Confidential

Closed book strategy The outsourced option?

Ian Betley

VP, International Head of Sales

DSTi Holdings and IFDS Group

2 Confidential

Agenda

• Introduction and overview of IFDS

• A brief history of closed book in the UK

• Challenges and successes ?

• Case Study – Old Mutual

• Sample Case Studies, Phoenix and Hartford Life

• What does next generation look like ?

• Insurer demands

• Market Sector influences

• The impact of technology

3 Confidential

A bit of background

• Myself • 20 years in Financial Services outsourcing – including technology replacement, rationalisation,

ITO, BPO, offshore, transformation

• Working with approximately 10-15 insurers per year solving their problems or supporting their opportunities

• Current initiatives

• Pan European DC Pension solution for major global provider (IORP)

• Rationalisation of 4m closed policies across 9 (so they say) systems and 720 products

• Consolidation strategy for combination of private Equity provider and Reinsurer of annuity closed books

• Who are IFDS • Europe’s largest provider of insurance and investment administration services with 60% market

share in the UK (16m customers across 205 clients)

• Owned by State Street Bank and DST Systems

• Rapid and successful service diversification into Life and Pensions and Wealth Management over the last 4 years

• Completion of 4 next generation outsourcing deals in the last 3 years with 2 more imminent this year

4 Confidential

IFDS Update At a glance What do we do? At IFDS, we offer a range of outsourced administration and technology solutions to financial organisations. Acting on your behalf, we provide solutions to serve your end customers, delivering the same passion and great experience you expect within your own organisation.

Where do we operate? We operate in many of the world’s key financial markets, with an extended network accessible through our parent organisations DST and State Street. This means we have the scale and global footprint to provide innovative and sustainable servicing models to continually meet your evolving needs.

Who are our services for? Our solutions are tailored for: asset managers, asset gatherers, platform providers, wealth managers, banks, credit unions, trust companies, insurers, re-insurers and life companies.

• Operating for over 40 years in US • 20 years experience in Europe • 380+ clients serviced globally • 47.5m accounts administered worldwide • c. 8,000 employees • No.1 transfer agent in Canada, Ireland,

Luxembourg, UK and USA

• 2nd oldest US financial institution • Responsible for holding and / or

managing 12% of the world’s assets • $28.19tr in assets under custody • 29 countries. 29,000 employees

• 97.4m accounts serviced • 7.1m Retirement accounts • Business process management technology • Customer communications • Data analytics and insight

5 Confidential

Who are we? A global enterprise

Our Business Process Outsourcing (BPO) services operate in 17 countries across 4 continents. We support over 400 clients worldwide through our network of c.8,000 employees

Asia-Pacific Australia Hong Kong India Japan Singapore Taiwan Thailand

Europe Austria France Germany Ireland Italy Luxembourg Switzerland UK

North America Canada USA

6 Confidential

Providing services to the market

6

Group product delivery

Investor record-keeping

Platform and wealth

management solutions

Policyholder servicing

Distribution support services

Custody

Fund accounting and valuations

Trustee and depository

Middle office outsourcing

Business process management

Customer communications

Data analytics and insight

Pension and actuarial services

7 Confidential

Some of our clients

8 Confidential

The UK life sector is evolving…so what’s happening?

• Solvency II Directive

• Auto Enrolment • RDR • OFT Review

• FCA Retirement Income Study feedback

Pre 2014 2014

Q1 Q2 Q3

2015

Q1 Q2 Q3

2016

• FCA thematic review of treatment of legacy customers

• Workplace pensions fee cap • Budget announcement on annuities • FCA Retirement Income study

• Removal of Life Assurance Premium Relief • New pensions freedoms • FCA thematic review of fair treatment of legacy

customers feedback

Regulation has been the leading driver of change in the industry – Increased focus on closed books

• Solvency II preparation and implementation

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Closed funds are facing a significant uplift in complexity and cost

• Long term political focus on accumulation / decumulation / support in old age

• Peers will be challenged by cross –subsidisation of

open and closed books • Increased regulatory focus is here to stay • Most legacy customers are now orphaned from

advice - decline of direct sales forces • Focus on legacy products – customer outcomes and

service levels

Regulation / Legislation Challenges for closed funds

x Legacy products are complex to administer and manage

x Increased regulation may lead to requirement for further system investment

x Legacy book migrations are complex and expensive

x Fixed cost pressure as book runs off

x Requirement to maintain specialist expertise

x Risks to persistency given new pension freedoms

Absolute need for a next generation outsourced operational model

10 Confidential

The ‘real’ challenges

• Legacy technology with poor quality data

• Spaghetti of systems caused by mergers and tactical solutions

• Processes embedded in peoples heads, with many manual workarounds

• Stagnation of the working population

• Poor quality staff – with no design or implementation skills

• Lifers in the business

• Union protected

• Public Sector / Fiefdom culture

• Short-termism view of any change or transformation

• Driven by shareholders and executive bonuses

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The market demands

What does an insurer and an outsource partner need to consider ?

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UK market landscape

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Policies (m)

Policies (m)

UK L&P TPA market growth by number of policies outsourced …

13 Confidential

Up to 2004, the market consisted of mostly small, closed book deals and was served by a number of suppliers battling to get to 1 million policies – ‘same mess for less approach’

L&P Company TPA Provider Deal Value Deal Type Year # of Policies (Approximate)

Lloyds TSB (Abbey Life) Unisys/UISL £60m Traditional Outsource. Subsequently acquired by Deutsche Bank and outsourced to Capita

2000 1.7m

Barclays Schroders N/a GPP green-field outsource 2000 N/a

JPMAM - Save & Prosper Liberata £60m Traditional Outsource - with migration costs included in cost per policy

2001 350k

GE Pensions Group MSG £11m Traditional Outsource – admin of various portfolios of pension related policies over expected five-year term

2001 70k

Sun Life Financial of Canada MSG £95m Traditional Outsource - with 550 staff transfer plus systems implementation

2002 800k

Lincoln Financial Group Capita £160m Creative Partnership - share in business growth over 10 years 2002 900k

Prudential JLT & Hazell Carr N/a Group Pensions 2002 N/a

Barclays/Woolwich Liberata N/a Evergreen deal 2002 1.5m

AXA Sun Life Liberata £50m Axa Equity & Law Closed Book 2002 800k

AMP Hazell Carr £35m Group pensions closed book 2003 100k

Royal Sun Alliance Unisys >£300m Multi-location lift-out creating largest FS TPA deal in Europe at the time

2003 2.8m

Zurich Life Admin Re N/a Post sale to Swiss Re 2003 230k

Liverpool Victoria EDS £109m 13 year deal for open and closed book. Subseuently brought back in-house

2004 600k

Prudential International Capita n/d Dublin based operation for administration of UK sold offshore business

2004 400k

Children’s Mutual Capita £430m Creation of utility to provide CTF servicing to CM and others 2004 New venture

UK market development Phase 1

14 Confidential

From 2005-2010, deals increased in size, included more open books and the market became dominated by Capita with circa 26 million policies – rationalise and offshore

L&P Company TPA Provider Deal Value Deal Type Year # of Policies (approximate)

Pearl TCS (Diligenta) £486m Collection of closed books acquired by Pearl 2005 3.8m

Living Time (AIG) Vertex n/a Launch of new virtual life company 2006 n/a

Zurich UK Life Capita £300m Closed and open book. Planned future product development on Elixir platform

2006 2.8m

Aviva Swiss Re n/a System consolidation and cost reduction play 2007 3m

Prudential Capita £722m Predominantly “mature” (closed) L&P book. Capita also acquired PPMS (Mumbai)

2007 5.5m

Resolution Capita £580m Collection of mostly closed books acquired by Resolution. Resolution since acquired by Pearl. Scottish Provident since sold to Royal London

2007 4.5m

CFS Capita £270m Open book and future product development 2007 4.5m

HSBC Life Vertex n/a Support for new product launches 2007 n/a

Deutsche Bank (Abbey Life) Capita £130m Closed book acquired from LTSB in 2007 2009 1.1m

AXA Capita £500m Closed life and pensions book 2009 3.2m

Equitable Life HCL £120m 30 year deal to cover areas such as IT operational support, policy administration and financial, actuarial and call centre

2009

UK market development Phase 2

15 Confidential

Since 2010, the most significant deals in the market have effectively gone to new entrants... All have a closed and open book approach

L&P Company TPA Provider

Deal Value

Deal Type Year # of Policies (approximate)

Friends Life Diligenta £1.37bn Diligenta’s first competitive win since the Pearl and Phoenix acquisitions. Closed book protection business and significant part of its corporate benefits business

2011 3.2m

AEGON Serco £170m Closed and open book. Protection business Serco’s first entry into L&P

2012 500k

St James Place IFDS £1.0bn 15 year deal for legacy book and new retirement wealth platform

2013 800K+

Old Mutual Wealth IFDS £1.2bn 20 year deal for outsource of closed books, new business and wealth platform

2013 1.1m+

UK market development Phase 3

2015+ = Phase 4 The large outsources are unlikely to continue

16 Confidential

Key requirements for success in the closed life consolidation market

Operating model

Customer focus

Variable cost base supported by outsourcers

Ability to migrate legacy books

Build and retain specialist expertise

Demonstrable focus on product

governance

Improve customer Outcomes and

experience

Ability to source range of new products for

customers through the customer

lifecycle

17 Confidential

TPA key selection criteria

Company level Solution level

(varies by proposition)

• Corporate strength and

strategy

• Corporate culture and fit

• Pricing and commercials

• Implementation risk

• Risk management and

controls

• Business solution

• Operations and service s

• IT

• People

• Technical (product)

expertise

• Regulation

By analysing multiple deals in recent years, typically you can identify a number of key criteria used in selecting TPAs…

The key components that have historically been missed out in selection are: Customer experience and retention

Contract sustainability and future cost of ownership

18 Confidential

One approach to segmenting the UK market (in terms of both deals and competitors) is by level of process-driven vs systems-driven rationalisation…

Significant

Significant

Low

Low Platform Rationalisation

Pro

cess

Rat

ion

alis

atio

n

UK market segmentation – outsourced positioning

Transformational change including

process and platform

rationalisation

New Products

Niche

Process rationalisation

on current platform

IT system consolidation

programs

19 Confidential

Comparison of Market

Capita IFDS Diligenta HCL Liberata

Cost reduction

Operational efficiency

Flexibility of service model

Breadth of technology coverage

Risk & compliance framework / control

Proven Migration Capability

Brand / reputation

Future TCO/ Contract Sustainability

Ease / cost of exit

Focus on FS Industry / appetite

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Offshore ITO BPO Transformational BPO

Continuous transformation

/ GBS Outsource Maturity

Val

ue

ad

d

Same mess for less Sustainable value

Supplier / Partner evolution

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0204060

80

Cost benefit

Benefit Impact across the maturity model

Transformation

Same mess for less

22 Confidential

The evolution in policy administration costs

0 10 20 30 40 50 60 70 80 90

Corporate Overhead

Operational Cost

IT Cost

Remember – outsourcing is not just about the administration

staff – the real value is when you can reduce actuaries, legal,

compliance and senior management !!

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So how has it gone ? • 80% of the contracts are unsustainable and clients are unhappy with the

outcome

• They have failed due to • Inability to migrate / rationalise platforms (Prudential)

• Inability to change due to legacy – same staff different employer (Liberata)

• Poor knowledge transfer has led to programme failure or added cost to buy back in the knowledge (Friends Life)

• Contracts badly written

• Old processes implemented – cost of keeping lights on too high

• Staff protected against redundancy / performance management (Aegon)

• Short term view on cost certainty with too many dependencies on building scale or driving out efficiencies

• Consequences

• Margin pressure by outsourcers lead to poor customer service

• Stagnation and no thought-leadership innovation or drive for improvement

• Treated as a wasting asset – now performing as a wasting asset – or the value has been bled out of the books

• High risk from regulatory change

24 Confidential

Successes - Skandia

Skandia have signed a twenty year contract to partner with IFDS, to further outsource a significant proportion of their processing, administration and technology.

Skandia is part of Old Mutual Group who is one of the world’s largest life insurance companies.

This contract builds on our existing relationship with Old Mutual and will enable Skandia to replace a number of administration functions and the majority of its UK platform plus Retirement and Insurance Solutions (RIS) technology

This agreement will enable us to continuously improve the service we offer to financial advisors and their clients, introduce new products as well as meet our financial objectives. The IFDS technology will ensure that we can respond to adviser and customer needs faster than we can today and will results in new functionality and greater flexibility to be delivered to advisers via the UK platform.

Paul Feeney, Chief Executive

“ “ 20 year contract On the grounds of a strong existing relationship, successful track record and the ability to demonstrate how to transform Skandia’s business – longest contract of it’s kind

2016 go live The integration of IFDS administration, processing and technology is due to start in 2016.

25 Confidential

Heritage SIS (1)

Heritage SIS (2)

Heritage

Policy Admin

Special Deals

New Business

Contact Shared Service Doc Management

IFA / Network

Web (60 Portals)

Mail Direct

Network Overlap

Heritage SIS (3)

Claims& New Bus

IFA Network

Wealth Interactive

Wealth (New World)

• Legacy systems • Poor data quality • Expensive to maintain • Policy centric • Increasing risk • Slow speed to market

• Manual processes • Lack of control and quality • Inefficient operational

management • Spaghetti of tactical solutions

• No channel management or single customer view

• Poor customer service levels and work turnaround

• Unable to enforce self service • 60 portals of various tactical

solutions with poor user experience

• No brand consistency • Competitive disadvantage

Skandia ‘current’ model

26 Confidential

D2C Option

IFDS PERCANA DST BLUEDOOR

AWD

IFDS BUSINESS PROCESS OUTSOURCING

Transfer of customers

• Modern technology on a multi-tenanted environment

• Quality data • Significantly lower TCO • Future-proofed for legacy /

closed books • More relevant and faster

speed to market

• Industrialised BPO • CI and best practice • AWD acts as control • Exceptional customer

experience • Shared service benefits

• Single customer view • STP and self service • Opportunities for targeted

campaigns • Increased customer insight • Customer stickiness • Upsell / cross sell

Skandia ‘to be’ model

Wealth Network

Heritage Network

DST Bluedoor Portal

USE

RS

Port

al

Bu

sin

ess

Po

rtal

Su

rro

un

d

CO

RE

syst

ems

27 Confidential

Flow of the key buying criteria

Standard service Customer retention

OMW focus on customer experience

Lowest cost per policy

Embedded value

Upsell / transfer

Integrated heritage and wealth

High offshore

leverage

Protecting the oval brand and reputation

The value of the joint Oval / IFDS / State Street brands

Same mess for less

Shift and Lift then transform

Transformational BPO

28 Confidential

Increased client value, shorter L&P supply chain

Customer

Policy administration

admin BPO IT platform

IFDS UK

DSTO IFDS

Percana

DST Global

Solutions

State Street Syntel

Services

DST PAS

Hang- Tien

Services

Fund administration

admin Accounting Custody Trading

State Street Bank & Trust

Investment market

29 Confidential

The Closed book opportunity

The Legacy / Closed books

There is no such thing as a legacy customer there are only legacy products

Inforce customer Segmentation

Product swap

Upsell / Cross-sell

Retain and Serve

Lowest Service Cost

Transfer to wealth

30 Confidential

Closed book – release the embedded value

Low Value but potential

Upsell and Cross-sell more products

High Value in Transition

Engage & Transfer to wealth platform

Offer new products for at and post retirement

Low Value

Service at lowest cost of ownership

High Value

Engage protect and provide excellent customer experience

Closed Book

Strategy

Assets Under Management

Customer Insight

31 Confidential

Focus on asset retention and embedded value

0

200'000

400'000

600'000

800'000

1'000'000

1'200'000

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Lapse 9%

Lapse 11%

Added value

Difference in total policy years over 10 years at 9% lapse rate to 11% is just under 1,000,000

TIME

AV

. CO

ST P

ER

PO

LIC

Y

32 Confidential

Retention Case study based on 1m policies

Outsourcer A IFDS

Average Single Premium £40,000 £40,000

Annual Management Charge 1% 1%

Outsourcer Annual Policy Fee £15 £20

Annual lapse Rate 11% 9&

Internal Renewal Expense £25 £25

First Year Gross Margin £400 £400

First Year Net Margin £360 £355

Risk Discount Rate 10% 10%

Annual Discount Factor 0.81 0.83

Embedded Value Multipliers 5.24 5.7

Embedded Value/ VIF £1885.71 £2055.26

Net Gain Per policy in Force £169.55

Increasing the embedded value by increasing the service and increasing the retention rates

33 Confidential

Combining new and the old - what could this look like ? Assisting our clients’ business evolution

• True transformation of operating models to one that can absorb business change incrementally and fluidly, instead of requiring periodic step changes and transition projects.

• We can service both old and new worlds and enable a customer centric view across all books of business

Upgrade of closed book or open book customers to wealth platform services (e.g. as wealth increases with age or third party assets are captured and consolidated)

Closed book customers becoming open book or wealth customers (e.g. up-sell / cross-sell), capture of third party investment assets or insurance covers, especially on life events)

Wealth customers becoming open book or closed book customer (e.g. wealth services are no longer required by the customer as asset values decline)

Open book or wealth customers becoming closed book customers (e.g. product closure)

34 Confidential

Driving value out of closed book

• Consistent brand control across all the business and channels

• Economies of scale across group operations and systems

• Retention, customer stickiness and propensity to consolidate wealth

• Future-proof the legacy model on modern technology, which will continue to evolve

• Opportunity to manufacture products and sell into platform (e.g. Life, annuity, 3rd way products)

• Transfer of customer assets to the wealth management platform allowing the up-sell and cross-sell of additional products (research shows additional 30% propensity)

• Lower capital requirements, and more capital efficiency in respect of Solvency II

• Ability to sell third party products into the client base

• Easy absorption of acquired businesses, distribution channels and segmentation between the core and non-core customer base

• Drive better and more sustainable commercial deal wit the outsource

Retention benefits of the integration

of new world and heritage

35 Confidential

• “The commercial ambition to outsource is to gain efficiencies, introduce automation to reduce manual processes and bring staff numbers to the optimum level to run the business as it runs down “

Ciaran McGettrick CEO

• “IFDS’s state-of-the-art technology platform offers a superior proposition. We’re confident this move will ensure our customers continue to receive the quality of service they have come to expect, well into the future”

Alastair Murray – CEO

Closed book case studies

36 Confidential

How will you address the challenges ?

37 Confidential

The two conflicts of interest

An insurance policy, retirement investment is

for Life

A executive bonus package is

annual

Faster

Cheaper

You can only have any two

Better

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The two conflicts of interest

An insurance policy, retirement investment is

for Life

A executive bonus package is

annual

More complex

Cheaper and faster

You can only have

one !

Customer Experience

and outcomes

Actuaries and IT

Procurement and CFO

Sales and Distribution and the Regulator

Oh!.... and the policyholder

39 Confidential

How can you make real transformation happen with so many conflicting priorities ?

What Drives

Successful Business?

CEO

Shareholder Value

CFO

Controllable Cost Base

Chief Actuary

Product Design

CTO

Modern Technology

Stack

CIO

Digital / Multi-

Channel

COO

Operational Streamlining

Marketing Director

Distribution

Tactical Tinkering?

Strategic Alignment?

CUSTOMER

40 Confidential

Phase 4 - So what’s happened in a year?

• Digital + / Data Driven Experience

• Roboadvice

• As-a-service

• Collaborative Utility

• RPA

• ………….and Fintech is here

Example RPA

Nearshore / Offshore €12000

Robot licence and run €4000

3 shifts per day € 1350

Current Administrator €30000 pa

41 Confidential

Op

tim

isin

g re

ven

ue

op

po

rtu

nit

ies

Customer Insight

Orphaned product holder

Policyholder

KYC Know your customer

Customer Centric (SCV)

Customer Lifecycle

Customer, family or

community

Transactional& Scheduled

ST Person

Customer e-cosystem Workplace, Education, Planning, communities

Family, Tax, Advisor ST Profits

Automation Enablement ST Process

Offline ST

Postbox

Paper Online ST Printer

Lower cost of client servicing

Conclusion : The more you know about your customer the more you can sell. The more the customer engages the more you can automate and the cheaper they are to administer.

Digital maturity and the definition of STP Where are you on this line ?

42 Confidential

Heritage administration model Retirement and Insurance Solutions

Investor/advisor

Opendoor website Contact / front office

Telephone calls

E-mails Retention Complaints

Documents in

Policy servicing Document

s out New Business

Client services

Money out

Client finance

Post in

Scanning

Indexing

Cheque banking

Regulatory reporting

Technical corrections

Periodic processes

HMRC rebates

Operations fraud controls

Chargeable events certs/reporting

Daily correspondenc

e

Ad-hoc correspondenc

e

Bulk and ad-hoc mailings

Technical

Underwriting Return of Legal/ AML docs

New Business Applications

Transfers in

Top Up Processing

Annual Reviews

Annuity Admin

Divorce Triviality Small Pot

Commutation

Deceased Maintain Pensions

Drawdown

Serious Ill Health

Partial surrenders

Full Surrenders

Transfer Out Cancellation

Regular & Ad-hoc RIF

Payroll Maintenance

Reinstatements Written Enquiries

Adviser Servicing

Client Maintenance

Illustrations Quotations

Legal Documents, assignments &

Trusts

Group Pensions Maintenance

Premium Servicing

Switch Redirection

AML Servicing

Investment Administration

Archiving

Plan servicing

Arrears

Term adjustments

Sum assured adjustments

Cover basis admin

IIP Portal

Groups

Group

Web

CI & Benefit Claims assessing

Rider Benefit Claims processing

Distribution processing

BACS/CHAPS Processing

TT Processing

Debtor/Creditor monitoring and

chasing

General Ledger Accounting

General Ledger Maintenance

Offshore Controls

SEPA Processing

Multi Currency Payments

Client Payments

Balance Sheet Reconciliations

Receipting of payments

Bank Reconciliations

Cheque Reissues

Payroll Payment Processing

Month End Accounting

Infor10 Maintenance

Payslips

Quality controls

Product set servicing : Savings, Bonds, Protection, Pensions IFDS DSTO Core services

OM retained India Key:

43 Confidential

Service model flexibility – it’s not all or nothing Service model

Capable of serving insurance companies with technology and BPO solutions for wealth, heritage / traditional L&P and funds in an owner-operated, multi-tenanted/shared service environment

Alternatively, our clients have the flexibility to adjust their servicing model based on:

• business segment

• business function

• service channel

• product type or variant

• by customer or customer segment

• by distribution channel

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The Toolkit’s results are analyzed and mapped onto a prioritization matrix. The factors under consideration are: • The client’s need for offshoring • The operational ease of offshoring • The projected dollar value savings that might be gained from offshoring the process

Process Prioritization Matrix

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

0.00 0.20 0.40 0.60 0.80 1.00

0.77

0.77

0.77

0.75

0.66

0.56

0.48

0.48

0.52

0.40

0.42

0.38

0.30

0.25

0.22

Data analysis

Data preparation

Actuarial audit

Valuation

Model validation

Statutory reporting

Mortality and lapse analysis

Profit testing

Parameter estimation

Margins for adverse deviation

Transfer value calculation

Bonus earning capacity analysis

Surrender and Paid-up value calculation

Benefit illustration

Surplus analysis

Pricing and reserving

Individual capital assessment

Embedded value calculation

Product designing

45 Confidential

The predicted change in operations

0

50

100

150

200

250

300

350

400

Front Office

Middle & Back Office

Support Services

IT Run

IT Change

Assuming book size of 1 million policies

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From this

To This

47 Confidential

Finally - Comparison to the UK market

• Germany is ‘kicking the can’ and in crisis denial

• The industry is too slow to change and the crisis will be on them before there is a suitable reaction

• General fear of the BaFin rather than ‘partnership / embracing regulation’

• Restrictive environment

• Workers Unions

• Legacy protectionism / culture

• Immediacy of Policyholder rights

• Data protection

• Conflict of short-term ownership versus long term value

• Products

• Distanced from the clients

• Incredible product complexity ‘seen as unique…but not’

• Systems, processes ,data and control generally weak

48 Confidential

Thank you for your time

Questions ?

ibetley@ifdsgroup.co.uk

++44 7919 172577