Supplementary Report on the proposed insurance business transfer from Financial Assurance Company Limited to AXA France Vie

Transcription

1 Supplementary Report on the proposed insurance business transfer from Financial Assurance Company Limited to AXA France Vie Supplementary Report by the Independent Expert under Part VII - Section 109 of the Financial Services and Markets Act November 2018

2 Contents Contents 1. Introduction and scope Introduction Layout of this Supplementary Report Developments affecting the AFV Transfer Updated information considered Exchange rates Duty to the Court Statement of truth Executive Summary Key developments Other issues Overall conclusion Developments affecting the AFV Transfer Intra-group transactions such that FACL becomes a direct subsidiary of AFV Swiss insurance business transfer AFV authorised branches Ongoing legal proceedings Mis-selling complaints experience The anticipated regulatory environment after the UK leaves the EU Policyholder notifications and representations Financial position of the companies as at 30 June Pro forma financial position of the Companies FICL Life business Market conditions Reinsurance Tax Unit-linked business and structured settlements Collateral Other changes Appendix A Summary of data provided EY i

3 Introduction and scope 1. Introduction and scope 1.1 Introduction Insurance business transfer schemes are regulated in the United Kingdom ( UK ) under Part VII of the Financial Services and Markets Act 2000 ( FSMA ). Section 109 of FSMA requires that a scheme report must accompany an application to the High Court of Justice of England and Wales ( Court ) to approve such schemes. The scheme report should be produced by a suitably qualified independent person ( Independent Expert ) who has been nominated or approved by the Prudential Regulation Authority ( PRA ) in consultation with the Financial Conduct Authority ( FCA ). Financial Assurance Company Limited ( FACL ) has appointed Mr David King ( me, I, my ), of Ernst & Young LLP ( EY, we, us, our ), to act as the Independent Expert for the proposed insurance business transfer scheme ( AFV Transfer ) of the insurance and reinsurance business of FACL (and the FICL Life business 1, a small portfolio of life reinsurance business currently written in FICL) to AXA France Vie ( AFV ). In my role as Independent Expert I have produced a report to meet the requirement for a scheme report described above. My appointment as Independent Expert for the AFV Transfer has been approved by the PRA in consultation with the FCA. My report ( Report ) on the AFV Transfer entitled Report on the proposed insurance business transfer from Financial Assurance Company Limited to AXA France Vie dated 13 July 2018 was submitted in evidence to the Court at an initial hearing (the Directions Hearing ) which took place on 20 July My Report considers the effect which the proposed AFV Transfer is expected to have on different groups of policyholders in FACL, FICL and AFV (the Companies ), and whether the position of any group is, or is likely to be materially adversely affected. The definition of what is "material" depends on the matter being discussed, and so where there are adverse changes, I have attempted to give some context as to their size and/or the likelihood of them occurring. Unless otherwise stated, if the potential effect represents a small impact or is very unlikely to happen, I do not consider this material. My Report sets out my findings to assist the Court in deciding whether or not to allow the AFV Transfer to proceed. The purpose of this document (the Supplementary Report ) is to document for the Court any developments since the date of my Report and outline the additional information I have considered to be able to do this. In particular, I have considered whether any of the developments since my Report would lead to a change in my conclusion made in my Report as to whether the AFV Transfer has a material adverse impact on policyholders. This Supplementary Report will be presented to the Court at the Sanctions Hearing, at which the AFV Transfer will be submitted to the Court for sanction. If approved, the AFV Transfer is expected to become effective on 14 December 2018 for the FICL Life business (the FICL Life Effective Date ) and on 1 January 2019 for the insurance and reinsurance business of FACL (the FACL Effective Date ). Collectively I refer to the FICL Life Effective Date and the FACL Effective Date as the Effective Dates. The Supplementary Report must be read in conjunction with my Report in order to be taken in its proper context. It represents an addition to my Report and does not contain the full background to the AFV Transfer as contained within that document. Therefore considering the Supplementary Report in isolation may be misleading. All terms used in the Supplementary Report are as defined in my Report. In combination with my Report, it complies with the actuarial guidance and standards set out in Section 1.15 of my Report. In line with my Report, the work documented in this Supplementary Report has been peer 1 This small portfolio of life reinsurance underwritten by FICL (referred to in this Report as the FICL Life business ) is assumed reinsurance business with one specific policyholder. The policyholder is also a policyholder of FACL. All other assumed life reinsurance business written by FICL (of which there was 48m gross written premium in 2017) will have ceased before the Effective Dates. The FICL Life business represents 2m gross written premium (out of a total of 569m) in 2017 and 0.4m technical provisions (out of a total of 325m) as at 31 December EY 1

4 Introduction and scope reviewed by a suitably qualified person (a Fellow of the IFoA within my own firm with over 25 years experience of actuarial work in the life insurance industry) and also complies with the UK Actuarial Profession Standard X2: Review of Actuarial Work ( APS-X2 ). I note in particular the statements of reliance and limitations described in Section 1 and Section 10 of my Report, as these apply equally to the Supplementary Report. In particular, the parties that may have access to this Supplementary Report and those who may place reliance on it, and the extent to which they may do so, are identical to those described in my Report. I have been assisted by other employees of EY working under my supervision in the preparation of this Supplementary Report. However, I take sole responsibility for the conclusions reached and the opinions expressed. The terms of my engagement are set out in a letter dated 9 March An extract of this letter setting out the scope of my work is included in Appendix B of my Report. 1.2 Layout of this Supplementary Report My Supplementary Report is structured as follows: Section 1 provides an introduction and describes the scope of this Supplementary Report; Section 2 provides an executive summary of this Supplementary Report, including my overall conclusion; Section 3 describes the developments affecting the AFV Transfer since my Report, together with an assessment of their impact on my conclusions as presented in my Report; Appendices providing additional information which should be taken into account when reading this Supplementary Report. 1.3 Developments affecting the AFV Transfer In my Report, I indicated that I would comment in the Supplementary Report on any relevant developments relating to: a. Intra-group transactions such that FACL was to become a direct subsidiary of AFV - see Section 3.1; b. Swiss insurance business transfer of FACL s Swiss portfolio (with the exception of its long term disability covers) to AXA Leben AG and FACL s Swiss long term disability covers to AXA Versicherungen AG (noting that this transfer occurred on the 1 July 2018, but that the final de-authorisation of FACL s Swiss branch was yet to be completed) see Section 3.2; c. AFV s establishment of authorised branches in several countries, including the UK see Section 3.3; d. Ongoing legal proceedings by AXA in respect of the mis-selling liabilities of the Specific Distributor see Section 3.4; e. Emerging mis-selling complaints experience see Section 3.5; f. The anticipated regulatory environment after the UK leaves the EU see Section 3.6; g. The policyholder notification programme and any notable concerns expressed by policyholders see Section 3.7; EY 2

5 Introduction and scope h. Half-year management accounts and other financial information see Section 3.8; i. Changes in the financial position of the Companies including the FICL Life business see Section 3.9 and Section 3.10; j. Changes in market conditions which may affect the Companies see Section 3.11; and k. Any other changes occurring between the date of my Report and the Supplementary Report, which I believe could impact upon my conclusions see Sections 3.12 to Within this Supplementary Report, I have considered whether these developments would lead to a change in my conclusion made in my Report, as to whether the AFV Transfer has a material adverse impact on policyholders. Within the Supplementary Report, I have considered the effect of these developments on: Transferring Policyholders: This group consists of all existing policyholders of FACL and a small portfolio 2 of Life Reinsurance business (the FICL Life business); and Receiving Policyholders: This group consists of all existing policyholders of AFV. I note that I similarly considered Transferring and Receiving Policyholders within my Report. 1.4 Updated information considered I have based my findings in this Supplementary Report on the additional information supplied by the Companies since the writing of my Report, together with the information used in preparing my Report. My assessment of this additional information received has also been supplemented by discussions with the Companies. A summary of key items of data received from the Companies for use in this Supplementary Report is shown in Appendix A of this Supplementary Report, which complements Appendix D of my Report. 1.5 Exchange rates AFV reports financial information in Euros ( EUR, ) whereas FACL report in Pounds Sterling ( GBP, ). For the purpose of this Supplementary Report, the financial information provided by AFV as at 30 June 2018 has been converted to GBP at the following exchange rate, which is the rate used by AXA Group to prepare its financial statements as at 30 June 2018: 1 EUR = GBP (ie, EUR = 1 GBP) 1.6 Duty to the Court I confirm that I am aware and have complied with the relevant requirements of Part 35 of the Civil Procedures Rules of the Civil Justice Council and the associated relevant Practice Direction and the Guidance for the Instruction of Experts in Civil Claims. In reporting on the AFV Transfer as the Independent Expert, I recognise that I owe a duty to the High Court of Justice of England and Wales to assist it on matters within my expertise. 2 The FICL Life business referred to here is the assumed life reinsurance business associated with a specific policyholder. The FICL Life business was previously discussed within the Report. EY 3

6 Introduction and scope This duty overrides any obligation to FACL and/or AFV. I confirm that I have complied with this duty. 1.7 Statement of truth 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. EY 4

7 Executive Summary 2. Executive Summary 2.1 Key developments Financial position: Within my Report I used financial positions at 31 December 2017 for my analysis of the Companies. The updated financial positions as at 30 June 2018 are now available and the pre-afv Transfer and post-afv Transfer pro forma positions are provided in Sections 3.8 and 3.9. I have reviewed these updated financials and there are no material changes when compared with the financials shown in my Report; therefore, they do not give me any reason to change the conclusions stated in my Report. The anticipated regulatory environment after the UK leaves the EU: Within my Report I commented on the UK-based transferring policyholders who will transfer to a UK branch of AFV. AFV will be required to submit an application to the PRA for a Solvency II third country branch in the UK in order to be able to continue to administer UK-based Transferring Policyholders and pay associated claims after the UK leaves the EU. I give more detail on the latest regulatory position in Section 3.6. The latest regulatory position does not give me any reason to change the conclusions stated in my Report. Mis-selling complaints experience: I have reviewed the most recent mis-selling dashboards provided to me by FACL. These provide a comparison of the actual misselling experience to the expected experience. I am comfortable that there have been no material adverse developments since the time of writing of my Report which would change the conclusions in relation to mis-selling. Policyholder notifications: Since the writing of my Report, the Companies have begun an exercise to communicate information relating to the AFV Transfer with policyholders in accordance with the proposals put to the Court at the Directions Hearings. I have considered any queries and objections received from policyholders up until the time of writing within this Supplementary Report and do not consider that these change my conclusions in my Report. However, I will also consider any queries and objections received from policyholders following issuance of this Supplementary Report up until the date of the Sanctions Hearing and I will notify the Court should these give me any reason to change my conclusions. 2.2 Other issues There may be some issues which were discussed in my Report that I have not discussed in this Supplementary Report. This is on the basis that I am not aware of any developments in relation to these issues and therefore my conclusions on these issues within my Report still hold. EY 5

8 Executive Summary 2.3 Overall conclusion I have considered the AFV Transfer and its likely effects on the Transferring and Receiving Policyholders. As set out in this Supplementary Report, I have considered developments since writing my Report. I am not aware of anything that would change the conclusions in my Report, and as such my conclusions remain unchanged, which is to say that: I conclude that the security provided to the affected policyholders would not be materially adversely affected by the AFV Transfer, that the benefit expectations for policyholders would not be materially adversely impacted by the AFV Transfer and that the level of customer service provided to policyholders would not be materially adversely affected by the AFV Transfer. Therefore, I consider that there is no reason that the AFV Transfer should not go ahead. 29 November 2018 David King Fellow of the Institute and Faculty of Actuaries Director Ernst & Young LLP EY 6

9 Developments affecting the AFV Transfer 3. Developments affecting the AFV Transfer 3.1 Intra-group transactions such that FACL becomes a direct subsidiary of AFV On 2 July 2018, FACL became a direct subsidiary of AFV through a series of intra-group transactions. The diagram below shows the simplified AXA company structure following the completion of these intra-group transactions. Figure 1: Simplified AXA company structure chart following the intra-group transactions such that FACL becomes a subsidiary of AFV AXA SA AXA France IARD ( AFI ) FICL AXA France Vie ( AFV ) FACL Other AXA Group entities including: AXA Partners SAS CIGL The expected impacts of FACL becoming a direct subsidiary of AFV were discussed in my Report. At the time of writing this Supplementary Report, the transactions have taken place as expected and therefore the conclusions in my Report still hold. As the intra-group transactions occurred on 2 July 2018, they are not reflected in the financial information as at 30 June 2018 which I discuss in Section 3.8. As such, I have considered the expected impact of the intra-group transactions in the pro forma positions in Section 3.9 of this Supplementary Report. 3.2 Swiss insurance business transfer At the time of writing my Report, FACL was in the process of de-authorising its Swiss branch following the Swiss insurance business transfer of FACL s Swiss portfolio (with the exception of its long term disability covers) to AXA Leben AG and FACL s Swiss long term disability covers to AXA Versicherungen AG. I note that the de-authorisation of the Swiss branch is still in progress. The Swiss branch s insurance licence was surrendered on 6 July 2018, however an audit of the Swiss branch will need to be performed before the de-authorisation can be finalised. I note that this is expected to be finalised before 1 January As this Swiss business has now transferred I do not regard the status of the de-authorisation of the Swiss branch as significant to my conclusions. As such, I consider that my conclusions in my Report are still appropriate. As with the intra-group transactions discussed in Section 3.1, the impact of the Swiss transfer was not reflected in the financial information as at 30 June 2018 which I discuss in Section 3.9 and so I have considered the expected impact in the pro forma positions in Section EY 7

10 Developments affecting the AFV Transfer 3.3 AFV authorised branches At the time of writing my Report, AFV was in the process of establishing branches in Denmark, Finland, Germany, Greece, Ireland, Italy, Norway, Poland, Portugal, Spain, Sweden and the UK. The expectation was that each of these branches would be operational and have licences to underwrite insurance business before the Effective Dates. At the time of writing this Supplementary Report, I understand all the planned branches have already been established and have gained the relevant approvals to underwrite business, with the exception of the planned branch in Spain. Based on information provided by AFV in relation to the planned branch in Spain, I am not aware of any reason why this branch will not be authorised prior to the FACL Effective Date. If the planned branch in Spain is not authorised prior to the FACL Effective Date, then Transferring Policyholders in Spain will transfer directly into AFV, rather than into its Spanish branch; I am not aware of any adverse impact that this would have on the affected policyholders. I am therefore satisfied that developments are in line with the expectations set out in my Report, and I consider that the conclusions in my Report remain unchanged. 3.4 Ongoing legal proceedings The legal proceedings outlined in my Report in respect of mis-selling liabilities related to the Specific Distributor are on-going and the only major development since my Report has been the dismissal of Genworth s Part 20 claim. If successful this would have affected the order of the legal proceedings but this does not impact the conclusions in my Report. It is not expected that any further major developments will occur before the Effective Dates and therefore this has not impacted my conclusions in my Report. I will continue to monitor these legal proceedings following issuance of this Supplementary Report up until the Sanctions Hearing and I will notify the Court should any developments give me any reason to change my conclusions. 3.5 Mis-selling complaints experience In my Report, I noted that I would continue to monitor FACL s mis-selling complaints experience and comment on any developments in this Supplementary Report. I have reviewed the most recent mis-selling dashboards provided to me by FACL which provide a comparison of the actual number of complaints and average redress payments with the expected amounts. These dashboards have shown that although the number of complaints and redress payments continue to be uncertain, the reserves held in respect of mis-selling complaints are sufficient and the AXA Guarantee is operating as expected. In the brief period of time between this Supplementary Report and the Sanctions Hearing, I do not anticipate any significant announcements or campaigns from the FCA in relation to mis-selling. Therefore, I have no reason to believe there would be a sudden increase in the cost of mis-selling claims during this period but I will notify the Court should I become aware of any significant developments. On this basis, I consider that the development of the mis-selling complaints experience since the writing of my Report does not change the conclusions discussed in my Report. 3.6 The anticipated regulatory environment after the UK leaves the EU In my Report, I noted that AFV was applying to set up a Solvency II third country branch in the UK to allow it to continue to administer UK-based Transferring Policyholders and pay associated claims following the UK s departure from the EU ( Brexit ). This process will necessarily not be completed before the AFV Transfer as the PRA cannot formally approve a third country branch until the UK leaves the EU. The PRA has however confirmed that either: EY 8

11 Developments affecting the AFV Transfer a) There will be a transition phase during which the UK branch can continue to operate under current passporting arrangements until the end of the transition phase, which is expected to be 31 December AFV would need to apply for third country branch approval during this transition period in order to be authorised as such on 31 December 2020; or b) There will not be a transition phase (eg, if there is a hard Brexit with no deal). In this scenario, the PRA has confirmed they will provide temporary permission for up to 3 years for the existing UK branches to carry on regulated activities in the UK. AFV will need to notify the PRA that they need a temporary permission during this period and would need to apply for third country branch approval in order to be authorised as such by the time the temporary permission expires. I understand AFV is in discussions with the PRA around the third country branch application and I have no reason to believe that the PRA will not ultimately approve the third country branch in the required timeframe. The latest regulatory position does not give me any reason to change the conclusions stated in my Report. I have also been monitoring the wider implications of Brexit and how these may impact the AFV Transfer. Since the writing of my Report, the UK and the EU have published a proposal for the final terms of Brexit ( the withdrawal agreement ). This is currently being discussed across both the UK and EU and there is a chance of potentially significant changes to the agreement or a chance of a no-deal situation. As a result the level of associated risks facing insurers operating in the UK including increased market volatility with a particular emphasis on exchange rate volatility, a higher risk of negative interest rates and an increased level of regulatory change remain. Given that these risks were discussed in my Report and there remains uncertainty in regards to Brexit, I consider that the developments in relation to the anticipated regulatory environment after the UK leaves the EU do not change the conclusions made in my Report on the AFV Transfer. 3.7 Policyholder notifications and representations Since the time of my Report, the Companies have begun an exercise to communicate information relating to the AFV Transfer with policyholders and intermediaries in accordance with the proposals put to the Court at the Directions Hearings. Policyholders and intermediaries are therefore being given the opportunity to raise queries or formal objections to the AFV Transfer. Although the general advertising of the proposed AFV Transfer was made in Poland as planned there was a delay in individually notifying policyholders in Poland through the notification process. This has led to these individual Polish policyholders having a shorter period to respond to their individual notifications than the usual minimum of six weeks before the Sanctions hearing. These individual notification letters were issued by the 15 th November and marked as urgent. We would also note that the Sanctions hearing was delayed by two weeks to specifically give these Polish policyholders approximately four weeks to respond and raise any concerns that they might have with the AFV Transfer. We understand that the FCA has confirmed its acceptance of the reduced notification period for these Polish policyholders. As a result of the individual notifications being marked urgent, the public advertising of the AFV Transfer being made in the Polish media and the FCA confirming its acceptance of the four week notification period I believe the conclusions made in my Report on the AFV Transfer are unchanged. I note that a small number of policyholders have raised objections to the proposed AFV Transfer. Some of these have not provided any supporting rationale but there are some UK policyholders who have raised objections in relation to their policies moving from a UK entity (FACL) to a French entity (AFV) in light of the UK s forthcoming exit from the EU. Within my EY 9

12 Developments affecting the AFV Transfer Report I had specifically considered UK-based policyholders and any changes the AFV Transfer would have on their policies. I concluded that they would be moving to a larger, more diversified and more strongly capitalised entity and also that they would continue to benefit from any relevant FOS and FSCS protections that are currently in place (conclusion paragraphs 2.10 (a), (c) and (d) within my Report). I also specifically considered the potential implications of Brexit on these policyholders (section 8.10 within my Report). Overall these objections do not change the conclusions made in my Report on the AFV Transfer. Based on the information provided by the Companies so far, I am satisfied that the policyholder communications are being conducted as anticipated. Based on the queries and objections received to date, I do not consider that there is any reason to change the conclusions of my Report. However, I will consider any queries and objections received following issuance of this Supplementary Report up until the Sanctions Hearing and I will notify the Court should these give me any reason to change my conclusions. 3.8 Financial position of the companies as at 30 June 2018 In this section, I consider changes to the financial position of the Companies from 31 December 2017 to 30 June My analysis is based on unaudited Solvency II quantitative reporting templates as at 30 June 2018 as well as additional information from the Companies such as internal management information and reserve committee packs. The table below shows FACL s solvency positon. Table 1: FACL summary solvency position on a Solvency II basis as at 31 December 2017 and 30 June 2018 FACL YE 2017 HY 2018 Difference Solvency position m m m SCR (4) Eligible own funds (22) Solvency ratio 373% 366% (7%) FACL s SCR has decreased by approximately 4m. This is mainly because of a reduction in the market risk and counterparty default risk components of the SCR. However, eligible own funds have also decreased over this period by approximately 22m. This decrease in eligible own funds is mainly due to losses in the first half of the year. The decrease in eligible own funds is proportionally greater than the decrease in SCR and consequently the solvency ratio has decreased from 373% to 366%. This change represents a relatively small decrease in solvency ratio and I note that a solvency ratio of 366% remains above the minimum threshold set by FACL in its Capital Management Policy. The table below shows AFV s solvency positon. Table 2: AFV summary solvency position on a Solvency II basis as at 31 December 2017 and 30 June 2018 AFV YE 2017 HY 2018 Difference Solvency position m m m SCR 4,856 5, Eligible own funds 7,233 7, Solvency ratio 149% 146% (3%) The AFV SCR has increased by approximately 193m, primarily as a result of increased market risk but also increased life underwriting risk from higher volumes of business. AFV eligible own funds have increased by approximately 121m and the main driver was from higher volumes of business in the first half of Overall the eligible owns funds have increased by proportionally less than the SCR and consequently the solvency ratio has decreased from 149% to 146%. EY 10

13 Developments affecting the AFV Transfer Despite reducing from 149% to 146%, the AFV solvency ratio remains in excess of AFV s minimum threshold outlined in its risk appetite statement. 3.9 Pro forma financial position of the Companies The table below shows the SCR, eligible own funds and solvency ratio of the Companies as at 30 June 2018 as well as pro formas illustrating the estimated solvency positions immediately before and after the AFV Transfer. Table 3: SCRs and solvency ratio of FACL and AFV pre- and post-afv Transfer AFV HY 2018 actual FACL and AFV Pro Formas [A] FACL Pre-AFV Transfer pro forma [B] Post-AFV Transfer pro forma [C] HY 2018 actual [D] Pre-AFV Transfer pro forma [E] Post-AFV Transfer pro forma [F] Total SCR ( m) ,049 5,069 5,119 Eligible own funds ( m) ,354 7,354 7,354 Solvency ratio 366% 317% 146% 145% 144% As in the Report, the pre- and post-afv Transfer pro formas are based on a recent actual financial position (in this case HY 2018), adjusted for changes which are known or expected to impact the Companies financial positions before the Effective Dates. These changes relate to the impact of the intra-group transactions resulting in FACL becoming a direct subsidiary of AFV and FICL becoming a direct subsidiary of AFI. I am not aware of any other changes expected to occur prior to the AFV Transfer that will materially impact the financial positions of FACL or AFV. The intra-group transaction whereby FICL is no longer a subsidiary of FACL (column [A] to [B]), reduces FACL s eligible own funds (funds received for FICL are different from the value of participation in the Solvency II balance sheet) and increases FACL s SCR (reduction in equity risk from FACL s ownership of FICL offset by an increase in currency risk exposure due to the loan to AFV being denominated in Euros and an increase in counterparty default risk as a result of the loan to AFV). This leads to a decrease in solvency ratio to 317% but FACL will still hold eligible own funds comfortably in excess of the regulatory capital requirement. The estimated impact of FACL becoming a direct subsidiary of AFV (column [D] to column [E]), has little impact on AFV s solvency ratio, reducing it from 146% to 145%. AFV s SCR increases due to the additional market risk associated with taking on FACL, but the eligible own funds are not significantly impacted (as the value of the participation in FACL is similar to the price paid for FACL). The post-afv Transfer pro forma for FACL (column [C]) is blank as FACL will be merged with AFV as part of the FACL Cross-Border Merger. As was the case in my Report, a simplified approach to calculating the post-afv Transfer pro forma position has been used. This involves combining the HY 2018 SCR of AFV to the HY 2018 solo SCR of FACL to calculate AFV s post-afv Transfer pro forma position. This approximation may overstate the AFV Total SCR post Transfer as it does not allow for the diversification effects between the FACL and AFV businesses. Allowing for this diversification, we would expect the solvency ratio to lie between the pre- and post-afv Transfer ratios shown in the above table (of 145% and 144%). In my Report, I concluded that all of both the Transferring Policyholders and the Receiving Policyholders would not be materially adversely affected by the AFV Transfer. The updated pro forma financial positions outlined above do not give me any reason to believe these conclusions have changed. EY 11

14 Developments affecting the AFV Transfer 3.10 FICL Life business As described in my Report, the FICL Life business is a small portfolio of life reinsurance underwritten by FICL which is transferring to AFV as part of the AFV Transfer. At the time of writing my Report, it was anticipated that the transfer of the FICL Life business would occur on the same effective date as the transfer of the FACL business which also transfers to AFV under the AFV Transfer. However, since writing my Report, the Companies have modified the Scheme documents so that the FICL Life business will transfer to AFV earlier than the FACL business. The FICL Life business is expected to transfer to AFV on 14 December 2018 (the FICL Life Effective Date) whereas the FACL business is expected to transfer to AFV on 1 January 2019 (the FACL Effective Date). Given that the FICL Life Effective Date is before the FACL Effective Date, the FICL Life business will form part of AFV without FACL for a period before the FACL Effective Date, and the relevant pro forma solvency positions from the perspective of the policyholders of the FICL Life business would be as follows: Table 4: SCR and solvency ratio for policyholders of the FICL Life business pre- and post-afv Transfer Solvency position for FICL Life business For further commentary on the solvency position of FICL, please refer to the Supplementary Report for the AFI Transfer. As can be seen in the table, the solvency positions in terms of the solvency ratio are very similar so the short timing gap between the Effective Dates does not impact my conclusions. None of the other considerations which I took into account when forming the conclusions in my Report would be different and the conclusions in my Report would therefore remain valid. It is possible, although very unlikely, that the FICL Life business transfers to AFV but that due to unforeseen circumstances the transfer of the FACL business to AFV is delayed indefinitely or abandoned. In this unlikely scenario, the solvency position from the perspective of the FICL Life business, and for the AFV policyholders, would remain that of AFV including the FICL Life business but excluding the FACL policyholders, as illustrated in column [C] in the table above. In terms of the solvency ratio, this is very similar to the post-afv Transfer pro forma. In addition, none of the other considerations which I took into account when forming my conclusions would be different. Therefore, even if the FICL Life business transferred but the transfer of the FACL business were delayed indefinitely or abandoned, the conclusions in my Report would remain valid Market conditions Through my own assessment and discussions with the Companies, I can conclude that no significant changes to market conditions have occurred since the writing of my Report that I consider would lead me to change the conclusions originally made in my Report Reinsurance Pre-Transfer pro forma [A] FICL (before FICL Life Business Effective Date) Pre-Transfer pro forma [B] AFV (before FICL Life Business Effective Date) Intermediate pro forma [C] AFV (after FICL Life Business Effective Date) Post- Transfer pro forma [D] AFV (after FACL Effective Date) Total SCR ( m) 210 5,069 5,069 5,119 Eligible own funds ( m) 295 7,354 7,354 7,354 Solvency ratio 141% 145% 145% 144% In my Report, I note that FACL has entered into both assumed and ceded reinsurance arrangements with insurance and reinsurance companies outside of the EEA. I also note that these arrangements may not automatically transfer to AFV through the AFV Transfer but EY 12

15 Developments affecting the AFV Transfer 3.13 Tax FACL expects them to transfer under the FACL Cross-Border Merger or through other appropriate steps. Since the time of my Report, FACL has continued discussions with the relevant companies based outside of the EEA and a number of contracts have now been agreed and are in the process of being finalised. I am aware that the expectation from FACL is that the appropriate steps will have been taken to transfer all relevant reinsurance agreements before the Effective Dates. As these developments remain in line with the expectations discussed in my Report, I consider that the conclusions in my Report remain unchanged. As indicated in my Report, FACL was seeking rulings as to the tax treatment of the AFV Transfer in certain countries in which it operates. FACL has continued to seek such rulings and has made progress by submitting letters to the relevant tax authorities in the UK, France, Finland and Italy and is expecting to receive responses before the Effective Dates. On the basis of these tax developments, I do not consider that there will be a material adverse impact on policyholders from the AFV Transfer and the conclusions in my Report remain unchanged Unit-linked business and structured settlements In my Report, I considered FACL s unit-linked business. This unit-linked business was comprised of two products, unit-linked investment Bonds and flexible access bonds, which provide benefits to the policyholder that are linked to the value of the underlying assets in the related unit-fund(s). Similarly, I also considered FACL s structured settlements within my Report. Structured settlements are where the insurance company and claimant have agreed to settle a claim through a series of regular payments, rather than an upfront lump-sum. While these are no longer offered by FACL, the payments can be treated as benefits and therefore the claimants are effectively policyholders. Both unit-linked business and structured settlements are currently administered by third party providers. At the time of writing my Report, I was awaiting confirmation of whether the existing third party providers would continue to administer the unit-linked business and structured settlements following the AFV Transfer. I have now received confirmation that the third party providers will continue to administer the unit-linked business and structured settlements. As such, I consider that policyholders who hold a unit-linked policy or policyholders who have a structured settlement with FACL will not be materially adversely impacted as a result of the AFV Transfer Collateral In my Report, I noted that there were a number of letters of credit and charges registered by distribution partners over certain of FACL s assets. From discussions with FACL, I note that the letters of credit and charges over certain assets are no longer in place, will no longer be needed or are being transferred to AFV prior to the AFV Transfer. I would therefore not expect there to be an impact on the AFV Transfer from these letters of credit and charges and the conclusions in my Report remain unchanged. EY 13

16 Developments affecting the AFV Transfer 3.16 Other changes The PRA has recently issued a consultation paper (Consultation Paper CP26/18: UK withdrawal from the EU: Changes to PRA Rulebook and onshored Binding Technical Standards) setting out a proposed approach for its rules following Brexit including those relating to the FSCS. This proposes that the protection for policyholders in successor firms (ie the firms covering the policyholders following the transfer) in the EEA will still be provided by the FSCS after Brexit so far as concerns policies issued prior to exit day by a UK insurer provided that the transferee is a relevant person as defined in the PRA Rulebook (which may be loosely summarised in this context as an insurer with UK authorisation). I have described below my latest understanding in relation to FSCS protection for the different groups of Transferring Policies: Transferring Policies which transfer to the UK branch office of AFV will maintain the same FSCS protection as they had before the Transfer. Transferring Policies which transfer to the head office of AFV, or a branch office of AFV other than the UK, will also retain the FSCS protection as their insurer will by virtue of its UK branch authorisation remain a relevant person. If the proposed PRA rule changes are effected as described within the consultation paper, the position of UK policyholders will be unchanged from my original Report. The position of non- UK policyholders who currently benefit from FSCS protection will retain this protection and this would improve their position compared to the situation described in my original Report. As a result this does not affect my conclusions on the Transfer. I am not aware of any other significant additional changes, emerging issues or risks that may impact my conclusions. EY 14

17 Appendix A - Summary of data provided Appendix A Summary of data provided The following is a list of the key items of data received from the Companies used as part of our review for the purposes of this Supplementary Report. These items, as well as other information provided both verbally and through correspondence in relation to the AFV Transfer, have been confirmed within the witness statements which have been provided to the Court. Entity Description File name Financial information FACL FACL Half Year 2018 QRT Financial Assurance Company Limited Quarter xlsx FICL FICL Half Year 2018 QRT Financial Insurance Company Limited Quarter xlsx AFV AFV Half Year 2018 QRT Liasse Efiling AFV 2Q18.xlsx AFV/AFI Pro forma financial positions Synthèse Agregation FICL FACL AFI AFV.xlsx FICL/FACL Pro forma financial positions Pro-forma Q xlsx FICL/FACL Q risk committee deck Risk Committee Deck Q1'18 Final.pptx FICL/FACL Q risk committee deck Risk Committee Deck Q2'18 Final.pptx FACL FACL UK IFRS and Group IFRS Valuation Results Q Q2 FACL IFRS and Group IFRS Reserves.pdf FICL FICL UK IFRS and Group IFRS Valuation Results Q Q2 FICL UK IFRS and Group IFRS URR Reserves.pdf FICL/FACL Q LPI Claims Reserves UK GAAP and Solvency II 2018Q2 LPI Claim Reserves.pdf FACL Structured settlements update 29 June Q2 Reserve Committee Update - Structured Settlements Update pdf FICL/FACL Q Solvency II Technical Provisions 2018Q2 Solvency II Technical Provisions.pdf FICL FICL Third Witness Statement Transfer information AXA - FICL - Third Witness Statement v0.23.docx AFV AFV Second Witness Statement AXA - Part VII - AXA France Vie - Second Witness Statement v0.7.docx FACL FACL Third Witness Statement AXA - Part VII- FACL - Third Witness Statement v0.21.docx AFV AFV Notice of Transfer AXA France Vie - Notice of transfer v0.3.docx AFV AFV Scheme Summary AXA France Vie - Scheme Summary v4.0.docx AFV AFV Scheme Document AXA France Vie Scheme Document v6.0.docx AFV/AFI CLP Ownership Structure CLP Ownership Structure September 2018.pptx Mis-selling and conduct FICL/FACL Conduct risk results Risk Board pages Sep 18 V1.pptx FICL/FACL Mis-selling dashboard - July 2018 XX July 2018 Dashboard.pdf* Tax FICL/FACL HMRC informal ruling letter HMRC informal ruling letter - FINAL.docx Reinsurance FICL/FACL Inwards reinsurance agreements Inwards Agreements FICL FACL.xlsx FICL Life business FICL / AFV FICL Life business amendment to reinsurance agreement Amendment to 2009 Multi Country Reinsurance Agreement - Signed.pdf FICL / AFV FICL life business reinsurance transfer memo AXA Integration - Memo on FICL Reinsurance Transfer v0.7.pdf FICL / AFV FICL Life business reinsurance agreement (Denmark) Denmark - Reinsurance Agreement Signed.pdf FICL / AFV FICL Life business ammendment to reinsurance agreement (Denmark) Denmark -amendment agreement signed.pdf FICL / AFV FICL Life business agreement LH RI 2009 Agreement signed.pdf Policyholder communications AFV/AFI AFV and AFI newspaper notices List of newspaper notices.docx FICL/FACL Summary of first week of FICL/FACL policyholder communications Week 1 policyholder questions summary.xlsx *Name of distribution partner not shown A summary of key items of data received from the Companies to be used as part of our review for the purposes of my Report is provided in Appendix D of my Report. EY 15