James, Brennan & Associates

Transcription

1 Actuarial and Management Consultants Supplementary report for the transfer of insurance business pursuant to The Financial Services and Markets Act 2000 From Liverpool and London Steamship Protection and Indemnity Association Limited To R&Q Insurance (Malta) Limited D James Fellow of the Institute and Faculty of Actuaries Date of report: 10th December 2015 Roman Wall House, 1-2 Crutched Friars, London, EC3N 2HT; Company Reg# (0) enquiries@james-brennan.com

2 Contents Executive Summary Matters reviewed in the Supplementary report : The Parties updated financial condition Claims experience Statutory accounting position RQIM subordinated loan issue Solvency II regulatory position for RQIM RQIM Medium Term Capital Management Plan RQIHL obtaining rating for inter-company loan RQIM s investments as a prudent person RQIM pipeline transactions The commercial rationale for the Transfer Considerations with respect to the effect of Diverted Profits Tax on RQIM Grayhill and funding the Transfer premium Policyholder communications and excluded policyholders Matters arising in relation to the International Group of P&I Clubs Opinion Appendix Schedule of additional information Version : LnL_RQIM_Supplementary_Report_October_2015_V6.3_Final_signed.docx

3 1. EXECUTIVE SUMMARY OF THE SUPPLEMENTARY REPORT 1.1 I, Dewi James, act as Independent Expert ( IE ) for the proposed insurance business transfer ( the Transfer ) of rights and liabilities under policies and insurance obligations underwritten or assumed by Liverpool and London Steamship Protection and Indemnity Association Limited ( L&L, the Transferor ), transferring to R&Q Insurance (Malta) Limited ("RQIM, the Transferee ), referred to together as The Parties. 1.2 My report on the Transfer ( The IE Report ) was signed on 3 rd September 2015 and the purpose of this supplementary report is to update the opinion expressed in the IE Report in the light of financial and other developments in the period since the IE Report was issued. 1.3 I have assumed that this supplementary report will be read together with the IE Report as its findings rely on the IE Report. All reliances, limitations, assumptions and sources of uncertainty which were discussed in the IE Report will, unless otherwise mentioned, apply to this supplementary report 1.4 I have considered the Transfer as a whole and commented specifically on the matters set out below: A review of the claims experience over 2015 and an updated view of the Parties financial condition RQIM s projected capital requirement under Solvency II at December 2015 and the extent to which it has maintained its surplus capital position. I have also reviewed RQIM s Medium Term Capital Management Plan 1 ( MTCMP ) The progress that Randall and Quilter Investments Holdings Limited ( RQIHL ) is making towards obtaining a security rating (an ECAI 2 rating), for the inter-company loan made by RQIM to its parent, RQHIL RQIM s investments viewed relative to the prudent person principle RQIM underwrites portfolios of insurance and reinsurance business to administer and run-off for profit. I have reviewed the position of the portfolios that were in the course of being assimilated at the time of the 1 Solvency II Regulations Article 71(1)(g) and 1.80 of Solvency II Systems of Governance Guideline 37) 2 The rating must be issued by an approved External Credit Assessment Institution ( ECAI ). Without such a rating, the loan is treated under the Solvency II Standard F ormula as unrated. 3 As set out in Article 132 of the Solvency II Directive. 3

4 IE Report and have also considered the effect of subsequent transactions on the Transfer. Two transactions are in an advanced state of negotiation, one of which is commercially sensitive and not in the public domain, which I have referred to as Company X, the other transaction is in respect of IC Insurance Limited, aspects of which are commercially sensitive In section 6 of the IE Report I set out The Parties commercial rationale for the Transfer; I have reviewed that rationale in the light of subsequent events Further considerations on the potential effect of Diverted Profits Tax ( DPT ) The premium payable by L&L is obtained through a transfer of funds from Grayhill, its Bermudian reinsurance subsidiary. I have reviewed the circumstances surrounding this aspect of completing the Transfer Policyholder communications and whether circumstances have arisen leading to the exclusion of any policyholder liabilities from the Transfer Further developments regarding RQIM s handling of L&L s involvement in the International Group of P&I Clubs Pooling Agreement ( IG, IG Pooling Agreement ). I do not believe that there are any other matters of substance that require specific reference. 1.5 I have set out in Appendix 1 the individual items of information provided. I held meetings with the key function holders of RQIM and L&L over the course of preparing this supplementary report so that I could ensure that the scope of my supplementary review is sufficiently broad and to identify any other factors which may not have been apparent in the data itemised in Appendix This supplementary report has been prepared in compliance with the relevant Technical Actuarial Standards ( TAS ) of the Financial Reporting Council (TAS D:Data; TAS M:Modelling; TAS R: Reporting Actuarial Information; Insurance TAS; Transformation TAS). The supplementary report and the IE Report together form an aggregate report as defined in TAS R. 4

5 Expert s Declaration 1.7 I confirm that in producing this supplementary report I am subject to the same duty to the Court to which I refer in paragraph 1.10 of the IE Report and that this obligation overrides any obligation to any person from whom I have received instructions or by whom I am paid. 1.8 I confirm that I have made clear which facts and matters referred to in this report are within my own knowledge and which are not. Those that are within my own knowledge I confirm to be true. The opinions I have expressed represent my true and complete professional opinions on the matters to which they refer. 1.9 I confirm that I have read Part 35 of the Civil Procedure Rules, the accompanying practice direction and the document titled "Protocol for the Instruction of Experts to give Evidence in Civil Claims" The PRA has consulted with the FCA and approved the form of this Supplementary Report. Objections to the Transfer 1.11 I have confirmed with the Parties that communication with affected parties was fully implemented as specified in the IE Report. A log of the resulting correspondence has been maintained and I have been informed that there has been one objection to the transfer I have been provided with correspondence to this policyholder by RQIM. The objection was in relation to the policyholder s concern over the change in jurisdiction from the UK to Malta The correspondence explains that the complainant s policy was with Chevanstell and that it is already under Maltese jurisdiction following an earlier Part VII Transfer. As such the Transfer has no jurisdictional effect on the policyholder The correspondence also confirms that the policyholder was informed when the Chevanstell transfer occurred and that they raised no objection at that time I have been informed that there have been no other objections to the Transfer and been provided with the latest communication logs. 5

6 Conclusions 1.13 Based on the further materials produced by the Parties and on the analysis that I have carried out in preparing this supplementary report, I have concluded that the opinion expressed in the IE Report is unchanged, namely that The security of the transferring L&L policyholders and claimants and of the policyholders of RQIM, will not be materially adversely affected by the Transfer and that the Transfer will not impact the service levels experienced by any of those groups of policyholders and claimants adversely I am also satisfied that there is no material adverse impact on other P&I Clubs participating in pooled reinsurances with L&L, third party reinsurers or Grayhill 2. MATTERS REVIEWED IN THE SUPPLEMENTARY REPORT The Parties updated financial condition. Claims experience 2.1 I have reviewed the claims experience of the Parties over With respect to RQIM The internal management accounts of RQIM to mid-2015 and subsequently to the end of September 2015 indicate a modest reduction in incurred claims over the course of This favourable outcome is attributed to case reserve redundancy on certain claims, which had previously been identified as likely to occur, being crystallised. An emergence of surplus on other claims provisions arose as they have been settled or adjusted I have confirmed with the senior management of RQIM that the basis of establishing provisions for outstanding claims is set to the same standard as was used in the information upon which the IE Report was based. 6

7 With respect to L&L I was provided with a claims listing for the Club year to 20 August I have compared this with the claims experience of prior years and the claims experience appears to be favourable and likely to be within actuarial expectations I have confirmed with the senior function holder of L&L that there has been minimal activity in relation to L&L s participation in the IG Pooling arrangement. Based on my high-level review of the claims experience, I am satisfied that no claims matters have arisen which lead me to change the opinion expressed in the IE Report Statutory accounts 2.2 I have reviewed the interim statutory financial statements of RQIM, L&L (consolidated financial statements), and Grayhill and note the following : 2.3 With respect to RQIM Since December 2014 the statutory balance sheet surplus has increased by approximately 2.5m whilst the claims provisions, net of reinsurance have reduced by 2m. Consequently, on a statutory basis, RQIM has increased the level of balance sheet surplus relative to net technical provisions. In the IE Report, paragraph 8.17, I showed comparative measures of balance sheet surplus as at 31 March The table below shows how the level of surplus funds on a statutory basis has changed in the light of the actual emerging experience together with RQIM s projected position as at 31 December 2015 RQIM Per statutory accounts Mar-15 Jun-15 Dec-15 Surplus to gross claims provisions 129% 137% 152% Surplus to net claims provisions 202% 221% 245% In September 2015 RQIM obtained additional finance in the form of a subordinated debt. Under the statutory accounting basis this has not added to the balance sheet surplus however under the regulatory, Solvency II basis, this has increased the level of balance sheet surplus that is available to meet policyholder obligations. I have explained this feature further in paragraph 2.9 7

8 2.3.3 I noted in paragraph 8.15 of the IE Report that a significant feature of RQIM s balance sheet is a 28m, unsecured, inter-company loan made to its parent RQIHL. This feature remains a material aspect of the balance sheet and the loan amount has been increased to 29m at September In the IE Report I applied a number of tests in order to satisfy myself that this feature of RQIM s financial structure did not present a material risk to policyholder security; in particular I considered the financial resources of RQIHL in the event that RQIM should request that the inter-company loan be redeemed at short notice. I have reviewed the RQIHL group interim financial statements, as at 30 June 2015 which were issued in September 2015 and confirmed with senior function holders of RQIM that RQIHL has balance sheet surplus and additional access to rolling finance sufficient to give a coverage ratio of approximately 300% of the loan amount, with access to additional finance if called-up in a stress scenario to redeem the loan. Whilst I consider the loan coverage ratio to have fallen relative to that calculated in the IE Report, the extent of cover remains substantial and this aspect does not affect the opinion expressed in the IE Report I noted in paragraph 8.26 of the IE Report that the inter-company loan had not been ascribed a security rating consistent with the requirements of Solvency II and that RQIHL was in the course of obtaining a rating. I have considered the credit rating of the inter-company loan further in paragraph I have also reviewed RQIM s evaluation of its capital requirements on a regulatory basis under Solvency II. This is explained in paragraph With respect to L&L The conclusion of my review of RQIM s most recent internal management accounts is that its financial condition is marginally improved over its condition at the time of issuing the IE Report. I am therefore satisfied that the changed financial condition of RQIM does not affect my opinion I have reviewed L&L s statutory consolidated management accounts which were prepared as at 20 August In the six months since 20 February 2015, the date of L&L s most recently audited financial statements, claims activity has been at a low level; there has been no change in the values associated with the IG pooling arrangement. 8

9 2.4.2 The overall composition of the investment portfolio has not changed materially since the IE Report was issued. The conclusion of my review of L&L s management accounts is that the financial condition is substantially unchanged from that which was in effect at the time of the preparation of the IE Report, table 5 paragraph 8.15, and my opinion on the Transfer is not affected. 2.5 With respect to Grayhill I have reviewed Grayhill s statutory management accounts as at 20 August The overall position is largely unchanged from that pertaining when I prepared the IE Report, shown in table 5a paragraph 8.16 of the IE Report Grayhill has maintained the majority of its investments in short term deposits and cash with the balance held as marketable equity investments I have been provided with schedules of investments prepared by Grayhill s investment managers as at 9 November 2015 and based on this I am satisfied that Grayhill will be able to meets it obligations to L&L and that my opinion regarding the risk arising from the assets of Grayhill has not changed. I am satisfied that the position of Grayhill has been maintained at a level similar to that in force when I prepared the IE Report and that the most recently available information does not affect my opinion. RQIM raising funds through a sub-ordinated loan 2.6 RQIM have raised funds through the issuance of a sub-ordinated loan The loan is for 20m. RQIM has invested 6.8m as Funds at Lloyd s ( FAL ), with an investment vehicle R&Q Capital Number 1 in support of syndicates 1991 and 3330; 8.5m is earmarked to fund an acquisition 4. I have been informed that all proceeds of the subordinated loan, including the FAL monies will be invested into a UCITS 5 fund consistent with the investment criteria outlined in paragraph Clariant further explained in paragraph Undertaking for Collective Investment in Transferable Securities a form of collective investment vehicle 9

10 2.7 From a regulatory, Solvency II perspective, this debt is treated as Own Funds tier 2 capital since it ranks behind all other creditors; and in particular policyholder liabilities take priority over the redemption of the debt. As such, from a regulatory perspective the subordinated debt enhances the capital ratios within the Solvency II framework, which I have explained in the section below. RQIM s capital requirement under Solvency II 2.8 In paragraphs 8.20 to 8.28 of the IE Report I explained aspects of the regulatory capital requirements applicable to RQIM, noting in particular: The use of the Standard Formula basis for determining the Solvency Capital Requirement ( SCR ) The impact of the inter-company loan by RQIM to RQIHL, and the significance of achieving a rating for this loan that is acceptable under the Standard Formula The undertaking given by RQIM to maintain a level of Solvency II regulatory capital at least 10% higher than required under the Standard Formula 2.9 The actuarial department of RQIS provides technical support to RQIM and has carried out an evaluation of the SCR requirement in a similar format to that which I reported upon in the IE Report. In the table below I have compared the regulatory capital ratios shown in table 7 of the IE Report with the SCR at the end of June 2015 and with RQIM s forecast to December 2015, which includes the subordinated loan. I have shown separately the forecast December 2015 positions with- and without- the pipeline transactions that are anticipated to be effected prior to 31 December RQIM RISK METRICS Mar-15 Jun-15 Dec-15 Dec -15 (**) Underwriting Risk / Technical provisions 29% 31% 31% 30% Available Capital/ SCR 256% 272% 392% 370% (**) Include Pipeline transactions Clariant, FNF (see also paragraph 2.25) and L&L 2.10 The table shows that the ratio of Available Capital relative to the SCR has improved compared to the values set out in the IE Report and the raising of subordinated debt finance has further increased the regulatory capital level significantly. The level of regulatory capital is considerably greater than 10

11 required under RQIM s undertaking to the High Court pursuant to an earlier Part VII transfer (relating to the legacy portfolio Chevanstell Limited) to exceed the SCR by 10% As I note in paragraph 2.25, I have reviewed RQIM s internal due-diligence memorandum on Clariant and FNF and I am satisfied that the risks associated with these transactions have been properly addressed and that the estimation process for the level of technical provisions is reasonable; I have not carried out an independent review as I did not consider this necessary given the nature and scale of the transactions The SCR calculations underpinning the above treat the inter-company loan as bbb rated. I noted in the IE Report that the basis of this rating does not meet the full requirements for recognition under the Standard Formula but that I considered that the approach taken by RQIM was not unreasonable since RQIHL was taking the appropriate measures to obtain the required security rating for the loan. I remain of the opinion that the approach taken is not unreasonable and I have noted in paragraph 2.18 below the progress that RQIHL is making towards obtaining an acceptable rating Based on the above analysis, I am satisfied that RQIM remains a wellcapitalised company and that the level of balance sheet surplus has improved relative to the evaluation set out in the IE Report. RQIM s Medium Term Capital Management Plan ( MTCMP ) 2.14 RQIM has prepared a MTCMP to manage its risks and solvency over the medium term The MTCPM forms part of RQIM s overall capital management process and its Own Risk and Solvency Assessment ( ORSA ) I have reviewed the MTCMP in the context of the Transfer and note that it identifies the following key aspects of capital maintenance: RQIM plans to increase its capital base, in line with the dividend policy, through the reinvestment of MFSA approved dividends paid to R&Q Malta Holdings Limited, back into RQIM The MTCMP is subject to RQIM Board control and governance; specifically a distribution of surplus funds is only contemplated should RQIM change its business strategy away from seeking to acquire new run-off portfolios, or should RQIM become over-capitalised relative to the funds required to operate the business. 11

12 The MTCMP contemplates the management actions that might be taken in the event of a financial stress leading to a demand for additional capital. The MTCMP contemplates the maintenance of capital for the existing portfolio and the level of capital required to ensure that RQIM continues to be an attractive platform for future business The MTCMP includes forward-looking forecasts which take into account the impact of the Transfer 2.17 In my opinion the MTCMP reflects RQIM s intention of maintaining a substantial level of regulatory capital in order to maintain its position as a commercially attractive and financially secure platform for managing portfolios in run-off. Security rating for the inter-company loan made by RQIM to its parent, RQHIL I have been advised by RQIHL s Chief Financial Officer that RQIHL has consulted with AM Best in London since I produced the IE Report. The result of that meeting is that RQIHL considers itself to be on-target to achieve the intended ECAI rating for the parent (Group) by 31 December The expectation remains that it will be a confirmation of the shadow rating of bbb as discussed in paragraph 8.26 of the IE Report I am satisfied that the intended actions are being undertaken to achieve the rating in line with those set out in the IE Report Within the IE Report I examined the effect on regulatory capital should the inter-company loan not achieve a bbb rating by considering the ratio of available capital under Solvency II to the SCR projected to December 2015 both with and without the bbb rating (see IE Report paragraph 8.28 Table 7a). In the table below I have compared the regulatory capital ratios shown in the IE Report with the current levels which reflect the addition of the subordinated debt and the inclusion of two new transfers to RQIM. RQIM RISK METRICS IE Report Current Available Capital/ SCR (bbb) 240% 370% Available Capital/ SCR (unrated) 147% 205% The IE Report projections include L&L, the Current projections include the Subordinated Debt, L&L, Clariant and FNF (see paragraphs and ). 12

13 RQIM remains very well capitalised in the event that an ECAI rating is not achieved RQIM s investments viewed relative to the prudent person principle 2.21 RQIM has given me an explanation of the controls and principles which it adopts in its investment policy, specifically with respect to ensuring that the prudent person principles within the Solvency II Directive are satisfied. These principles are that : RQIM has an extensive set of guidelines in place to ensure compliance at all times with the prudent person principle and to provide an optimal balance between income, yield, liquidity and low mark to market volatility Investments are actively managed by an external firm of investment managers, overseen by the company s investment committee and board, and are reviewed by the company s investment committee on a regular basis at their quarterly meetings. Investments are only made in securities listed on EU and US markets which provides transparency on value and a high ability to monitor and control risk To mitigate risks RQIM ensures liquidity through highly tradeable and diversified securities and prioritises short maturity funds to mitigate volatility The investment portfolio is managed to control the effect of capital movements should interest rates increase, commensurate with a policy of appropriately matching the technical provisions by currency and duration Assets covering the MCR and SCR are comprised of diversified, mainly short dated liquid securities, low beta equities on the London Stock Exchange and on demand intercompany loans offering a return of 275bp over LIBOR Based on the above I am satisfied that RQIM has invested its funds in line with the prudent person principles 13

14 RQIM Pipeline transactions RQIM s business model is to acquire portfolios in run-off and to manage them, settling valid claims promptly and to ultimately release surplus capital. In the IE Report I identified four transactions that had been in various stages of being implemented over the course of preparing the IE Report (Aker, Tryg, Principle and Guardian). With the exception of Guardian, the transactions were completed prior to my issuing the IE Report. As I noted in the IE Report, the Guardian transaction involves a Part VII transfer of a portfolio which is already wholly reinsured by RQIM and as such the financial position of RQIM is essentially unaffected by this transfer; I have been advised that this transfer is now most likely to be completed in the first quarter of I noted in paragraph 9.11 of the IE Report that RQIM carries out a forward assessment of its risk profile and capital requirement forecasts which reflects the run-off of existing business and the acquisition of new portfolios. The forward looking assessment (the FLAOR) is used as part of RQIM s risk management and control processes and is submitted to its regulator, the MFSA together with the MTCMP. The FLAOR, ORSA and MTCMP together represent RQIM s evaluation and planning framework around its capital and risk management RQIM continues to pursue business opportunities. In the period since the IE Report was issued, four business opportunities have been pursued. I have been provided with a synopsis of the financial evaluation and due-diligence review that was carried out on each of these and I have summarised the nature of each of the transactions below and commented beneath my summary on the impact of these transactions on the Transfer Clariant Insurance AG (a) (b) An acquisition of a captive insurance company with a limited number of open claims. The portfolio is to be absorbed into RQIM as a merger of the captive insurer with RQIM and is subject to regulatory approval in Malta, Lichtenstein and Switzerland. The acquisition and merger is expected to occur in December Clariant is in run-off and provided high level general liability cover, which is substantially reinsured, and some residual UK Employers Liability and US Workers Compensation for its parent company. There are no open general liability claims and the 14

15 general liability cover was on either a claims made or a losses reported basis with no future claims expected. (c) Given the sensitive nature of this transfer I cannot comment further but a full due diligence has been carried out and, given the information I have been provided with, I do not believe that this transfer will materially affect the L&L policyholders FNF Title Insurance Company Limited (a) (b) (c) (d) An acquisition of a Maltese insurance company which is a subsidiary of Chicago Title Insurance Company. The company is to be absorbed into RQIM as a merger and is subject to the regulatory approval of the MFSA The due-diligence investigation indicates that there are no current open claims. RQIM s financial position is underpinned through a 100% reinsurance with an A rated counterparty in respect of any policyholder liabilities that may emerge. The transaction is a mechanism to facilitate an exit from a particular insurance sector for FNF and to effectively transfer the regulatory burden to RQIM. The structure is accretive to RQIM s balance sheet surplus, generating an increase to RQIM s Solvency II capital of 0.1m and is expected to occur prior to 31 December Company X (a) (b) (c) An acquisition of a UK insurance company. R&Q have proposed to accept the business with the benefit of its reinsurance protections by means of a Part VII transfer into RQIM. The Part VII process aims to ensure that none of the affected parties is materially adversely impacted. There are no remaining net outstanding claims. The only remaining claims relate to two Employers Liability claims and one Motor claim from 2013, totalling 63,000 of reserves. It is anticipated that these claims will all be settled prior to the proposed transfer. Company X is 100% reinsured for all exposures into either a Bermuda captive related to Company X or through other channels. I have reviewed the supporting documentation in respect of these 15

16 IC Insurance Limited arrangements and I consider the arrangements and the evaluation carried out by RQIM to be reasonable. (a) An acquisition of a UK insurance company which was a captive insurer of a major industrial concern. R&Q have acquired the shares of the company and propose to transfer the policyholder liabilities under a Part VII process. The Part VII process aims to ensure that none of the affected parties is materially adversely impacted. (b) The due diligence investigation indicates that there are approximately 2m of outstanding claims, with no reinsurance asset. (c) The structure of the transaction is accretive to R&Q s balance sheet I have confirmed with the senior function holders of RQIM that a complete review and risk evaluation process has been carried out in accordance with RQIM s acquisition policy on each of the above transactions RQIM have produced an estimated Solvency II balance sheet as at 31 December 2015 reflecting the marginal impact of Clariant and FNF. The calculations of regulatory capital are consistent with the calculations I used when writing the IE Report and I am satisfied that the additions of Clariant and FNF have been accurately represented. A separate capital evaluation has been projected to 31 December 2016 on alternative bases - with no new business, including Company X and including both Company X and IC Insurance Limited; the forward forecasts show that RQIM is expected to continue to be strongly capitalised. The Parties commercial rationale for the Transfer In section 6 of the IE Report I set out the commercial rationale for the proposed Transfer. I have confirmed with the Parties that this commercial rationale has not changed. 16

17 Further considerations on the potential effect of Diverted Profits Tax ( DPT ) 2.29 RQIM have taken tax advice with respect to the potential impact of DPT 6 on the Transfer. The advice was obtained from a major accounting and tax advisory practice, Smith and Williamson and I was provided with a copy of the associated correspondence. The advice received is that DPT is unlikely to apply to this transaction as the Transfer is being undertaken primarily for regulatory, business development and capital efficiency reasons. In obtaining this advice, RQIM informed Smith and Williamson of the context and I did not consider it necessary to obtain separate independent advice on this matter since Smith and Williamson is a large and highly experienced professional advisory practice I have been advised by senior function holders of RQIM that RQIM is domiciled in Malta as its regulatory platform of choice and for the convenience of its anticipated client base. The favourable tax environment is not RQIM s primary motivation. RQIM takes the view that, should the relative tax advantages of Malta compared with alternative domiciles be eroded, such a situation is not envisaged to change the business model or the core solvency objective of RQIM. Grayhill and funding the premium payable to RQIM under the terms of the Transfer 2.31 I have confirmed with the senior function holders of L&L that the appropriate actions are being undertaken to effect the transfer of funds from Grayhill to RQIL which are required to meet the transfer premium upon the effective date of the Transfer The schedule of investment referred to in paragraph 2.5 confirms that Grayhill s investments are consistent with the values reported in the 20 August 2015 financial statements and that the Grayhill currently has sufficient funds to meet the agreed transfer premium In paragraph 7.43 of the IE Report I stated that L&L is intending to reduce its quota share cession to Grayhill as a mechanism to release the investment funds from Grayhill so that they become available to L&L to remit to RQIM. I have been advised that L&L is considering a termination of the quota share arrangement since this is a simpler method of achieving this objective; the termination of the quota share rather than a reduction of the quota cession is the more likely approach. I do not consider that using this alternative method would materially change the opinion I expressed in the IE Report. 6 DPT was explained in paragraph 9.72 of the IE Report 17

18 Policyholder communication and excluded policyholders 2.34 I have confirmed with the Parties that communications with affected parties to the Transfer were fully implemented: The Transfers have been advertised in the London, Edinburgh and Belfast Gazettes, in the Times and Daily Mail in the UK, in the Lloyd s List, TradeWinds Magazine and the UK and Global Financial Times A website has been established onto which the Scheme Document, notices and the IE Report have been made available. This supplementary report will also be made available on this website Notices have been sent to all groups of policyholders, reinsurers, banks, brokers, Members and other P&I clubs mentioned in the IE Report. Some correspondence was undeliverable due to the lack of correct address information. With regards to undelivered letters RQIM have undertaken further research on the Companies House database, and various other resources, and have located 161 alternate addresses. Given the nature of the communication exercise, I do not consider it unreasonable for some policyholders to be uncontactable and it is my opinion that RQIM are taking the necessary steps to contact as broad a set of policyholders as possible The Parties have provided me with summary statistics regarding the form of enquiries that have been raised as a result of the communication strategy. I have confirmed with the parties that where action was required as a result of such enquiries, the appropriate action, which for the most part required RQIM to supply additional information, was performed. As mentioned in paragraph 1.11 there has been one objection which I have been made aware of, given the nature of the objection I did not consider it material to the Transfer I have not been made aware of any circumstances which might cause any policyholders to be excluded from the Transfer. I have also further confirmed that the Parties do not have any intention of excluding any policyholders I have not been made aware of any other matters which have in any way affected my opinion. 18

19 Matters regarding the International Group of P&I Clubs Pooling Agreement 2.38 I have been advised that since the IE Report was issued, RQIM and L&L have contacted representatives of the IG Pooling arrangement, making themselves available for communication in addition to the formal reporting mechanism described in paragraph I have confirmed with the Parties that no concerns have been raised by representative of the IG No matters have been brought to my attention in relation to the transfer of L&L s commitments as a participant in the International Group Pooling agreement I am satisfied that no matters have arisen in relation to the IG Group that cause me to change my opinion. 3. OPINION 3.1 Based on the information I reviewed when writing the IE report and the updated information I have used to prepare this Supplementary Report, I am satisfied that the circumstances surrounding the Transfer have not changed materially and that no factors have arisen since I issued the IE Report that lead me to change my opinion that The transferring L&L policyholders and claimants and the policyholders of RQIM will not be materially adversely affected by the Transfer and that the Transfer will not impact the service levels experienced by any of those groups of policyholders and claimants adversely I am also satisfied that there is no material impact on any other party related to the Transfer including other P&I clubs and reinsurers. Dewi James FIA Limited 10th December

20 APPENDIX SCHEDULE OF ADDITIONAL INFORMATION The following information was provided : RQIM Medium Term Capital Management Plan RQIM Capital adequacy evaluation forecast to 31 December 2015 and 31 December 2016 Liverpool and London consolidated financial statements (not audited) as at 20 August 2015 RQIM / RQIS due-diligence evaluation of Clariant Insurance AG, FNF, Company X and IC Insurance Limited Liverpool and London claims listing for the 6 months to 20 August 2015 RQIM internal summary of paid and incurred movements in the legacy portfolio as at 30 June 2015 and as at 30 September 2015 RQIM management accounts as at 30 June 2015 at 30 September 2015 (not audited) Log of communications strategy implementation and responses. RQIHL interim group financial statements as at 30 June 2015, published in September 2015 (not audited) Grayhill investment managers report on the investment portfolio as at 9 November 2015 Correspondence relating to professional advice obtained by RQIM on DPT 20