Appendices B and C to this report contain definitions of technical terms and explanations of abbreviations used in this report respectively.

Transcription

1 Report by Simon Sheaf FIA FSAI, Independent Expert, on the Proposed Transfer of a Portfolio of Policies from Guardian Assurance Limited to R&Q Insurance (Malta) Limited 17 May 2016

2 Contents 1 Introduction 1 2 Information on which this report is based 5 3 Regulatory background 9 4 Summary of the Scheme 13 5 Analysis 15 6 Findings 47 7 Conclusions 51 Appendices Appendix A Information received 52 Appendix B Definitions 55 Appendix C Abbreviations 57 Appendix D Relationships with RQIM and Guardian 59

3 1 Introduction My name is Simon Sheaf and I am Head of General Insurance Actuarial and Risk within Grant Thornton UK LLP ("Grant Thornton", "we", "us", "our"). I have been instructed by Guardian Assurance Limited ("Guardian") and R&Q Insurance (Malta) Limited ("RQIM") to report as the Independent Expert pursuant to Section 109 of the Financial Services and Markets Act 2000 ("the FSMA") in relation to the transfer of a portfolio of policies from Guardian to RQIM ("the Transfer"). Appendices B and C to this report contain definitions of technical terms and explanations of abbreviations used in this report respectively. The scope of this report 1.3 I am required as Independent Expert to consider the likely effects of the proposed Insurance Business Transfer Scheme ("the Scheme") on policyholders, including whether the Scheme will result in material detriment to any policyholders affected by the Scheme, relative to their current situation. The purpose of this report is to set out my considerations. 1.4 Material detriment in the context of this report means any material adverse effect on: the security of policyholders' contractual rights the levels of service provided to policyholders the reasonable expectations of policyholders The policyholders affected by the Scheme include not only the policyholders that would be transferring but also existing policyholders of RQIM and the non-transferring policyholders of Guardian at the Effective Date of the Transfer. I am not required to consider the impact of the Transfer on any policyholders that subsequently effect policies with either Guardian or RQIM. I have, however, considered the likely effect of known subsequent transfers into or out of Guardian or RQIM on the three groups of policyholders identified above. I am not required to consider any alternative scheme or proposal that might be put forward but only to consider the Scheme relative to the current situation of the affected policyholders. Shortly before the date of the Court hearing at which an order sanctioning the Scheme will be sought, I will prepare a Supplemental Report covering any relevant matters which might have arisen since the date of this report. The Scheme provides for the possibility of one or more policies included in the scope of the Transfer not being successfully transferred on the Effective Date. Should there be any such residual policies following the sanction hearing, the Scheme states that RQIM will provide an indemnity to Guardian for any claims arising from these residual policies Grant Thornton UK LLP. All rights reserved. 1

4 Skills and experience of the Independent Expert 1.9 I am a Fellow of the Institute and Faculty of Actuaries and a Fellow of the Society of Actuaries in Ireland. I have 25 years of experience working within the general insurance industry in the UK. I trained as an actuary at Tillinghast Towers Perrin (now part of Towers Watson), qualifying in After 11 years of consulting to the general insurance industry, I joined Travelers Insurance Company Limited in 2001 as the UK Actuary. In 2004, my role expanded to be the UK and Ireland Actuary. I joined Grant Thornton's Financial Services Group as General Insurance Practice Leader in 2006, providing actuarial and risk consulting services to the general insurance industry. My current job title is Head of General Insurance Actuarial and Risk During my career I have taken an active role in the actuarial profession. Between 2011 and 2015, I sat on the Council of the Institute and Faculty of Actuaries and between 2012 and 2015, I was also a member of its Management Board. Between 2009 and 2015, I was a member of the Institute and Faculty of Actuaries' General Insurance Board. I have previously been chairman of the General Insurance Education and CPD Committee and a member of the General Insurance Reserving Oversight Committee, the Education Committee and the Education Board. I have also chaired or been a member of numerous working parties. I currently hold a Chief Actuary (non-life with Lloyd's) Practicing Certificate and a Lloyd's Syndicates Practicing Certificate. In addition, I have previously held an Irish Signing Actuary Practicing Certificate and have previously been recognised as a Responsible Actuary by the financial regulator in Liechtenstein. The Prudential Regulation Authority ("PRA"), having considered the skills needed to make a proper report, and having consulted the Financial Conduct Authority ("FCA"), has approved my appointment as Independent Expert. I have no financial interest in, nor have I previously advised in a professional capacity, Guardian or RQIM, or the groups of companies to which they belong. I have reviewed all current and past business relationships between Grant Thornton UK LLP or other member firms of Grant Thornton International Ltd and Guardian or RQIM, or the groups of companies to which they belong, and I do not believe that any of these business relationships create a conflict with my acting as the Independent Expert on the proposed Transfer. Details of these relationships are contained in Appendix D to this report. The preparation of this report 1.15 In preparing this report, I have had access to documents held by Guardian and RQIM. I have been provided with all the information which I have requested and have had all my questions answered. In addition, I have had access to and have had discussions with their respective managements and legal advisers As an Independent Expert reporting to the Court I am required to act in accordance with Part 35 of the Civil Procedure Rules, Practice Direction 35 and the Guidance for the Instruction of Experts in Civil Claims. I confirm that I am aware of the requirements of Part 35 of the Civil Procedure Rules, Practice Direction 35 and the Guidance for the Instruction of Experts in Civil Claims, and that I have complied with these requirements. This report is prepared for the assistance of the Court and I confirm that I understand my duty to the Court and have complied with that duty Grant Thornton UK LLP. All rights reserved. 2

5 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. This report has been prepared under the terms of the Statement of Policy produced by the PRA in April 2015, namely "The Prudential Regulation Authority's approach to insurance business transfers" and the guidance set out in Chapter 18 of the Supervision Manual ("SUP18") contained in the FCA Handbook of Rules and Guidance to cover scheme reports on the transfer of insurance business. In my considerations, I have placed particular importance on the reports from actuaries operating under the Actuarial Profession's code of conduct. Additionally, I have taken comfort from the fact that those reports have been prepared in accordance with the Technical Actuarial Standards ("TASs") issued by the Financial Reporting Council ("FRC"). I have relied on the accuracy of the information which has been provided to me and I have not undertaken any work in the nature of an audit or verification of the data provided to me. However, I have considered, and am satisfied with, the reasonableness of this information from my own experience in the general insurance industry. If further information is produced or brought to my attention after the service of this report, I reserve the right to reassess my opinion as appropriate. In my opinion, this report has been produced in line with the requirements of the TASs issued by the FRC. In particular, this report has been prepared in accordance with TAS D: Data, TAS M: Modelling, TAS R: Reporting Actuarial Information, the Insurance TAS and the Transformations TAS issued by the FRC. The financial information contained in this report is in respect of various periods from 31 December 2013 to 31 December I will use any updated information that is available in preparing my Supplemental Report to be provided in advance of the final Court hearing. This report is provided for the use of the High Court, the Guardian Board, the RQIM Board, the PRA, the FCA and the Malta Financial Services Authority ("MFSA") for the sole purpose of considering the impact of the Scheme on the affected policyholders. In addition, draft and final versions of this report may be distributed to RQIM's legal advisers, Guardian's legal advisers, companies within the group to which RQIM belongs as necessary in connection with the transaction, and companies within the group to which Guardian belongs as necessary in connection with the transaction. Should this report be distributed to any of the entities listed in the previous sentence, no reliance should be placed on this report by these entities, and we do not assume any liability to these entities or any other third parties that choose to rely on this report. In addition, RQIM shall be responsible for any confidentiality breach that arises from the distribution of this report to RQIM's legal advisers, to companies within the group to which RQIM belongs or to any other entities to which it releases this report. Similarly, Guardian shall be responsible for any confidentiality breach that arises from the distribution of this report to Guardian's legal advisers, to companies within the group to which Guardian belongs or to any other entities to which it releases this report Grant Thornton UK LLP. All rights reserved. 3

6 Copies of the final version of this report may be made available for inspection by policyholders and copies may be provided to any person requesting the same in accordance with legal requirements. The final version of this report may also be made available on websites hosted by RQIM in connection with the Scheme. However, Grant Thornton does not accept any liability to any party other than RQIM, Guardian, or the Court who chooses to act on the basis of our reports. I also consent to the final versions of my Summary Report and Supplemental Report being made available on the website to be hosted by RQIM in connection with the Scheme. The underlying figures in this report are calculated to many decimal places. In the presentation of the figures in the various tables, there may be reconciliation differences due to the effect of rounding Grant Thornton UK LLP. All rights reserved. 4

7 2 Information on which this report is based Background to Guardian 2.1 Guardian is primarily a run-off life insurer and a 100% owned subsidiary of Guardian Financial Services Holding UK Limited, which is owned by Admin Re, a consolidator of portfolios of closed life insurance. Admin Re is part of the Swiss Re group Guardian was founded in 1821 and currently manages 15.8 billion of assets on behalf of about 610,000 policyholders. Guardian was closed to new business in Its business model is to run-off a closed book of in-force policies in line with regulatory requirements. It is authorised by the PRA and regulated by both the PRA and FCA. I have been informed that Guardian will rebrand as ReAssure Life Limited on or around the 27 June Further to this, it is expected that the business, other than the GI business, will transfer under Part VII of the FSMA to ReAssure Limited by the end of Although the name of Guardian is expected to have changed prior to the anticipated date of the Transfer, for simplicity I will refer to this entity as Guardian in the remainder of this report. Business written by Guardian 2.7 Guardian is primarily a run-off life insurer incorporated in the United Kingdom. Its products include in-payment annuities, deferred annuities and with-profits business. The transferring business 2.8 In 2002, a non-life run-off portfolio was transferred to Guardian under Schedule 2C of the Insurance Companies Act 1982 and it is this business which is the subject of the proposed transfer ("the Transferring Portfolio"). This business was originally underwritten by Aegon Insurance Company (UK) Limited ("AIC") and was closed to new business in At the time of this transfer, Guardian and AIC were both part of the same group of companies, whose ultimate parent was Aegon Group NV. AIC was subsequently wound up and Guardian was sold to Cinven in The Transferring Portfolio is the only element of non-life insurance that currently resides within Guardian. The Transferring Portfolio accounted for 0.06% of the total insurance liabilities of Guardian as at 31 December This account consisted of a mixture of employers liability, public liability, other liability, non-marine excess of loss reinsurance, professional indemnity, property, marine, aviation and transport reinsurance and aviation insurance. This account contains exposure to asbestos-related diseases, other health claims, as well as the potential for the development of a public liability claim brought under a Football League Policy ("the Football League claim") Grant Thornton UK LLP. All rights reserved. 5

8 The Football League claim is sensitive and the information relating to it is confidential and, as a result, Guardian has only been able to provide me with a limited amount of information concerning it. I do not feel this limits my ability to provide an opinion for the reasons set out in paragraph AIC was for many years a member of the Institute of London Underwriters ("ILU"), and was required to issue a guarantee to the ILU, as were all insurers writing business through the ILU. AIC's ultimate parent, Aegon NV placed this guarantee with the ILU. RQIM and Guardian are currently in discussions about the quantum of a letter of credit or letters of credit to be placed with the ILU covering these policies to replace the guarantee from Aegon NV. On 11 September 2014, Guardian entered into a loss portfolio transfer reinsurance agreement with RQIM ("the LPT") to provide Guardian with 100% quota share reinsurance for the Transferring Portfolio. In addition, the claims handling agreement was also signed on this date. Since the date of the LPT, claims management has been provided by R&Q Insurance Services Limited ("RQIS"), a member of the same corporate group as RQIM. RQIS has procured the services of the ex-ceo of the AIC business on a contract basis to assist with understanding the underlying business. The ex-ceo of the AIC business had previously been providing services to Guardian and he started providing services to RQIS at the point the LPT and the claims handling agreement were executed. Should the Transfer become effective, I understand from RQIM that claims management will continue to be provided by the same team at RQIS. Background to RQIM 2.15 RQIM was established in 2013 and is incorporated in Malta. Its immediate parent company is R&Q Malta Holdings Limited (incorporated in Malta), whose immediate parent is Randall & Quilter II Holdings Limited (incorporated in the United Kingdom). RQIM was set up as an European Union consolidator for Randall & Quilter Investment Holdings Ltd ("RQIH"), the strategy being to merge or transfer the future acquisitions of European Economic Area insurance or reinsurance companies or portfolios into RQIM. RQIH has an issuer credit rating of bbb- from A.M. Best RQIM is regulated by the Malta Financial Services Authority ("MFSA"). In December 2013, the insurance business written by Chevanstell Limited ("Chevanstell") was transferred to RQIM by an insurance business transfer. Chevanstell was acquired in 2006 by Randall & Quilter Investment Holdings Ltd (incorporated in Bermuda), which is the ultimate owner of RQIM. RQIM's business model, as a consolidator of non-life insurance business, is to settle valid claims promptly in order to release capital. The business strategy of RQIM is to acquire books of run-off liabilities either by transfer, novation, merger or reinsurance. RQIM believes that its financial strength is paramount to success in this strategy and always aims to maintain a strong capital base Grant Thornton UK LLP. All rights reserved. 6

9 Business written by RQIM 2.19 Prior to the agreement of the LPT, the only business residing in the RQIM portfolio was that business previously written or assumed by Chevanstell. This business included business written by Chevanstell between 18 April 1975 and 4 September 2003 and business that was transferred to Chevanstell from other insurance companies by way of portfolio transfers in 1996, 1998 and The main lines of business transferred from Chevanstell to RQIM were aviation, marine and property. The most significant reserves relate to liability, marine, treaty and aviation classes, including amounts for asbestos, pollution and health hazard ("APH") claims On 30 December 2014, RQIM completed the inwards transfer of Aker Insurance ("Aker"), a book of Norwegian liabilities covering workers' compensation and personal accident. Additionally, on 30 December 2014 RQIM completed the inwards transfer of Tryg Insurance ("Tryg"), a book of Danish, Swedish and Norwegian liabilities covering marine hull. On 30 June 2015, RQIM completed the inwards transfer under Part VII of FSMA of Principle Insurance Company Limited ("Principle"). Principle is a wholly-owned subsidiary of RQIH that wrote UK motor insurance and household insurance business that was compliant with Sharia Law. I understand from RQIM that there are currently no open claims in this portfolio. On 31 December 2015, RQIM completed the inwards transfer under Part VII of FSMA of Liverpool & London Steamship Protection and Indemnity Association Limited ("L&L"). L&L is a mutual association whose members include insured ship owners. The remaining claims are dominated by UK asbestos claims arising from two members that are in liquidation. I have held discussions with the Independent Experts for the Principle and L&L transfers. We have discussed our respective responsibilities and shared information with each other where necessary. RQIM has recently completed the acquisition of FNF First Title Insurance Company Limited ("FNFT"). FNFT wrote title insurance. It began trading during the first quarter of 2012 and its owners have recently taken a decision to cease trading. I understand from RQIM that FNFT currently has no claims outstanding. I further understand from RQIM that the previous parent of FNFT provides 100% quota share reinsurance and a claims handling service. On 30 December 2015, RQIM executed a 100% reinsurance contract for specified underlying policies with a Belgian insurer Aviabel S.A ("Aviabel"), effective from 1 January A portfolio transfer is required to be approved by the Belgian National Bank in respect of this portfolio. The business reinsured consists of legacy APH claims. I understand from RQIM that the reserves for the transferring policyholders amount to $2.5 million. It is expected that the portfolio transfer will be effective around June It follows that, at the time of writing this report, the insurance liabilities that RQIM is responsible for are the Chevanstell business, the Aker business, the Tryg business, the business transferred in through the Principle Part VII transfer, the business transferred in through the L&L Part VII transfer, the FNFT business, the inwards reinsurance of Aviabel and the inwards reinsurance of the Transferring Portfolio Grant Thornton UK LLP. All rights reserved. 7

10 In addition, it is expected that RQIM will acquire business through a number of other transactions during 2016 as described in paragraphs 2.29 to One such transaction is the acquisition of the shares of Clariant Insurance AG ("CI") which is expected to complete in CI is the 100% owned captive insurer of Clariant, a Swiss specialty chemicals company. The business written by CI was mainly the fronting of Clariant's high level excess layers on its general and products liability programme. In addition, it wrote a quota share reinsurance of part of the Marine programme which is expected to be commuted prior to the sale. Thirdly, it has exposure to business written by another Clariant-owned captive, BTP Insurance Company ("BTP"), which has been in run-off since I understand from RQIM that there is a small IBNR provision in respect of BTP's reinsurance of UK employers' liability and US workers compensation. I further understand from RQIM that this is expected to be the only net claims reserves at the time of the sale. As at 30 June 2015, it amounted to CHF63,175. I have been informed by RQIM that three to four months after this acquisition, ownership of the shares in CI will pass to RQIM's immediate parent, R&Q Malta Holdings Limited. At this stage, RQIM and CI will become sister entities and RQIM will have no investment in this entity. In addition, RQIM is in the early stages of a portfolio transfer from a Finnish company within the same group as RQIM, Alma Vakuutus OY ("Alma"), which is expected to transfer in the third quarter of Alma has claims reserves of 900k. RQIM is also in the early stages of two further Part VII transfers as described in paragraphs 2.33 to The first of these is a small UK insurer ("Insurer A"). RQIM has proposed to accept the business with the benefit of its reinsurance protection by means of a Part VII transfer. I am not able to name this insurer for confidentiality reasons. I understand from RQIM that, as at 31 March 2015, Insurer A only had five outstanding claims. I understand from RQIM that the total gross reserves on these claims were 50k as at 31 March 2015 and that it is anticipated that these claims will all be settled prior to the proposed transfer. I further understand that all business post 1 October 2008 within this insurer is 100% reinsured into the captive of the post 2008 policyholder. Four of the five claims open as at 31 March 2015 relate to claims from business written post 1 October I understand from RQIM that, at the time writing the Report, the claim from business prior to 1 October 2008 had been settled and that all that remained to be paid on this claim was 500 in costs. As a result, at the time of writing the Report, Insurer A had 45k of gross outstanding claims and 500 of net outstanding claims. The timing of the potential transfer of Insurer A remains uncertain and, should it occur, it could become effective either before or after the Transfer. The second of these proposed Part VII transfers, yet to commence, is the transfer of RQIM's recent acquisition of IC Insurance. IC Insurance was a captive insurer of a major industrial concern. R&Q has acquired the shares of the company and proposes to transfer the policyholder liabilities to RQIM under a Part VII process. There are approximately 2m of outstanding claims, with no reinsurance asset. I will review these two Part VII transfers as appropriate in my Supplemental Report Grant Thornton UK LLP. All rights reserved. 8

11 3 Regulatory background 3.1 In this section, I provide some background on the regulatory requirements in the UK and Malta. However, as discussed in paragraph 1.17, the opinions contained in this report are based on my own analysis and not based on regulators' views of the companies involved. Solvency II 3.2 Insurance regulation in Europe has recently undergone a major overhaul. Since 1 January 2016, the majority of EU insurers are now required to meet a new common set of requirements developed by the European Commission ("Solvency II"). This has largely removed the differences between the UK and Maltese regulations in relation to capital requirements, governance, risk management and reporting. 3.3 Solvency II is a principles-based regime set around three pillars: Pillar 1 quantitative requirements Pillar 2 qualitative requirements Pillar 3 reporting and disclosure requirements Under Solvency II, there are two sets of capital requirements to allow for different levels of supervisory intervention. The higher of these two is the Solvency Capital Requirement ("SCR"). This is the amount of capital required in excess of liabilities in order to ensure continued solvency over a one year time frame in 99.5% of cases. The Minimum Capital Requirement ("MCR") defines the point of severe supervisory intervention. I have been provided with calculations of the SCR and MCR by both Guardian and RQIM. I have used this information to give consideration to the financial strength of both companies under Solvency II. UK Overview of regulation 3.8 UK insurers are regulated by both the PRA and FCA. The PRA and FCA are statutory bodies set up under the Financial Services Act Prior to 1 April 2013, all regulation of financial services institutions was undertaken by the Financial Services Authority ("FSA"). All regulatory responsibility was transferred from the FSA to the PRA and/or FCA on 1 April Grant Thornton UK LLP. All rights reserved. 9

12 3.9 The PRA is part of the Bank of England and is responsible for prudential regulation of: banks building societies credit unions insurance companies major investment firms Its three statutory objectives, as applicable to insurance companies, are: to promote the safety and soundness of the firms which it regulates to contribute to the securing of an appropriate degree of protection for policyholders to facilitate effective competition The third objective above is secondary to the first two The FCA is a separate organisation and its strategic objective is to ensure that the relevant markets function well. To support this, it has three operational objectives: to secure an appropriate degree of protection for consumers to promote and enhance the integrity of the UK financial system to promote effective competition in the interests of consumers. Current capital requirements 3.13 From the 1 January 2016, insurance companies in the UK are required to maintain capital in line with the Solvency II requirements as discussed in paragraphs 3.4 to 3.6. FCA conduct principles 3.14 The FCA has set out its Principles for Businesses, the general statements of the fundamental obligations of firms under the regulatory system. These principles include the following that relate to the fair treatment of customers: Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly Principle 7: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading Principle 8: A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client Principle 9: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely on its judgement. Claims handling obligations for Employers' Liability business 3.15 Section 8.4 of the Insurance Conduct of Business sourcebook ("ICOBS") sets out obligations relating to claims handling for insurers providing employers' liability insurance. These obligations include the duty to produce, and make publically available, an employer's liability register and supporting documents and the requirement to conduct effective searches of historical policies Grant Thornton UK LLP. All rights reserved. 10

13 The insurer must also allow requests by a tracing office to use information published on the insurer's employer's liability register that is necessary to enable the tracing office to provide comprehensive searching facilities to its users. In addition, the transferor of an insurance business transfer scheme must provide the transferee with information and documents which the transferor holds in compliance with ICOBS 8.4 in relation to the insurance business being transferred. Security under wind up 3.18 The winding up of an insurance undertaking is governed by the Insurers (Reorganisation and Winding Up) Regulations 2004 in the UK. Under these regulations, claims arising under direct contracts of insurance take precedence over other claims on the insurance undertaking with the exception of certain preferential claims (e.g. claims by employees, rights in rem etc.) with respect to the whole of the insurance undertaking's assets. Therefore, direct policyholders rank equal and above inwards reinsurance policyholders and all other unsecured/non preferential creditors in the event that an insurer is wound up. Financial Services Compensation Scheme 3.19 The Financial Services Compensation Scheme ("FSCS") is the compensation fund of last resort for customers of authorised financial services firms. For eligible claimants, the FSCS will pay 100% of a claim for compulsory insurance and professional indemnity insurance and 90% of a claim for other non-compulsory insurance. Financial Ombudsman Service 3.20 The Financial Ombudsmen Service ("FOS") was set up by law as an independent public body. Its job is to resolve individual disputes between consumers and businesses. In order to access FOS, it is necessary for the insurance policy to have been administered from within the UK. Capital extraction 3.21 Any request for capital extraction from an insurer has to be approved by the PRA. Malta Overview of regulation 3.22 Maltese insurers are regulated by the MFSA as the single regulator for financial services in Malta. It is therefore responsible for the regulation of: credit institutions financial and electronic money institutions securities and investment services companies regulated markets insurance companies pension schemes and trustees The MFSA is also responsible for consumer education and consumer protection in the financial services sector. This function is vested in the Consumer Complaints Manager. Current capital requirements 3.24 From the 1 January 2016, insurance companies in Malta are required to maintain capital in line with the Solvency II requirements as discussed in paragraphs 3.4 to Grant Thornton UK LLP. All rights reserved. 11

14 Security under wind up 3.25 The winding up of an insurance undertaking is governed by the Companies Act (Chapter 386 of the Laws of Malta), as modified by the provisions of the Insurance Business Act 1998 and the Insurance Business (Reorganisation and Winding Up of Insurance Undertakings) Regulations Under the aforesaid regulations, claims arising under direct contracts of insurance have precedence over any claim on the insurance undertaking with the exception of assets subject to rights in rem, with respect to the whole of the insurance undertaking's assets. Therefore, direct policyholders rank equally and above inwards reinsurance policyholder and all other unsecured/non preferential creditors in the event that an insurer is wound up Security under wind up is therefore essentially the same in the UK and Malta. The only exception to this is that in Malta, only rights in rem rank ahead of policyholders whereas in the UK, certain other preferential claims on the whole of the insurance undertaking's assets (eg. claims by employees) may also take precedence over policyholders. As such, there are fewer types of claim that rank ahead of insurance claims than would be the case in the UK. Protection and Compensation Fund 3.27 The Protection and Compensation Fund ("PCF") is in place in Malta to pay for claims in the event an insurer is unable to meet its obligations. These claims must be in respect of protected risks situated in Malta or protected commitments where Malta is the country of commitment. There is therefore no obligation for the PCF to pay for claims outside of Malta. Capital extraction 3.28 Any request for capital extraction, reduction of capital contribution or dividend declaration from an insurer has to be approved by the MFSA Grant Thornton UK LLP. All rights reserved. 12

15 4 Summary of the Scheme I have been provided with a copy of the Scheme document. I have also been provided with a copy of the Executed Transfer Agreement between Guardian and RQIM. The main purpose of the Scheme is to transfer the legal obligations under the transferring policies from Guardian to RQIM to fulfil the transaction agreed between Guardian and RQIM. This transaction provides the following benefits: Provides security for the transferring policyholders to be part of an insurer focussed entirely on non-life insurance with substantially more relevant experience and expertise Removes Guardian's exposure to an area in which it has limited experience Reduces "Key Man" and other operational risks within Guardian Results in an improvement in administrative efficiency and a reduction in costs for Guardian Allows Guardian to focus solely on life assurance The Scheme also provides for appropriate transfer of records. It is proposed that the Effective Date of the Transfer will be [1 September 2016]. As set out in clause 5 of the LPT, the premium from Guardian to RQIM is held by Guardian in a segregated account, and remains the property of Guardian. Until the Transfer becomes effective, payments to settle claims are contained within a claims float operated by RQIS. Releases from the segregated account to the claims float require permission of both RQIM and Guardian. The protections contained in the LPT, as described in paragraphs 4.5 above, will cease from the Effective Date because the LPT itself will terminate at that date. There is a mechanism within the LPT that allows the funds to be moved to a segregated account held by RQIM, over which Guardian has security. It is the intention that this mechanism will be effected prior to the date of the Transfer. If the Transfer becomes effective, the security from Guardian will be released and the balance of the secured account will be transferred to RQIM. At the date the LPT became effective, the amount contained in the segregated account was 10.5m. As of 31 December 2015, as a result of claim payments and exchange rate movements, this amount was 9.7m. This is 2.9m more than RQIM's current estimate of the liabilities for the Transferring Portfolio. Should the Transfer not become effective, Guardian has the right to terminate the LPT. RQIM does not have the right to terminate the LPT on any grounds Grant Thornton UK LLP. All rights reserved. 13

16 4.10 Guardian has the option to terminate the LPT in the following additional circumstances: if RQIM becomes insolvent if RQIM's permission as an insurer is removed if RQIM fails to comply with an obligation within the LPT to pay claims or to supplement the fund, where the value of this obligation is greater than 100k if any laws or regulations make it impossible for RQIM to comply with its duties under the LPT. Rights and responsibilities under the existing policies 4.11 The rights and responsibilities under the policies currently managed by Guardian would not be changed as a result of the Transfer. Rather, Guardian's rights and responsibilities would become those of RQIM The protections contained in the LPT, as described in paragraphs 4.5 above, will cease from the Effective Date because the LPT itself will terminate at that date. From the Effective Date, RQIM will assume responsibility for all rights, powers, duties and obligations in respect of the transferring policies. Equally, from the Effective Date, Guardian will cease to have any responsibilities in respect of the transferring policies. Taxation 4.14 Guardian does not believe there to be any tax implications that affect the Scheme. The tax losses (c. 0.1m) as a result of the LPT are minor in comparison to the expected profits on the life assurance business (which amounted to 108m in 2015) RQIM does not believe there to be any tax implications that affect the Scheme. Costs of the Transfer 4.16 Guardian and RQIM will meet their respective costs subject to certain cost-sharing provisions agreed under the LPT. The costs of the preparation of this Report will be met in full by RQIM. Policyholder benefits will not be affected Grant Thornton UK LLP. All rights reserved. 14

17 5 Analysis Perspectives considered 5.1 The approach I have adopted is to undertake a review of the financial and non-financial aspects of the Transfer and evaluate the likely effect on security and service levels separately for each of the three groups of policyholders (together known as "the Affected Policyholders") directly affected, namely: transferring policyholders; policyholders remaining within Guardian; and existing policyholders of RQIM at the proposed Effective Date of Transfer. Data sources 5.2 I based my financial analysis on the most recent available data, that was as follows: Signed report and accounts for Guardian as at 31 December 2015 Signed report and accounts for RQIM as at 31 December 2015 Solvency II SCR and MCR as at 31 December 2015 for Guardian Standard formula output as at 31 December 2015 showing the impact of the Transfer for RQIM Valuation report for Guardian's life liabilities as at 31 December 2015 Reserving report by RQIM's external actuaries ("Firm B") as at 30 September 2015 for the Chevanstell portfolio, the Transferring Portfolio, the Aker portfolio, the Tryg portfolio and the Principle portfolio Letter from Firm B to RQIM discussing reserves as at 31 December 2015 for the Chevanstell portfolio, the Transferring Portfolio, the Aker portfolio, the Tryg portfolio and the Principle portfolio Memo to RQIM's Board from RQIM's internal actuaries recommending the level of RQIM's reserves as at 31 December 2015 Report by RQIM's internal actuaries on the Solvency II Technical provisions as at 31 December 2015 Reserving report by RQIM's external actuaries ("Firm C") for the L&L portfolio as at 20 November 2015 Documentation setting out analysis of the Aviabel portfolio that was undertaken by RQIM during due diligence. 5.3 I will use any updated information that is available in preparing my Supplemental Report to be provided in advance of the final Court hearing Grant Thornton UK LLP. All rights reserved. 15

18 5.4 This section discusses the following elements in turn: the reserve strength of the Transferring Portfolio the reserve strength of RQIM, excluding the Transferring Portfolio the reserve strength of Guardian the financial impact of the Transfer on Guardian and RQIM the solvency position of each of Guardian and RQIM the ILU guarantee the expertise for managing the Transferring Portfolio within each of Guardian and RQIM the preparations for Solvency II the operational issues relevant to the Transfer the impact on compensation and complaints the impact of the business strategy of RQIM the investment strategy of each of Guardian and RQIM the portfolio diversification within each of the portfolios the considerations if the Transfer were not to proceed the impact of the policyholder notification strategy Reserve strength of the Transferring Portfolio 5.5 This section discusses only the reserve strength of the Transferring Portfolio. I discuss the reserve strength of the remainder of the RQIM portfolio in the following section As discussed in paragraph 2.10, the Transferring Portfolio consists of employers liability, public liability, other liability, professional indemnity and property insurance, marine, aviation and transport reinsurance and non-marine excess of loss reinsurance. The case reserves for these liabilities were calculated to be 2.3m as at 31 December The majority of these case reserves (circa 2m) are in respect of the non-marine excess of loss reinsurance and professional indemnity portfolios. The other 0.3m of case reserves are in respect of the liability, property and aviation insurance portfolios and the marine, aviation and transport ("MAT") reinsurance portfolio. Prior to the execution of the LPT, Guardian estimated the total IBNR for the Transferring Portfolio to be 1.6m as at 31 December 2013, resulting in a booked claims reserve of 3.9m. In 2014, an external firm of actuaries ("Firm A") was commissioned by Guardian to review these claims reserves as at 31 December This report has since been superseded and so I have not discussed the methodology and assumptions used in that report or the results contained in that report. In 2015, an external firm of actuaries ("Firm B") was commissioned by RQIM to review these claims reserves as at 30 September This review estimated the IBNR to be 5.6m. Most notably, Firm B's estimate of IBNR on the liability account was 4.9m, a 4.6m increase on the IBNR held by Guardian as at 31 December Firm B's review resulted in a revised claims reserve of 7.9m Grant Thornton UK LLP. All rights reserved. 16

19 I have been provided with Firm B's report on its review of the claims reserve for RQIM (including the Transferring Portfolio) as at 30 September I have reviewed the methodologies and major assumptions used by Firm B to assess their reasonableness, the reserve strength and the areas of uncertainty surrounding the reserve estimate. However I have not performed a detailed review of the calculations performed by Firm B. I have also been provided with a letter from Firm B to RQIM which sets out its assessment of the impact of claim movements from 30 September 2015 to 31 December 2015 on the gross and net of reinsurance reserves for RQIM (including the Transferring Portfolio). I have reviewed the approach and major assumptions used by Firm B to estimate the claims reserves as at 31 December 2015 to assess their reasonableness and the reserve strength. However I have not performed a detailed review of the calculations performed by Firm B. Firm B is a long established and reputable firm. I am satisfied that Firm B has the necessary expertise to undertake a review of this nature and for me to rely on its review. In addition, RQIM has provided me with a high level reserve review summary from its internal actuaries regarding the adequacy of reserves as at 31 December RQIM has booked reserves for the Transferring Portfolio of 6.7m as at 31 December Further to this, RQIM has provided me with a report on its review of the technical provisions on a Solvency II basis as at 31 December I have reviewed the approach and major assumptions used by RQIM to estimate the technical provisions on a Solvency II basis as at 31 December 2015 to assess their reasonableness and the reserve strength. However I have not performed a detailed review of the calculations performed by RQIM. I am satisfied that the actuaries at RQIM have the necessary expertise to undertake a review of this nature and for me to rely on the results of this report. Summary of methodologies and major assumptions as at 30 September 2015 (Firm B) 5.17 Below I have summarised the methodologies and major assumptions used by Firm B as at 30 September 2015 for each portfolio or group of portfolios. UK Asbestos and Noise-Induced Hearing Loss 5.18 Firm B analysed the UK employers' liability and public liability account for two major types of claim: asbestos-related diseases (mesothelioma and others); and noise-induced hearing loss ("NIHL") For both types of claim, IBNR has been estimated by applying projected claim numbers in future calendar years to average claim costs and allowing for annual claims inflation. For asbestos-related diseases, the actuaries have projected future claim numbers by applying the insurance market projections produced by the Institute and Faculty of Actuaries' Asbestos Working Party ("AWP") in The average claim severity was selected using the central estimates set out by the AWP with an allowance for claims inflation. For NIHL claims, Firm B used a data decay curve projection to estimate the number of future NIHL claims. An average cost per claim was selected based on the settled claims and an inflation assumption of 3.5% Grant Thornton UK LLP. All rights reserved. 17

20 Liability Football League claim 5.22 Following discussions with RQIM, Firm B has made no allowance for future deterioration of the Football League claim. Non-marine excess of loss reinsurance James Hardie 5.23 Guardian's coverage of James Hardie results in exposure to product liability claims on the years and public liability claims on the years The product liability claims have specific aggregate attachment points and limits. Based on a KPMG report on the ground-up James Hardie liabilities, Firm B expects the limit of liability of the policies for which RQIM is liable to have been reached in respect of all of the years. For the public liability component of the cover, Firm B has used its market knowledge as to how these claims will likely emerge, along with some reliance on the Manville curve, a curve derived from a large mature, US asbestos insured. Non-marine excess of loss reinsurance ECRA 5.26 The ECRA pool engages external actuaries to conduct a regular review of the required reserves, and advises the pool participants of the results. The IBNR and case estimates are contained within RQIM's outstanding reserves. Firm B has estimated an additional IBNR requirement of zero on top of this. Professional indemnity 5.27 There are a small number of open claims remaining on the professional indemnity book. These claims amount to 0.3m. Firm B has noted the potential for redundancy to emerge on these claims but has selected zero IBNR on this class. Other classes 5.28 Firm B has reviewed the paid and incurred triangles for these classes and does not expect any further development. As a result, it has selected zero IBNR on these classes. Summary of methodologies and major assumptions for all classes of business as at 31 December 2015 (Firm B) 5.29 Firm B assessed the movements in paid and incurred claims, gross and net of reinsurance, between 30 September 2015 and 31 December 2015, to estimate the claims reserve as at 31 December This analysis has been undertaken at an aggregate level for RQIM. In other words this includes the Chevanstell portfolio, the Aker portfolio, the Tryg portfolio, the Principle portfolio and the Transferring Portfolio The total net incurred for RQIM (the Transferring Portfolio, Chevanstell, Aker, Tryg and Principle) has decreased by 179k. Firm B has reviewed the largest of these movements and notes that they are in line with Firm B's expectations. Given these movements, Firm B has assessed that the ultimate claims calculated as at 30 September 2015 remained appropriate Grant Thornton UK LLP. All rights reserved. 18

21 Adjustments made to derive Solvency II technical provisions 5.31 RQIM has made a number of adjustments to its reserves as at 31 December 2015 to derive its Solvency II technical provisions. These adjustments are as follows: removed any margins for prudence allowance for Events Not in Data ("ENIDs") allowance for business that was yet to be incepted but that RQIM were legally obligated to underwrite as at 31 December 2015 (Aviabel) allowance for expenses associated with the run off of claims allowance for reinsurance bad debt discounting the payments to allow for the time value of money allowance for a risk margin Booked reserves as at 31 December RQIM has estimated the reserves for the Transferring Portfolio as at 31 December 2015 by conducting its own analysis. The booked reserve at 31 December 2015 is 6.7m. The difference between this estimate and the estimate produced by Firm B as at 31 December 2015 ( 7.8m) is mainly down to the assessment of mesothelioma and NIHL reserves. There is considerable uncertainty relating to assessing claims of this type. Firm B has set out in its letter provided as at 31 December 2015 that it has reviewed the models used by RQIM and has confirmed that these models are reasonable and that the results estimated by RQIM are within the range of scenarios that Firm B has considered RQIM has made the adjustments discussed in 5.31 to estimate its technical provisions on a Solvency II basis as at 31 December It has estimated technical provisions (excluding the risk margin) for the Transferring Portfolio of 5.9m. Conclusions 5.34 Based on my experience and on current market practice, the methodologies and assumptions used to project a claims reserve for the Transferring Portfolio as at 30 September 2015 appear to be reasonable. It follows that I believe the actual estimated reserves as at 30 September 2015 to be reasonable In addition, based on my experience and on current market practice, the methodologies and assumptions used to project a claims reserve for the Transferring Portfolio of 7.8m as at 31 December 2015 appear to be reasonable. It follows that I believe the actual booked reserves of 6.7m as at 31 December 2015 to be reasonable. Further to this, based on my experience and on current market practice, the methodologies and assumptions used to project the technical provisions on a Solvency II basis for the Transferring Portfolio as at 31 December 2015 appear to be reasonable. It follows that I believe the technical provisions on a Solvency II basis as at 31 December 2015 to be reasonable. However, due the nature of the liabilities, there is considerable uncertainty surrounding the eventual ultimate claims. As a result, there are other equally reasonable assumptions that could be made that would lead to different results. Indeed RQIM and Firm B have both made reasonable assumptions but have estimated different levels of reserves. I have highlighted the major areas of uncertainty in paragraphs 5.38 to 5.46 below Grant Thornton UK LLP. All rights reserved. 19

22 The projections make no allowance for the potential emergence of new types of latent claims which could move future claim developments unfavourably. However, given the maturity of the book of business, I do not consider this to be an unreasonable assumption. There is a considerable level of uncertainty surrounding the estimate of reserves for UK asbestos related claims. It should be noted that the AWP released an updated market study of average claim severities for mesothelioma and non-mesothelioma claims in The average severities contained in this study are somewhat lower than those in the 2009 report. Compared to the most recent data available, Firm B has therefore erred on the side of prudence. Firm B assumed that the number of NIHL claims notified in 2016 will be the same as in It has then assumed that there will be 10% fewer claims in 2017 and 20% fewer claims in each subsequent year. There is a considerable degree of uncertainty surrounding this assumption. Other assumptions are equally reasonable and may lead to a higher or lower estimates of unpaid claims. For the UK employers' liability and public liability portfolio, there is additional uncertainty around the estimates of IBNR due to the recent publication of the Employers' Liability register on the Guardian website. This publication has led and could further lead to an increase in the number of enquires and hence unfavourable claim development. There is uncertainty surrounding the cost of the Football League claim referred to in paragraph 5.22, with a potential for unfavourable claim development. For reasons of confidentiality, I have only been provided with limited information in relation to this claim and therefore I have not been able to estimate the ultimate outcome. However I have been provided with the details of the policies written and have considered the impact if claims were made up to the total limit applicable under the policies. The impact is less than the excess of assets over liabilities being transferred under the Scheme, which amounted to 2.9m as at 31 December There is also uncertainty about the appropriate level of adjustments to make in order to estimate the technical provisions on a Solvency II basis. RQIM could have made other equally valid adjustments which would lead to different results. I have discussed in paragraphs 5.45 and 5.46 below some of the elements where RQIM could have taken alternative approaches. In order to make allowance for ENIDs, RQIM has taken a simplistic approach by applying a percentage to its reserves. In addition, it has benchmarked the result against an analysis undertaken by Firm B. The benchmarking analysis resulted in materially similar results. While RQIM could have adopted a more complex approach, in my view the approach taken is proportionate to the size of the organisation and I would not expect a more complicated approach to lead to a materially different result. In order to allow for additional expenses required to run-off the claims, RQIM has runoff costs in line with the claims provisions. Certain costs, such as fixed costs are unlikely to run-off in line with the claims provisions. However, the approach taken is proportionate to the size of the organisation and I would not expect a more complicated approach to lead to a materially different result Grant Thornton UK LLP. All rights reserved. 20

23 5.47 Even if experience deteriorates in line with my comments in paragraphs 5.38, 5.42 and 5.43 above, the excess of assets over liabilities which are transferring under the Scheme (which amounted to 2.9m as at 31 December 2015) will be sufficient to cover the deterioration. Reserve strength of RQIM 5.48 The existing RQIM business consists of the business acquired from Chevanstell, the business acquired from Tryg Insurance, the business acquired from Aker, the business acquired from Principle, the business acquired from L&L, the business acquired from FNFT, the inwards reinsurance of the Aviabel portfolio and the inwards reinsurance of the Transferring Portfolio I have discussed the reserve strength of the Transferring Portfolio in paragraphs 5.6 to 5.47 above. In this section, I discuss the reserving strength of the Chevanstell portfolio, the Tryg portfolio, the Aker portfolio, the Principle portfolio, the L&L portfolio and the Aviabel portfolio. I will discuss the reserve strength of FNFT, CI and Insurer A in my Supplemental Report. However since, as mentioned above, I understand from RQIM that the claims reserves in respect of FNFT are zero, the net claims reserves of those CI liabilities that will remain at the time of the sale are only CHF63,175, and the net claims reserves of Insurer A are zero, I would not expect the reserve strength of any of these portfolios to have a significant impact on the reserve strength of RQIM. Firm B reviewed the reserves as at 31 September 2015 for the Chevanstell portfolio, the Tryg portfolio, the Aker portfolio, the Principle portfolio and the Transferring portfolio. Firm B did not undertake an analysis for either the L&L portfolio or the Aviabel portfolio. I have also been provided with a letter from Firm B to RQIM which sets out its assessment of the impact of claim movements from 30 September 2015 to 31 December 2015 on the gross and net of reinsurance reserves for the portfolios discussed in paragraph 5.52 in aggregate. I have reviewed the approach and major assumptions used by Firm B to estimate the claims reserves as at 30 September 2015 and 31 December 2015 to assess their reasonableness and the reserve strength. However I have not performed a detailed review of the calculations performed by Firm B. Firm B is a long established and reputable firm. I am satisfied that Firm B has the necessary expertise to undertake reviews of this nature and for me to rely on its reviews. I have also been provided with an internal actuarial report from RQIM's actuaries to its Board, setting out the actuaries' recommendations of the reserves to be held in respect of the portfolios set out in paragraph 5.52 and the L&L portfolio. I am satisfied that the actuaries at RQIM have the necessary expertise to undertake a review of this nature and for me to rely on the results of this report Grant Thornton UK LLP. All rights reserved. 21

24 I have been provided with a report by a firm of external actuaries ("Firm C") setting out its analysis of the reserves of the L&L portfolio as at 20 November The L&L portfolio is the only portfolio that Firm C has reviewed. Firm C is a reputable firm. I am satisfied that Firm C has the necessary expertise to undertake reviews of this nature and for me to rely on its review. I have also been provided with a report produced by RQIM during the due diligence to assess the level of reserves for Aviabel as at 26 November I am satisfied that RQIM's internal actuaries have the necessary expertise to undertake a review of this nature and for me to rely on the results of this review. Background Chevanstell 5.61 Chevanstell was a London Market insurer which wrote through various pools and entered run-off in The main classes of business underwritten were Aviation, Marine and Property. The most significant remaining reserves relate mainly to Liability and Treaty classes and to Chevanstell's participation in the Lennox Pool. These reserves include Asbestos, Pollution and Health ("APH") losses Chevanstell acquired the business of Arran Insurance Company Limited ("Ex-Arran") in The reserves for the Ex-Arran business include US APH and non-aph liabilities. Tryg Tryg Insurance, based in Denmark, is one of the largest Danish insurers. In 2010, Tryg ceased underwriting marine business and sold the renewal rights to that business. The pre-2010 liabilities of the book were transferred to RQIM on 30 December This portfolio has been in run-off since 2010 and comprises business underwritten in Denmark, Sweden and Norway. The Danish business commenced in 1998, the Swedish business in 2006 and the Norwegian business in The majority of the business that was written was marine hull with a small amount of loss of hire and some boat yard risks. There was no liability business written within this portfolio. Aker 5.66 Aker Insurance AS was a captive insurer set up to manage the insurance arrangements for the Aker Group in Norway. It underwrote workers compensation and personal accident cover for six years from 1 June 2003 to 31 May This portfolio was transferred to RQIM on 30 December Principle 5.67 Principle is a small insurer that is now in run off. It wrote Sharia-compliant (Takaful) UK motor insurance between July 2008 and October 2009, and UK household insurance between April 2009 and October I believe from information received that Principle entered run-off in October On 30 June 2015, this business was transferred to RQIM through a Part VII transfer. L&L 5.68 L&L is a mutual association, whose members include ship owners and charterers. It ceased underwriting with effect from 20 January Grant Thornton UK LLP. All rights reserved. 22

25 The remaining claims are dominated by UK Asbestos claims, representing approximately 80% of the insurance liabilities. The majority of those asbestos claims relate to two former club members who are in liquidation. On 31 December 2015, this business was transferred to RQIM through a Part VII transfer. Aviabel 5.71 Aviabel is a specialist Belgium domiciled aviation insurer formed in Aviabel wrote aviation insurance with a focus on general aviation but also wrote reinsurance. Aviabel's revised strategy is to focus on general aviation and it therefore wishes to remove the legacy APH exposure from its balance sheet RQIM has provided 100% reinsurance with effect from 1 January 2016 to assume the APH exposure for specified policies from Aviabel, with the intention of undertaking a portfolio transfer for those specified policies later this year. Summary of methodologies and major assumptions used by Firm B as at 30 September 2015 Chevanstell excluding ex-arran and Lennox pool 5.73 Below I have summarised the methodologies and major assumptions used by Firm B to estimate the claims reserves for all classes of business within the business acquired from Chevanstell, excluding the Ex-Arran portfolio and the participation in the Lennox Pool, as at 30 September Non-APH losses 5.74 To calculate the gross reserves for non-aph losses, Firm B used the paid and incurred chain ladder methods rather than loss ratio methods and credibility methods due to the maturity of these classes of business. Where necessary, Firm B adjusted for redundancy in the incurred claims To calculate net reserves for the non-aph losses, as net of reinsurance claims data was unavailable, Firm B applied the proportion of recoveries expected on current outstanding claims to the gross IBNR to derive the recoveries expected on gross IBNR reserves. Asbestos losses 5.76 Firm B has estimated reserves in relation to the direct insurance and inwards reinsurance of Colonial Sugar Refineries ("CSR") claims, the direct insurance and inwards reinsurance of James Hardie claims and the involvement in two policies of Foseco Minsep Firm B projected zero IBNR on both the direct insurance and the inwards reinsurance of the CSR claim as this claim has been deemed to be fully settled. The direct insurance of James Hardie results in exposure to liability claims on the years. Based on market knowledge of mesothelioma claims and the published KMPG projections of future costs as at 31 March 2014, Firm B believes that James Hardie's ultimate ground-up claims will exhaust each of the 1981 to 1985 policy years in full. Firm B has not projected IBNR on the 1986 to 1988 policy years as the policies are on a 'claims-made' basis and therefore no further deterioration is expected Grant Thornton UK LLP. All rights reserved. 23

26 Firm B has not projected IBNR on the inwards reinsurance of the James Hardie claims as the policies reinsured are on a 'claims-made' basis and therefore no further deterioration is expected. Firm B has relied on information supplied by RQIM and its own market knowledge to estimate claims reserves in relation to the Foseco claims. For the CSR, James Hardie and Foseco asbestos-related losses, RQIM provided Firm B with reinsurance models. These models apply the reinsurance programme to gross losses to explicitly determine the resulting net losses. A pure IBNR reserve is held to allow for the emergence of new asbestos insureds on the liability account. Firm B set this pure IBNR reserve at 5% of the total known asbestos reserves. To determine the net IBNR reserves, a combination of reinsurance recovery rates and excess of loss reinsurance programmes have been applied to the gross IBNR reserves. For small asbestos losses, benchmark IBNR to outstanding claims ratios have been applied for both direct and inwards reinsurance business. NIHL losses 5.84 The same approach as applied for NIHL claims on the Transferring Portfolio was applied. Ex-Arran and Lennox pool 5.85 For the Ex-Arran business, Firm B has applied IBNR-to-Outstanding claim ratios to project gross IBNR claims. Reinsurance recoveries on the gross IBNR are assumed to be in proportion to the recoveries expected on outstanding claim amounts For the liabilities arising from exposure to the Lennox Pool, Firm B has applied benchmark IBNR-to-Outstanding claim ratios to project gross IBNR. Reinsurance recoveries on the gross IBNR are assumed to be in proportion to the recoveries expected on outstanding claim amounts. Tryg 5.87 Firm B has used a redundancy analysis to assess the degree of redundancy in the outstanding claims reserves of the Tryg portfolio. Firm B has seen evidence for significant amounts of redundancy over recent years for this portfolio. Aker 5.88 Firm B has considered the results from the paid and incurred chain ladder methods. Principle 5.89 Principle currently has no outstanding claims and has not received a new claim since Firm B considers that the risk that a motor bodily injury claim could reopen is remote. It has therefore estimated a reserve of zero. Summary of methodologies and major assumptions used by Firm B as at 31 December As discussed in paragraph 5.29, Firm B assessed the movements in paid and incurred claims, gross and net of reinsurance, for RQIM in aggregate between 30 September 2015 and 31 December 2015, to estimate the claims reserve as at 31 December Grant Thornton UK LLP. All rights reserved. 24

27 5.91 Based on the movements, Firm B has assessed that the ultimate claims estimated in aggregate for the Chevanstell portfolio, the Tryg portfolio, the Aker portfolio, the Principle portfolio and the Transferring Portfolio as at 30 September 2015 remain appropriate. Summary of methodologies and major assumptions used by Firm C for L&L portfolio 5.92 Below I have summarised the methodologies and major assumptions used by Firm C to estimate the claims reserves for the business acquired from L&L as at 20 November Firm C has split its analysis into four claim types: mesothelioma, asbestosis, lung cancer and deafness. For each of claim types, IBNR has been estimated by applying projected claim numbers in future calendar years to average claim costs. In order to estimate the future claim numbers, Firm C has used data from a model released by the AWP in 2011 which was based on the Health and Safety Laboratory's ("HSL") report published in In order to estimate the average cost for each claim type, Firm C has taken account of both the historical data for L&L, allowing for inflation, and the 2015 update from AWP to select an appropriate average cost. For the Union Castle exposure, Firm C has applied a shift to the AWP model as the exposure for this insured ended in 1967 and so is likely to have a different exposure profile to that contained in the HSL report. Prior to making its selection of future claim numbers and average claim severities, Firm C explored a number of alternative assumptions to understand the sensitivity to each assumption. Booked reserves as at 31 December 2015 Chevanstell 5.99 RQIM has adjusted Firm B's net reserve estimates to account for differences in actuarial judgement in relation to the redundancy in the reserves. This results in a booked net reserve estimate as at 31 December 2015 which is 0.2m higher than the net reserve estimated by Firm B for the Chevanstell portfolio. These adjustments are described below RQIM's internal actuaries consider Firm B's reserve estimate for the Foseco asbestosrelated losses to be a prudent or a worst case scenario rather than a best estimate. This is because RQIM believes that there are a number of investigations, including an inspection of policy and claims records, which would lead to a reduced settlement value With regards to the NIHL claims, RQIM's internal actuaries agree that Firm B's approach to estimating the IBNR is appropriate. However it is their view that, although there has been a recent increase in notified claims, many of the recent notifications will result in very little or no loss Grant Thornton UK LLP. All rights reserved. 25

28 Tryg RQIM's internal actuaries have used the incurred chain ladder method to estimate the reserves for this portfolio. RQIM has booked reserves that are 0.3m above those projected by Firm B. Aker RQIM's internal actuaries have estimated the reserves for the Aker portfolio by blending together the results from the incurred chain ladder method and a survival ratio benchmark. RQIM has booked reserves that are 0.2m higher than those estimated by Firm B. Principle Principle has no outstanding claims and, consequently, RQIM has booked a reserve of zero as at 31 December This is in line with the reserve estimated by Firm B for this business. L&L RQIM has booked reserves in line with those estimated by Firm C as at 20 November 2015 taking account of the claims paid between 20 November 2015 and 31 December Bad debt Firm B's net reserve estimate does not account for reinsurance bad debt on future potential reinsurance recoveries. RQIM has calculated the bad debt provision to be 0.9m. This has been calculated by applying default percentages to the anticipated recoveries which vary based on credit rating. Conclusions Based on my experience and on current market practice, the methodologies and assumptions used by Firm B to project the claims reserve for the Chevanstell portfolio, the Tryg portfolio, the Aker portfolio and the Principle portfolio as at 30 September 2015 and 31 December 2015 appear to be reasonable. It follows that I believe Firm B's reserve estimate as at 31 December 2015 to be reasonable RQIM has made a number of adjustments to the reserves estimated by Firm B. Based on my experience, I believe these adjustments to be appropriate and the reserves booked by RQIM as at 31 December 2015 to be reasonable Based on my experience and on current market practice, the methodologies and assumptions used by Firm C to project the claims reserve for the L&L portfolio as at 20 November 2015 appear to be reasonable. It follows that I believe Firm C's reserve estimate as at 20 November 2015 to be reasonable RQIM has confirmed that it has booked reserves as at 31 December 2015 in respect of L&L in line with the results of the analysis undertaken by Firm C based on data as at 20 November 2015 taking into account what has been paid between 20 November 2015 and 31 December It follows that I believe the actual booked reserves in respect of L&L to be reasonable Grant Thornton UK LLP. All rights reserved. 26

29 5.111 Despite my comments above, it should be recognised that, due the nature of the liabilities, there is considerable uncertainty surrounding the eventual ultimate claims in respect of Chevenstall, Tryg, Aker, Principle and L&L. There are other equally reasonable assumptions that could be made that would lead to different results. I have highlighted the major areas of uncertainty below. Areas of uncertainty relating to Chevanstell Significant uncertainty attaches to the estimated reserves for Chevenstall for the reasons discussed below There is a considerable level of uncertainty surrounding the estimate of reserves for UK asbestos related claims RQIM considers that, although there has been a recent increase in notified NIHL claims, many of the recent notifications will result in very little or no loss. However, due to the nature of the liabilities, there is considerable uncertainty surrounding the eventual claim severities There is a high level of reliance on the receipt of reinsurance recoveries on many classes of business. The net reserves could be materially impacted if the reinsurance recoveries actually received on gross IBNR losses differ from the recoveries projected Due to the reliance on reinsurance recoveries the business is also heavily exposed to reinsurer credit risk. While I believe that RQIM has taken reasonable approaches to estimating reinsurance bad debt, there remains considerable uncertainty surrounding the estimates I have reviewed RQIM's exposure to reinsurers on the Chevanstell portfolio. Its largest exposure to any single reinsurer is about 3.7m with the Swiss Re group. Given that this group of companies has a credit rating of A+ with AM Best, I consider it very unlikely that it will default on the recoveries. However, even if this were to happen, RQIM would still have sufficient Own Funds to meet its capital requirements under Solvency II RQIM's second largest exposure to a single reinsurer on the Chevanstell portfolio is 1.1m The projections also make no allowance for the potential emergence of new types of latent claims which could move future claim developments unfavourably. However, in my view, this is not an unreasonable assumption given the maturity of the portfolio. Areas of uncertainty relating to L&L business There is a considerable level of uncertainty surrounding the estimate of reserves for UK asbestos related claims. Firm C has implemented a certain methodology with certain assumptions. There are other equally reasonable assumptions that could be made that would lead to different results. Areas of uncertainty relating to overall business Setting the gross and net reserves at 31 December 2015 equal to the gross and net reserves at 30 September 2015 is reasonable given the immaterial paid and incurred claim movements during the intervening period Grant Thornton UK LLP. All rights reserved. 27

30 5.122 As required by accounting rules, the reserves in RQIM's balance sheet are not discounted for the time value of money. This provides an implicit margin which increases the security provided to policyholders and offsets an element of the uncertainty surrounding the reserve estimates. Solvency II technical provisions, however, are required to be discounted for the time value of money. Aviabel portfolio Summary of methodologies and major assumptions for Aviabel portfolio RQIM's internal actuaries had little information relating to the specified policies under consideration in order to apply standard actuarial techniques to estimate the reserves required for the Aviabel portfolio. This was because the information they had related mainly to the business that was remaining in Aviabel. In addition, RQIM's actuaries informed me that the paid data they received likely included non-aph payments, which are not part of the proposed transfer RQIM applied a two stage approach. Firstly, it relied on the work undertaken by the claims team on existing reported claims to ensure the robustness of the held case reserves and to form a view on the required level of IBNR for reported claims. Then, it utilised the knowledge of the claims and actuarial teams to establish the potential for new losses on the listed contracts. Conclusions Aviabel portfolio There is still uncertainty surrounding the reserves of the specified policies within this portfolio given the nature of the business written. However, more than 60% of the reserves arise from one insured for which the policy limit has already been exhausted. In addition, the total reserves for this account amount to $2.5m, which is a relatively small proportion of RQIM's total liabilities Based on my experience and on current market practice, the methodologies and assumptions used to project the claims reserve for the Aviabel portfolio as at 26 November 2015 appear to be reasonable. It follows that I believe the reserves estimated as at 26 November 2015 to be reasonable, given the limited information available. All RQIM portfolios as at 31 December Adjustments made to derive Solvency II technical provisions RQIM has made a number of adjustments to its reserves as at 31 December 2015 to derive its Solvency II technical provisions. These adjustments are as follows: removed any margins for prudence allowance for Events Not in Data ("ENIDs") allowance for business that is yet to be incepted but that RQIM are legally obligated to underwrite as at 31 December 2015 allowance for expenses associated with the run off of claims allowance for reinsurance bad debt discounting the payments to allow for the time value of money allowance for a risk margin There is uncertainty about the appropriate level of adjustments to make in order to estimate the technical provisions on a Solvency II basis. RQIM could have made other equally valid adjustments which would lead to different results. I have discussed in paragraphs to below some of the key elements where RQIM could have taken alternative approaches Grant Thornton UK LLP. All rights reserved. 28

31 5.129 In order to make allowance for ENIDs, RQIM has taken a simplistic approach by applying a percentage to its reserves. In addition, it has benchmarked the result against an analysis undertaken by Firm B. The benchmarking analysis resulted in materially similar results. While RQIM could have adopted a more complex approach, in my view the approach taken is proportionate to the size of the organisation and I would not expect a more complicated approach to lead to a materially different result In order to allow for additional expenses required to run-off the claims, RQIM has runoff costs in line with the claims provisions. Certain costs, such as fixed costs are unlikely to run-off in line with the claims provisions. However, the approach taken is proportionate to the size of the organisation and I would not expect a more complicated approach to lead to a materially different result In order to calculate the reinsurers share of technical provisions, RQIM has used gross to net ratios. This is a simplified approach that is unlikely to lead to a true best estimate. However, given the level of reinsurance within RQIM, I would not expect a more complicated approach to lead to a materially different result. Overall conclusions Based on my experience and on current market practice, the methodologies and assumptions used to project the claims reserve for the Chevanstell portfolio, the Aker portfolio, the Tryg portfolio, the Principle portfolio and the Transferring Portfolio as at 31 December 2015 appear to be reasonable. In addition, I believe the booked reserves in respect of the L&L portfolio to be reasonable. Further to this, the methodologies and assumptions used to project the claims reserve for the Aviabel portfolio as at 26 November 2015 appear to be reasonable. It follows that I believe the actual reserves to be reasonable Further to this, based on my experience and on current market practice, the methodologies and assumptions used to project the technical provisions on a Solvency II basis for the Chevanstell portfolio, the Aker portfolio, the Tryg portfolio, the Principle portfolio, the L&L portfolio, the Aviabel portfolio and the Transferring Portfolio as at 31 December 2015 appear to be reasonable. It follows that I believe the actual technical provisions on a Solvency II basis to be reasonable. Reserve strength of Guardian's life assurance book Guardian has carried out a valuation of its life assurance book as at 1 January 2016 on a Solvency II Pillar 1 basis. Guardian uses a Standard Formula approach to value its liabilities under Solvency II Pillar I have been provided with the 2015 year-end valuation report and the Methodology and Assumptions of YE2015 Reporting documents prepared by Guardian s Chief Actuary. The documents describe the key methodologies and assumptions used in the Solvency II valuation and the valuation results Grant Thornton UK LLP. All rights reserved. 29

32 5.136 My life insurance colleagues have reviewed these documents, in order to satisfy me that it is reasonable for me to rely on the Chief Actuary's work for the life business. This included reviewing the reports mentioned in paragraph and a high level assessment of the appropriateness of the methodologies and the major assumptions used based on the information contained in those reports. My life insurance colleagues have not attempted to review in detail the calculations performed by Guardian or to verify the underlying experience data. Instead, my life insurance colleagues have reviewed the process by which best estimate liabilities are set, the key areas of uncertainty and the approach to determining the Solvency II Pillar 1 capital requirements. For the avoidance of doubt, my life insurance colleagues have not attempted to produce independent estimates of the liabilities or reviewed the appropriateness of the Solvency II Standard Formula calculations The life insurance colleagues on whom I have relied have substantial relevant experience of life insurance which has been gained over decades. Having reviewed their experience, I am satisfied that they have the necessary expertise to undertake a review of this nature and for me to rely on the results of this review. I assured myself of their output by discussing it with them Based on the experience of my life insurance colleagues, upon which I have relied, and on current market practice, the methodologies used to value assets and liabilities and the underlying valuation basis under Solvency II Pillar 1 as at 31 December 2015 appear to be reasonable. Consequently, I also consider the level of technical provisions calculated to be appropriate. Financial effect of the Transfer Guardian The economic effect of the proposed Transfer on Guardian's audited balance sheet as at 31 December 2015 is demonstrated in Table 1 below 1 : Table 1: Economic effect of Transfer on Guardian at 31 December 2015 ( m) Pre-Transfer Effect of Transfer Post- Transfer Assets: Cash (9.0) Investments 13,223.4 (0.7) 13,222.7 Reinsurance assets 1,332.8 (6.7) 1,326.1 Other assets Total assets 15,843.2 (16.4) 15,826.8 Liabilities: Insurance contracts 11,452.5 (6.7) 11,445.8 Investment contracts 2, ,437.8 Other liabilities (9.7) Total liabilities 14,665.1 (16.4) 14,648.7 Available capital 1, , The 'Pre-Transfer' balance sheet is post the LPT between Guardian and RQIM. 1 Reconciliation differences in this table are due to the effect of rounding as the underlying figures are calculated to many decimal places Grant Thornton UK LLP. All rights reserved. 30

33 5.141 The 'Other Liabilities' entry of 'Pre-Transfer' balance sheet at 31 December 2015 contains provisions of 9.7m. These provisions are there to allow for the assets held within the segregated account that will be transferred to RQIM following the Transfer The 'Reinsurance Assets' entry of the 'Pre-Transfer' balance sheet contains the amount created as a result of the LPT. It therefore completely offsets the amount contained in 'Insurance Contracts' for the Transferring Portfolio Following the Transfer, 16.4m of assets and liabilities will be removed from Guardian's balance sheet as at 31 December 2015, resulting in no change in capital The statutory accounts in Table 1 contain both Guardian's life assurance business and the Transferring Portfolio. As the Transferring Portfolio is trivial in comparison to Guardian's life insurance account, the Transfer would have an immaterial impact on Guardian's financial position and therefore on the policyholders remaining within Guardian Table 2 below shows a simplified Solvency II balance sheet for Guardian as at 31 December 2015: Table 2: Solvency II balance sheet for Guardian at 31 December 2015 ( m) Assets: Cash 882 Investments 13,137 Reinsurance assets 822 Other assets 314 Total assets 15,156 Liabilities: Insurance 11,189 Investment 1,568 Other liabilities 316 Total liabilities 13,073 Own funds 2,083 Available own funds 1, As can be seen from the table above, Guardian has a substantial quantum of assets above its liabilities. The With Profits Fund within Guardian is treated as a ring fenced fund. As a result the amount in excess of the SCR for the With Profits Fund is not available to meet other liabilities within Guardian. Therefore, 171m is deducted from the Own Funds to get to the Available Own Funds Grant Thornton UK LLP. All rights reserved. 31

34 RQIM The economic effect of the proposed Transfer on RQIM's audited balance sheet at 31 December 2015 is demonstrated in Table 3 below 2 : Table 3: Economic effect of Transfer on RQIM at 31 December 2015 ( m) Pre-Transfer Effect of Transfer Post- Transfer Assets: Cash Investments Reinsurance assets Segregated assets 9.7 (9.7) - Other assets Total assets Liabilities: Subordinated debt Insurance contracts Investment contracts - - Other liabilities Total liabilities Available capital On 30 June 2014, the LPT became effective and RQIM 100% reinsured the Transferring Portfolio. As a result, RQIM's pre-transfer balance sheet as at 31 December 2015 contains the Transferring Portfolio. Therefore, at a high level, the Transfer will not result in any movements in RQIM's balance sheet as at 31 December 2015 although, at a more detailed level, some of the assets and liabilities will move between different categories The transferred assets will consist of cash and investments in the proportions set out in the LPT It should be noted that pre-transfer 9.7m of assets within the balance sheet of RQIM as at 31 December 2015 can only be used to pay for claims in the Transferring Portfolio and not for any other purpose as they remain in the segregated account. Should the Transfer proceed, these funds would be released from the segregated account and be available to RQIM It should also be noted that, towards the end of 2015, RQIM issued 20m of subordinated debt. RQIM has invested 6.8m of this as Funds at Lloyd's ("FAL") in support of Syndicates 1991 and I understand from RQIM that it is only subject to investment risk through this investment rather than losses due to underwriting in those syndicates. This is because RQIH is legally contracted to address any underwriting losses. RQIM receives interest on the investment, in addition to the investment return. The monies invested in FAL are not available to meet losses in the remainder of RQIM. These monies have been invested for an initial period of one year with a three month notice period. 2 Reconciliation differences in this table are due to the effect of rounding as the underlying figures are calculated to many decimal places Grant Thornton UK LLP. All rights reserved. 32

35 5.152 I understand from RQIM that RQIM will utilise the remainder of the proceeds from the subordinated debt issuance ( 13.2m) in order to execute its business strategy, therefore funding further acquisitions Table 4 below shows a simplified Solvency II balance sheet for RQIM as at 31 December 2015: Table 4: Solvency II balance sheet for RQIM at 31 December 2015 ( m) Assets: Financial assets 54.5 Reinsurer's share of technical provisions 9.0 Intra-group loans 30.9 Insurance activities and other debtors 1.5 Other assets 0 Total assets 95.9 Liabilities: Gross technical provisions best estimate 36.4 Risk margin 3.4 Creditors 7.5 Total liabilities 47.2 Own funds 48.6 Available own funds As can be seen from the table above, RQIM has a substantial quantum of assets above its liabilities. However, both the Transferring Portfolio and the funds invested in FAL at Lloyd's are being treated as ring fenced funds within RQIM's Solvency II calculations. As a result of this, own funds in excess of the SCR for each of these ring fenced funds are not available to meet the SCR of the remaining portfolio. Therefore, it should be noted that 3.8 million of own funds are not available to meet RQIM's SCR. 0.2m of this amount arises from the Transferring Portfolio and the remaining 3.6m of this amount arises from the funds invested in FAL at Lloyd's. Solvency Both Guardian and RQIM have provided me with information to enable me to calculate solvency ratios on a Solvency II basis post Transfer For the purposes of this report, I have defined a company as sufficiently capitalised if it has a coverage ratio (relative to the SCR) which is greater than 100%. I describe a company as well capitalised if it has a coverage ratio in excess of 150%, very well capitalised if it has a coverage ratio in excess of 200% and extremely well capitalised if it has a coverage ratio in excess of 250% Grant Thornton UK LLP. All rights reserved. 33

36 Solvency II Solvency of RQIM I have been provided with calculations of the Solvency II Standard Formula for RQIM on the following bases as at 31 December 2015: assuming that the LPT was in place and that the Transferring Portfolio was treated as a ring fenced fund assuming that the Transfer had proceeded RQIM calculates its Solvency II capital requirement using the Standard Formula. These calculations are performed using proprietary software, sourced from an external party. I have not performed a full review of this proprietary tool and I have therefore assumed during my review that the software's calculations are accurate and that the tool has been used correctly I understand from RQIM it has considered the appropriateness of the use of the standard formula. It concluded that the SCR would be reduced as a result of not using the standard formula. For example, the standard formula does not recognise that no deterioration is possible on the Australian asbestos liabilities because they are reserved to limits I understand from RQIM that it assesses the appropriateness of the results of the standard formula through iterative processes of peer review and validation. The peer review is undertaken by the Chief Actuary and Head of Capital. The validation includes stress and sensitivity tests. These processes enable RQIM to verify whether the capital requirement arising from the standard formula is reflective of its business In my opinion, there is a danger that the costs of building an internal model would be disproportionate to the size of RQIM In addition, I note that, should the Transfer not proceed, the transferring policyholders would still be within an organisation that is using the standard formula to calculate its Solvency II regulatory capital requirements On balance, for the reasons stated above, it is my opinion that the use of the standard formula by RQIM is reasonable. Comments on assumptions I have however reviewed the key assumptions used in RQIM's Solvency II calculations. My opinion is that the assumptions used are reasonable although I have commented on a few of the assumptions below All claims reserves from the non-marine excess of loss reinsurance account have been allocated to the Northern Europe territory within the Standard Formula due to this being the source of the majority of this business. As James Hardie is an Australian loss, in theory the claims reserves for this policy should be allocated to the Oceania territory. It is possible that the reserves for other non-marine excess of loss reinsurance policies should be allocated to territories other than Northern Europe, however this information is not readily available to RQIM. I do not believe that allocating all claims reserves from the non-marine excess of loss reinsurance account to the Northern Europe territory would have a material effect on the resulting SCR Grant Thornton UK LLP. All rights reserved. 34

37 5.166 When calculating the Solvency II Technical Provisions, an input into the SCR and the Solvency II balance sheet, the same run-off expense ratio and the same Events Not In Data ("ENID") uplift ratio have been used for the Transferring Portfolio as is used for RQIM's current business. This has been recognised as a limitation to RQIM's Solvency II modelling. These assumptions have been sensitivity tested and I have been provided with the results of these tests. Based on these results, I do not believe these assumptions materially affect the calculation of the SCR In theory, counterparty risk should be calculated individually for each reinsurance corporate group. However RQIM has a large number of reinsurance counterparties and these reinsurers have been grouped into model points by credit rating due to the capacity of the proprietary tool. I do not believe that this approach has a material impact on the SCR calculation Similarly, the risk mitigating effect should in theory be calculated individually for each reinsurance counterparty in turn. However the information to do so is not available and therefore RQIM has used a simplification which is set out in the Standard Formula's Technical Specification published by the European Insurance and Occupational Pension Authority ("EIOPA"). I do not believe that this simplification has a material impact on the calculation of the RQIM's SCR. Coverage ratio of RQIM pre and post Transfer It is my opinion that the Transferring Portfolio should be treated as a ring fenced fund prior to the Transfer. This is because, prior to the Transfer, the assets of the Transferring Portfolio cannot be used to pay for any losses in the remainder of the RQIM portfolio. Following the Transfer, these assets will be available to RQIM to use as is appropriate In addition, a portion of the proceeds from the subordinated debt issuance has been invested in FAL. The FAL provided to support Syndicates 1991 and 3330 has been provided by a combination of RQIM, RQIH and a third party provider. FAL is only required to be called upon in extreme circumstances. I understand from RQIM that the investment by RQIM in the FAL supporting Syndicates 1991 and 3330 would only be called upon if approximately 40% of the total FAL supporting those Syndicates had been called This portion is not available to pay for losses in the remainder of the RQIM portfolio. Therefore the funds invested in FAL at Lloyd's should be treated as a ring fenced fund As a result, in order to calculate the coverage ratio of RQIM prior to the Transfer, the SCR and Own Funds need to be calculated separately for the following portions of RQIM's business: the Transferring Portfolio the funds invested in FAL the remaining portion of RQIM's portfolio Both the Transferring Portfolio and the funds invested in FAL have been treated as ring fenced funds. Any excess capital above the SCR for a ring fenced fund cannot be used to meet the SCR or other liabilities for any other ring fenced fund or the remainder of the insurer's business Grant Thornton UK LLP. All rights reserved. 35

38 5.174 This means that, as a result of the Transferring Portfolio, RQIM has capital of 0.2m that is not available to meet the SCR for either the funds invested in FAL or the remainder of the RQIM portfolio. The effect of this is shown in the table below In addition, as a result of the amount invested in FAL, RQIM has additional capital of 3.6m that is not available to meet the SCR for either the Transferring Portfolio or the remainder of the RQIM portfolio. For the purposes of simplicity, I have not explicitly shown the ring fenced fund for the amount invested in FAL within the Report. It is however, included within RQIM's SCR, own funds and coverage ratio in table 5 and Table 5 below shows RQIM's coverage of its SCR as at 31 December 2015, where each of the columns is represented as follows: the coverage ratio of RQIM, excluding the Transferring Portfolio, prior to the Transfer the coverage ratio of the Transferring Portfolio, treated as a ring fenced fund within RQIM prior to the Transfer the coverage ratio of RQIM, including the Transferring Portfolio, prior to the Transfer i.e. the combination of 1 and 2 the coverage ratio of RQIM post the Transfer Table 5 1 ( m) 2 ( m) 3 ( m) 4 ( m) Capital available to meet SCR SCR Coverage ratio 290.9% 100.0% 260.6% 285.8% It can be seen from the table above that the coverage ratio of RQIM will increase as a result of the Transfer, although RQIM is an extremely well capitalised insurer both prior to and post the Transfer The coverage ratio improves for RQIM as a result of the Transfer for the reason discussed in paragraphs and It can also be seen from the table above that the coverage ratio of the ring fenced fund within RQIM is 100%. This is because, as discussed in paragraph 5.173, the excess capital in the ring fenced fund of 0.2m is not available to meet the SCR for the remainder of the portfolio. However, there is a clause in the LPT which allows for further funds to be obtained from RQIM if necessary. Therefore the coverage ratio for the Transferring Portfolio is effectively higher than is shown in the table above prior to the Transfer The subordinated debt has been allowed for as Tier 2 qualifying debt under Solvency II. This is because in the event of the wind-up of RQIM, the subordinated debt would only be payable after all policyholder debts and other creditors had been paid. Given the balance of assets held by RQIM, I believe that the subordinated debt, with the exception of the funds invested in FAL, is available to meet the SCR for RQIM I note that, should the liabilities relating to the Transferring Portfolio ultimately exceed the 9.7m of assets held within the segregated account as at 31 December 2015, RQIM is sufficiently capitalised to withstand the reserve deterioration in any reasonably foreseeable scenario without endangering its solvency and the security of either its existing policyholders or the transferring policyholders Grant Thornton UK LLP. All rights reserved. 36

39 5.182 Should the Transfer become effective, the transferring policyholders will be exposed to potential deteriorations in the remainder of RQIM's liabilities. However, the fact that RQIM is extremely well capitalised gives me comfort that RQIM is sufficiently capitalised to withstand the reserve deterioration in any reasonably foreseeable scenario without endangering its solvency and the security of either its existing policyholders or the transferring policyholders It should be noted that, in the figures provided in table 5 above, RQIM has not treated Aviabel as a ring fenced fund. Given that, prior to the portfolio transfer of this business, the funds transferring in respect of Aviabel are not available to use for the remainder of the RQIM liabilities, it is my opinion that Aviabel should be treated as a ring fenced fund prior to the transfer of the business. I have conducted some analysis to understand the impact of treating Aviabel as a ring fenced fund, and the SCR only increases by approximately 0.5m with no impact on available own funds. As a result, although the coverage ratio reduces, RQIM still remains an extremely well capitalised insurer. In addition to this, should the transfer of Aviabel proceed as expected, the coverage ratio will improve to that shown in column 3 of table 5 above The coverage ratios above do not include CI or Insurer A as they were not part of RQIM as at 31 December I will discuss the capital impact of CI and Insurer A in my Supplemental Report. However, given the materiality of these transactions, I would not expect either of these portfolios to have a significant impact on the coverage ratio of RQIM Under Solvency II, the SCR is the amount of capital that is required for the insurer to have a 99.5% chance of meeting its obligations over the next year. By definition this does not take account of the capital required to meet obligations in subsequent years. For some insurers the method of calculating its SCR could understate the capital required to meet policyholder obligations over the course of the run-off of existing business I cannot comment on whether RQIM would require more capital if it was required to consider meeting obligations over a longer period. However, I have been informed that RQIM plans to maintain a coverage ratio of 200% of its SCR and as shown in table 5 above has a coverage ratio of above 200% as at 31 December I also note that Guardian's calculation of its SCR is subject to exactly the same limitation. Conclusion Taking all of the above into account, my opinion is that RQIM will remain an extremely well capitalised insurer following the Transfer. Own Risk and Solvency Assessment In order to meet the Solvency II regulations, each regulated entity is required to undertake an Own Risk and Solvency Assessment ("ORSA"). I been provided with RQIM's most recent ORSA which was approved by its Board in December This represents a forward looking assessment of its risk profile and capital requirements, reflecting the run-off of existing business and the acquisition of new portfolios The business strategy of RQIM is discussed in the ORSA. This strategy is to acquire books of non-life insurance that are in run-off RQIM's ORSA projects that it expects to remain an extremely well capitalised insurer throughout the next three years Grant Thornton UK LLP. All rights reserved. 37

40 5.192 RQIM has conducted various stress and scenario tests within its ORSA to test the robustness of its capital base. The stress and scenario testing covers a wide range of risks that RQIM is exposed to. The stress and scenario testing that RQIM has undertaken demonstrates that only in extreme scenarios does it fail to have sufficient capital to meet its SCR. I consider the range of stresses and scenarios that RQIM has considered to be reasonable. Solvency of Guardian The table below sets out the capital position of Guardian on a Solvency II basis as at 31 December 2015: Table 6 1 ( m) Capital available to meet SCR 1,912 SCR 1,304 Coverage ratio 146.6% The table above shows that Guardian is currently a sufficiently capitalised insurer. Due to the size of the Transferring Portfolio relative to Guardian's life assurance business, I do not believe that the Transfer would have a material impact on Guardian's Solvency II capital position. Please note that given the immateriality of the Transferring Portfolio to Guardian, I have not reviewed the calculations and assumptions used to determine Guardian's Solvency II MCR and SCR. Own Risk and Solvency Assessment I have been provided with Guardian's most recent ORSA which was approved by its Board in November 2015 based on results as at 31 December This represents a forward looking assessment of its risk profile and capital requirements, reflecting the run-off of existing business. My life insurance colleagues have reviewed this document I am satisfied that my life insurance colleagues have the necessary expertise to undertake a review of this nature and for me to rely on the results of this review. Guardian's ORSA projects that it expects to remain a sufficiently capitalised insurer throughout the next three years Guardian has conducted various stress and scenario tests within its ORSA to test the robustness of its capital base. The stress and scenario testing covers a wide range of risks that Guardian is exposed to. The stress and scenario testing that Guardian has undertaken demonstrates that only in extreme scenarios does it fail to have sufficient capital to meet its SCR. Based on the experience of my life insurance colleagues, upon which I have relied, I consider the range of stresses and scenarios that Guardian has considered to be reasonable Grant Thornton UK LLP. All rights reserved. 38

41 Security of the Transferring Portfolio I note that RQIM's coverage ratio on a Solvency II basis is at least as high as Guardian's coverage ratio The Transferring Portfolio currently has the protection of RQIM through the LPT and, should RQIM ultimately fail, the protection of Guardian. Should the Transfer proceed, the Transferring Portfolio will no longer have the protection of Guardian. Therefore, should the Transfer proceed, the Transferring Portfolio would lose one layer of protection. In addition, the assets used to pay the liabilities for the Transferring Portfolio are currently in a segregated account and cannot be used for any other purpose. This will cease to be the case following the Transfer. However, in my opinion, even without these additional protections, as discussed in the section above, the Transferring Portfolio would be transferred to an extremely well capitalised company Therefore, in my opinion the security for the transferring policyholders would not be materially adversely affected by the Transfer. ILU guarantee I note that, according to a report produced by an external firm of actuaries ("Firm A") on the reserves for the Transferring Portfolio as at 31 December 2013, the quantum of exposure remaining where policies were written through the ILU is minimal As mentioned above in paragraph 2.12, insurers were required to place a guarantee with the ILU for business written through the ILU. This was in order to provide additional protection to these policyholders I understand from RQIM that a letter of credit will be provided by Randall & Quilter II Holdings Limited prior to the Transfer becoming effective. The process of providing a letter of credit is analogous to the process that RQIM followed as part of the Chevanstell transfer. I will confirm in my Supplemental Report whether such a letter of credit has been put in place. However, as discussed in paragraph 5.202, the quantum of exposure to these policies is minimal and, as such, the impact on RQIH of such a letter of credit will be minimal. Expertise As discussed in paragraph 2.8, the Transferring Portfolio is the only non-life insurance account that resides within Guardian. Guardian's expertise lies in life insurance which presents a different set of risks and challenges to that of non-life insurance The Transferring Portfolio had been managed by four or five individuals on a part time basis (the equivalent of one full time employee) prior to the LPT being signed. Guardian is therefore subject to key man risk if any of those individuals became unavailable. I understand from Guardian that, as Guardian is primarily a life insurer, its systems are not set up to deal with managing a non-life portfolio By contrast, RQIH is the ultimate owner of a group of companies that specialise in nonlife insurance and operate worldwide RQIM specialises in non-life insurance and already manages a similar account of non-life run-off insurance. It follows that RQIM has substantially greater expertise in this type of account. In addition to RQIM, there are a number of other non-life insurance entities within RQIH that are managed by RQIS. RQIS can therefore gain additional expertise from other entities within the group Grant Thornton UK LLP. All rights reserved. 39

42 5.209 One example of this difference in expertise is Guardian is currently using an accounting platform for the Transferring Portfolio that is no longer supported. However, it cannot justify upgrading this platform given the size of this business in the overall context of Guardian. By contrast, RQIM accounting platform is entirely appropriate for a non-life insurer It is therefore my opinion that the transferring policyholders will benefit from the expertise within RQIM if the Transfer becomes effective. Preparations for Solvency II Both Guardian and RQIM have invested substantial time and resources in their preparations for Solvency II, which is now in effect Based on the discussions I have had with both Guardian and RQIM, I am satisfied that both Guardian and RQIM were suitably prepared for Solvency II at 31 December Guardian focussed its efforts in preparations for Solvency II on its life business. Should the Transfer not proceed, Guardian may need to undertake further work in preparation for the Transferring Portfolio. However, given the size of the Transferring Portfolio in comparison to Guardian's life business, this additional work is not anticipated to be an issue It is therefore my opinion that both the transferring policyholders and the policyholders remaining within Guardian will be in no worse a position regarding Solvency II if the Transfer proceeds rather than if it does not proceed For the policyholders of RQIM, it will make no difference whether the Transfer proceeds or not in terms of Solvency II preparedness. Operational issues Location of decision making in RQIM RQIM has no staff, either in the UK or in Malta. All services are outsourced. I understand from RQIM that these outsourcing agreements have been approved by the MFSA RQIM holds quarterly Board meetings in Malta. Most Board members in attendance attend all of these meetings in person and all Board members attend at least one of these meetings in person, and dial into the remainder of the meetings RQIM also has an Underwriting & Claims Committee (UWCC) and an Investment Committee both of which meet quarterly in Malta. In addition, further meetings of the UWCC are held as and when required. These are either held in Malta, or are held via a teleconference which originates and is chaired in Malta. All transactions are referred to the UWCC for approval. A report of pipeline items is also provided to the UWCC at the quarterly Board meetings along with progress reports on the book of business as a whole I understand from RQIM that the MFSA is comfortable with RQIM s structure and has not raised any concerns about the location of decision making within RQIM Grant Thornton UK LLP. All rights reserved. 40

43 5.220 Given that many key decisions are made in Malta, notably at the board, UWCC and Investment Committee meetings, and that the MFSA does not appear to have any concerns with either the structure or the decision making processes of RQIM, I have concluded that the fact that some decisions may be made in London will have no material impact on the transferring policyholders. In my view, it is far more important to them that the key decision makers have substantial experience and expertise in the types of non-life liabilities that are transferring. Claims handling I have discussed the claims handling procedures with Guardian and RQIM If the Transfer proceeds, the claims management will continue to be provided by RQIS, as has been the case since the LPT was signed. RQIS has more than 200 staff with expertise in handling general insurance claims across all classes of business. I understand from RQIM that RQIS will continue to procure the services of the ex-ceo of the AIC business for a period until sufficient transfer of knowledge has occurred RQIM's business model is to settle valid claims promptly. My view is that, as a result of this, valid claims will not be settled any slower than is currently the case. Consequently, the transferring policyholders would be in a no worse position than at present in relation to speed of settlement of claims Should the Transfer not proceed, Guardian will have the option to terminate the LPT and attempt to find another purchaser. Based on my discussions with Guardian, I do not expect it to terminate the LPT However, if Guardian chooses to take this option, this will result in the claims handling reverting to Guardian. Prior to the LPT, this was carried out on a part time basis. Should the Transfer become effective this will allow existing employees to focus on the life insurance business If Guardian chooses not to take this option, RQIS will continue to provide the claims management until all of the claims have settled. It is therefore my opinion that the transferring policyholders will be in a better position in terms of claims handling if the Transfer proceeds. Furthermore, it is my opinion that the policyholders remaining in Guardian will be in no worse a position in terms of claims handling if the Transfer proceeds I have considered the impact on the claims handling department at RQIS of this Transfer proceeding in addition to the L&L transfer. RQIS services a number of entities within RQIH. Therefore, I would not anticipate that the increase in workload would be material to RQIS. In addition, discussions with RQIM have confirmed there is not expected to be a significantly detrimental effect on the workload for employees of RQIS as a result of the Transfer and the L&L transfer It is therefore my opinion that the existing policyholders of RQIM will not be materially adversely affected in terms of claims handling as a result of the Transfer and the L&L transfer proceeding Grant Thornton UK LLP. All rights reserved. 41

44 5.231 In addition, it is my opinion that, should the Transfer proceed, the reasonable expectations of the Affected Policyholders in relation to claims handling will continue to be met. Policy servicing After the Transfer, policy servicing will continue to be provided by RQIS. There are not likely to be a significant number of policy servicing queries as the Transferring Portfolio has been in run-off for some time. Given this, my opinion is that neither the transferring policyholders nor the existing policyholders of RQIM will be materially adversely affected in terms of the level of service experienced as a result of the Transfer In addition, it is my opinion that the reasonable expectations of the transferring policyholders and the existing policyholders of RQIM in relation to policy servicing will continue to be met if the Transfer takes place. ELTO Both Guardian and RQIM are members of the Employers' Liability Tracing Office ("ELTO") and details relating to the Employers' Liability policies within the Transferring Portfolio will remain accessible to ELTO following the Transfer. It is therefore my opinion that the Transfer would not be to the detriment of the transferring policyholders' ability to trace Employers' Liability policies. Compensation and complaints I have seen a confirmation from the FSCS stating that the protection of the transferring policyholders from the FSCS will not be affected as a result of the Transfer. That is, if policyholders are protected by the FSCS prior to the Transfer, they will continue to be protected by the FSCS following the Transfer. Similarly, policyholders that are not protected by the FSCS prior to the Transfer will not be protected by the FSCS following the Transfer RQIM has signed up to the 'voluntary jurisdiction' of FOS, meaning that it agrees to formally deal with complaints through FOS and comply with decisions of FOS. Therefore, the transferring policyholders will have the same recourse to complaints as they do at present. I have seen the letter dated 28 November 2013 confirming that RQIM had been accepted into the voluntary jurisdiction of FOS It is therefore my opinion that the reasonable expectations of the transferring policyholders will be met in relation to compensation and complaints if the Transfer takes place. Business strategy of RQIM As discussed in paragraph 2.18, RQIM's business strategy is to acquire books of non-life insurance that are in run-off. This includes acquiring further books of business following the Transfer. RQIM believes that its financial strength is paramount to success in this strategy and it has informed me that it aims to maintain a coverage ratio of 200% of its SCR I agree with this statement and, in my view, it is arguably even more important for an insurer with this strategy to maintain substantial financial strength than for an insurer writing new business. This is because it needs to maintain excess funds in order to demonstrate that it will be able to offer sufficient security to future acquisitions. Because of this, it is my opinion that the likelihood of the transferring policyholders being materially adversely impacted by the strategy of RQIM is remote Grant Thornton UK LLP. All rights reserved. 42

45 Investment strategy Guardian The investment strategy of Guardian differs between investments relating to the Transferring Portfolio and its life insurance business. The investment strategy for the assets relating to the Transferring Portfolio is to invest in cash or cash equivalents and government bonds Given the nature of the life insurance liabilities, assets are held that are longer term than those held in respect of the Transferring Portfolio. These assets are subject to greater uncertainty. However, should the investment strategy of the life insurance business cause Guardian to get into financial difficulties, this would also be to the detriment of the transferring policyholders had the Transfer not occurred. RQIM I understand from RQIM that RQIM's investment objectives are to maximise total return through investment income and capital appreciation consistent with moderate risk of principal, while providing adequate liquidity and complying with internal and regulatory guidelines RQIM's strategy specifically excludes very risky investments such as derivatives and it has specific rules about the quality of assets it invests in Given that RQIM has long term liabilities (arising from asbestos, pollution and health hazard claims) and has excess assets above liabilities, it is reasonable for it to invest in longer term assets, that are subject to greater uncertainty than cash or cash equivalents The table below sets out the split of investments as at the 31 December 2015: Table 7 % Cash 37 Bonds 21 Equities 5 Intra group loans The intra-group loans are to RQIH. The loans all have the same terms: unsecured, payable within 12 months, and interest at a margin above LIBOR. These intra-group loans represent a large proportion of RQIM s total investments but, even if RQIH defaults on them, RQIM would have sufficient capital to meet its regulatory capital requirements under the Solvency II regime RQIM has provided me with an explanation as to why it believes it has invested its assets in line with the prudent person principle article within the Solvency II Directive. I understand from RQIM that the RQIM Investment Committee reviews all investments on a regular basis at quarterly meetings and adheres to the investment guidelines for the company. These guidelines aim 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 through a high quality and diversified portfolio. The assets, in particular those covering the MCR and SCR, have been invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole Grant Thornton UK LLP. All rights reserved. 43

46 5.248 In addition, the business model of RQIM gives me additional comfort that RQIM will continue to invest its assets in line with the prudent person principle as it will need to demonstrate to potential targets that it has appropriately prudent investment policies in place. Indeed, in my view, the need to adhere to this principle is arguably even more important for an insurer seeking to attract run-off portfolios than for an insurer writing new business After consideration of the above, I am satisfied that RQIM has appropriate controls in place to take an appropriate balance between risk and return and has therefore invested its assets in line with the prudent person principle article within the Solvency II Directive. Stress Testing I have conducted stress testing on the impact on the coverage of RQIM's SCR following the Transfer, should various percentages of the intra-group loans be written off. I have considered percentages of 25%, 50%, 75% and 100% write offs. This analysis was undertaken assuming that the Principle and L&L transfers had occurred and that the subordinated debt had been issued as at 30 June It was also undertaken on the basis that the Transfer had become effective The amount invested in FAL has been treated as ring fenced fund, and therefore any excess capital above the SCR for this fund cannot be used as capital to meet the SCR for the remainder of RQIM. This has been reflected in the analysis below The table below shows the results of this stress testing. Table 8 25% write off ( m) 50% write off ( m) 75% write off ( m) 100% write off ( m) Capital available to meet SCR SCR Coverage ratio % 227.1% 179.8% 119.6% The table below shows the results of this stress testing on the coverage ratio of assets to liabilities. Table 9 25% write off ( m) 50% write off ( m) 75% write off ( m) 100% write off ( m) Assets Liabilities Ratio of assets to liabilities 187.5% 171.0% 154.6% 138.1% The tables above demonstrate that even following a 100% write off of the loans, RQIM has sufficient Own Funds to meet its SCR. Conclusion I consider the possibility of even a 50% write off to be highly unlikely and the possibility of a 100% write-off to be extremely remote. My reasons for this are discussed in the following two paragraphs. 3 As can be seen from the table above, the SCR decreases as the write off increases. As the write off increases, the value of the intercompany loans decreases. This means they have a less significant impact on the SCR of RQIM Grant Thornton UK LLP. All rights reserved. 44

47 5.256 I have been informed that it is a core strategy for RQIH to upstream excess capital from its subsidiaries to make efficient use of capital RQIH has an issuer credit rating of bbb- from A.M. Best. In addition, RQIH is a substantial business, with group assets of 537m and group liabilities of 446m as at 31 December It follows that the loans from RQIM equate to less than 10% of the group's consolidated liabilities. Indeed the totality of intra-group loans to RQIH from all group companies equate to less than 20% of the group's consolidated liabilities. What is more, the repayment of the loans will not weaken the consolidated balance sheet because RQIH will simply be transferring money between different subsidiaries I have received a statement from RQIH confirming that it fully intends to honour the intra-group loans. Should the loans be renewed following repayment, I would expect the terms to be the same as they currently are and I am informed that RQIH's commitment to honouring the loans will remain unchanged. Consequently, in my view, the likelihood of the transferring policyholders being materially adversely affected by the investment policy of RQIM is remote. Portfolio diversification At present the Transferring Portfolio is a small non-life portfolio within a large life insurer. As a result of this, some of the risks which affect the Transferring Portfolio do not affect the remainder of the business within Guardian and vice versa Should the Transfer proceed, the risks which affect the Transferring Portfolio will be more similar in nature to those risks which affect the remainder of RQIM's business as it is all non-life business. However, as described throughout my Report, there is a wide variety in the classes of business in the various portfolios within RQIM. Therefore there remain some risks which affect the Transferring Portfolio that do not affect the remainder of the business within RQIM and vice versa In addition, I note that the calculation of the SCR under Solvency II explicitly takes account of the level of diversification and that, as a result, RQIM is required to hold more capital than if its portfolio was more diversified. This protection is magnified by RQIM's intention to maintain capital resources of at least 200% of its SCR As a result, my opinion is that, whilst the Transferring Portfolio will lose an element of diversification, it will not be materially adversely affected by this loss of diversification. Should the Transfer not proceed I have considered the likely effects on the Affected Policyholders should the Transfer not go ahead For the Affected Policyholders, there are two possible options that I have considered. Firstly, the LPT continues and secondly the LPT is cancelled. It should be noted that RQIM does not have the option to cancel the LPT. Guardian does have this option but based on my discussions with Guardian, I do not expect it to terminate the LPT If the LPT continues for a period of time, then the Affected Policyholders will be in the same position as they are currently in. None of the Affected Policyholders are therefore affected in this situation Grant Thornton UK LLP. All rights reserved. 45

48 5.266 If the LPT is cancelled, I understand from Guardian that Guardian will revert to the situation prior to the LPT. If this occurs, my opinion is that the transferring policyholders will be in a marginally worse position than at present because they will be with an insurer that is concentrating primarily on life assurance business If the LPT is cancelled, a disproportionate amount of time will be diverted by Guardian to the Transferring Portfolio in order both to manage it and to find an alternative buyer. This would have an adverse impact on the policyholders remaining within Guardian In this case, RQIM could revert to the situation prior to the LPT. It follows that the existing policyholders of RQIM would be unaffected. Policyholder notifications I have discussed the suggested approach to policyholder notification with Guardian's legal adviser There is an intention to notify those policyholders within RQIM with open claims. In addition, there is an intention to notify those policyholders from the FNFT portfolio who do not currently have open claims There is currently no intention to contact the remainder of RQIM's existing policyholders as the parties believe that RQIM's existing policyholders' rights will not change as a result of the Transfer and in any event it would not be possible to identify all of its existing policyholders because of the limited records available to RQIM in respect of its existing business which is in a mature state of run-off There is also no intention to contact the policyholders remaining within Guardian as the parties believe that the rights of the policyholders remaining within Guardian will not change as a result of the Transfer and also this would be disproportionate given the size of the Transferring Portfolio compared to that of Guardian's life insurance business There are certain difficulties in identifying all the transferring policyholders. Given this business ceased to be written in 1995 and at that time was written by AIC, records are poor. The parties are therefore intending to contact a portion of transferring policyholders. This portion will include: policyholders with open claims brokers that can be identified to have placed business within the Transferring Portfolio Although records are poor for this business, in my experience, this is not unusual for a book of business of this type and this age. In addition, advertisements will be placed in national and European newspapers Given the size and implications of the Transfer, I believe that the proposed approach to policyholder and claimant notification is proportionate and reasonable Grant Thornton UK LLP. All rights reserved. 46

49 6 Findings Effect of Transfer on transferring policyholders 6.1 Considering the possible outcomes for the transferring policyholders, my opinion is that the probability that the transferring policyholders will be materially adversely affected by the Transfer is remote. My reasons for reaching this conclusion are discussed in the following paragraphs It is my opinion that the level of service provided to the transferring policyholders will not be materially diminished as a result of the Transfer. My reasons for this are discussed in paragraphs to It is my opinion that the transferring policyholders are transferring to a company with a significantly greater level of relevant expertise relating to the Transferring Portfolio. My reasons for this are discussed in paragraphs to It is my opinion that the overall level of security for the transferring policyholders will not be materially diminished as a result of the Transfer. My reasons for this are discussed in paragraphs to and paragraphs to It should be noted that prior to the Transfer the Solvency II coverage ratio for RQIM is deflated as the Transferring Portfolio is considered as a ring fenced fund. As discussed in paragraph 5.200, the transferring policyholders currently have the protection of RQIM through the LPT, and should RQIM ultimately fail, the protection of Guardian. Therefore, should the Transfer proceed, the Transferring Portfolio would lose one layer of protection. In addition, the assets used to pay the liabilities for the Transferring Portfolio are currently in a segregated account and cannot be used for any other purpose. This will cease to be the case following the Transfer. However, given that in all reasonably foreseeable scenarios, RQIM is at least a very well capitalised insurer, my view is that the loss of these protections does not constitute a material reduction in the level of security for the transferring policyholders. Because of the LPT, which means that the liabilities are already 100% reinsured to RQIM, it is only in the unlikely circumstances that one of the parties to the Transfer becomes insolvent or Guardian terminates the LPT that the occurrence of the Transfer makes a difference to the benefits to be received by these policyholders. I have discussed the situation where either party becomes insolvent in paragraphs 6.8 to 6.19 below. I have discussed the situation where Guardian terminates the LPT for one of the reasons set out in paragraph 4.10 other than the insolvency of RQIM, in paragraph 6.20 below Grant Thornton UK LLP. All rights reserved. 47

50 If Guardian becomes insolvent 6.8 Given that Guardian is an insurance company authorised by the PRA and regulated by the FCA and PRA, the probability that it will become insolvent is remote. This is because it is subject to the Solvency II regime which requires it to hold sufficient capital to have a 99.5% chance of surviving for a year. As discussed in paragraphs and above, Guardian has a margin of excess assets over all liabilities and capital requirements assessed against the SCR. Nonetheless, there are circumstances, however remote, where Guardian s capital resources could become inadequate. 6.9 If it is Guardian that becomes insolvent, then it is an advantage to the transferring policyholders for the Transfer to have taken place as opposed to if the Transfer had not taken place. My reasons for this are discussed in paragraphs 6.10 and 6.11 below. If the Transfer has not occurred 6.10 If Guardian were to become insolvent and the Transfer had not taken place, RQIM would continue to make claim payments under the insolvency clause of the LPT. In addition, policyholders who currently have access to the FSCS would continue to have such access if required. There would, however, be increased uncertainty in this situation. This is because the transferring policyholders would rank alongside the policyholders remaining within Guardian and may have to wait longer to receive their claim payments. If the Transfer has occurred 6.11 Considering the position if Guardian were to become insolvent and the Transfer had taken place, the transferred policyholders would not be affected as they would have already transferred. Accordingly, their position would have been improved by the Transfer. If RQIM becomes insolvent 6.12 RQIM, is an insurance company authorised by the MFSA and therefore the probability that RQIM will become insolvent is remote. This is because it is subject to the Solvency II regime which requires it to hold sufficient capital to have a 99.5% chance of surviving for a year. As set out in paragraphs to above, RQIM has a margin of excess assets over all liabilities and capital requirements assessed against the SCR. In addition, RQIM has access to funds from RQIH if required. Nonetheless, there are circumstances, however remote, where RQIM s capital resources could become inadequate If it is RQIM that becomes insolvent, my opinion, as discussed in paragraphs 6.14 to 6.19 below, is that, the transferring policyholders will not be materially adversely affected. If the Transfer has not occurred 6.14 If RQIM were to become insolvent and the Transfer has not taken place, Guardian has the option to terminate the LPT in line with clause 15.4(a) of the LPT. However, regardless of whether or not it chooses to invoke this option, the liabilities of the transferring policyholders will ultimately rest with Guardian. The transferring policyholders can therefore rely on Guardian to meet their insurance claims In this situation, Guardian's liabilities may increase if RQIM is unable to meet all of its liabilities or if the LPT is terminated. However, this increase in liabilities would be immaterial in the context of Guardian's overall liabilities Grant Thornton UK LLP. All rights reserved. 48

51 6.16 If the LPT is terminated, the remainder of the balance (less certain amounts discussed in the LPT) would be paid to Guardian. This would leave Guardian with more assets than at present in monetary terms. However, this increase in assets would be immaterial in the context of Guardian's total assets. If the Transfer has occurred 6.17 If RQIM were to become insolvent and the Transfer had gone ahead, then the transferred policyholders would be in the same situation as the existing RQIM policyholders, ranking alongside them. Therefore, the policyholders could have their benefits reduced compared to if RQIM had not become insolvent. However, as discussed in paragraph 5.235, I expect the policyholders to continue to be protected by the FSCS. Under the FSCS regime, policyholders who are eligible to receive recoveries from the FSCS prior to the Transfer will remain eligible following the Transfer, while those who are ineligible prior to the Transfer remain ineligible once it has occurred. However, the time taken to achieve a final outcome for the eligible transferring policyholders is likely to be longer than if RQIM had not become insolvent. This is because it would take longer to obtain payment of eligible claims from the FSCS. In consequence, the eligible transferring policyholders will suffer greater uncertainty If RQIM were to become insolvent, policyholders who are not eligible to receive recoveries from the FSCS would rank ahead of where they would be prior to the Transfer, as they would now be direct policyholders. However, they would no longer be able to rely on Guardian if RQIM was unable to meet their claims. Given that the transferring policyholders would be transferring to a company with greater expertise in non-life insurance and the fact that the likelihood of RQIM becoming insolvent is remote, I do not consider this scenario to be a material risk to the transferring policyholders. If Guardian terminates the LPT 6.20 I now consider the situation where the Transfer has not occurred and Guardian terminates the LPT for one of the reasons set out in paragraph 4.10, other than the solvency of RQIM. This situation would be analogous to the situation where Guardian terminated the LPT as a result of the insolvency of RQIM as described in paragraphs 6.14 to Effect of Transfer on existing RQIM policyholders 6.21 It is my opinion that the likelihood that the existing RQIM policyholders will be materially adversely affected by the Transfer is remote. This is discussed in paragraphs 6.22 to 6.25 below The coverage ratio above the SCR is that of an extremely well capitalised company both before and after the Transfer. As a result, the existing policyholders of RQIM will continue to be subject to a high level of security. If Guardian becomes insolvent 6.23 A failure of Guardian would have no impact on the existing policyholders of RQIM at the proposed Effective Date of the Transfer regardless of whether the Transfer has occurred or not. This is because RQIM would be responsible for the payment of claims either way Grant Thornton UK LLP. All rights reserved. 49

52 If RQIM becomes insolvent 6.24 In the situation where RQIM fails, the existing policyholders of RQIM will rank alongside the transferring policyholders if the Transfer has taken place, compared to ranking ahead of Guardian policyholders (and, therefore, the transferring policyholders) if the Transfer has not taken place. The assets supporting the liabilities would be broadly the same level overall if the Transferring Portfolio is reinsured to RQIM or if the Transfer has taken place due to the nature of the LPT Given the remoteness of the scenario that RQIM fails, I do not believe that the fact that there will be additional policyholders whose claims on RQIM's assets rank alongside those of the existing policyholders will result in the existing policyholders being materially disadvantaged by the Transfer. Effect of Transfer on policyholders remaining within Guardian 6.26 For the policyholders remaining within Guardian, there will be no net impact on the balance sheet as a result of the Transfer, as the LPT has already been accounted for Given this, it is my opinion that the likelihood that the policyholders remaining within Guardian will be materially adversely affected by the Transfer is remote Grant Thornton UK LLP. All rights reserved. 50

53 7 Conclusions In my opinion, the Scheme does not give rise to any material adverse impact on the reasonable expectations of any of the groups of policyholders affected by the Transfer. In my opinion, the Scheme does not give rise to any material adverse impact on the security of any of the groups of policyholders' contractual rights. In my opinion, the Scheme does not give rise to any material adverse impact on the service level experienced by any of the groups of policyholders affected by the Transfer. There is nothing in the intended strategy on communications to policyholders of which I have been made aware that is inconsistent with my understanding of the impact of the Scheme or the parties to the Scheme or with the opinions I have given. Simon Sheaf FIA, FSAI Head of General Insurance Actuarial & Risk, Grant Thornton UK LLP 2016 Grant Thornton UK LLP. All rights reserved. 51

54 Appendix A Information received Information provided by Guardian and Admin Re Company structure chart for Guardian Signed report and accounts for Guardian as at 31 December 2013 Signed report and accounts for Guardian as at 31 December 2014 Signed report and accounts for Guardian as at 31 December 2015 Solvency II balance sheet for Guardian as at 31 December 2015 Solvency II SCR and MCR as at 31 December 2015 for Guardian Signed PRA return as at 31 December 2013 Signed PRA return as at 31 December 2014 Valuation report for Guardian's life liabilities as at 31 December 2013 Valuation report for Guardian's life liabilities as at 31 December 2014 Valuation report for Guardian's life liabilities as at 31 December 2015 Report on methodology and assumptions used to estimate Guardian's technical provisions as at 31 December 2015 Briefing for the FCA on the general insurance business transfer dated August 2014 Firm A's reserving review report as at 31 December 2013 for the Transferring Portfolio Recommendation note to Guardian's Board in respect of pricing for the Transferring Portfolio Internal memorandum on the IBNR for the Transferring Portfolio as at 31 December 2013 Management accounts for the Transferring Portfolio as at 31 December 2013 Guardian's audit conclusions for the year ending 31 December 2013 Insurance schedule for the Football League claim Guardian's capital projections and key assumptions Guardian's investment policy relating to shareholders funds Guardian's own risk and solvency assessment as at 31 December 2014 A schedule showing the reserves for the Transferring Portfolio as at 31 December 2014 A document setting out the expected timetable for the reorganisation of the Guardian business A document setting out the changes to the brand from Guardian to ReAssure Information provided by RQIM Management accounts for RQIM as at 30 June 2014 Signed report and accounts for RQIM as at 31 December 2013 Signed report and accounts for RQIM as at 31 December 2014 Signed report and accounts for RQIM as at 31 December 2015 Regulatory return for RQIM as at 31 March 2014 Regulatory return for RQIM as at 31 December 2014 Firm B's reserve review report for Chevanstell as at 30 September Grant Thornton UK LLP. All rights reserved. 52

55 Letter from Firm B on reserves for Chevanstell as at 31 December 2013 Firm B's reserve review report for Chevanstell as at 30 September 2014 Internal reserving report on Tryg portfolio as at 31 December 2014 Internal reserving report on Aker portfolio as at 31 December 2014 Letter from Firm B on reserves for RQIM as at 31 December 2014 Reserve review summary for Board meeting as at 31 December 2014 Reserving report by RQIM's external actuaries ("Firm B") as at 30 September 2015 for the Chevanstell portfolio, the Transferring Portfolio, the Aker portfolio, the Tryg portfolio and the Principle portfolio Letter from Firm B to RQIM discussing reserves as at 31 December 2015 for the Chevanstell portfolio, the Transferring Portfolio, the Aker portfolio, the Tryg portfolio and the Principle portfolio Internal reserving report on RQIM as at 31 December 2015 Memo to RQIM's Board from RQIM's internal actuaries recommending the level of RQIM's reserves as at 31 December 2015 Report by RQIM's internal actuaries on the Solvency II Technical provisions as at 31 December 2015 Reserving report by RQIM's external actuaries ("Firm C") for the L&L portfolio as at 20 November 2015 Firm D's reserve report for Principle as at 31 December 2013 Group structure for RQIH as at July 2014 Extract of Group structure for RQIM Signed report and accounts for RQIH as at 31 December 2013 Draft balance sheet for RQIH as at 31 December 2014 RQIM's interpretation of Solvency II guidelines in relation to intercompany loans Claims handling agreement between RQIM and RQIS Key assumptions documents for the standard formula calculations as at 30 June 2014 Standard formula output as at 30 June 2014 showing the impact of the Transfer and the Aker, Tryg, Principle and L&L transfers Standard formula output as at 31 March 2015 showing the impact of the Transfer and the Principle and L&L transfers Standard formula output as at 31 March 2015 showing the impact of the Transfer assuming that the subordinated debt of 20m had been in place Standard formula output as at 30 June 2015 showing the impact of the Principle and L&L transfers and assuming the subordinated debt had been in place Standard formula output as at 31 December 2015 showing the impact of the Transfer RQIM's standard formula model Sensitivity testing for RQIM assumptions used in standard formula Inputs used by RQIM for calculating concentration risk External reviews of RQIM's Solvency II capital requirements as at 31 December 2013 and 31 December to PRA setting out RQIM's proposed approach to allowing for concentration risk on inter-company loans RQIM's 2015 ORSA Supervisory Report Information on the Principle and L&L transfers from the FSCS confirming protection from the FSCS for the eligible policyholders in the Transferring Portfolio following the Transfer Letter confirming RQIM's acceptance to the voluntary jurisdiction of FOS RQIM's investment policy Memo from AM Best confirming RQIH's credit rating 2016 Grant Thornton UK LLP. All rights reserved. 53

56 from RQIH confirming its intention to apply for a credit rating with AM Best before 31 December 2015 Introductory slides to the Transfer Summary of expected reinsurance recoveries by counterparty as at 30 September 2014 and as at 31 December 2014 Draft Independent Expert reports for Principle and L&L Final Independent Expert reports for Principle and L&L Draft Independent Expert report for Insurer A An appraisal document for the acquisition by RQIM of FNF Title Insurance Company Limited An appraisal document for the acquisition by RQIM of the shares of Clariant Insurance AG Documentation setting out analysis of the Aviabel portfolio that was undertaken by RQIM during due diligence. An appraisal document for the transfer of Alma to RQIM Information provided by Guardian's legal advisers Executed Loss Portfolio Transfer Agreement between Guardian and RQIM Executed Transfer Agreement between Guardian and RQIM Executed Services Agreement between Guardian and RQIS Policyholder notification and waiver proposal Order for the Transfer Legal notice for the newspapers Letter to the brokers Letter to claimant's representatives Letter to policyholders Order for the Directions Hearing Part 8 claim form Explanatory circular for policyholders Post transfer notice Insurance business transfer scheme First witness statement of Mark Langridge First witness statement of Matthew Cuhls Draft first witness statement of Jonathan Yates (superseded) Information from other sources Other A copy of the letter from the PRA confirming my approval to act as Independent Expert dated 24 November 2014 A copy of the Independent Expert report and the Supplemental report for the L&L transfer Health and Safety Laboratory's report published in 2011 AWP's 2011 model I also relied on information arising from correspondence and discussions with RQIM, Guardian, Admin Re and their legal advisers Grant Thornton UK LLP. All rights reserved. 54

57 Appendix B Definitions Coverage ratio Free reserves The quantum of assets an insurer has to meet its regulatory capital requirements, expressed as a percentage of its regulatory capital requirements, depending on the requirements under discussion. The excess of an insurer's assets over its liabilities. Funds at Lloyd's The capital provided by a member of Lloyd's of London in order to support ("FAL") their total underwriting business. These monies are required as a fund of last resort. Incurred but not reported ( IBNR ) Claims that have occurred prior to a particular date but have not yet been reported to the insurer plus future developments on claims that have already been reported to the insurer. Own Funds Pure IBNR Quota share reinsurance Redundancy Reinsurance Solvency II Solvency II Minimum Capital Requirement ( MCR ) The excess of an insurer's admissible assets over its liabilities on a Solvency II basis. Claims that have occurred prior to a particular date but have not yet been reported to the insurer. This excludes any future developments on claims that have already been reported to the insurer. A form of reinsurance in which an insurer passes on an agreed percentage of every risk it insures that falls within a specified portfolio to a reinsurer. The positive difference between the amount a claim is expected to settle at and the amount the claim actually settles at. An arrangement with another insurer or reinsurer whereby risks are shared (or passed on). The current regulatory regime for insurers which came into force on 1 January 2016 with the aim of harmonising regulation across all EU and EEA countries. The lower level of regulatory capital requirements under the Solvency II regime Grant Thornton UK LLP. All rights reserved. 55

58 Solvency II The higher level of capital regulatory requirements under the Solvency II Solvency Capital regime. Requirement ( SCR ) Technical provisions The insurance liabilities of an insurer, as determined for regulatory purposes. These are calculated as the provisions for the ultimate costs of settling all claims arising from events which have occurred up to the balance sheet date, including provision for claims incurred but not yet reported, less any amounts paid in respect of these claims; plus the provisions for claims arising on unexpired periods of exposure less any premium in respect of the business written that has not yet been received Grant Thornton UK LLP. All rights reserved. 56

59 Appendix C Abbreviations AIC Aker Alma APH Aviabel AWP BTP Chevanstell CI ECRA ELTO FAL FCA FNFT FRC FSA FSCS Aegon Insurance Company (UK) Limited Aker Insurance Alma Vakuutus OY Asbestos, pollution and health hazard claims Aviabel S.A The Institute and Faculty of Actuaries' Asbestos Working Party BTP Insurance Company Chevanstell Limited Clariant Insurance AG Excess and Casualty Reinsurance Association Employers' Liability Tracing Office Funds at Lloyd's Financial Conduct Authority FNF Title Insurance Company Limited Financial Reporting Council Financial Services Authority Financial Services Compensation Scheme FSMA Financial Services and Markets Act 2000 Grant Thornton Guardian Grant Thornton UK LLP Guardian Assurance Limited 2016 Grant Thornton UK LLP. All rights reserved. 57

60 HSL ICOBS ILU L&L MAT MCR MFSA NIHL PCF PRA Principle RQIH RQIM RQIS SCR SUP 18 TAS Tryg UWCC Health and Safety Laboratory Insurance Conduct of Business Sourcebook Institute of London Underwriters Liverpool & London Marine, aviation and transport Solvency II Minimum Capital Requirement Malta Financial Services Authority Noise-induced hearing loss The Protection and Compensation Fund Prudential Regulation Authority Principle Insurance Company Limited Randall & Quilter Investment Holdings Ltd R&Q Insurance (Malta) Limited R&Q Insurance Services Limited Solvency Capital Requirement Chapter 18 of the Supervision Manual Technical Actuarial Standards Tryg Insurance Underwriting & Claims Committee 2016 Grant Thornton UK LLP. All rights reserved. 58

61 Appendix D Relationships with RQIM and Guardian I outline in this appendix relationships between Grant Thornton UK LLP and companies in the groups to which R&Q and Guardian belong. I also outline relationships between other member firms of Grant Thornton International Limited ("GTIL") and companies in the groups to which R&Q and Guardian belong. In addition, I explain why I do not believe that any of these relationships affect my independence in fulfilling the role of Independent Expert for the proposed transfer. Relationships between members firms of GTIL and entities in the group to which R&Q belongs Project 1 In 2011, Grant Thornton UK LLP was appointed by an entity in the group to which RQIM belongs to investigate the market for captive managers. I do not believe that this project creates a conflict with my acting as the Independent Expert on the proposed transfer for the following reasons: The project was undertaken by Grant Thornton's team in Bermuda. Neither myself nor any member of our actuarial team had any involvement in this project. No member of the team involved in this project has been involved in the Independent Expert assignment and we have maintained Chinese walls. This project concluded in early Project 2 Grant Thornton (Gibraltar) Limited provides payroll services to an entity in the group to which RQIM belongs. I do not believe that this project creates a conflict with my acting as the Independent Expert on the proposed transfer for the following reasons: The entity for which the work was undertaken and RQIM are sister companies rather than one being a direct or indirect parent of the other. The project is undertaken by Grant Thornton (Gibraltar) Limited which is a separate legal entity from Grant Thornton UK LLP. Neither myself nor any member of our actuarial team has had any involvement in this project. No member of the team involved in this project has been involved in the Independent Expert assignment and we have maintained Chinese walls Grant Thornton UK LLP. All rights reserved. 59

62 Relationships between members firms of GTIL and entities in the group to which Guardian belongs Relationships between Grant Thornton UK LLP and entities in the group to which Guardian belongs Grant Thornton UK LLP has previously engaged with an entity in the group to which Guardian belongs regarding its contracts with an unrelated insurance group. I do not believe that this project creates a conflict with my acting as the Independent Expert on the proposed transfer for the following reasons: Whilst this entity is effectively the parent of Guardian,: there are seven additional companies that sit between Guardian and this entity, that each own 100% of the shares in the company below our work was mainly carried out for another entity in the group to which Guardian belongs, which is not a parent of or subsidiary of Guardian. The project is complete. Neither myself nor any member of our actuarial team had any involvement in this project. No member of the team involved in this project has been involved in the Independent Expert assignment and we have maintained Chinese walls. Grant Thornton UK LLP has also provided the following services to entities in the group to which Guardian belongs: various tax, regulatory and pension advisory services transaction advisory services tax advisory services transaction advisory services modelling of income protection products voluntary liquidation services for various dormant entities. I do not believe that these projects create a conflict with my acting as the Independent Expert on the proposed transfer for the following reasons: The entities to whom Grant Thornton UK LLP provided these services are sister entities of Guardian rather than parents or subsidiaries. The projects listed above are all complete. Neither myself nor any member of the engagement team had any involvement in these projects. No member of the team involved in this project has been involved in the Independent Expert assignment and we have maintained Chinese walls. Grant Thornton UK LLP is currently providing the following services to entities in the group to which Guardian belongs: various tax and regulatory advisory services tax advisory services voluntary liquidation services to a dormant entity within the group I do not believe that these projects create a conflict with my acting as the Independent Expert on the proposed transfer for the following reasons: 2016 Grant Thornton UK LLP. All rights reserved. 60

63 The entities to whom Grant Thornton UK LLP is currently providing these services are sister entities of Guardian rather than parents or subsidiaries. Neither myself nor any member of our actuarial team has had any involvement in these projects. No member of the team involved in this project has been involved in the Independent Expert assignment and we have maintained Chinese walls. Relationships between Warth and Klein Grant Thornton AG in Germany and entities in the group to which Guardian belongs One of the members of the Board of Warth and Klein Grant Thornton AG in Germany holds shares in Swiss Re AG. I do not believe this creates a conflict with my acting as the Independent Expert on the proposed transfer for the following reasons: This individual is not a majority shareholder within Swiss Re AG. Warth & Klein Grant Thornton AG is a separate legal entity to Grant Thornton UK LLP. This individual exerts no influence over myself or my team. Relationships between Grant Thornton LLP in the United States and entities in the group to which Guardian belongs Grant Thornton LLP in the US provided audit services to an entity in the group to which Guardian belongs. The last audit engagement was for the year ending 31 December I do not believe that this project creates a conflict with my acting as the Independent Expert on the proposed transfer for the following reasons: This entity and Guardian are sister entities rather than any one being a direct or indirect parent of another. The most recent project was completed about six years ago. The projects were undertaken by Grant Thornton LLP which is a separate legal entity to Grant Thornton UK LLP. Neither myself nor any member of our actuarial team had any involvement in these projects. No member of the team involved in this project has been involved in the Independent Expert assignment and we have maintained Chinese walls. It follows that I do not believe that any of the above relationships create a conflict with my acting as the Independent Expert on the proposed transfer Grant Thornton UK LLP. All rights reserved. 61

64 Grant Thornton UK LLP. All rights reserved. "Grant Thornton" means Grant Thornton UK LLP, a limited liability partnership. Grant Thornton UK LLP is a member firm within Grant Thornton International Ltd ('Grant Thornton International'). Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered by the member firms independently.