Nucleus Life AG
Solvency and Financial Condition Report
for the financial year ended 31 December 2018
Nucleus Life AG l Bangarten 10 l FL-9490 Vaduz l Liechtenstein Tel +423 399 10 90 l Fax +423 399 10 97 l [email protected] l www.nucleus.li
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Contents Executive Summary ................................................................................................................................. 4
A. Business and performance .......................................................................................................... 6
A.1 Business and external environment ........................................................................................ 6
A.1.1 Name and legal form of the undertaking ........................................................................ 6
A.1.2 Name of the responsible Supervisory Authority ............................................................. 6
A.1.3 Name of the external auditors ........................................................................................ 6
A.1.4 Holders of qualifying holdings in the undertaking .......................................................... 6
A.1.6 Lines of business and geographical areas ....................................................................... 6
A.2 Underwriting performance ..................................................................................................... 7
A.3 Performance from investment activities ................................................................................. 8
A.4 Expenses .................................................................................................................................. 8
B. System of governance ................................................................................................................. 9
B.1 General governance arrangements ......................................................................................... 9
B.1.1 System of Governance ..................................................................................................... 9
B.2 Fit and proper ........................................................................................................................ 10
B.3 Risk management system ...................................................................................................... 11
B.4 Own Risk and Solvency Assessment ...................................................................................... 12
B.5 Internal control system ......................................................................................................... 12
B.6 Internal audit function........................................................................................................... 12
B.7 Actuarial function .................................................................................................................. 13
B.8 Outsourcing ........................................................................................................................... 13
C. Risk profile ................................................................................................................................. 14
C.1 Underwriting risk ................................................................................................................... 14
C.2 Market risk............................................................................................................................. 14
C.3 Credit risk .............................................................................................................................. 15
C.4 Liquidity risk .......................................................................................................................... 15
C.5 Operational risk ..................................................................................................................... 16
D. Valuation for solvency purposes ............................................................................................... 18
D.1 Assets ..................................................................................................................................... 18
D.2 Technical provisions .............................................................................................................. 18
D.2.1 Key assumptions ............................................................................................................ 19
D.2.2 Technical provision calculation methodology ............................................................... 20
D.3 Other liabilities ...................................................................................................................... 20
E. Capital management ................................................................................................................. 21
E.1 Own funds ............................................................................................................................. 21
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E.2 Solvency Capital Requirement and Minimum Capital Requirement ..................................... 21
Annexures: Quantitative Reporting templates ................................................................................. 23
Balance Sheet .................................................................................................................................... 24
Premiums, claims and expenses by line of business ......................................................................... 26
Premiums, claims and expenses by country ..................................................................................... 27
Life & Health Technical Provisions .................................................................................................... 28
Own funds ......................................................................................................................................... 29
Solvency Capital Requirement .......................................................................................................... 31
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Executive Summary
Nucleus Life AG (“the Company”) is a life insurance company domiciled in Vaduz, Liechtenstein, and
regulated by the Financial Market Authority (FMA) Liechtenstein.
Business and performance
The Company writes mainly single premium Deposit-Linked business, targeting high net worth clients
and the mass-affluent market. It focuses on Germany where it sells policies local compliant products,
and international business (written according to Liechtenstein law), but also writes some business in
Austria, Belgium, Sweden and Norway.
Gross booked premiums in 2018 amounted to CHF 6’674’547 (2017: CHF 16’987’044), while the loss
for the year came to CHF 631’679 (2017: CHF 189’431).
System of Governance
The Board of the Company considers the system of governance to be adequate and proportionate to
the nature, scale and complexity of the risks inherent in its business.
The Company ensures that all persons, who effectively run the Company or fulfill other key functions,
are fit to provide sound and prudent management through their professional qualifications,
knowledge and experience, and are proper by being of good repute and integrity.
The Company’s system of governance has been designed around a Risk Management framework
together with the controls and processes. It employs the “three lines of defense” governance model:
▪ 1st Line of Defence: Management and staff
▪ 2nd Line of Defence: Risk management & Compliance (Oversight)
▪ 3rd Line of Defence: Internal Audit (Assurance)
It performs an Own Risk and Solvency Assessment (ORSA) at least once year, during which all risks
inherent to its business are assessed and the corresponding capital needs determined. As part of the
ORSA, “stress scenarios” are considered as well.
Its internal control system consists of four elements:
▪ Supervisory Board
▪ Compliance and Risk Management
▪ Internal Audit
▪ Controls over Outsourced Activities
The governance structure of the Company has not changed materially in the year to 31 December
2018.
Risk profile
The Company mainly assumes Deposit-Linked business whereby the policyholder bears the financial
risk. In accordance with the Prudent Person principle, the Company only invests policyholder funds in
assets and instruments the risks of which it can properly identify, measure, monitor, manage and
control. Shareholder assets are only invested in secure, non-volatile assets.
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The key risks the company are exposed to are the following:
▪ Lapse risk
▪ Inadequate new business risk
▪ Currency risk
▪ Liquidity risk
▪ Litigation risk
▪ Operational risk
Valuation for solvency purposes
As at 31 December 2018, the assets and liabilities of Company based were as follows:
Capital management
The objective of Own Funds management is to maintain, at all times, sufficient Own Funds to cover
the Solvency Capital Requirement (“SCR”) and Minimum Capital Requirement (“MCR”) with an
appropriate buffer. The Company’s Solvency II position as at 31 December 2018, and the
comparative position as at 31.12.2017, were as follows:
It can be seen that the Company’s solvency position deteriorated during the course of 2018, and as
at 31.12.2018 it failed to cover the Minimum Capital Requirement. A capital injection of CHF 563’750
in January 2019 restored its solvency position.
Vaduz 12 April 2019
Balance Sheet 31.12.2018
Solvency II
value
(CHF'000)
Statutory
value
(CHF'000)
Total assets 128'247.3 128'247.3
Total technical provisions 122'456.1 121'494.1
Other liabilities 2'079.2 2'079.2
Total liabilities 124'535.3 123'573.4
Excess of assets over liabilities (Ow n Funds) 3'712.0 4'673.9
Capital requirements
2018
CHF '000
2017
CHF '000
Solvency Capital Requirement (SCR) 1'519.78 2'134.50
SCR Ratio 244.2% 234.4%
Minimum Capital Requirement (MCR) 4'169.53 4'329.50
MCR Ratio 89.0% 115.6%
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A. Business and performance
A.1 Business and external environment
A.1.1 Name and legal form of the undertaking
Nucleus Life AG (“the Company”) is incorporated in Liechtenstein as a company limited by
shares (Aktiengesellschaft). Its registered offices are at:
Bangarten 10
FL-9490 Vaduz
A.1.2 Name of the responsible Supervisory Authority
The Financial Market Authority Liechtenstein (FMA) is responsible for the financial
supervision of the Company. The FMA’s address is:
Financial Market Authority Liechtenstein
Landstrasse 109
PO Box 279
FL-9490 Vaduz
A.1.3 Name of the external auditors
The Company’s external auditor is BDO (Liechtenstein) AG:
Wuhrstrasse 14
FL-9490 Vaduz
A.1.4 Holders of qualifying holdings in the undertaking
The Company is de facto controlled by Nucleus (Holdings) SCA, Luxembourg, even though
Plenum Holdings AG, Switzerland, legally held a 56.72% interest of the Company as at
31.12.2018. There are no other qualifying shareholders with an interest of 10% or more.
A.1.6 Lines of business and geographical areas
The Company is authorised to write the following classes of business:
Class 1. Life Insurance
Class 3. Unit-/Fund-linked Life Insurance
It is authorised to do business in Austria, Belgium, Germany, Ireland, Italy, Norway, Sweden
and Switzerland.
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A.2 Underwriting performance
The Company’s main markets are International (written according to Liechtenstein law) and
Germany, with modest volumes coming from Belgium and Norway. The Company’s gross
booked premiums per country in 2018 and the corresponding numbers for 2017 are depicted
in the table below (in CHF).
Gross booked premiums
2018 (CHF
2017 CHF)
Liechtenstein 3'965'815 12'121’761
Germany 2'689'750 3'956’534
Belgium 18'982 428’915
Norway - 479’834
Total 6'674'547 16'987’044
Financial statements are prepared in accordance with Liechtenstein GAAP. The salient items
of the profit and loss for the year ended 31 December 2018 are shown below.
Year ended 31 December 2018 2018 (CHF)
2017 (CHF)
Gross premiums 6'674'547 16‘987‘044
Gross claims -18'094'094 -4‘351‘645
Acquisition costs -707'850 -682‘470
Operating expenses -1'071'417 -984‘123
Change in provisions for Deposit-linked contracts 24'248'967 -20‘499‘583
Result -631'679 -189‘431
Lower than budgeted premium income and higher than expected surrenders, combined with
a strengthening of the Swiss Franc, lead to a substantial reduction in fee income and a
resultant increase in the loss for the year.
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A.3 Performance from investment activities
The Company writes only Deposit-Linked business, and does not provide any asset selection
advice. The investments linked to insurance policies are selected by policyholders or their
appointed advisers, or, where applicable, by asset managers selected by the policyholders
and appointed for this purpose by the Company. Assets and policyholder liabilities are
matched at all times.
The following assets* are held to cover technical provisions for linked liabilities.
Asset class 2018 (CHF)
2017 (CHF)
Equity 86’302’819 98'876'513
Fixed income 25’594’439 35'975'737
Cash, deposits and money market
9’581’297 10'876'510
Total 121’478’555 145‘728‘760
* Excluding assets of policies not yet issued and policies surrendered but not yet paid out.
Where assets are suspended or no market value is available, a fair value is calculated; if this is
not possible, the value of the asset is written down to zero.
Investment income comprises dividends, interest and other income receivable, realised gains
and losses on investments and unrealised gains and losses. Movements are recognised in the
profit and loss account in the period in which they arise.
The Deposit-Linked insurance policies are valued by reference to their linked asset values.
The performance of the policies therefore depends on the performance of the assets
selected and the application of policy related charges in line with the policy contract terms
and conditions.
A.4 Expenses
Expenses can be split into acquisition costs and operating expenses.
Expenses 2018 (CHF)
2017 (CHF)
Acquisition costs 707’850 682’470
Operating expenses 1'071’417 984’123
Acquisition costs will continue to vary according to type and size of business written, while
expense levels are expected to remain constant.
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B. System of governance
The Board of the Company considers the system of governance to be adequate and
proportionate to the nature, scale and complexity of the risks inherent in its business.
B.1 General governance arrangements
The Company’s system of governance has been designed around a Risk Management
framework together with the controls and processes.
B.1.1 System of Governance
The Management and the Supervisory Board, collectively the “AMSB” (Administrative,
Management or Supervisory Body), is responsible for the implementation and monitoring of
the governance of the Company.
The Supervisory Board is responsible for defining the Risk Appetite of the shareholders of the
Company by means of a Risk Statement, while the Management is required to manage the
Company in accordance with this Risk Appetite. In case of uncertainty, Management consults
with the Board.
Board of Directors
▪ Vincent Derudder (Chairman)
▪ Simon Colboc
▪ Markus Graf
Key Functions
The Company has established the four key independent control functions required under the
Corporate Governance Requirements for Insurance Undertakings under Solvency II. These
functions are responsible for providing oversight of and challenge the business, and for
providing assurance to the Board in relation to the Company’s control framework.
The following section provides a summary of the authority, resources and operational
independence of the key functions:
Compliance function (Internal Controls) - led by the Head of Compliance
▪ responsible for the Company’s Compliance Policy
▪ identifies, assesses, monitors and reports the compliance risk exposure
▪ tracks changes in the environment that could affect the Company’s compliance risk, and
monitors the appropriateness of the Company’s compliance procedures
▪ inputs into the ORSA process and report
The Compliance function considers and monitors the regulatory environment, financial
crime, data protection, and compliance. The findings of the Compliance function are
reported to the Management and the Board.
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Risk function - headed by the Risk Officer (“RO”)
▪ oversees and monitors the effective operation of the risk management system and ORSA
▪ identifies and assesses emerging risks
▪ maintains an entity-wide view on risk exposures and the Company’s risk profile
▪ ensures that material risk issues receive sufficient attention at Board level and that the
Board plays an active part in setting and reviewing the overall risk-appetite and tolerance
limits
▪ provides detailed reporting on risk exposures and advises on risk-management matters,
including strategic affairs such as corporate strategy, mergers and acquisitions, major
projects and investments
The Risk Officer prepares a quarterly Risk Assessment Matrix which is presented to Board,
giving it information gathered through the risk management process. The risk function
maintains independence by carrying out an oversight role in the major processes, allowing
for robust challenge of decisions and processes across the business.
Actuarial function - performed by an external actuary
▪ approves the methodologies and assumptions used for calculating technical provisions,
ensuring that they are appropriate for the line of business
▪ approves the underwriting policy and reinsurance arrangements
▪ analyses and evaluates data and results and reports to the Board
▪ contributes to the risk management system
Under Liechtenstein law, an insurance company is required to have an Appointed Actuary in
addition to the Actuarial function required under Solvency II. Considering the size of the
Company and the nature of its business, the same actuary performs both roles. Care has
been taken ensure that there is no conflict of interest, and that independent checks (4-eyes
principle) are at all times ensured.
Internal Audit function - performed by an external company
▪ evaluates the adequacy and effectiveness of the internal control systems and other
elements of governance
▪ reviews the ORSA process & report
▪ provides an independent assessment in a report to the AMSB
The Internal Auditor is an experienced auditor from an external organisation, providing the
required level of independence. The findings of the Internal Auditor are reported to the
AMSB.
B.2 Fit and proper
The Company ensures that all persons who effectively run the Company or perform key
functions are fit to provide sound and prudent management through their professional
qualifications, knowledge and experience, and are proper by being of good repute and
integrity.
The following persons are checked prior to commencement of their employment contracts:
▪ Directors
▪ Management
▪ Appointed Actuary
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▪ Risk Officer
▪ Compliance Function
▪ Actuarial Function
▪ Internal Auditor
Information required and checks performed include the following:
▪ Interview
▪ Passport or ID
▪ CV (educational background, professional qualifications, membership)
▪ References
▪ Criminal record check
▪ Credit check
▪ Bankruptcy check
▪ Financial Sanctions & Anti-money Laundering check
Recurring checks are performed on a regular basis.
B.3 Risk management system
Risk Management framework
The Risk Management framework consists of a set of policies covering all the possible risks
the Company could face, summarised in the form of a Risk Assessment Matrix and a Risk
Report. The Risk Assessment Matrix is updated on a regular basis, together with controls
which the Company uses to manage the specified risk.
Risk Appetite Statement
The Risk Appetite Statement is defined by the Board and describes the risk boundaries (and
hence the risks) the Company is willing to operate within. Overall the Company is risk averse,
which is reflected in the way it conducts its business.
“Three Lines of Defence” governance model
The Company’s Risk Management system follows the “three lines of defence” principle:
▪ 1st Line of Defence: Management and staff
The 1st line of defence is responsible for the day to day management of risk and control
within the business operations as well as delivering the strategy and optimising business
performance within the agreed governance and risk framework.
▪ 2nd Line of Defence: Risk management & Compliance (Oversight)
The 2nd line of defence is comprised of the Risk Management function and the
Compliance function. These are independent functions that provide assurance to the
Board with regards to the adequacy and effectiveness of the overall risk management
system.
▪ 3rd Line of Defence: Internal Audit (Assurance)
The 3rd line of defence is provided by the independent Internal Audit function which
validates the controls and performs an objective review of the risk management process.
This function provides assurance to the Management and the Board on assertions of the
Company’s risk exposure.
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B.4 Own Risk and Solvency Assessment
The main purpose of the Own Risk and Solvency Assessment (“ORSA”) is to ensure that the
Company assesses all risks inherent to its business and to determine the corresponding
capital needs – or, alternatively, to identify other methods to mitigate specific risks.
The ORSA takes a top-down approach, linking business objectives, business risks, business
planning and capital planning. It is performed at least once per annum, or on an ad hoc basis
if a new project or product that may impact on the capital of the Company is considered. It
can also be triggered by a sudden, unexpected adverse event.
As part of the ORSA, “stressed scenarios” are considered, as well as the capital needs and/or
mitigation measures necessary under such scenarios. The aim of these stress tests is to
ensure that the business is robust enough to weather adverse events without detriment to
policyholders.
The outcome of the ORSA is presented to the AMSB.
B.5 Internal control system
The purpose of the internal control system is to manage or mitigate, rather than eliminate,
the risk of failure to achieve business objectives, and can only provide reasonable, and not
absolute, assurance against material losses.
The Company is of the opinion that the internal control system is appropriate to the nature,
scale and complexity of its business.
The internal control framework has four elements:
▪ Supervisory Board
The Board has overall responsibility for ensuring that an adequate and effective system
of internal control is maintained in the Company.
▪ Compliance and Risk Management functions
These functions oversee internal controls, including drafting and implementing policies
and procedures, and monitoring against compliance with them.
▪ Internal Audit function
The Internal Audit function is an external appointment, providing a layer of independent
assurance.
▪ Controls over Outsourced Activities
The Company makes extensive use of outsourcing, and therefore pays particular
attention to the monitoring of these activities and ensures that these persons or entities
maintain at least the same standards as those of the Company.
B.6 Internal audit function
The independent (external) Internal Audit function provides an analysis and evaluation of the
adequacy, effectiveness, efficiency and quality of risk management, internal control and
governance systems and processes.
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An audit plan is created on an annual basis to ensure that sufficient evidence is obtained to
evaluate the effectiveness of the risk management and control processes across the
business.
The findings and recommendations of the Internal Auditor are discussed with Management,
after which it is presented to the Board.
B.7 Actuarial function
The Company has outsourced the Actuarial function to an external actuary; this additional
skilled (and independent) resource provides an additional layer of control and confidence.
Due to the size of the Company and the nature of its business, the Actuarial function also acts
as Appointed Actuary. Sufficient checks and balances have been built into the processes to
ensure that the Actuarial function remains objective and free from the influence of other
functions or from the Company’s AMSB.
The Actuarial functions drafts an annual Actuarial Report which is presented to the Board and
the Regulator.
B.8 Outsourcing
The Company outsources a number of important functions to independent external
providers. The rationale behind the decision is that outsourcing, if managed and monitored
properly, not only gives the Company access to a wider and better range of skills, but can also
be more cost-effective (as opposed to employing permanent staff).
The following important functions are outsourced:
▪ Appointed Actuary
▪ Actuarial function
▪ Internal Audit function
▪ Bookkeeping incl. payroll
The Compliance function is responsible for evaluating all new outsourcing partners, as well as
monitoring them on an ongoing basis, performing at least annual checks.
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C. Risk profile
The Company assumes mainly Deposit-Linked business whereby the policyholder bears the
financial risk. In accordance with the Prudent Person principle, the Company only invests
policyholder funds in assets and instruments the risks of which it can properly identify,
measure, monitor, manage and control. Shareholder assets are only invested in secure, non-
volatile assets.
The more significant financial risks to which the Company is exposed are set out below.
C.1 Underwriting risk
Mortality risk
The Company is exposed to the risk of mortality experience being higher than expected,
leading to higher than expected death claims.
As the Company writes only risk business with very low sums assured, this is a very limited
risk.
Suitable reinsurance arrangements are in place to reinsure the bulk of the mortality risk
commensurate with the Company’s risk profile and capital.
Lapse risk
The Company is exposed to the risk of surrenders being higher than expected, leading to a
loss in fee income.
The Company writes mainly single premium investment business, which typically shows a
relatively low and stable lapse rate.
The lapse risk is not always easy to manage, as policies are often surrendered for reasons
outside of the control of the Company, for example due to poor market performance, or
because the policyholder is in need of money.
The risk of one or two very large policies being surrendered for whatever reason, remains a
real risk that can result in a not insignificant reduction in fee income. It was, however,
assumed that the standard lapse stress scenarios under Solvency II (upward and downward
increase of 50%; immediate 40% mass lapse) are adequate, and that no further stress
scenarios are required.
C.2 Market risk
Market risk describes the risk of loss or of adverse change in the financial situation resulting,
directly or indirectly, from fluctuations in the level and in the volatility of market prices of
assets, liabilities and financial instruments.
As the Company writes mainly Deposit-Linked business where the investment risk is carried
by the policyholders, the key market risk is that of a fall in the value of policyholder assets,
resulting in lower fee income.
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Price risk
A change in the market value of the Deposit-Linked funds would affect the annual
management charges accruing to the Company, since these charges are based on the market
value of policyholder assets.
Currency risk
Similarly, due to the fact that the annual management charges are deducted from contracts
in contract currency, a change in foreign exchange rates relative to the Swiss Franc can result
in fluctuations in fee income.
The currency risk is a sizeable risk, as the bulk of its fee income is derived in Euro, while
almost all of its expenses are in Swiss Franc. The stress tests performed allow for a ±25%
change in exchange rates, which is deemed to be adequate.
Interest rate risk
The only interest rate risk that the Company faces is that of the interest earned on its own
capital, which is fully invested in cash. This capital already attracts a negative rate of interest,
and the risk is that the Swiss National Bank may increase this interest penalty even further.
C.3 Credit risk
Credit risk refers to the risk of loss, or of adverse change in the financial situation resulting
from fluctuations in the credit standing of issuers of securities, counterparties and any
debtors to which the Company is exposed.
Reinsurance counterparties
This is a negligible risk – as mentioned above the mortality risk is limited, while the
Company’s reinsurer is A-rated.
Banking counterparties
The defaulting of a policyholder custodian bank would not have a direct impact on the
financial situation of the Company, although there could be an indirect impact if the amount
of fee income from policyholder assets is reduced. The fact that policyholder assets are
spread across a number of European banks mitigates this risk.
The Company has the bulk of its own capital at an A-rated bank in Liechtenstein.
C.4 Liquidity risk
Liquidity risk refers to the risk that Company, though solvent, does not have sufficient
financial resources to enable it to meet its obligations as they fall due.
Short-term liquidity
Short-term liquidity assessments (for periods of less than one year) are performed at least
once per quarter. As the Company’s capital of CHF 5 Mio is being restricted by the FMA, this
is a potential risk – and one experienced in 2018 when fee income reduced as a result of low
new business volumes, high surrenders and a strengthening of the Swiss Franc.
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Long-term liquidity
Long-term liquidity is a limited risk, as the Company follows a very prudent investment
strategy, investing its capital only in high quality and liquid assets.
A key requirement for managing this risk is for the company to grow (increase in policyholder
assets under management) and to keep its expenses under control.
C.5 Operational risk
Operational risk is the risk of a change in value due to inadequate or failed internal
processes, people or systems, or from external events.
People risk
The Company operates with a very small team of experienced, skilled people. A person
leaving or falling ill may therefore have a detrimental impact on the business, in particular
over the short term.
This risk has been mitigated to some extent by increasing the notice periods of some of the
staff members, while a panel of external consultants who can provide assistance at short
notice has been identified. This does, however, remain a real risk.
Outsourcing risk
The outsourcing strategy of the Company actually reduces the people risk described above,
as it provides access to a wider range of skills. On the other hand, outsourcing comes with
the risk of failure, non-performance, ineffective management and/or oversight of the
outsourcing partner.
The Compliance function attends to the management and monitoring of outsourcing
partners.
Administration risk
As a result of the highly bespoke nature of the Company’s products, not all processes can be
fully automated, which, if combined with the small staff complement, poses some risk. All
processes and procedures have, however, been documented in detail, which will enable an
external resource to take over at short notice.
Litigation risk
A life insurance company focussing on investment business will always be subject to litigation
risk – even though the investment risk is supposed to remain with the policyholder. The most
typical reasons are poor investment performance or fraudulent activities (e.g. by
intermediaries or asset managers).
An incident of fraud dating back to 2015 whereby an external asset manager unlawfully
enriched himself with customer funds, became a legal case on 01.03.2019 through the
initiation of legal proceedings against Nucleus Life AG on behalf of the policyholder. The
lawyers of the Company are still in the process of gathering further information, but
according to current knowledge the chances of a successful claim appear to be rather low,
and it was therefore not deemed necessary to set up any additional provisions in this regard
as at 31 December 2018.
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Regulatory risk
The Company’s solvency situation combined with short term liquidity constraints could lead
to regulatory action.
Misselling risk
Whereas misselling is not a substantial risk when dealing with High Net Worth clients, it can
occur in the mass-affluent segment. Great care is therefore taken to make sure that
investments are not only assessed in terms of size, but also in terms of the needs and risk
profile of the policyholder.
Reputation risk
Any legal or regulatory breach, poor customer service, or local insurer failures can give the
Company a bad reputation, effecting its ability to write business or form new business
relationships. Whereas the Company takes care to mitigate legal and customer service risks,
external risks cannot be managed.
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D. Valuation for solvency purposes
D.1 Assets
The following table shows the Company’s assets as at 31 December 2018, as well as the
corresponding numbers for 2017:
Intangible assets
Intangible assets are made up only of sophisticated software, and do not include any
goodwill such as brands, trademarks or contractual relationships. The stated value, which is
well below the estimated market value, is not material and therefore assumed to be fair.
Equities
Listed equities have been valued at market value, while unlisted equities have been valued at
net asset value. Equities that cannot be traded at all are valued at zero.
Assets held for index-linked and unit-linked contracts
The valuations of these assets are mostly provided by the custodian banks where the assets
are held. If a custodian bank cannot determine a market value, it would typically value the
asset at zero. In rare instances the Company would value an asset based on the NAV on its
balance sheet, but if that is not possible it would value it at zero.
Receivables and other assets
The value of these assets is based on the best estimate of the recoverable or realisable value.
Cash and cash equivalents
Cash and cash equivalents are valued at the amount held at the period end, translated using
the year-end exchange rate where appropriate.
D.2 Technical provisions
The technical provisions comprise the Best Estimate of the Liabilities (“BEL”) and the Risk
Margin. The technical provisions as at 31 December 2018 and the corresponding values for
2017 are shown in the table below.
Assets
2018
(CHF'000)
2017
(CHF'000)
Intangible assets 6.9 11.6
Equities 1.6 29.2
Assets held for index-linked and unit-linked contracts 123'184.5 146'654.0
Insurance and intermediaries receivables 0.6 116.3
Receivables (trade, not insurance) 29.9 63.5
Cash and cash equivalents 5'002.7 5'431.3
Any other assets, not shown elsewhere 21.0 25.3
Total assets 128'247.3 152'331.2
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The decrease in the technical provisions without a corresponding decrease in expenses, led
to an increase in the present value of future losses, and hence a substantial increase in the
Risk Margin.
D.2.1 Key assumptions
Interest rate and inflation
The risk-free interest rate term structure used for discounting the projected cash flows in the
technical calculation is the CHF relevant risk-free structure as provided by European
Insurance and Occupational Pensions Authority (“EIOPA”).
The inflation assumption used is based on the Swiss Consumer Price Index (CPI).
Expenses
The expense assumption is based on a no new business scenario and consists of cost of
administration, claims management/handling and overhead expenses. An expense analysis is
performed to allocate expenses between initial and renewal, and variable and fixed
expenses, allowing for a gradual reduction in expenses under a run-off scenario.
Lapse assumptions
The lapse assumption is based on a lapse analysis of the actual lapse experience of the
Company, considering lapses by number of policies as well as lapses weighted for policy size.
As the Company experienced an increase in lapses in 2018, the lapse assumption was
increased from 5.0% to 7.5% per annum.
Projection term
The term used for cash flow projections has a substantial impact on the capital requirements
of a small company in the process of increasing its assets under management. Bigger
companies that have reached break-even, can use the present value of future profits (PVFP)
to increase its Own Funds. However, as the Company is still in a loss position, it has to set
aside additional capital to cover future losses. As such, in 2017 a limit was placed on the term
used for the cash flow projections, based on the point when assets management fall below
CHF 100 Mio; this resulted in a term of 6.5 years.
In addition to the above, the Board agreed to initiate procedures to transfer the book to
another carrier free of charge should the assets under management reach a level of CHF 120
Mio, and to have the transfer completed before the assets under management reach the
level of CHF 100 Mio.
Technical provisions
2018
(CHF'000)
2017
(CHF'000)
Technical provisions – life (excluding health and index-
linked and unit-linked) 15.6 17.4 Best estimate 15.6 17.4
Risk margin 0.0 -
Technical provisions – index-linked and unit-linked 122'440.5 146'030.0 Best estimate 121'478.6 145'728.8
Risk margin 962.0 301.2
Total assets 122'456.1 146'047.4
Page 20 of 32
Due to the reduction is policyholder assets in 2018, the comparable projection term fell
below 5 years (i.e. the point when the assets under management would reach the CHF 100
Mio level). As it would not have been prudent to perform the projections for less than 5
years, it was decided to cap the minimum projection term at 5 years.
D.2.2 Technical provision calculation methodology
The technical provisions represent a realistic estimate of the Company’s future obligations
with an allowance for some deviation for plausible changes in estimation in the form of the
risk margin. They are not expected to be sufficient to meet the Company’s obligations in all
scenarios.
Best Estimate Liabilities
The best estimate provision for index-linked and unit-linked contracts is equal to the value of
the underlying assets.
Risk Margin
The Risk Margin is an addition to the Best Estimate Liabilities to ensure that the technical
provisions as a whole are equivalent to the amount that another insurer would require to
take over the business and meet the insurance obligations. The Risk Margin is calculated as
the amount of capital needed to support the Solvency Capital Requirement over the lifetime
of the business at the prescribed cost of capital rate of 6% per annum (also see para D.2.1 –
Projection term).
D.3 Other liabilities
The table below summarises the other liabilities of the Company as at 31.12.2018, as well as
the corresponding values for 2017:
No adjustment is required to these valuations for the valuation for solvency purposes as the
amounts held under IFRS measurement principles are deemed to be approximations of fair
value.
Other liabilities
2018
(CHF'000)
2017
(CHF'000)
Other liabilities 1'983.8 1'140.8
Provisions other than technical provisions 1.8 31.8
Accruals 93.7 108.1
Total assets 2'079.2 1'280.7
Page 21 of 32
E. Capital management
E.1 Own funds
The objective of own funds management is to maintain, at all times, sufficient own funds to
cover the Solvency Capital Requirement (“SCR”) and Minimum Capital Requirement (“MCR”)
with an appropriate buffer.
The Company performs an Own Risk and Solvency Assessment (“ORSA”) exercise at least
annually, or when the risk profile of the Company changes. The ORSA exercise incorporates
the business planning process covering a three-year time horizon.
The Company’s own funds as at 31.12.2018 as well as the corresponding values for 2017 are
shown below:
The Company’s own funds are primarily invested in cash deposits at banks. The total amount
qualifies as Tier 1 unrestricted funds, and is therefore available to cover the SCR and MCR.
The following table reconciles the differences (reconciliation reserve) between the equity in
the financial statements and the excess of the assets over liabilities as calculated for solvency
purposes:
E.2 Solvency Capital Requirement and Minimum Capital Requirement
The Company uses EIOPA’s Solvency II Standard Formula. It does not use Company specific
parameters and does not use simplified calculations in its computations.
The Company’s SCR and MCR (as well as the corresponding ratios) as at 31 December 2018,
and the numbers for 2017, are shown in the table below.
The individual components of the SCR are shown in the Annexures.
Own funds
2018
CHF '000
2017
CHF '000
Ordinary share capital 5'730.0 5'730.0
Organisation fund (capital contributions) 3'400.0 3'400.0
Reconcil iation reserve -5'418.0 -4'126.9
Total own funds 3'712.0 5'003.1
Own funds reconciliation
2018
CHF '000
2017
CHF '000
Equity in financial statements 4'673.9 5'305.6
less items not recohnised in financial statrements - -1.2
less Risk Margins -962.0 -301.3
Solvency II - Ow n Funds 3'712.0 5'003.1
Page 22 of 32
It can be seen that the MCR Ratio (Own Funds / MCR) was 89.0% as at 31.12.2018.
The Risk Appetite laid down by the Board in the ORSA states the following: “The Board does
not accept any risk that may result in the SCR ratio of the Company falling below 125% or the
MCR ratio falling below 110%, as that would be the point when the shareholders would have
to inject additional capital.” A capital injection of CHF 563’750 was therefore made in
January 2019 to restore the solvency position.
It is clear that a substantial additional capital injection will be required during the course of
2018, and the Board is actively working on a solution.
Capital requirements
2018
CHF '000
2017
CHF '000
Solvency Capital Requirement (SCR) 1'519.78 2'134.50
SCR Ratio 244.2% 234.4%
Minimum Capital Requirement (MCR) 4'169.53 4'329.50
MCR Ratio 89.0% 115.6%
Page 23 of 32
Annexures: Quantitative Reporting templates
The following annual quantitative templates are attached as Annexures:
▪ Solvency II Balance Sheet
▪ Premiums, claims and expenses by line of business
▪ Premiums, claims and expenses by country
▪ Life and Health Technical Provisions
▪ Own funds
▪ Solvency Capital Requirement
Page 24 of 32
Balance Sheet
Solvency II value
C0010
Goodwill R0010
Deferred acquisition costs R0020
Intangible assets R0030 6'937.00
Deferred tax assets R0040 0.00
Pension benefit surplus R0050 0.00
Property, plant & equipment held for own use R0060 1'837.00
Investments (other than assets held for index-linked and unit-l inked contracts) R0070 1'634.19
Property (other than for own use) R0080 0.00
Holdings in related undertakings, including participations R0090 0.00
Equities R0100 1'634.19
Equities - l isted R0110 1'427.89
Equities - unlisted R0120 206.30
Bonds R0130 0.00
Government Bonds R0140 0.00
Corporate Bonds R0150 0.00
Structured notes R0160 0.00
Collateralised securities R0170 0.00
Collective Investments Undertakings R0180 0.00
Derivatives R0190 0.00
Deposits other than cash equivalents R0200 0.00
Other investments R0210 0.00
Assets held for index-linked and unit-l inked contracts R0220 123'184'451.87
Loans and mortgages R0230 0.00
Loans on policies R0240 0.00
Loans and mortgages to individuals R0250 0.00
Other loans and mortgages R0260 0.00
Reinsurance recoverables from: R0270 8'079.00
Non-life and health similar to non-life R0280 0.00
Non-life excluding health R0290 0.00
Health similar to non-life R0300 0.00
Life and health similar to l ife, excluding health and index-linked and unit-l inkedR0310
8'079.00
Health similar to l ife R0320 0.00
Life excluding health and index-linked and unit-l inked R0330 8'079.00
Life index-linked and unit-l inked R0340 0.00
Deposits to cedants R0350 0.00
Insurance and intermediaries receivables R0360 595.00
Reinsurance receivables R0370 0.00
Receivables (trade, not insurance) R0380 29'935.00
Own shares (held directly) R0390 0.00
Amounts due in respect of own fund items or initial fund called up but not yet paid
inR0400
0.00
Cash and cash equivalents R0410 5'002'717.10
Any other assets, not elsewhere shown R0420 11'105.00
Total assets R0500 128'247'291.16
Assets
Page 25 of 32
Solvency II value
C0010
Technical provisions – non-life R0510 0.00
Technical provisions – non-life (excluding health) R0520 0.00
Technical provisions calculated as a whole R0530 0.00
Best Estimate R0540 0.00
Risk margin R0550 0.00
Technical provisions - health (similar to non-life) R0560 0.00
Technical provisions calculated as a whole R0570 0.00
Best Estimate R0580 0.00
Risk margin R0590 0.00
Technical provisions - l ife (excluding index-linked and unit-l inked) R0600 15'606.41
Technical provisions - health (similar to life) R0610 0.00
Technical provisions calculated as a whole R0620 0.00
Best Estimate R0630 0.00
Risk margin R0640 0.00
Technical provisions – l ife (excluding health and index-linked and unit-l inked) R0650 15'606.41
Technical provisions calculated as a whole R0660 0.00
Best Estimate R0670 15'586.00
Risk margin R0680 20.41
Technical provisions – index-linked and unit-l inked R0690 122'440'505.22
Technical provisions calculated as a whole R0700 0.00
Best Estimate R0710 121'478'555.00
Risk margin R0720 961'950.22
Other technical provisions R0730
Contingent l iabilities R0740 0.00
Provisions other than technical provisions R0750 1'800.00
Pension benefit obligations R0760 0.00
Deposits from reinsurers R0770 0.00
Deferred tax liabilities R0780 0.00
Derivatives R0790 0.00
Debts owed to credit institutions R0800 0.00
Financial l iabilities other than debts owed to credit institutions R0810 0.00
Insurance & intermediaries payables R0820 1'706'036.00
Reinsurance payables R0830 0.00
Payables (trade, not insurance) R0840 277'726.00
Subordinated liabilities R0850 0.00
Subordinated liabilities not in Basic Own Funds R0860 0.00
Subordinated liabilities in Basic Own Funds R0870 0.00
Any other l iabilities, not elsewhere shown R0880 93'661.00
Total liabilities R0900 124'535'334.63
Excess of assets over liabilities R1000 3'711'956.53
Liabilities
Premiums, claims and expenses by line of business
Health
insurance
Insurance
with profit
participation
Index-linked
and unit-l inked
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
Gross R1410 0.00 0.00 6'673'078.11 1'468.68 0.00 0.00 0.00 0.00 6'674'546.79
Reinsurers' share R1420 0.00 0.00 144'941.25 0.00 0.00 0.00 0.00 0.00 144'941.25
Net R1500 0.00 0.00 6'528'136.86 1'468.68 0.00 0.00 0.00 0.00 6'529'605.54
Gross R1510 0.00 0.00 6'673'078.11 1'468.68 0.00 0.00 0.00 0.00 6'674'546.79
Reinsurers' share R1520 0.00 0.00 144'941.25 0.00 0.00 0.00 0.00 0.00 144'941.25
Net R1600 0.00 0.00 6'528'136.86 1'468.68 0.00 0.00 0.00 0.00 6'529'605.54
Gross R1610 0.00 0.00 18'094'093.76 0.00 0.00 0.00 0.00 0.00 18'094'093.76
Reinsurers' share R1620 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net R1700 0.00 0.00 18'094'093.76 0.00 0.00 0.00 0.00 0.00 18'094'093.76
Gross R1710 0.00 0.00 -24'250'205.54 0.00 0.00 0.00 0.00 0.00 -24'250'205.54
Reinsurers' share R1720 0.00 0.00 -1'239.03 0.00 0.00 0.00 0.00 0.00 -1'239.03
Net R1800 0.00 0.00 -24'248'966.51 0.00 0.00 0.00 0.00 0.00 -24'248'966.51
Expenses incurred R1900 0.00 0.00 1'862'349.32 0.00 0.00 0.00 0.00 0.00 1'862'349.32
Other expenses R2500 0.00
Total expenses R2600 1'862'349.32
Claims incurred
Changes in other technical provisions
Line of Business for: l ife insurance obligations Life reinsurance obligations
Total
Premiums written
Premiums earned
Page 27 of 32
Premiums, claims and expenses by country
Page 28 of 32
Life & Health Technical Provisions
Page 29 of 32
Own funds
Page 30 of 32
Page 31 of 32
Solvency Capital Requirement
Page 32 of 32
