. The interests of both MGMA and Hannover Re are therefore aligned.

MGMA’s exposure to longevity risk is measured in terms of its capital at risk for longevity risk. Following inception of a policy, MGMA’s longevity risk exposure is managed primarily through conducting investigations into the appropriateness of the longevity risk assumptions used in the pricing and technical provision bases. This analysis is enhanced with Hannover Re’s own analysis, who have significant experience of, and exposure to, annuity business both within the UK and globally.

Risk monitoring and reporting processes are also in place to ensure that those responsible for the management of longevity risks have the information required to fulfil their responsibilities. This includes monthly management information (which is monitored through ERIC, the MGMA RCIC and GroupCo) on actual versus expected longevity experience, pricing analysis (such as new business levels, mix of business and margins on new business), and annual tasks of assessing the capital requirements.

C.1.3 Risk Sensitivity

Stress and scenario testing is carried out at least annually for material risks. For underwriting, the 2016 ORSA focused on individual 1 in 10 year instantaneous stresses for longevity, expense risk and equity release early redemption risk. The scale of the 1 in 10 year stresses has been based on MGMA’s assessment of the risks, as represented by its ORSA basis risk calibrations.

The 1 in 10 stress work showed the most material underwriting impact was from longevity risk.

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C.2 Market risk


The Group is exposed to the following sub categories of market risk, primarily through business of MGMA:

Credit spread risk;

Investment-related counterparty default risk;

Property risk (including equity release mortgage risks);

Equity risk;

Interest rate risk (including asset liability management (“ALM”) risk);

Market concentration risk;

Currency risk; and

Inflation risk.

Taking into account the components of the Market Risk SCR, credit spread risk and the risk of default (and downgrades) from corporate bonds are the most material market risks for MGMA, followed by property risk (from equity release mortgage assets (“ERMA”)) and interest rate risks. However, as noted in C2.1.3, there is additional interest rate exposure to the overall solvency position arising from the Risk Margin and SCR, but that for more material changes in interest rates this volatility is significantly reduced by the ability to recalculate the TMTP.

In the other Group companies (mainly LuxCo) the principal assets are comprised of cash, bank deposits and holdings in highly liquid short-term assets. This gives rise to immaterial exposure to credit spread risk, interest rate risk and counterparty default risk.

The remainder of this section focuses on the material market risks, namely credit, property and interest rates. The spread risk and property risk for equity release are both, under Solvency II, reported under the spread risk sub-module which comprises 90% of the SCR in respect of undiversified market risk at 31 December 2016. Interest rate risk comprises 5% of undiversified market risk at 31 December 2016 for both MGMA and the Group.

C.2.1.1 Credit spread risk

The credit spread is the additional yield on corporate bonds relative to comparable risk free rates, and primarily represents compensation for the risk of default and downgrades of the bonds and an illiquidity premium. Spread risk arises mainly from the corporate bonds and equity release assets supporting the annuity business.

There are two main parts to credit spread risk:

The actual losses arising from counterparty defaults; and

The impact of changes in credit spreads, as a result of changes in economic conditions and market sentiment and factors specific to the bond including credit migration (e.g. downgrades).

As of 31 December 2016, the risk element of the SCR, including credit migrations and default has been calculated using a Partial Internal Model (“PIM”) rather than using the Standard Formulae approach defined by EIOPA.

For corporate bonds (and the equity release senior note issued in respect of restructured equity release cash flows) held inside the Matching Adjustment Portfolio, the impact of credit spread widening or narrowing (without any credit migration) has relatively little net impact – the change in value of the asset is largely offset by a change in the value of policy liabilities. There may be a net impact if the fundamental spread assumptions (set by EIOPA for the base liabilities) change as a

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result of the changed economic/market conditions. The fundamental spread is a deduction (to allow for the probability of default and cost of downgrade) from the yield on the assets that cannot be taken into account in deriving the liability discount rate. However, the fundamental spread assumptions are derived from average experience over a long period and so are unlikely to change materially over a short period.

For corporate bonds held in the Matching Adjustment Portfolio the impact of credit migration will result in a change to the fundamental spread deduction. The size of the fundamental spread varies by the credit rating, whether the bond is classed as ‘financial’ or ‘non-financial’ and by bond duration. So, for example, if a bond downgrades then the size of the fundamental spread deduction would increase and this would result in a loss (an increase to liability value relative to asset value).

For corporate bonds held outside the Matching Adjustment Portfolio the impact of credit spread widening is more significant as the value of the liabilities remain unchanged (assuming the risk-free rates have not changed) whereas the value of the assets will fall.

The impact of spread-narrowing is positive for the Group and MGMA’s Own Funds (there is little net impact in respect of the bonds being used to derive the Matching Adjustment but a positive impact from the other bonds). However, as spread-narrowing results in a higher base value of assets and liabilities the impact of subsequent stresses, and hence the size of the SCR, becomes higher. Therefore the net impact as at 31 December 2016 on the excess of Own Funds over the SCR (with the PIM) is that spread-narrowing is more adverse on the net surplus position than spread-widening. The corporate bonds portfolio is managed by Insight Investment Management who operate under an Investment Management Agreement. This agreement specifies a comprehensive set of portfolio guidelines in respect of credit risk and diversification. The adherence to these guidelines is monitored by the Retirement Advantage in-house investment team.

C.2.1.2 Property risk

It is within MGMA’s risk strategy to seek property risks through its holding of equity release assets. Following the sale of the MGMA head office at the end of 2016, MGMA is no longer exposed to additional direct holdings in property.

For the equity release loans, there is a risk that the value of the assets, arising from the property sales backing the of equity release loans, is insufficient to cover the outstanding loan balance of MGMA’s policyholders following death or entering long term care. This is a consequence of the No Negative Equity Guarantee (“NNEG”) clause present in the equity release mortgage policies, which implies that if the proceeds from sale of the property following a death or entering long term care are insufficient to cover the outstanding balance of the total equity release loan, the policyholder or their estate will not be liable to pay for the shortfall. Any instances of NNEG costs being incurred are not likely until well into the future (in 10 to 40 years) and so the key property risk is in respect of lower than expected property values over the long term which could occur from both severe one-off falls in property prices, significant property dilapidations or lower than expected rates of growth in property prices over long periods. There is also a risk arising from changes to the required property volatility assumption used in the valuation of the NNEG clause.

Following approval of the PIM for spread risk, the equity release assets are held within a bare trust, which has issued senior (fixed) and junior (residual) notes supported by the underlying asset cash flows. Both of the notes in respect of the restructured cash flows are owned by MGMA so MGMA’s exposure is effectively still to the raw equity release loan assets and the associated risk exposure of the raw equity release loan assets (i.e. property, redemption and interest cessation). The risks arising from the restructured equity release assets are reported within the credit spread risk sub-module. Equity release loan assets are originated within the Group by Stonehaven and the Group

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considers that this allows the Group, through the “in-house” product development and underwriting processes to better measure, manage and control the risks associated with equity release loans. This is reflected, for example, in the high proportion of interest paying loans held by MGMA and their low average loan-to-values (“LTV’s”).

C.2.1.3 Interest rate risk

Interest rate risk includes the risk of loss resulting from the sensitivity of the values of assets, liabilities and financial instruments to changes to interest rate levels, term structure of interest rates or volatility of interest rates. The impact of interest rate changes on the asset values and best estimate liability values will give rise to a profit or loss depending on the extent to which asset and liability cash flows are matched. To the extent possible the Group and MGMA seek to materially match asset and liability cash flows through the holding of corporate bonds and equity release loans with a duration similar to annuity cash flows. However, changes in interest rate will also impact the level of surplus through changes to the value of additional capital required to be held (to cover the risk margin and the SCR). As a result the overall Solvency II balance sheet is volatile to changes in interest rate. However, for more material changes in interest rates the Transitional Measure on Technical Provisions (“TMTP”) can be recalculated, which significantly reduces the volatility of the surplus to interest rate changes. During 2016 there was a large fall in risk free rates, which had an adverse impact on the surplus over SCR. However, as this was considered to materially impact the risk profile of MGMA the TMTP could be recalculated (with the approval of the regulator), which largely offset the adverse impact. During 2016 the transitional measure was recalculated at 30 June and 31 December.

C.2.2 Prudent Person Principle, Assessment and Risk Mitigation Techniques of Market Risk

C.2.2.1 Aspects common to all market risks

Risk identification processes are in place for non-routine investments and new asset classes. Thorough research is conducted on any proposed investment including appropriate due diligence and an assessment of the potential risks and capital impact before going through the appropriate governance procedures.

The Group and MGMA seeks to control its exposure to market risk using a range of techniques. These include:

Setting minimum and maximum limits on holdings in different investment assets, expressed in terms of asset benchmarks and operating ranges;

Permitting the use of defined risk hedging strategies using pre-authorised financial instruments;

Establishing Investment Management Agreements (“IMAs”) setting out for fund managers the required investment strategy (including asset benchmarks and operating ranges), valuation and reporting requirements and the framework for the escalation of exceptions so that the best interest of policyholders and beneficiaries can be met; and

Taking consideration of the financial market environment by monitoring key market data and central bank interest rate policy.

MGMA’s principal IMAs are with Insight and include limits on assets and exposures to ensure the desired level of eligibility, security, quality, liquidity and cash flow matching. These limits are approved by the MGMA RCIC and Board. It also covers the strict eligibility conditions for the MAP.

Assets are not permitted to be lent to counterparties with the exception of collateral purposes.

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The use of derivatives (other than inflation swaps) is limited by the terms of the IMA and can only be purchased for reduction of risks or efficient portfolio management. In accordance with the IMA, MGMA will not invest in securitised investments in the MAP.

All of MGMA’s investments in financial instruments are traded on a regulated financial market (with the exception of Inflation swaps and equity release mortgage assets). The equity release assets are valued at fair value using a mark to model approach as no market exists for valuing these.

Market risk measurement is achieved through a “capital at risk” measurement for each category of market risk. The Group and MGMA currently evaluates risk capital requirements in respect of market risk through its annual ORSA process, which includes stresses on market risk. A number of measures and associated metrics for the material market risks including spread, interest rate/ALM, property, market concentration/counterparty risk and inflation.

Regular risk monitoring is in place with a range of checks from daily monitoring of swaps, asset portfolios and transactions through to annual tasks including Profit and Loss attribution, assumption reviews and the ORSA.

The investment team produces a comprehensive monthly Investment MI pack covering the MAP, non-MAP and combined portfolios, which is reviewed by ERIC, GroupCo and the HoldCo and MGMA RCIC’s. Extracts of this report are included in the MGMA and HoldCo Board MI pack. The Monthly MI pack contains “traffic lights” or RAG’s for the key quantifiable market risks. It includes:

A key investment risks dashboard

Market report

Cash flow matching tests and ALM data including interest PV01 (interest sensitivity tests by maturity buckets) produced by the actuarial reporting team

Asset allocation (covering annuity backing assets and surplus assets)

Credit exposure (credit rating, term, industries, nationalities, top counterparties)

Credit watch list (spreads top decile, Solvency II vs Insight ratings) and commentaries

Capital usage, yield, spread, size of Matching Adjustment

Portfolio guidelines

Spreads and credit migration scenarios

Liquidity (MGMA, HoldCo and ServCo)

Equity Release asset origination, redemptions , LTV’s and portfolio progression

C.2.2.2 Aspects specific to credit spread risk

To manage credit spread risk, limits are set including the maximum proportion of a fund that may be invested in debt instruments, minimum credit ratings and maximum exposures to a sector or a credit rating. The limits are reviewed on at least an annual basis by the ERIC and GroupCo, and remain under scrutiny to ensure they continue to reflect current market conditions and changes in the profile of liabilities.

Additional requirements are in place for the MAP to ensure ongoing regulatory compliance, with processes established to assess risk arising from the purchase of investments in respect of asset eligibility and processes for assessing risk in respect of ensuring that the reason for asset trades are matching adjustment portfolio compliant.

The Group and MGMA understands that it is important not to rely overly on credit agencies ratings and has implemented regular MI reporting to challenge external credit assessment ratings.

Details of the monitoring and MI reporting are covered above in section C.2.2.1.

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C.2.2.3 Aspects specific to property risk

Property risk (arising from equity release assets) is managed by only funding loans which adhere to strict underwriting criteria and Loan to Value (“LTV”) criteria to ensure there is sufficient head room in case of underperformance of the properties, and to perform robust stresses to property prices through Monte Carlo simulations on the property portfolio. Capital is held against the potential impact of a large instantaneous shock to property prices or changes to future property growth rate or future volatility.

Benchmark limits for the proportion of the total assets that may be invested in equity release assets are approved by the MGMA Board and monitored monthly.

There is regular analysis and monitoring of the emerging experience.

As indicated above a bare Trust established to facilitate matching adjustment eligibility for equity release cash flows holds on behalf of MGMA the legal title to all the proceeds from MGMA’s equity release assets out of which has been issued a “Senior note” used to support the MA portfolio and any residual value in the form of a “Junior note”. As part of the PRA approved PIM MGMA undertakes a process to assess an internal credit rating of the Senior note. The MGMA MAP is exposed to the risk of non-payment or default of the Senior note which depends on future property values, rates of redemption and interest cessation. Any residual value arising in the Trust from the proceeds of the underlying equity release loans, after meeting the defined Senior note payments to the MA Portfolio, accrues to MGMA but falls outside the MA Portfolio.

C.2.2.4 Aspects specific to interest rate risk

The Group and MGMA aims to have limited exposure to interest rates as annuity liabilities are closely matched by bond and equity release cash flows.

MGMA operates full cash flow matching (within target tolerances) for the annuity business. Investment guidelines have been established for use by investment managers to ensure that the Group’s exposure to market risk remains within pre-defined ranges. These pre-defined ranges are subject to regular review by the Risk Owners to ensure they remain fit for purpose. The investment guidelines limits have particular regard to Risk Appetite statements and to any specific capital limits which have been set for market risk.

For the Matching Adjustment Portfolio compliance with prescribed tests set by the PRA (covering liquidity, interest, inflation and currency stresses and sufficiency of assets) are monitored monthly – these tests need to be met in order to continue to apply a matching adjustment. Any breach would need to be reported to the regulator.

Stress testing of fluctuations in interest rates and their impact on MGMA’s liabilities and underlying assets backing these liabilities are conducted periodically. The results of these tests are reported to the ERIC, GroupCo and the MGMA and HoldCo RCIC through the investment MI pack. This is also performed as part of the annual ORSA process.

Risk mitigating techniques are considered with the HoldCo and MGMA Boards and committees to determine their appropriateness.

C.2.2.5 Aspects specific to unit-linked assets

MGMA’s unit-linked assets consist of Flexible Income Annuities (“FIA”) funds and the drawdown element of The Retirement Account (“TRA”) funds. The directly written FIA provides investment flexibility to the policyholder such that they will benefit from potential increase in value over time on the chosen linked funds via enhancements to chosen levels of income. MGMA is not exposed

to any market risk relating to the inwards reinsurance of FIA unit liability (see A.1.6).

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The TRA drawdown product offering allows unit linked investment in balanced third party funds (active and passive) comprising cash, bonds and equities and protected funds.

The MGMA’s third party funds are run by a number of external managers, with a selection of the funds offered to policyholders based on external independent advice on manager selection. The Group and MGMA is exposed indirectly to equity, interest rate, spread, currency and counterparty default risk resulting from the variation in value of the underlying unit-linked fund assets. This exposure impacts the Solvency II balance sheet through the change in value of future management charges levied on the funds (although the exposure is not material). There is very limited direct equity, interest rate, spread, currency and counterparty default risk resulting from variation in value of the units held within a management “box”.

A monthly Investment Oversight Committee (“IOC”) meeting is held with the Group’s external advisor and chaired by the Director of Investments. This includes a formal review of individual fund performance for The Retirement Account and other linked funds. The Investment function is responsible for checking that the underlying assets within the MGMA funds are managed against the chosen sector.

The investment function monitors the performance for each unit-linked fund on a monthly basis against an appropriate benchmark along with any related performance fees. The monthly Investment MI pack produced for ERIC reports such matters as fund performance, investment views, changes of strategy and other matters of which it might reasonably expect to be made aware. The monthly MI pack also reports on all box positions. The monthly MI provided to the Board also includes fund performance reporting.


Stress and scenario testing is carried out annually for material risks. For market risk, the 2016 ORSA focused on individual 1 in 10 year stresses for spreads, default/downgrade, property level and volatility and interest rates. This work was completed on an estimate of the balance sheet, assuming PIM approval, at 30 June 2016. The scale of the 1 in 10 year stresses has been based on MGMA’s assessment of the risks, as represented by its ORSA basis risk calibrations.

The 1 in 10 year stress work showed the most material market risk impact was spread risk, followed by default/downgrade and interest rate risk. Although for the balance sheet impact (i.e. Own Funds only), default/downgrade stress is more onerous than the spread stress.

On the 30 June 2016 basis, the balance sheet is resilient to these stresses as a combined market risk event and this is further supported by reverse stress tests for spread, property and interest rate risks. The analysis indicated that it would take a 1 in 100 year spread risk event to breach the SCR.

C.3 Credit risk


MGMA’s exposure to counterparty risk arises primarily through reinsurance counterparty default risk, from the reinsurance agreements that MGMA have with Hannover Re and also from investment counterparty risk and from certain other asset holdings (deposits and derivatives). There is minimal credit risk exposure within other companies in the Group.

MGMA holds a material reinsurance asset on its balance sheet, however, MGMA’s risk strategy in relation to reinsurance counterparty default risks is to limit its exposure primarily through collateralisation or deposit back arrangements. Similarly, for derivatives MGMA looks to limit the counterparty risk through strong collateralisation arrangements.

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C.3.2 Assessment and Risk Mitigation of Counterparty Risk

The remainder of this section will discuss the reinsurance counterparty default risk. The relevant details for investment counterparty default risk are covered in section C.2 and section C.6.

The reinsurance arrangements that MGMA have in place with Hannover Re reflects the Company’s approach towards the risk mitigation of the longevity risk that the Company is exposed to.

MGMA follow a set of principles when selecting the reinsurance counterparties and follow procedures for assessing and monitoring the creditworthiness of reinsurance counterparties. This includes a rigorous selection process for the reinsurer, seeking collateral arrangements to help manage any interdependencies with longevity risk, ensuring that the contracts are legally enforceable and setting appropriate reinsurance exposure limits. The credit quality and the capital exposure to the reinsurer is monitored on a regular basis and reported to the appropriate committee’s as part of the risk management process, if the results are outside of the acceptable risk limits. In addition the design of the reinsurance arrangement and ensuring that risk transfer is at an appropriate level and effective is monitored and reported on at least annually by the Actuarial function.


Investment related counterparty credit risk is covered under market risk (see section C.2.4). No stresses are currently undertaken on other counterparty credit risks.

C.4 Liquidity risk


MGMA has long-term obligations to pay annuity liabilities. These liabilities are backed by cash flows from investments principally in corporate bonds and equity release assets. Assets are selected such that asset and liability cash flows are reasonably matched in timing (and that there are expected to be sufficient asset cash flows to meet the liability outgo when due). The equity release Trust established as part of the PIM approval, generates some additional liquidity risk, and so there is a requirement outside of the MA Portfolio to maintain a cash balance sufficient to cover the liquidity facility available for the Trust. Consideration is also given to stress scenarios.

MGMA and the other group companies also have short-term liquidity obligations principally in the form of immediate annuity payments and business expenses. These cash flows are covered by cash held on deposit at the bank and investments in Money Market Funds as well as cash-flows from maturing bonds and coupon payments.

Controls are in place to ensure active management of both long term and short-term liquidity risks including the establishment of RAG based liquidity management information metrics.

MGMA’s obligations in respect of its unit-linked business has a low liquidity risk. All of the insurance contracts are single premium annuities and therefore there is no expected profit included in any future premiums.

C.4.2 Assessment and risk mitigation techniques of Liquidity Risk

The identification and analysis of liquidity risks that MGMA and the Group are exposed to includes consideration of the relevant financial market, social, political, legal, regulatory, geographic and environmental changes, supported by a process for the identification of emerging risks. The liquidity risk owner is responsible for identifying where liquidity risk could come from as the business evolves.

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Liquidity risks are managed through cash flow forecasting (with procedures for both short term and long term cash flow matching), stress and scenario modelling (used to calculate an annual liquidity requirement which covers a 1 in 200 year level of risk event) and ensuring that sufficient cash and liquid assets are held within the portfolio and in line with any requirements as set by the investment function for managed funds.

Liquidity risk metrics are used to aid an understanding of MGMA’s liquidity risk profile over short and long-term horizons. Projections for the next 3 and 12 months are in place to monitor the short- term liquidity requirements, taking into account all cash inflows and outflows.


No additional liquidity risk sensitivity for the Group is completed at this time.

C.5 Operational risk


Operational risk means the risk of loss arising from inadequate or failed internal processes, personnel or systems or from external events.

During 2016, the Group completed two outsourcing deals which have impacted operational risk:

ServCo agreed to outsource services to the Equiniti group on 28 November 2016. This transaction has resulted in the outsourcing of the Customer Services Department, Business Change, HR (including payroll), IT provision and support and the provision of a serviced office for the retained ServCo staff based in Worthing.

Mobius Life Administration Services were engaged as an outsourcing partner to provide investment administration services.

Following these changes, the Group’s exposure to operational risk arises primarily from potential failures of the outsourcing arrangement with Equiniti. In addition there is operational risk relating to losing regulatory permission to continue to apply the Matching Adjustment as a result of MGMA failing to comply with the MA requirements and being unable to restore compliance within the required two months.

C.5.2 Assessment and Risk Mitigation of Operational Risk

The main tool which is used for the management of operational risk is the risk register, which is a central database for all risks identified by HoldCo and its subsidiaries. All risks included in the risk register are reviewed and regularly assessed under normal business conditions. The risk register also includes details of all the specific controls in place to manage the risks. Risk owners use the results of the risk assessment rating to manage the risks they are responsible for.

This management is supported through the bi-annual Risk and Compliance Self-Assessment (“RCSA”) process and the risk events process. The RCSA process facilitates the identification, assessment, management and monitoring of operational risk.

More significant risks are subject to additional stress and scenario testing as well as reverse stress testing analysis, where appropriate and required. This particularly applies to those risks affecting capital and solvency requirements.

Operational risk is monitored regularly by the MGMA and HoldCo RCIC’s and the Boards. Outsourcing agreements which affect operational capability are monitored via the standards outlined in section B7 and performance is reported to the MGMA and HoldCo Boards through the

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monthly MI packs. In the case of the risk of non-compliance with the MA requirements, this is managed through the governance and monitoring arrangements put in place for the MA Portfolio.


Under the standard formula approach, the capital requirement for operational risk is formulaic (as opposed to being derived from our own assessment of our operational risk exposures). The formula is the greater of two components, one depends on the Group and MGMA’s technical provisions at the valuation date and the other depends on the level of new premiums written over the past 12 months and the 12 months prior to that. Separate operational risk SCRs need to be calculated for the Matching Adjustment Portfolio and remaining portfolio.

The 2016 ORSA included a qualitative assessment of a cyber risk threat and resulting failure of the outsourcer and the impact of a 10% worsening in the standard formula SCR calculation basis. The impact of this was to reduce the SCR coverage by only 1%. The assessment has not lead to any proposed changes in the management of the risk.

C.6 Other material risks

As noted in Section C.3 there is minimal market risk concentration risk within the Group. At 31 December 2016, £4m SCR capital was held for the Group to cover this risk. The monitoring and reporting of investment-related concentrations (section C.2.2.1) by issuer, sector and rating are considered appropriate.

C.7 Any other information

There is no other material information relating to MGMA or the Group.

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D Valuation for Solvency Purposes

This section has been subject to external audit (see section H for details), except for the elements in respect of the Risk Margin and SCR, which are not required to be audited.

D.1 Assets

D.1.1 Basis of accounting

The financial statements of MGMA and HoldCo have been prepared in accordance with International Financial Reporting Standards (“IFRS”) adopted by the European Union.

The individual financial statements of LuxCo are prepared in accordance with generally accepted accounting principles applicable in Luxembourg (“LuxGAAP”).

The IFRS financial statements have been prepared on a going concern basis under the historical cost convention, except for the revaluation of certain financial instruments that are measured at revalued amounts or fair values at the end of each reporting period. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

D.1.2 Solvency Valuation Principles

The Solvency II Pillar 3 (“SII”) regulation sets out requirements for the valuation of assets and other liabilities (i.e. other than technical provisions). The underlying principle which prevails in this regulation is that both assets and liabilities shall be valued at “the amount for which they could be exchanged between knowledgeable willing parties in an arm’s length transaction”.

D.1.3 Quantitative analysis of IFRS to Solvency II Assets

The underlying principle which prevails in the requirements relating to the valuation of assets and liabilities is that they shall be valued at the amount for which they could be exchanged between knowledgeable willing parties in an arm’s length transaction. Where permitted under SII regulation MGMA and the Group has adopted the IFRS valuation basis.

For the purposes of Solvency II group reporting, the individual financial statements of LuxCo are first assessed to identify any valuation differences between LuxGAAP and IFRS. If any such differences arise, adjustments are made to the financial statements of LuxCo to convert their basis of preparation from LuxGAAP to IFRS. Subsequently, valuation differences between IFRS and Solvency II are assessed and adjusted for.

There were no asset valuation differences that arose between LuxGAAP and IFRS at 31 December 2016.

The following tables set out a summary of the valuation of assets on both IFRS and SII basis in respect to MGMA and the Group. The differences comprise reclassifications and SII valuation adjustments compared to IFRS.

Reclassifications mainly reflect that under SII the equity release assets held within the bare trust generate notes backed by the equity release cash flows whereas under IFRS the underlying assets are reported on a look through basis. In addition, assets held in respect of index-linked and unit-linked contracts are shown separately for IFRS purposes whereas Solvency II again looks through to the underlying assets. Reclassifications relate only to presentational differences required between standard IFRS formats and the SII QRT Reporting Templates.

Asset valuation differences that arise between IFRS and Solvency II are comprised of intangible assets (which are inadmissible under Solvency II and therefore not valued) and the reinsurance asset component of technical provisions. It is also possible that a deferred tax asset may be recognised under Solvency II in relation to valuation differences between IFRS and Solvency II technical provisions, any such deferred tax asset would be assessed for future recoverability.

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As at 31 December 2016, the following assets were held:

Asset Class

MGMA

IFRS

Financial

Statements

£’000

Reclassification for Solvency II

Reporting Templates

£’000

Solvency II Valuation

adj. £’000

Solvency II £’000

Debt Instruments 1,014,848 - - 1,014,848 OEIC and Unit Trust Investments 600,079 (539,685) - 60,394 Assets held for index-linked and Unit-linked contracts

-

540,403

-

540,403

Derivative instruments 123 10 - 133 Notes backed by Equity Release Trust assets

- 465,323 4 465,327

Other loans and mortgages 457,719 (457,719) - - Reinsurance recoverable 524,021 - (17,255) 506,766 Insurance and other receivables 9,590 (773) - 8,817 Cash and cash equivalents 14,528 (5,335) - 9,193

Total 2,620,908 2,224 (17,251) 2,605,881

Asset Class

Group

IFRS

Financial

Statements

£’000


Reporting Templates

£’000


adj. £’000


Debt Instruments 1,014,848 - - 1,014,848 OEIC and Unit Trust Investments 611,387 (539,685) - 71,702 Assets held for index-linked and Unit-linked contracts

-

540,403

-

540,403

Derivative instruments 123 10 - 133 Notes backed by Equity Release Trust assets

- 465,323 4 465,327

Tangible and Intangible assets 2,592 (7) (2,585) - Other loans and mortgages 457,719 (457,719) - - Holdings in related undertakings - 166 - 166 Reinsurance recoverable 524,021 - (17,255) 506,766 Insurance and other receivables 14,265 (1,269) - 12,996 Cash and cash equivalents 15,684 (5,787) - 9,897

Total 2,640,639 1,435 (19,836) 2,622,238

The Debt instruments held are:

Analysis by Financial Instrument

MGMA

£’000

Group

£’000

Government Bonds 54,384 54,384

Corporate Bonds 953,370 953,370

Collateralised securities 7,094 7,094

Total Debt Instruments 1,014,848 1,014,848

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D.1.4 Valuation of Assets

D.1.4.1 Basis

Financial Investments are valued at market value, where that value is based on readily available

market prices sourced from deep and liquid markets, most of the Group and MGMA financial assets

are traded on active markets. Valuation by fair value significantly reduces a recognition

inconsistency that would otherwise arise from measuring assets or liabilities or recognising the

gains and losses on them on different bases. The fair values of investments are based on quoted

bid prices, or based on modelled prices (using observable market inputs) where quoted bid-prices

are not available. Section D.4 sets out the valuation approach for the equity release assets, which

do not have observable market prices. Section D.2.1.2 sets out the value of the reinsurance

recoverable asset.

MGMA and the Group manages these investments and makes purchase and sale decisions based

on their fair value in accordance with the Group and MGMA investment strategy.

D.1.4.2 Principles on Valuation of Assets

The main principles applicable to the valuation of assets for Solvency II purposes is fair value, which

is consistent with IFRS. Under IFRS certain financial instruments are measured at revalued amounts

or fair values as permitted.

The categories of assets which required a valuation change between IFRS and Solvency II at 31

December 2016 included the following:

The group value of intangible assets is observable under IFRS as it primarily arises from the

result of past business combinations, being amortised intellectual property and bespoke

software £2,146k and 439k attributable to internally developed software with operational

value in use. Under Solvency II, the business combination value is required to be valued at

£nil and the as the internally developed software is not capable of separate sale to a user,

it is also valued at £nil.

The reinsurance asset decreased in value by £17,255k from IFRS to Solvency II (by the same

amount for MGMA and the Group) due to the use of different valuation discount rates (see

section D.2.1.2).

A valuation difference of £4k arises on ERMA assets due to timing recognition between IFRS

and Solvency II.

A summary of assets as at 31 December 2016 is set out in D.1.3 above.

D.2 Technical provisions

D.2.1 Summary of Technical Provisions

MGMA is the only insurance company within the Group and so the Technical Provisions set out in this section are the same for both MGMA and the Group.

The following table sets out the technical provisions and value of reassurance by product type.

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Product

Best Estimate

Liabilities (£000)

Risk Margin

(unaudited) (£000)

Technical Provisions

(£000)

Individually Underwritten Annuity 1,461,827 78,412 1,540,239 Flexible Income Annuity 65,428 631 66,059 Flexible Income Annuity (reinsured in) 460,065 - 460,065 Pension Drawdown 13,884 - 13,884 Pension Annuity Transfers 177 - 177 Additional Expense Provision 800 - 800 Total before Reassurance and Transitional Adjustment

2,002,181 79,043 2,081,224

Reassurance Recoverable Asset - IUA (506,766) - (506,766) Transitional Adjustment (unaudited) (312,666)

Total after Reinsurance and Transitional Adjustment

1,261,792

D.2.1.1 Bases, methods and assumptions

The bases, methods and main assumptions used to determine the Best Estimate Liability for the different products is described below.

Under Solvency II regulations the technical provisions consist of the Best Estimate Liabilities and the Risk Margin. The risk margin is intended to be an additional amount over the best estimate liability such that the value of the technical provisions is equivalent to the amount that another insurance or reinsurance undertaking would be expected to require in order to take over the insurance obligations.

In accordance with the regulations the risk margin is required to be calculated by determining the cost of providing an amount of eligible Own Funds equal to the solvency capital requirement (“SCR”) necessary to support the non-hedgeable market and insurance risks of the insurance and reinsurance obligations over their remaining lifetime. For MGMA this translates to amounts equal to the SCR that captures the longevity, expense and operational risks for each of the future years until the existing business runs-off.

Individually Underwritten Annuities (“IUAs”)

The best estimate liabilities for the IUA (these comprise the EA and RGA product lines) are determined by discounting the expected future cash-flows.

Discounting The discounting uses the GBP risk free structure prescribed by EIOPA and, for the IUA policies included in the Matching Portfolio, a Matching Adjustment derived in accordance with prescribed regulations.

Mortality The expected cash-flows allow for expectations of future deaths of the policyholders. The mortality assumptions are derived from individual underwriting assessments carried out prior to policy issue. This is adjusted to allow for anticipated future improvements to mortality using the CMI2014 model.

Expenses The expense cash-flows include maintenance expenses and investment expenses. These assumptions are based on an analysis of past and expected future experience and reflect contractual agreements.

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Inflation Where expenses or policyholder benefits may increase over time allowance for future inflation is included. The assumption is derived from market implied future RPI inflation (with appropriate adjustments where future increases are expected to differ from RPI).

Policyholder options and management actions After the policy commences the policyholder does not have any options that impact future payments (such as surrender or changes to benefit levels) so no policyholder behaviour is assumed.

In addition no future management actions are modelled.

Risk Margin (unaudited) The calculation of the risk margin requires a projection of the SCR into the future until all of the business runs-off. For the material line of business (IUAs) the amount of the projected SCR used in the risk margin calculation has been recalculated for each future year by projecting the business forward to that year and then applying the required stresses at that point.

Flexible Income Annuity (directly written)

These policies are unit linked annuity policies. The Best Estimate Liability is set equal to the unit value plus an additional reserve for those few policies for which the main life has died and the guarantee period has not expired – for these policies the additional liability is the present value of the annuity for the remainder of the guarantee period.

Risk margin (unaudited) The SCR assessment considers the losses occurring (from changes in the value of guarantee costs and expenses less change in value of future charges) from stresses. The risk margin has been calculated allowing for the value of the projected cost of holding the non-hedgeable elements of the SCR. The projected SCR elements have been approximated by assuming it runs off in line with the projected run off of the Best Estimate Liability.

In calculating the longevity SCR element it has been assumed that following a longevity stress the reviewable mortality credits would be amended to reflect the stressed experience. However, no allowance is included for potential increases to policy charges that could be made in certain stressed conditions.

Flexible Income Annuity (reinsured in)

In addition to Flexible Income Annuity business directly underwritten in MGMA there are some Flexible Income Annuity unit reserves reinsured into MGMA from Scottish Friendly. For the reinsured in Flexible Income Annuity unit reserves MGMA does not have economic exposure to the underlying risks of the policies. The Best Estimate Liability is therefore determined as the unit value with nil non-unit reserve or risk margin.

Pension Drawdown Policies

For these policies the Best Estimate Liability has been set equal to the unit liability with a nil risk margin.

Pension Annuity Transfer Policies

For these policies premiums have been received from policyholders but are still to be annuitised. The Best Estimate Liability has been set equal to the face amount of the premium received (including any interest that has been allocated) with a nil Risk Margin.

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Additional Expense Reserve

In addition to the per policy expenses allowed for in deriving the Best Estimate Liability for the policies of the different products there are additional expenses expected to be incurred in respect of the future maintenance of the existing business. The amount held at December 2016 is £0.8m and is included as an additional expense provision.

D.2.1.2 Valuation of Reinsurance Asset

There are two reinsurance arrangements covering the IUA business. These are described in section A.2. The liability to repay the reinsurance deposit which mitigates counterparty exposure with Hannover Re’s has been included as a current liability. The reassurance asset is the value of the expected remaining net payments (including recovery of annuity payments from the reinsurer and reassurance premiums to the reinsurer) arising from the reinsurance treaties. The assumptions (mortality and investment return) used to determine the value of the reassurance asset are the same as the assumptions used to determine the Best Estimate Liabilities for the IUA business.

D.2.1.3 Uncertainty associated with the Technical Provisions and Reassurance Asset

The technical provisions are derived allowing for a number of assumptions regarding future experience. Inevitably there will be some uncertainty relating to these assumptions. For the IUA business the key assumptions are the future mortality rates and the discount rates. A robust assumption setting process is followed, including a review by the actuarial function, external adviser to the Boards and ACC and GroupACC, enabling the range of outcomes to be understood.

For the Flexible Income Annuity and Pension Drawdown products the volume of in-force business at this valuation date is relatively low and so the level of uncertainty in the technical provisions is not material. MGMA does not have exposure to the underlying risks of the policies in respect of the Reinsured in Flexible Income Annuity business and so the level of uncertainty in the level of technical provisions is negligible.

D.2.1.4 Comparison of methodology and assumptions used for solvency and for financial statements

At 31 December 2016 a comparison of the policy liabilities for solvency purposes and for financial statements is shown in the table and notes set out below:

Technical provisions IFRS Financial

Statements (£000)

Solvency II

(£000)

Change (£000)

Best Estimate Liabilities

- Individually Underwritten Annuity 1,262,067 1,461,827 199,760

- Flexible Income Annuity 65,334 65,428 94

- Flexible Income Annuity (reinsured in) 460,065 460,065 -

- Pension Drawdown 13,884 13,884 -

- Other 977 977 -

Total BEL 1,802,327 2,002,181 199,854

Risk Margin (SII unaudited)

- Individually Underwritten Annuity 29,000 78,412 49,412

- Flexible Income Annuity - 631 631

- Flexible Income Annuity (reinsured in) - - -

- Pension Drawdown - - -

- Other - - -

Total RM 29,000 79,043 50,043

Reassurance recoverable asset - IUA (524,021) (506,766) 17,255

Transitional Adjustment (unaudited) - (312,666) (312,666)

Total after Reinsurance and Transitional Adjustment

1,307,306 1,261,792 (45,514)

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Generally the methods and assumptions that have been used for Solvency II purposes and for the IFRS financial statements are the same except as follows:

The discount rate assumptions for the annuity business (including reassurance asset) differ. For Solvency II purposes the discount rate is a prescribed risk free rate with, for the policies in the Matching Adjustment Portfolio of 162 bps, the addition of a Matching Adjustment derived in a way prescribed by EIOPA. For the financial statements the discount rate is 3.85%, which is the risk adjusted yield on the backing assets.

For Solvency II purposes the risk margin is determined in a prescribed way, as described above. For the IFRS financial statements an additional margin was included based on an approximate assessment of the additional risk and uncertainty associated with the higher reserves required under Solvency II. The IFRS risk margin was valued at £29.0m to reflect the unpredictability and potential variability in the assumptions intrinsic to long-term insurance contract liability and equity release mortgage asset valuations.

The provisions for Solvency II purposes include a transitional adjustment, whereas those for the IFRS financial statements do not.

D.2.2 Matching Adjustment

The Group and MGMA have regulatory approval to use a Matching Adjustment to the discount rate to use in valuing the Best Estimate Liabilities of the IUAs in the Matching Portfolio. The Matching Portfolio contains most (but not all) of the IUA business. IUA policies are annuity policies paying pre-defined amounts depending on the survivorship of the policyholder(s) (and expiry of guarantee period, if applicable).

The assets assigned to the Matching Portfolio consist mainly of eligible fixed income bonds but also include some cash/deposits and inflation derivatives. The fixed income bonds include the Trust Senior note in respect of equity release assets as discussed above (a fixed income note secured against a portfolio of equity release mortgage assets).

Key factors impacting on the size of the Matching Adjustment are the spread on the assets in the Matching Portfolio and the prescribed deductions (the Fundamental Spreads), which depend on the credit rating and duration of the bonds (and whether they are classed as Financial or Non-financial).

The Matching Adjustment provides the balance sheet with improved resilience from the impact of spread movements. For example if bond spreads were to increase, bond asset values would reduce but also the size of the Matching Adjustment should increase resulting in a reduction of the Technical Provisions therefore offsetting the impact on asset values.

However, if the Matching Adjustment were to reduce to zero (with no increase to bond asset values) there would be an adverse impact on the size of the Technical Provisions, the value of the reassurance asset and the amount of the SCR of MGMA and the Group. A summary of the impacts (after tax) on the Solvency II balance sheet is shown below. The summary does not include the beneficial impact of any management actions, if this were to happen, and does not include an allowance for a recalculation of the Transitional Adjustment to Technical Provisions that may be available.

Impact of Matching Adjustment reducing to zero (£000) MGMA Group Impact on Best Estimate Liabilities 263,705 263,705 Impact on Risk Margin (unaudited) - - Impact on basic Own Funds (280,431) (280,431) Impact on eligible Own Funds to cover SCR (280,431) (280,431) Impact on SCR (unaudited) 179,215 179,215 Impact on eligible Own Funds to cover MCR (280,431) (280,431) Impact on MCR 44,804 44,804

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These impacts differ slightly from those shown in the QRT S.22.01.22 as that QRT shows the impact of removing the Matching Adjustment after having already removed the benefit of the Transitional Measure.

D.2.3 Volatility Adjustment

The Group and MGMA does not use a volatility adjustment, as referred to in article 77d of Directive 2009/138/EC.

D.2.4 Transitional risk free interest rate term structure

The Group and MGMA does not use a transitional risk free interest rate term structure as referred to in article 308c of Directive 2009/138/EC.

D.2.5 Transitional Deduction (unaudited)

Like many other insurers MGMA has received regulatory approval to use a Transitional Measure to the Technical Provisions. Without applying the Transitional Measure the initial policy liabilities would be higher under Solvency II than under the previous solvency regime mainly due to the Solvency II regulations requiring a lower discount rate to be used in calculating annuity liabilities and the need to additionally hold a further explicit risk margin. The Transitional Measure results in a reduction of the risk reserves to reflect this initial excess (in order to help to smooth the transition to the new solvency regime) but only applies to the business in-force at the start of the Solvency II regime and runs off over a 16-year period. At 1 January 2017 the amount of the Transitional Measure, and hence the amount of the Own Funds, reduces by £19.5m reflecting the first of 16 annual step-downs and the transitional adjustment will reduce to nil over a 16 year period. MGMA has prepared and shared with the PRA a phasing-in plan to demonstrate that sufficient surplus is expected to emerge each year so that the Own Funds continues to exceed the SCR as the Transitional Measure runs off.

The impact, as at 31 December 2016, of not applying this Transitional Measure adjustment would be as set out below.

Impact of not applying the Transitional Measure (£000) MGMA Group Impact on Technical provisions 312,666 312,666 Impact on basic Own Funds (304,737) (304,737) Impact on Own Funds eligible to cover SCR (304,292) (304,292) Impact on SCR 8,916 8,916 Impact on Own Funds eligible to cover MCR (304,292) (304,292) Impact on MCR 2,229 2,229

D.2.6 Material changes over reporting period

The 2016 financial reporting year is the first in which the Solvency II regulations apply. Therefore, there is no comparison of material changes in the assumptions used in the calculation of Technical Provisions compared to the previous reporting period.

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D.3 Other liabilities

D.3.1 Valuation of other liabilities

A summary of other liabilities as at 31st December 2016 and related comments are shown below.

Other Liabilities

MGMA

IFRS

Financial

Statements

£’000


reporting templates

£’000


adj. £’000


Deposits from reinsurers 596,384 - - 596,384 Deferred tax liabilities - - 7,929 7,929 Derivatives 408 10 - 418 Insurance & intermediaries payables

2,507 - - 2,507

Payables (trade, not insurance) 1,889 (388) - 1,501 Other liabilities 867 2,602 - 3,469

Total 602,055 2,224 7,929 612,208

Other Liabilities

Group

IFRS

Financial Statements

£’000


reporting templates

£’000


adj. £’000


Deposits from reinsurers 596,384 - - 596,384

Deferred tax liabilities - (378) 7,929 7,551

Derivatives 408 10 - 418 Insurance & Intermediaries payables

2,507 - - 2,507

Payables (trade, not insurance) 14,356 (800) (11) 13,545 Other liabilities - 2,603 - 2,603 Subordinated loans 5,800 - 5,800

Total 619,455 1,435 7,918 628,808

The deposit from reinsurer is collateral held to mitigate counterparty default risk and represents a present value of future cash flows (reinsurance benefits) using prudent assumptions. The deposit is valued according to the terms of the quota share treaty with Hannover Re. The deferred tax asset of £378k, presented as an offset to deferred tax liabilities, is unused tax losses that meet the recoverability criteria requirements of IFRS. They are recognised to the extent it is probable that future taxable profit will be available against which the unused tax losses can be utilised. The additional deferred tax liability of £7,929 arises specifically because of the valuation difference in technical provisions between the IFRS and Solvency II balance sheets. This temporary difference is expected to reduce to nil over the next 16 years as the transitional measures run off. All other liabilities are included at fair value.

Reclassification differences relate to presentational differences between IFRS and SII, as the category items included in the balance sheet QRTs of Solvency II are more granular and in some cases different to those reported under IFRS.

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Deferred taxation

Deferred tax assets are recognised when it is probable that future taxable profit will be available to utilise the temporary differences. Deferred tax liabilities are recognised for all temporary taxable differences. The Group and MGMA has right of legal offset of its deferred tax assets and liabilities and therefore these are presented net in the statement of financial position.

D.4 Alternative methods for valuation

Equity release mortgage assets

As indicated above in section C2.1 the economic interests in the Group’s equity release mortgage assets were restructured in 2016. All of MGMA’s (and the Group’s) equity release assets are held in a bare trust at 31 December 2016. The trust has issued a senior note held by the Matching Portfolio of MGMA and a junior note held in MGMA outside of the Matching Portfolio. Neither the notes issued by the trust or the equity release mortgage assets are traded and so do not have an observable market value. As a result it is necessary to use alternative methods to derive the value for these assets.

Equity release assets are loans secured on residential property made to older people who can either make interest rate payments on the loans advanced during their lifetime or roll-up the interest to the eventual repayment amount. On death or entering residential long-term care the loan-holders’ property which is secured on the loan advanced is sold to repay the outstanding loan amount and the balance if any is paid to the loan-holder or their estate.

The equity release mortgage assets held by MGMA have been valued by calculating a projection of the expected payments to be received on the loans and then discounting those future payments.

These projected payments allow for the expected future loan interest payments, loan repayments, expenses and the impacts of the ‘no negative equity’ (“NNEG”) feature. The NNEG feature means that the loan redemption proceeds will not be greater than the value (at the time of loan redemption) of the property, on which the loan is secured. Stochastic modelling is used to capture the expected cost of this feature, which will depend on the expected rate and volatility of future house price growth.

The timing of future redemptions is modelled by making assumptions as to future rates of mortality (or going into long term care) and voluntary loan repayments. These assumptions are set following an analysis of the firm’s own historic experience, together with wider industry experience.

The discount rate used reflects the risk free structure plus a spread above the risk free rate. The spread includes a market related element and a further element to include allowance for the high illiquidity arising from a non-trading asset.

Senior Trust note

The senior note issued by the Trust has a schedule of future fixed payments. An assessment of the ability of the Trust to meet these payments when due has been made, which included stochastic modelling, and based on this assessment a credit rating has been assigned to the senior note. The senior note has been valued by discounting the schedule of future payments due.

The discount rate used reflects the then current risk free structure as well as the assessed credit rating and includes some allowance for the illiquidity arising from a non-traded asset.

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Junior Trust note

The junior note has been valued as the residual value of the assets in the Trust (after including allowance for the expected costs of operating the Trust).

As a result, the total value of the two notes held by MGMA ( and the Group) , issued by the Trust, is equal to the value of the assets held in the Trust (save for a reduction to allow for the costs of running the Trust).

Valuation uncertainty

The valuation of the equity release assets is derived allowing for a number of assumptions regarding future experience. Inevitably there will be some uncertainty relating to these assumptions as future experience may differ from the assumptions made. A robust assumption setting process is followed in order to ensure that uncertainty is well understood and experience relative to these assumptions is regularly monitored.

D.5 Any other information

There is no other information in respect of MGMA or the Group.

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E Capital Management

This section has been subject to external audit (see section H for details), except for the elements in respect of the Risk Margin and SCR, which are not required to be audited.

E.1 Own Funds

E.1.1 Managing Own Funds

The objective of Own Funds management is to maintain, at all times, sufficient eligible Own Funds to cover the SCR and MCR with an appropriate buffer. This is monitored regularly by management and the relevant Boards and Board Committees. MGMA and the Group undertake an Own Risk and Solvency Assessment (“ORSA") exercise at least annually, or when the risk profile of the Group or MGMA materially changes. The ORSA exercise incorporates the business planning process, which is typically considered over a three year time horizon and includes projections of the amounts of eligible Own Funds, SCR and MCR. There have been no significant changes to the process during 2016. The processes employed to manage Own Funds are included within the risk management framework, incorporating the risk appetite and ORSA, which are detailed further in section B3.

E.1.2 Own Funds – Classification into Tiers

Tier 1 capital substantially possesses the characteristics of permanent availability and subordination. The instruments must be available or callable on demand to fully absorb losses in the event of an SCR breach and repayment is subordinate to policyholder insurance liabilities. Tier 1 capital is not subject to quantitative limits in meeting the SCR or the MCR. Tier 2 capital has similar characteristics as Tier 1 capital but the technical specifications applied to it are less onerous. Tier 2 capital is subordinated to policyholder insurance liabilities but is not required to include the same Tier 1 loss absorbency mechanisms in the event of a significant breach of SCR. Tier 2 capital is subject to quantitative limits in meeting the SCR and the MCR.

Own fund items classified as Tier 1 include ordinary share capital, share premium account and reconciliation reserve. The reconciliation reserve is equal to the total excess of assets over liabilities (including subordinated liabilities) less ordinary share capital and the share premium account. As a result it is representative of the retained earnings and other reserves adjusted for Solvency II valuation differences. The own fund items classified as Tier 2 for MGMA consist of perpetual debt and for the Group comprise Perpetual Preferred Equity Certificates (“PPECs”) and Preferred Equity Certificates (“PECs”).

The classification of MGMA capital resources into ‘tiers’ based on rules specified in the SII regulations is specified below:

Analysis of Own Funds

MGMA Total Tier 1 Tier 2

£’000 £’000 £’000

Ordinary share capital 41,620 41,620 -

Reconciliation reserve 134,617 134,617 -

Subordinated liabilities 48,878 - 48,878

Total Own Funds after deductions at 31 December 2016 225,115 176,237 48,878

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The following table analyses the Reconciliation reserve which is a specified Own Funds item under Solvency II regulations:

Analysis of Reconciliation reserve MGMA

£’000

Retained earnings 73,028

Distributable capital contribution reserve 24,000

Surplus items per IFRS Financial Statements 97,028

Technical provisions 45,514

Deferred taxation (7,929)

Other valuation differences 4

Valuation differences between IFRS and Solvency II 37,589

Total Reconciliation reserve 134,617

The following table compares Own Funds on IFRS and Solvency II bases and is reconciled by both classification changes from liabilities to assets (which have no net impact on Own Funds) and the valuation differences included within the Reconciliation reserve:

Valuation and analysis changes from IFRS to SII MGMA

IFRS

Solvency II

Change

£’000 £’000 £’000

Total assets, excluding Reinsurance asset (Section D.1.3) 2,096,887 2,099,115 2,228

Technical provisions, including Reinsurance asset (Section D.2.1.4)

(1,307,306) (1,261,792) 45,514

Deposit from reinsurers (596,384) (596,384) -

Valuation of other liabilities (Section D.3.1) (5,671) (15,824) (10,153)

Total Own Funds 187,526 225,115 37,589

The classification of Group capital resources into ‘tiers’ based on rules specified in the SII regulations is specified below:

Analysis of Own Funds

Group Total Tier 1 Tier 2

£’000 £’000 £’000

Ordinary Share capital 200 200 -

Share premium account related to ordinary share capital 55,656 55,656 -

Non-available own fund items (see E.1.2.1) (1,000) (1,000) -

Reconciliation reserve 104,022 104,022 -

Subordinated liabilities 64,994 - 64,994

Total Own Funds after deductions at 31 December 2016 223,872 158,878 64,994

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The following table analyses the Reconciliation reserve which is a specified Own Funds item under Solvency II regulations:

Analysis of Reconciliation reserve Group £’000

Retained earnings 59,449

Other reserves 328

Surplus items per IFRS Financial Statements 59,777

Technical provisions 45,514

Deferred taxation (7,929)

Inadmissible intangible assets (2,585)

Other valuation differences 15

Valuation differences between IFRS and Solvency II 35,015

Non-controlling interest in initial capital included within the Group 8,230

Other Group capital subsequently deducted as non-available Own Funds 1,000

Other capital items 9,230

Total Reconciliation reserve 104,022

The total Non-controlling interest in the group, the value of which is fully available as Own Funds to meet the consolidated group SCR and MCR, includes initial capital injected with nominal value of £8.23m and £12.62m of attributable surplus, the latter of which is included within ‘Retained earnings’ and ‘Valuation differences between IFRS and Solvency II’ in the table above. The following table compares total Own Funds on IFRS and Solvency II bases and is reconciled by classification changes from liabilities to assets (which have no net impact on Own Funds), valuation differences included within the Reconciliation reserve and non-available Own Funds under Solvency II:

Valuation and analysis changes from IFRS to SII Group IFRS Solvency II Change £’000 £’000 £’000 Total assets, excluding Reinsurance asset (Section D.1.3) 2,116,618 2,115,472 (1,146)

Technical provisions, including Reinsurance asset (Section D.2.1.4) (1,307,306) (1,261,792) 45,514

Deposit from reinsurers (596,384) (596,384) -

Valuation of other liabilities (Section D.3.1) (23,071) (32,424) (9,353)

189,857 224,872 35,015

Non-available Own Funds - (1,000) (1,000)

Total Own Funds 189,857 223,872 34,015

E.1.2.1 Deductions from Own Funds and restrictions affecting availability and transferability of Own Funds

For MGMA there are no deductions from Own Funds.

Within MGMA there is a ring-fenced Matching Adjustment Portfolio. Surplus from this portfolio can be extracted as long as certain requirements are met. As a result there is some restriction on the availability and transferability of this element of the Own Funds both within MGMA and within the Group. At 31 December 2016 this restriction had no impact on the amounts of Own Funds available to meet the SCR or MCR for either MGMA or the Group as, in respect of the MA Portfolio alone, there was no excess Own Funds over SCR (with Own Funds in the remaining fund covering part of the SCR of the MA Portfolio).

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For the Group there are £1m of other specific classes of ordinary share capital, which may be reduced through repurchase and cancellation and as a result the amount of these shares are ineligible as basic Own Funds (reported within Group Own Funds as ‘Non-available surplus funds at group level’).

In addition, there is a minority holding (non-controlling interest) in HoldCo (see section 1.4). However, at 31 December 2016 there was no excess of Own Funds over SCR (when consolidated to the level of HoldCo) and so there was no deduction from the Group’s Own Funds as a result of the minority holding.

E.1.2.2 Eligibility of Own Funds to cover SCR

All of the Own Funds are eligible to cover the SCR in respect of MGMA and the Group.

E.1.2.3 Eligibility of basic Own Funds to cover MCR

All of the Tier 1 Own Funds are eligible to cover the MCR in respect of MGMA and the Group. In addition a restricted amount (up to 20% of the MCR) of the Tier 2 Own Funds can be used.

E.2 Solvency Capital Requirement and Minimum Capital Requirement

E.2.1 Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR)

The following table summarises the SCR and MCR of MGMA and Group as at 31 December 2016.

SCR and MCR MGMA

£ 000 Group £ 000

SCR (unaudited) 160,435 163,107

MCR/Minimum consolidated Group SCR 40,109 34,818

The following table summarises the SCR results by risk module as at 31st December 2016.

SCR by risk module (unaudited) MGMA

£ 000 Group £ 000

Life underwriting 46,949 46,949

Market risk 142,549 142,580

Counterparty 2,038 2,423

Diversification* (28,976) (29,244)

Operational risk 7,322 7,322

Loss absorbency of deferred tax (9,447) (7,607)

SCR (for Stonehaven) on Sectorial rules n/a 684

Total SCR 160,435 163,107

* The reduction to SCR from diversification is lower than it would otherwise be due to the ring-fencing of the Matching Adjustment Portfolio.

Simplified calculations or undertaking specific parameters have not been used in applying the standard formulae.

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The MCR calculation is formulaic and the inputs used to calculate the MCR are set out below.

Inputs for MCR calculation MGMA

£ 000 Group £ 000

Absolute floor (€3.7m) 3,332 3,332

Index linked and unit linked insurance obligations (BEL) 539,377 539,377

Other life insurance obligations 721,783 721,783

SCR (unaudited) 160,435 163,107

Group proportional share in MGMA - 86.81%

MCR/Minimum consolidated Group SCR 40,109 34,818

This is the first period in which the SCR and MCR have been reported and so no changes have been disclosed on this occasion.

E.3 Use of the duration-based equity risk sub-module in the calculation of the Solvency Capital Requirement (unaudited)

This does not apply to MGMA or the Group.

E.4 Differences between the standard formula and any internal model used (unaudited)

MGMA and the Group have used a PIM to determine the amount of capital required under the spread risk sub-module of the market risk module. This covers the risk of loss to Own Funds arising from corporate bond migrations, defaults and spread movements. It also covers the risk of loss to Own Funds arising from MGMA’s portfolio of restructured equity release mortgages. As for the Standard Formula the selected stressed loss to Own Funds is assessed at the level of a 99.5th percentile worst loss over a one year time horizon. For the corporate bonds the PIM determines, from an analysis of historic experience, distributions of bond downgrades, defaults and spread-widening. Using these distributions many potential future scenarios are modelled and the resulting losses (allowing for both changes to asset and liability values) are determined. From this the 99.5th percentile level of loss to Own Funds is determined. For the equity release mortgages the PIM considers the key risk drivers impacting the amount and timing of the future cash-flows. These include those related to future house price changes and those related to the timing of the loan redemptions. For each key risk driver a distribution has been derived. The PIM uses these various distributions to stochastically project the future proceeds from the mortgages. Those projections are then used to assess a credit rating for the restructured equity release mortgage trust Senior Trust note (see section A.1.7). Additionally the distributions are used to assess the appropriate 99.5th percentile level of stress to the future equity release mortgage cash-flows, the value of the equity release mortgages and the rating of the Senior Trust note.

The Partial Internal Model only relates to the spread risk sub-module. For other risks the Standard Formula is used. The Partial Internal Model is integrated with the Standard Formula risk sub-modules and modules using the standard formula aggregation process.

E.5 Non-compliance with the Minimum Capital Requirements and non- compliance with the Solvency Capital Requirements

MGMA and the Group have maintained capital sufficient to meet their Minimum Capital Requirement and Solvency Capital Requirement throughout the period covered by this report.

E.6 Any other information

There is no other information in respect of MGMA or the Group.

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F. Templates

The following Quantitative Reporting Templates (“QRTs”) are included at the end of

this report.

QRT ref QRT Template name

MGMA

S.02.01.02 Balance Sheet

S.05.01.02 Premiums, claims and expenses by line of business - Life

S.05.02.01 Premiums, claims and expenses by country - Life

S.12.01.02 Life and Health SLT technical provisions

S.22.01.21 Impact of long term guarantees measures and transitionals

S.23.01.01 Own Funds

S.25.02.21 SCR-Standard Formula and Partial Internal Model

S.28.01.01 MCR

QRT ref QRT Template name

Group

S.02.01.02 Balance Sheet

S.05.01.02 Premiums, claims and expenses by line of business - Life

S.05.02.01 Premiums, claims and expenses by country - Life

S.22.01.22 Impact of long term guarantees measures and transitionals

S.23.01.22 Own Funds

S.25.02.22 SCR-Standard Formula and Partial Internal Model

S.32.01.22 Undertakings in the scope of the Group

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G. Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Solvency and Financial Condition Report (“SFCR”) in accordance with the Prudential Regulatory Authority (PRA) rules and SII Regulations. The PRA Rulebook for SII firms in Rule 6.1(2) and Rule 6.2(1) of the Reporting Part requires that MGM Advantage Life Limited and ICE Acquisitions S.à r.l. must have in place a written policy ensuring the ongoing appropriateness of any information disclosed and that MGM Advantage Life Limited and ICE Acquisitions S.à r.l. must ensure that its SFCR is subject to approval by the Directors. Financial year ended 31 December 2016 The Directors, confirm that, to the best of their knowledge:

1. The Solvency and Financial Condition Report has been properly prepared in all material respects in accordance with the PRA rules and Solvency II Regulations: and 2. We are satisfied that: (a) Throughout the financial year in question, MGM Advantage Life Limited and ICE

Acquisitions S.à r.l. have complied in all material respects with the requirements of the PRA rules and Solvency II Regulations as applicable to MGM Advantage Life Limited and ICE Acquisitions S.à r.l. ; and

(b) It is reasonable to believe that, at the date of the publication of the SFCR, MGM

Advantage Life Limited and ICE Acquisitions S.à r.l. has continued to comply, and will continue to comply in future.

Approved by the Boards and Signed on their behalf by: Director of MGM Advantage Life Limited Director of ICE Acquisitions S.à r.l.

_________________________________ ____________________________ Name: John Simon Smith Name: John Simon Smith Chief Financial Officer Class A Manager Date: 17 May 2017 Date: 17 May 2017

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H. Audit Report

Report of the external independent auditor to the Directors of ICE Acquisitions S.à r.l. ('the Company') pursuant to Rule 4.1 (2) of the External Audit Chapter of the PRA Rulebook applicable to Solvency II firms

Report on the Audit of the relevant elements of the Single Solvency and Financial Condition Report

Opinion

Except as stated below, we have audited the following documents prepared by ICE Acquisitions S.à r.l. as at 31 December 2016:

The 'Valuation for Solvency Purposes' and 'Capital Management' sections of the Single Solvency and Financial Condition Report of ICE Acquisitions S.à r.l. as at 31 December 2016, ('the Narrative Disclosures subject to audit');

Company templates S02.01.02, S12.01.02, S22.01.21, S23.01.01, S28.01.01 for MGM Advantage Life Limited ('the company Templates subject to audit'); and

Group templates S02.01.02, S22.01.22, S23.01.22, S32.01.22 for ICE Acquisitions S.à r.l. ('the Group Templates subject to audit').

The Narrative Disclosures subject to audit, the company Templates subject to audit and the Group Templates subject to audit are collectively referred to as the 'relevant elements of the Single Solvency and Financial Condition Report'.

We are not required to audit, nor have we audited, and as a consequence do not express an opinion on the Other Information which comprises:

information contained within the relevant elements of the Single Solvency and Financial Condition Report set out about above which are, or derive from the Solvency Capital Requirement, as identified in the Appendix to this report

the 'Business and Performance', 'System of Governance' and 'Risk Profile' elements of the Single Solvency and Financial Condition Report;

Company templates S05.01.02, S05.02.01, S.25.02.21 for MGM Advantage Life Limited;

Group templates S05.01.02, S05.02.01, S.25.02.22 for ICE Acquisitions S.à r.l.; and

information calculated in accordance with the previous regime used in the calculation of the transitional measure on technical provisions, and as a consequence all information relating to the transitional measures on technical provisions as set out in the Appendix to this report

the written acknowledgement by management of their responsibilities, including for the preparation of the Single Solvency and Financial Condition Report ('the Statement of Directors’ responsibilities);

Information which pertains to an undertaking that is not a Solvency II undertaking and has been prepared in accordance with PRA rules other than those implementing the Solvency II Directive or in accordance with an EU instrument other than the Solvency II regulations. ('the sectoral information').

To the extent the information subject to audit in the relevant elements of the Single Solvency and Financial Condition Report includes amounts that are totals, sub-totals or calculations derived from the Other Information, we have relied without verification on the Other Information.

In our opinion, the information subject to audit in the relevant elements of the Single Solvency and Financial Condition Report of ICE Acquisitions S.à r.l. as at 31 December 2016 is prepared, in all material respects, in accordance with the financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based, as modified by relevant supervisory modifications, and as supplemented by supervisory approvals and determinations.

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Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) including ISA (UK) 800 and ISA (UK) 805, and applicable law. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the relevant elements of the Single Solvency and Financial Condition Report section of our report. We are independent of ICE Acquisitions S.à r.l. in accordance with the ethical requirements that are relevant to our audit of the Single Solvency and Financial Condition Report in the UK, including the FRC's Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where:

the directors' use of the going concern basis of accounting in the preparation of the Single Solvency and Financial Condition Report is not appropriate; or

the directors have not disclosed in the Solvency and Financial Condition Report any identified material uncertainties that may cast significant doubt about the Company's and MGM Advantage Life Limited’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the Single Solvency and Financial Condition Report is authorised for issue.

Emphasis of Matter — Basis of Accounting

We draw attention to the ‘Valuation for Solvency Purposes' and the 'Capital Management' sections of the Single Solvency and Financial Condition Report, which describe the basis of accounting. The Single Solvency and Financial Condition Report is prepared in compliance with the financial reporting provisions of the PRA Rules and Solvency II regulations, and therefore in accordance with a special purpose financial reporting framework. The Single Solvency and Financial Condition Report is required to be published, and intended users include but are not limited to the Prudential Regulation Authority. As a result, the Single Solvency and Financial Condition Report may not be suitable for another purpose. Our opinion is not modified in respect of this matter.

Other Information

The Directors are responsible for the Other Information.

Our opinion on the relevant elements of the Single Solvency and Financial Condition Report does not cover the Other Information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the Single Solvency and Financial Condition Report, our responsibility is to read the Other Information and, in doing so, consider whether the Other Information is materially inconsistent with the relevant elements of the Single Solvency and Financial Condition Report, or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the relevant elements of the Single Solvency and Financial Condition Report or a material misstatement of the Other Information. If, based on the work we have performed, we conclude that there is a material misstatement of this Other Information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Directors for the Single Solvency and Financial Condition Report

The Directors are responsible for the preparation of the Single Solvency and Financial Condition Report in accordance with the financial reporting provisions of the PRA rules and Solvency II regulations which have been modified by the modifications, and supplemented by the approvals and determinations made by the PRA under section 138A of FSMA, the PRA Rules and Solvency II regulations on which they are based.

The Directors are also responsible for such internal control as they determine is necessary to enable the preparation of a Single Solvency and Financial Condition Report that is free from material misstatement, whether due to fraud or error.

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Auditor's Responsibilities for the Audit of the relevant elements of the Single Solvency and Financial Condition Report

It is our responsibility to form an independent opinion as to whether the relevant elements of the Single Solvency and Financial Condition Report are prepared, in all material respects, with financial reporting provisions of the PRA Rules and Solvency II regulations on which they are based.

Our objectives are to obtain reasonable assurance about whether the relevant elements of the Single Solvency and Financial Condition Report are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the decision making or the judgement of the users taken on the basis of the Single Solvency and Financial Condition Report.

This report is made solely to the Company’s directors, as a body, in accordance with rule 4.1 (2) of the External Audit Chapter of the PRA Rulebook applicable to Solvency II firms. Our audit work has been undertaken so that we might state to the Company’s directors those matters we are required by the rules to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's directors as a body for our audit work, for this report, or for the opinions we have formed.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at: https://www.frc.org.uk/Our-Work/Audit/Audit-and-assurance/Standards-and-guidance/Standards-and-guidance-for-auditors/Auditors-responsibilities-for-audit/Description-of-auditors-responsibilities-for-audit.aspx.

Other Matter

The Company has authority to calculate its Group Solvency Capital Requirement and the Solvency Capital Requirement of MGM Advantage Life Limited using a partial internal model ("the Model") approved by the Prudential Regulation Authority in accordance with the Solvency II Regulations. In forming our opinion (and in accordance with PRA Rules), we are not required to audit the inputs to, design of, operating effectiveness of and outputs from the Model, or whether the Model is being applied in accordance with the Company's application or approval order.

Report on Other Legal and Regulatory Requirements

Sectoral Information

In our opinion, in accordance with Rule 4.2 of the External Audit Chapter of the PRA Rulebook, the sectoral information has been properly compiled in accordance with the PRA rules and EU instruments relating to that undertaking from information provided by members of the group and the relevant insurance group undertaking.

Other Information

In accordance with Rule 4.1 (3) of the External Audit Chapter of the PRA Rulebook for Solvency II firms we are also required to consider whether the Other Information is materially inconsistent with our knowledge obtained in the audit of MGM Advantage Group Limited’s statutory financial statements. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Grant Thornton UK LLP Statutory auditor, Chartered Accountants London 17 May 2017

https://www.frc.org.uk/Our-Work/Audit/Audit-and-assurance/Standards-and-guidance/Standards-and-guidance-for-auditors/Auditors-responsibilities-for-audit/Description-of-auditors-responsibilities-for-audit.aspx



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The maintenance and integrity of the website http://www.retirementadvantage.com is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the Single Solvency and Financial Condition Report since it was initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of Single Solvency and Financial Condition Reports may differ from legislation in other jurisdictions.

Appendix — relevant elements of the Single Solvency and Financial Condition Report that are not subject to audit

Partial internal model The relevant elements of the Single Solvency and Financial Condition Report that are not subject to audit comprise:

The following elements of template S.02.01.02: - Row R0590: Technical provisions — health (similar to non-life) — risk margin - Row R0640: Technical provisions — health (similar to life) — risk margin - Row R0680: Technical provisions — life (excluding health and index-linked and unit-linked) — risk margin - Row R0720: Technical provisions — Index-linked and unit-linked — risk margin

The following elements of template S.12.01.02 - Row R0100: Technical provisions calculated as a sum of BE and RM — Risk margin - Rows R0110 to R0130 — Amount of transitional measure on technical provisions

The following elements of template S.22.01.21 - Column C0030 — Impact of transitional measure on technical provisions - Row R0010 — Technical provisions - Row R0090 — Solvency Capital Requirement

The following elements of template S.23.01.01 - Row R0580: SCR - Row R0740: Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring

fenced funds

The following elements of template [S.28.01.01] - Row R0310: SCR

The following elements of Group template S.02.01.02: - Row R0590: Technical provisions — health (similar to non-life) — risk margin - Row R0640: Technical provisions — health (similar to life) — risk margin - Row R0680: Technical provisions — life (excluding health and index-linked and unit-linked) — risk margin - Row R0720: Technical provisions — Index-linked and unit-linked — risk margin

The following elements of Group template S.22.01.22 - Column C0030 — Impact of transitional on technical provisions - Row R0010 — Technical provisions] - Row R0090 — Solvency Capital Requirement

The following elements of Group template S.23.01.22 - Row R0020: Non-available called but not paid in ordinary share capital at group level - Row R0060: Non-available subordinated mutual member accounts at group level - Row R0080: Non-available surplus at group level - Row R0100: Non-available preference shares at group level - Row R0120: Non-available share premium account related to preference shares at group level - Row R0150: Non-available subordinated liabilities at group level - Row R0170: The amount equal to the value of net deferred tax assets not available at the group level - Row R0190: Non-available own funds related to other own funds items approved by supervisory authority - Row R0210: Non-available minority interests at group level - Row R0380: Non-available ancillary own funds at group level - Rows R0410 to R0440 — Own funds of other financial sectors - Row R0680: Group SCR - Row R0740: Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring

fenced funds - Row R0750: Other non available own funds

Elements of the Narrative Disclosures (including tabular information therein) subject to audit identified as 'Unaudited'.

http://www.retirementadvantage.com/

MGM Advantage Life

Solvency and Financial

Condition Report

Disclosures

31 December

2016

(Monetary amounts in GBP thousands)

General information

Undertaking name MGM Advantage Life

Undertaking identification code 54930039E2N3MDVMYE05

Type of code of undertaking LEI

Type of undertaking Life undertakings

Country of authorisation GB

Language of reporting en

Reporting reference date 31 December 2016

Currency used for reporting GBP

Accounting standards The undertaking is using IFRS

Method of Calculation of the SCR Partial internal model

Matching adjustment Use of matching adjustment

Volatility adjustment No use of volatility adjustment

Transitional measure on the risk-free interest rate No use of transitional measure on the risk-free interest rate

Transitional measure on technical provisions Use of transitional measure on technical provisions

List of reported templates

S.02.01.02 - Balance sheet

S.05.01.02 - Premiums, claims and expenses by line of business

S.05.02.01 - Premiums, claims and expenses by country

S.12.01.02 - Life and Health SLT Technical Provisions

S.22.01.21 - Impact of long term guarantees measures and transitionals

S.23.01.01 - Own Funds

S.25.02.21 - Solvency Capital Requirement - for undertakings using the standard formula and partial internal model

S.25.02.21 - Solvency Capital Requirement - for undertakings using the standard formula and partial internal model

S.28.01.01 - Minimum Capital Requirement - Only life or only non-life insurance or reinsurance activity

S.02.01.02

Balance sheet

Solvency II

value

Assets C0010

R0030 Intangible assets

R0040 Deferred tax assets

R0050 Pension benefit surplus

R0060 Property, plant & equipment held for own use 0

R0070 Investments (other than assets held for index-linked and unit-linked contracts) 1,540,702

R0080 Property (other than for own use) 0

R0090 Holdings in related undertakings, including participations 0

R0100 Equities 0

R0110 Equities - listed 0

R0120 Equities - unlisted 0

R0130 Bonds 1,014,848

R0140 Government Bonds 54,384

R0150 Corporate Bonds 953,370

R0160 Structured notes 0

R0170 Collateralised securities 7,094

R0180 Collective Investments Undertakings 60,394

R0190 Derivatives 133

R0200 Deposits other than cash equivalents 0

R0210 Other investments 465,327

R0220 Assets held for index-linked and unit-linked contracts 540,403

R0230 Loans and mortgages 0

R0240 Loans on policies 0

R0250 Loans and mortgages to individuals

R0260 Other loans and mortgages

R0270 Reinsurance recoverables from: 506,766

R0280 Non-life and health similar to non-life 0

R0290 Non-life excluding health

R0300 Health similar to non-life

R0310 Life and health similar to life, excluding index-linked and unit-linked 506,766

R0320 Health similar to life 0

R0330 Life excluding health and index-linked and unit-linked 506,766

R0340 Life index-linked and unit-linked 0

R0350 Deposits to cedants 0

R0360 Insurance and intermediaries receivables 20

R0370 Reinsurance receivables 302

R0380 Receivables (trade, not insurance) 4,624

R0390 Own shares (held directly) 0

R0400 Amounts due in respect of own fund items or initial fund called up but not yet paid in 0

R0410 Cash and cash equivalents 9,193

R0420 Any other assets, not elsewhere shown 3,870

R0500 Total assets 2,605,881

S.02.01.02

Balance sheet

Solvency II

value

Liabilities C0010

R0510 Technical provisions - non-life 0

R0520 Technical provisions - non-life (excluding health) 0

R0530 TP calculated as a whole

R0540 Best Estimate

R0550 Risk margin

R0560 Technical provisions - health (similar to non-life) 0


R0580 Best Estimate

R0590 Risk margin

R0600 Technical provisions - life (excluding index-linked and unit-linked) 1,228,549

R0610 Technical provisions - health (similar to life) 0

R0620 TP calculated as a whole 0

R0630 Best Estimate 0

R0640 Risk margin 0

R0650 Technical provisions - life (excluding health and index-linked and unit-linked) 1,228,549


R0670 Best Estimate 1,228,549

R0680 Risk margin 0

R0690 Technical provisions - index-linked and unit-linked 540,009


R0710 Best Estimate 539,377

R0720 Risk margin 632

R0740 Contingent liabilities

R0750 Provisions other than technical provisions

R0760 Pension benefit obligations

R0770 Deposits from reinsurers 596,384

R0780 Deferred tax liabilities 7,929


R0800 Debts owed to credit institutions

R0810 Financial liabilities other than debts owed to credit institutions

R0820 Insurance & intermediaries payables 2,507

R0830 Reinsurance payables

R0840 Payables (trade, not insurance) 1,501

R0850 Subordinated liabilities 48,878

R0860 Subordinated liabilities not in BOF

R0870 Subordinated liabilities in BOF 48,878

R0880 Any other liabilities, not elsewhere shown 3,470

R0900 Total liabilities 2,429,644

R1000 Excess of assets over liabilities 176,237

S.05.01.02

Life

Health

insurance

Insurance with

profit

participation

Index-linked

and unit-linked

insurance

Other life

insurance

Annuities

stemming from

non-life insurance

contracts and

relating to health

insurance

obligations

Annuities

stemming from

non-life insurance

contracts and

relating to

insurance

obligations other

than health

insurance

obligations

Health

reinsurance

Life

reinsurance

C0210 C0220 C0230 C0240 C0250 C0260 C0270 C0280 C0300

Premiums written

R1410 Gross 16,407 172,548 329 189,284

R1420 Reinsurers' share 6,609 6,609

R1500 Net 16,407 165,939 329 182,675

Premiums earned

R1510 Gross 16,407 172,548 329 189,284


R1600 Net 16,407 165,939 329 182,675

Claims incurred

R1610 Gross 5,845 82,214 33,626 121,685


R1700 Net 5,845 39,950 33,626 79,421

Changes in other technical provisions

R1710 Gross 5,918 204,112 27,604 237,634


R1800 Net 5,918 194,793 27,604 228,315

R1900 Expenses incurred 2,795 28,997 0 31,792

R2500 Other expenses 2,306

R2600 Total expenses 34,098

Premiums, claims and expenses by line of business

Line of Business for: life insurance obligations Life reinsurance obligations

Total

S.05.02.01

Premiums, claims and expenses by country

Life

C0150 C0160 C0170 C0180 C0190 C0200 C0210

R1400

C0220 C0230 C0240 C0250 C0260 C0270 C0280

Premiums written

R1410 Gross 189,284 189,284


R1500 Net 182,675 0 0 0 0 0 182,675

Premiums earned

R1510 Gross 189,284 189,284


R1600 Net 182,675 0 0 0 0 0 182,675

Claims incurred

R1610 Gross 121,685 121,685


R1700 Net 79,421 0 0 0 0 0 79,421


R1710 Gross 237,634 237,634


R1800 Net 228,315 0 0 0 0 0 228,315

R1900 Expenses incurred 31,792 31,792



Home Country

Top 5 countries (by amount of gross premiums written) - life

obligations

Top 5 countries (by amount of gross

premiums written) - life obligations Total Top 5 and

home country

S.12.01.02

Life and Health SLT Technical Provisions

Contracts

without

options and

guarantees

Contracts with

options or

guarantees

Contracts

without

options and

guarantees

Contracts with

options or

guarantees

Contracts

without

options and

guarantees

Contracts

with options

or

guarantees

C0020 C0030 C0040 C0050 C0060 C0070 C0080 C0090 C0100 C0150 C0160 C0170 C0180 C0190 C0200 C0210

R0010 Technical provisions calculated as a whole 0 0

R0020

Total Recoverables from reinsurance/SPV and Finite Re after

the adjustment for expected losses due to counterparty default

associated to TP calculated as a whole 0 0

Technical provisions calculated as a sum of BE and RM

Best estimate

R0030 Gross Best Estimate 79,312 1,462,803 460,065 2,002,180

R0080

Total Recoverables from reinsurance/SPV and Finite Re after

the adjustment for expected losses due to counterparty default 506,766 0 506,766

R0090Best estimate minus recoverables from reinsurance/SPV

and Finite Re0 79,312 0 956,037 460,065 1,495,414

R0100 Risk margin 632 78,412 0 79,044

Amount of the transitional on Technical Provisions

R0110 Technical Provisions calculated as a whole 0

R0120 Best estimate -234,254 -234,254

R0130 Risk margin -78,412 -78,412

R0200 Technical provisions - total 79,944 1,228,549 460,065 1,768,558

Health insurance (direct business)

Annuities

stemming from

non-life

insurance

contracts and

relating to

health

insurance

obligations

Health

reinsurance

(reinsurance

accepted)

Total (Health

similar to life

insurance)

Insurance

with profit

participation

Index-linked and unit-linked insurance Other life insurance Annuities

stemming from

non-life

insurance

contracts and

relating to

insurance

obligation other

than health

insurance

obligations

Accepted

reinsurance

Total

(Life other

than health

insurance,

including

Unit-Linked)

S.22.01.21

Impact of long term guarantees measures and transitionals

Amount with

Long Term

Guarantee

measures and

transitionals

Impact of

transitional on

technical

provisions

Impact of

transitional on

interest rate

Impact of

volatility

adjustment

set to zero

Impact of

matching

adjustment

set to zero

C0010 C0030 C0050 C0070 C0090

R0010 Technical provisions 1,768,558 312,666 0 0 263,705

R0020 Basic own funds 225,115 -304,737 0 0 -288,361

R0050 Eligible own funds to meet Solvency Capital Requirement 225,115 -304,737 0 0 -288,361

R0090 Solvency Capital Requirement 160,435 8,916 0 0 171,326

R0100 Eligible own funds to meet Minimum Capital Requirement 184,259 -304,292 0 0 -279,794

R0110 Minimum Capital Requirement 40,109 2,229 0 0 42,832

S.23.01.01

Own Funds

Basic own funds before deduction for participations in other financial sector as foreseen in article 68 of Delegated Regulation 2015/35 TotalTier 1

unrestricted

Tier 1

restrictedTier 2 Tier 3

C0010 C0020 C0030 C0040 C0050

R0010 Ordinary share capital (gross of own shares) 41,620 41,620 0

R0030 Share premium account related to ordinary share capital 0 0 0

R0040 Initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings 0 0 0

R0050 Subordinated mutual member accounts 0 0 0 0

R0070 Surplus funds 0 0

R0090 Preference shares 0 0 0 0

R0110 Share premium account related to preference shares 0 0 0 0

R0130 Reconciliation reserve 134,617 134,617

R0140 Subordinated liabilities 48,878 0 48,878 0

R0160 An amount equal to the value of net deferred tax assets 0 0

R0180 Other own fund items approved by the supervisory authority as basic own funds not specified above 0 0 0 0 0

R0220 Own funds from the financial statements that should not be represented by the reconciliation reserve and do not meet the criteria to be classified as Solvency II own funds 0

R0230 Deductions for participations in financial and credit institutions 0

R0290 Total basic own funds after deductions 225,115 176,237 0 48,878 0

Ancillary own funds

R0300 Unpaid and uncalled ordinary share capital callable on demand 0

R0310 Unpaid and uncalled initial funds, members' contributions or the equivalent basic own fund item for mutual and mutual - type undertakings, callable on demand 0

R0320 Unpaid and uncalled preference shares callable on demand 0

R0330 A legally binding commitment to subscribe and pay for subordinated liabilities on demand 0

R0340 Letters of credit and guarantees under Article 96(2) of the Directive 2009/138/EC 0

R0350 Letters of credit and guarantees other than under Article 96(2) of the Directive 2009/138/EC 0

R0360 Supplementary members calls under first subparagraph of Article 96(3) of the Directive 2009/138/EC 0

R0370 Supplementary members calls - other than under first subparagraph of Article 96(3) of the Directive 2009/138/EC 0

R0390 Other ancillary own funds 0

R0400 Total ancillary own funds 0 0 0

Available and eligible own funds

R0500 Total available own funds to meet the SCR 225,115 176,237 0 48,878 0

R0510 Total available own funds to meet the MCR 225,115 176,237 0 48,878

R0540 Total eligible own funds to meet the SCR 225,115 176,237 0 48,878 0

R0550 Total eligible own funds to meet the MCR 184,259 176,237 0 8,022

R0580 SCR 160,435

R0600 MCR 40,109

R0620 Ratio of Eligible own funds to SCR 140.32%

R0640 Ratio of Eligible own funds to MCR 459.40%

Reconcilliation reserve C0060


R0710 Own shares (held directly and indirectly) 0

R0720 Foreseeable dividends, distributions and charges

R0730 Other basic own fund items 41,620

R0740 Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds 0

R0760 Reconciliation reserve 134,617

Expected profits

R0770 Expected profits included in future premiums (EPIFP) - Life business

R0780 Expected profits included in future premiums (EPIFP) - Non- life business

R0790 Total Expected profits included in future premiums (EPIFP) 0

S.25.02.21

Solvency Capital Requirement - for undertakings using the standard formula and partial internal model

Unique number

of componentComponent description

Calculation of the

Solvency Capital

Requirement

Amount modelled USP Simplifications

Row C0010 C0020 C0030 C0070 C0080 C0090

1 1 Market risk 142,550 131,423

2 2 Counterparty default risk 2,038 0

3 3 Life underwriting risk 46,949 0

4 4 Health underwriting risk 0 0

5 5 Non-Life underwriting risk 0 0

6 6 Intangible asset risk 0 0

7 7 Operational risk 7,322 0

8 8 LAC Technical Provisions (negative amount) 0 0

9 9 LAC Deferred Taxes (negative amount) -9,447 0

S.25.02.21

Solvency Capital Requirement - for undertakings using the standard formula and partial internal model

Calculation of Solvency Capital Requirement C0100

R0110 Total undiversified components 189,411

R0060 Diversification -28,976

R0160 Capital requirement for business operated in accordance with Art. 4 of Directive 2003/41/EC

R0200 Solvency capital requirement excluding capital add-on 160,435

R0210 Capital add-ons already set

R0220 Solvency capital requirement 160,435

Other information on SCR

R0300 Amount/estimate of the overall loss-absorbing capacity of technical provisions

R0310 Amount/estimate of the overall loss-absorbing capacity ot deferred taxes -9,447

R0400 Capital requirement for duration-based equity risk sub-module

R0410 Total amount of Notional Solvency Capital Requirements for remaining part 52,564

R0420 Total amount of Notional Solvency Capital Requirement for ring fenced funds

R0430 Total amount of Notional Solvency Capital Requirement for matching adjustment portfolios 107,871

R0440 Diversification effects due to RFF nSCR aggregation for article 304

S.28.01.01

Minimum Capital Requirement - Only life or only non-life insurance or reinsurance activity

Linear formula component for non-life insurance and reinsurance obligations C0010

R0010 MCRNL Result 0

Net (of

reinsurance/SPV) best

estimate and TP

calculated as a whole

Net (of reinsurance)

written premiums in

the last 12 months

C0020 C0030

R0020 Medical expense insurance and proportional reinsurance

R0030 Income protection insurance and proportional reinsurance

R0040 Workers' compensation insurance and proportional reinsurance

R0050 Motor vehicle liability insurance and proportional reinsurance

R0060 Other motor insurance and proportional reinsurance

R0070 Marine, aviation and transport insurance and proportional reinsurance

R0080 Fire and other damage to property insurance and proportional reinsurance

R0090 General liability insurance and proportional reinsurance

R0100 Credit and suretyship insurance and proportional reinsurance

R0110 Legal expenses insurance and proportional reinsurance

R0120 Assistance and proportional reinsurance

R0130 Miscellaneous financial loss insurance and proportional reinsurance

R0140 Non-proportional health reinsurance

R0150 Non-proportional casualty reinsurance

R0160 Non-proportional marine, aviation and transport reinsurance

R0170 Non-proportional property reinsurance

Linear formula component for life insurance and reinsurance obligations C0040

R0200 MCRL Result 18,933

Net (of

reinsurance/SPV) best

estimate and TP

calculated as a whole

Net (of

reinsurance/SPV) total

capital at risk

C0050 C0060

R0210 Obligations with profit participation - guaranteed benefits

R0220 Obligations with profit participation - future discretionary benefits

R0230 Index-linked and unit-linked insurance obligations 539,377

R0240 Other life (re)insurance and health (re)insurance obligations 721,783

R0250 Total capital at risk for all life (re)insurance obligations

Overall MCR calculation C0070

R0300 Linear MCR 18,933

R0310 SCR 160,435

R0320 MCR cap 72,196

R0330 MCR floor 40,109

R0340 Combined MCR 40,109

R0350 Absolute floor of the MCR 3,332

R0400 Minimum Capital Requirement 40,109

Ice Acquisitions SARL

Solvency and Financial

Condition Report

Disclosures

31 December

2016

(Monetary amounts in GBP thousands)

General information

Participating undertaking name Ice Acquisitions SARL

Group identification code 213800K67T1JNQY4YU31

Type of code of group LEI

Country of the group supervisor GB

Language of reporting en

Reporting reference date 31 December 2016

Currency used for reporting GBP

Accounting standards The group is using IFRS

Method of Calculation of the group SCR Partial internal model

Method of group solvency calculation Method 1 is used exclusively

Matching adjustment Use of matching adjustment

Volatility adjustment No use of volatility adjustment

Transitional measure on the risk-free interest rate No use of transitional measure on the risk-free interest rate

Transitional measure on technical provisions No use of transitional measure on technical provisions

List of reported templates

S.02.01.02 - Balance sheet

S.05.01.02 - Premiums, claims and expenses by line of business

S.05.02.01 - Premiums, claims and expenses by country

S.22.01.22 - Impact of long term guarantees measures and transitionals

S.23.01.22 - Own Funds

S.25.02.22 - Solvency Capital Requirement - for groups using the standard formula and partial internal model

S.25.02.22 - Solvency Capital Requirement - for groups using the standard formula and partial internal model

S.32.01.22 - Undertakings in the scope of the group

S.02.01.02

Balance sheet

Solvency II

value

Assets C0010

R0030 Intangible assets

R0040 Deferred tax assets

R0050 Pension benefit surplus

R0060 Property, plant & equipment held for own use 0

R0070 Investments (other than assets held for index-linked and unit-linked contracts) 1,552,175

R0080 Property (other than for own use) 0

R0090 Holdings in related undertakings, including participations 166

R0100 Equities 0

R0110 Equities - listed 0

R0120 Equities - unlisted 0

R0130 Bonds 1,014,848

R0140 Government Bonds 54,384

R0150 Corporate Bonds 953,370

R0160 Structured notes 0

R0170 Collateralised securities 7,094

R0180 Collective Investments Undertakings 71,702


R0200 Deposits other than cash equivalents 0

R0210 Other investments 465,327

R0220 Assets held for index-linked and unit-linked contracts 540,403

R0230 Loans and mortgages 0

R0240 Loans on policies 0

R0250 Loans and mortgages to individuals

R0260 Other loans and mortgages

R0270 Reinsurance recoverables from: 506,766

R0280 Non-life and health similar to non-life 0

R0290 Non-life excluding health

R0300 Health similar to non-life

R0310 Life and health similar to life, excluding index-linked and unit-linked 506,766

R0320 Health similar to life

R0330 Life excluding health and index-linked and unit-linked 506,766

R0340 Life index-linked and unit-linked

R0350 Deposits to cedants 0

R0360 Insurance and intermediaries receivables 3,509

R0370 Reinsurance receivables 302

R0380 Receivables (trade, not insurance) 5,315

R0390 Own shares (held directly) 0

R0400 Amounts due in respect of own fund items or initial fund called up but not yet paid in 0

R0410 Cash and cash equivalents 9,897

R0420 Any other assets, not elsewhere shown 3,870

R0500 Total assets 2,622,238

S.02.01.02

Balance sheet

Solvency II

value

Liabilities C0010

R0510 Technical provisions - non-life 0

R0520 Technical provisions - non-life (excluding health) 0


R0540 Best Estimate

R0550 Risk margin

R0560 Technical provisions - health (similar to non-life) 0


R0580 Best Estimate

R0590 Risk margin

R0600 Technical provisions - life (excluding index-linked and unit-linked) 1,228,549

R0610 Technical provisions - health (similar to life) 0


R0630 Best Estimate

R0640 Risk margin

R0650 Technical provisions - life (excluding health and index-linked and unit-linked) 1,228,549


R0670 Best Estimate 1,228,549

R0680 Risk margin

R0690 Technical provisions - index-linked and unit-linked 540,009


R0710 Best Estimate 539,377

R0720 Risk margin 632

R0740 Contingent liabilities

R0750 Provisions other than technical provisions

R0760 Pension benefit obligations

R0770 Deposits from reinsurers 596,384

R0780 Deferred tax liabilities 7,551


R0800 Debts owed to credit institutions

R0810 Financial liabilities other than debts owed to credit institutions

R0820 Insurance & intermediaries payables 2,507

R0830 Reinsurance payables

R0840 Payables (trade, not insurance) 13,546

R0850 Subordinated liabilities 70,794

R0860 Subordinated liabilities not in BOF 5,800

R0870 Subordinated liabilities in BOF 64,994

R0880 Any other liabilities, not elsewhere shown 2,603

R0900 Total liabilities 2,462,360


S.05.01.02

Life

Health

insurance

Insurance with

profit

participation

Index-linked

and unit-linked

insurance

Other life

insurance

Annuities

stemming from

non-life insurance

contracts and

relating to health

insurance

obligations

Annuities

stemming from

non-life insurance

contracts and

relating to

insurance

obligations other

than health

insurance

obligations

Health

reinsurance

Life

reinsurance

C0210 C0220 C0230 C0240 C0250 C0260 C0270 C0280 C0300

Premiums written

R1410 Gross 16,407 172,548 329 189,284


R1500 Net 16,407 165,939 329 182,675

Premiums earned

R1510 Gross 16,407 172,548 329 189,284


R1600 Net 16,407 165,939 329 182,675

Claims incurred

R1610 Gross 5,845 82,214 33,626 121,685


R1700 Net 5,845 39,950 33,626 79,421


R1710 Gross 5,918 204,112 27,604 237,634


R1800 Net 5,918 194,793 27,604 228,315

R1900 Expenses incurred 2,795 32,025 0 34,820



Premiums, claims and expenses by line of business

Line of Business for: life insurance obligations Life reinsurance obligations

Total

S.05.02.01

Premiums, claims and expenses by country

Life

C0150 C0160 C0170 C0180 C0190 C0200 C0210

R1400

C0220 C0230 C0240 C0250 C0260 C0270 C0280

Premiums written

R1410 Gross 189,284 189,284


R1500 Net 182,675 0 0 0 0 0 182,675

Premiums earned

R1510 Gross 189,284 189,284


R1600 Net 182,675 0 0 0 0 0 182,675

Claims incurred

R1610 Gross 121,685 121,685


R1700 Net 79,421 0 0 0 0 0 79,421


R1710 Gross 237,634 237,634


R1800 Net 228,315 0 0 0 0 0 228,315

R1900 Expenses incurred 34,820 34,820



Home Country

Top 5 countries (by amount of gross premiums written) - life

obligations

Top 5 countries (by amount of gross

premiums written) - life obligations Total Top 5 and

home country

S.22.01.22

Impact of long term guarantees measures and transitionals

Amount with

Long Term

Guarantee

measures and

transitionals

Impact of

transitional on

technical

provisions

Impact of

transitional on

interest rate

Impact of

volatility

adjustment

set to zero

Impact of

matching

adjustment

set to zero

C0010 C0030 C0050 C0070 C0090

R0010 Technical provisions 1,768,558 312,666 0 0 263,705

R0020 Basic own funds 223,872 -304,737 0 0 -288,361

R0050 Eligible own funds to meet Solvency Capital Requirement 223,872 -304,737 0 0 -288,361

R0090 Solvency Capital Requirement 163,107 8,916 0 0 171,326

S.23.01.22

Own Funds

Basic own funds before deduction for participations in other financial sector TotalTier 1

unrestricted

Tier 1


C0010 C0020 C0030 C0040 C0050

R0010 Ordinary share capital (gross of own shares) 200 200 0

R0020 Non-available called but not paid in ordinary share capital at group level 0

R0030 Share premium account related to ordinary share capital 55,656 55,656 0

R0040 Initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings 0 0 0

R0050 Subordinated mutual member accounts 0 0 0 0

R0060 Non-available subordinated mutual member accounts at group level 0

R0070 Surplus funds 0 0

R0080 Non-available surplus funds at group level 1,000 1,000

R0090 Preference shares 0 0 0 0

R0100 Non-available preference shares at group level 0

R0110 Share premium account related to preference shares 0 0 0 0

R0120 Non-available share premium account related to preference shares at group level 0

R0130 Reconciliation reserve 104,021 104,021

R0140 Subordinated liabilities 64,994 0 64,994 0

R0150 Non-available subordinated liabilities at group level 0

R0160 An amount equal to the value of net deferred tax assets 0 0

R0170 The amount equal to the value of net deferred tax assets not available at the group level 0 0

R0180 Other items approved by supervisory authority as basic own funds not specified above 0 0 0 0 0

R0190 Non available own funds related to other own funds items approved by supervisory authority 0

R0200 Minority interests (if not reported as part of a specific own fund item) 0

R0210 Non-available minority interests at group level 0

R0220 Own funds from the financial statements that should not be represented by the reconciliation reserve and do not meet the criteria to be classified as Solvency II own funds

R0230 Deductions for participations in other financial undertakings, including non-regulated undertakings carrying out financial activities 166 166

R0240 whereof deducted according to art 228 of the Directive 2009/138/EC 0

R0250 Deductions for participations where there is non-availability of information (Article 229) 0

R0260 Deduction for participations included by using D&A when a combination of methods is used 0

R0270 Total of non-available own fund items 1,000 1,000 0 0 0

R0280 Total deductions 1,166 1,166 0 0 0

R0290 Total basic own funds after deductions 223,706 158,712 0 64,994 0

Ancillary own funds

R0300 Unpaid and uncalled ordinary share capital callable on demand 0

R0310 Unpaid and uncalled initial funds, members' contributions or the equivalent basic own fund item for mutual and mutual - type undertakings, callable on demand 0

R0320 Unpaid and uncalled preference shares callable on demand 0

R0330 A legally binding commitment to subscribe and pay for subordinated liabilities on demand 0

R0340 Letters of credit and guarantees under Article 96(2) of the Directive 2009/138/EC 0

R0350 Letters of credit and guarantees other than under Article 96(2) of the Directive 2009/138/EC 0

R0360 Supplementary members calls under first subparagraph of Article 96(3) of the Directive 2009/138/EC 0

R0370 Supplementary members calls - other than under first subparagraph of Article 96(3) of the Directive 2009/138/EC 0

R0380 Non available ancillary own funds at group level 0

R0390 Other ancillary own funds 0

R0400 Total ancillary own funds 0 0 0

Own funds of other financial sectors

R0410 Credit Institutions, investment firms, financial insitutions, alternative investment fund manager, financial institutions 166 166

R0420 Institutions for occupational retirement provision 0

R0430 Non regulated entities carrying out financial activities 0

R0440 Total own funds of other financial sectors 166 166 0 0 0

S.23.01.22

Own Funds

Basic own funds before deduction for participations in other financial sector TotalTier 1

unrestricted

Tier 1


C0010 C0020 C0030 C0040 C0050

Own funds when using the D&A, exclusively or in combination of method 1

R0450 Own funds aggregated when using the D&A and combination of method 0

R0460 Own funds aggregated when using the D&A and combination of method net of IGT 0

R0520 Total available own funds to meet the consolidated group SCR (excluding own funds from other financial sector and from the undertakings included via D&A ) 223,706 158,712 0 64,994 0

R0530 Total available own funds to meet the minimum consolidated group SCR 223,706 158,712 0 64,994

R0560 Total eligible own funds to meet the consolidated group SCR (excluding own funds from other financial sector and from the undertakings included via D&A ) 223,706 158,712 0 64,994 0

R0570 Total eligible own funds to meet the minimum consolidated group SCR (group) 165,676 158,712 0 6,964

R0610 Minimum consolidated Group SCR 34,818

R0650 Ratio of Eligible own funds to Minimum Consolidated Group SCR 475.83%

R0660 Total eligible own funds to meet the group SCR (including own funds from other financial sector and from the undertakings included via D&A ) 223,872 158,878 0 64,994 0

R0680 Group SCR 163,107

R0690 Ratio of Eligible own funds to group SCR including other financial sectors and the undertakings included via D&A 137.25%

Reconcilliation reserve C0060


R0710 Own shares (held directly and indirectly)

R0720 Forseeable dividends, distributions and charges

R0730 Other basic own fund items 55,856

R0740 Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds 0

R0750 Other non available own funds

R0760 Reconciliation reserve 104,021

Expected profits

R0770 Expected profits included in future premiums (EPIFP) - Life business

R0780 Expected profits included in future premiums (EPIFP) - Non- life business

R0790 Total Expected profits included in future premiums (EPIFP) 0

S.25.02.22

Solvency Capital Requirement - for groups using the standard formula and partial internal model

Unique number

of componentComponent description

Calculation of the

Solvency Capital

Requirement

Amount modelled USP Simplifications

Row C0010 C0020 C0030 C0070 C0080 C0090

1 1 Market risk 142,581 131,423

2 2 Counterparty default risk 2,423

3 3 Life underwriting risk 46,949

4 4 Health underwriting risk

5 5 Non-Life underwriting risk

6 6 Intangible asset risk

7 7 Operational risk 7,322

8 8 LAC Technical Provisions (negative amount)

9 9 LAC Deferred Taxes (negative amount) -7,607

S.25.02.22

Solvency Capital Requirement - for groups using the standard formula and partial internal model

Calculation of Solvency Capital Requirement C0100

R0110 Total undiversified components 191,668

R0060 Diversification -29,244

R0160 Capital requirement for business operated in accordance with Art. 4 of Directive 2003/41/EC

R0200 Solvency capital requirement excluding capital add-on 162,423

R0210 Capital add-ons already set

R0220 Solvency capital requirement for undertakings under consolidated method 163,107

Other information on SCR

R0300 Amount/estimate of the overall loss-absorbing capacity of technical provisions

R0310 Amount/estimate of the overall loss-absorbing capacity ot deferred taxes -7,607

R0400 Capital requirement for duration-based equity risk sub-module

R0410 Total amount of Notional Solvency Capital Requirements for remaining part 54,552

R0420 Total amount of Notional Solvency Capital Requirement for ring fenced funds

R0430 Total amount of Notional Solvency Capital Requirement for matching adjustment portfolios 107,871

R0440 Diversification effects due to RFF nSCR aggregation for article 304

R0470 Minimum consolidated group solvency capital requirement 34,818

Information on other entities

R0500 Capital requirement for other financial sectors (Non-insurance capital requirements) 684

R0510 684

R0520 Institutions for occupational retirement provisions

R0530 Capital requirement for non- regulated entities carrying out financial activities

R0540 Capital requirement for non-controlled participation requirements

R0550 Capital requirement for residual undertakings

Overall SCR

R0560 SCR for undertakings included via D and A

R0570 Solvency capital requirement 163,107

Credit institutions, investment firms and financial institutions, alternative investment funds managers, UCITS management companies

S.32.01.22

Undertakings in the scope of the group

Country

Identification

code of the

undertaking

Type of code of

the ID of the

undertaking

Legal Name of the undertaking Type of undertaking Legal form

Category

(mutual/non

mutual)

Supervisory Authority

Row C0010 C0020 C0030 C0040 C0050 C0060 C0070 C0080

1 GB 54930039E2N3MDVMYE05 LEI MGM Advantage Life Limited Life insurance undertaking Company limited by shares or by guarantee or unlimited Non-mutual Prudential Regulation Authority

2 GB 213800RUVUGJAQB2IX80 LEI MGM Advantage Life Trustee Limited Other Company limited by shares or by guarantee or unlimited Non-mutual

3 GB 213800I8ASHT4JBJ5M03 LEI MGM Advantage Services LimitedAncillary services undertaking as defined in Article 1 (53) of Delegated

Regulation (EU) 2015/35Company limited by shares or by guarantee or unlimited Non-mutual

4 GB 2138007VQUE3VPXQH311 LEI MGM Advantage Holdings LimitedInsurance holding company as defined in Article 212(1) (f) of Directive

2009/138/ECCompany limited by shares or by guarantee or unlimited Non-mutual

5 GB 2138005YYDH5JQ2ORW68 LEI Stonehaven UK Limited Credit institution, investment firm and financial institution Company limited by shares or by guarantee or unlimited Non-mutual Financial Conduct Authority

6 LU 213800K67T1JNQY4YU31 LEI ICE ACQUISITIONS S.À R.LInsurance holding company as defined in Article 212(1) (f) of Directive

2009/138/ECSociété anonyme Non-mutual

S.32.01.22

Undertakings in the scope of the group

Country

Identification

code of the

undertaking

Type of code of

the ID of the

undertaking

Row C0010 C0020 C0030

1 GB 54930039E2N3MDVMYE05 LEI

2 GB 213800RUVUGJAQB2IX80 LEI

3 GB 213800I8ASHT4JBJ5M03 LEI

4 GB 2138007VQUE3VPXQH311 LEI

5 GB 2138005YYDH5JQ2ORW68 LEI

6 LU 213800K67T1JNQY4YU31 LEI

Group solvency calculation

% capital share

% used for the

establishment of

consolidated

accounts

% voting rights Other criteria Level of influence

Proportional share used

for group solvency

calculation

YES/NODate of decision if

art. 214 is applied

Method used and under method 1, treatment of the

undertaking

C0180 C0190 C0200 C0210 C0220 C0230 C0240 C0250 C0260

86.81% 100.00% 90.95% Dominant 100.00% Included in the scope Method 1: Full consolidation




86.81% 100.00% 90.95% Dominant 100.00% Included in the scope Method 1: Sectoral rules

Included in the scope Method 1: Full consolidation

Criteria of influenceInclusion in the scope of Group

supervision

retirement advantage group - canada life financial · group does not sponsor a defined benefit...

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