Actuarial Function Holder

Transcription

1 CLERICAL MEDICAL INVESTMENT GROUP LIMITED ( CMIG ) and SCOTTISH WIDOWS PLC ( SW ) and SCOTTISH WIDOWS ANNUITIES LIMITED ( SWA ) and SCOTTISH WIDOWS UNIT FUNDS LIMITED ( SWUF ) and PENSIONS MANAGEMENT (S.W.F.) LIMITED ( PMSWF ) and HALIFAX LIFE LIMITED ( HLL ) and ST ANDREW S LIFE ASSURANCE PLC ( SAL ) and CLERICAL MEDICAL MANAGED FUNDS LIMITED ( CMMF ) Report of the Actuarial Function Holder on the proposed transfer of business pursuant to Part VII of the Financial Services and Markets Act (2000) ( FSMA ). R McIntyre FIA Actuarial Function Holder (CMIG, SW, SWA, SWUF, PMSWF, HLL, SAL, CMMF) June 2015 Page 1 of 102

2 Table of Contents 1. SUMMARY INTRODUCTION LBGI STRUCTURE OVERVIEW OF THE COMPANIES CMIG (Transferee) SW (Transferor) SWA (Transferor) SWUF (Transferor) PMSWF (Transferor) HLL (Transferor) SAL (Transferor) CMMF (Transferor) Reinsurance arrangements Capital structure of LBGI companies OUTLINE OF SCHEME EFFECT OF THE LBGI 2015 SCHEME ON POLICYHOLDERS LBGI RISK MANAGEMENT FINANCIAL AND RISK PROFILE POSITION BEFORE AND AFTER TRANSFER CONSIDERATION OF IMPACT OF THE LBGI 2015 SCHEME BY COMPANY SW SWA SWUF PMSWF SAL HLL CMMF CMIG OTHER CONSIDERATIONS CONCLUSION Page 2 of 102

3 ANNEX A: DEFINED TERMS AND ABBREVIATIONS USED WITHIN THIS REPORT ANNEX B: OVERVIEW OF SOLVENCY BASES SUPPORTING THIS REPORT ANNEX C: SUMMARY OF LBGI RISK EXPOSURES ANNEX D: OVERVIEW OF THE PART VII RESTRUCTURING OF THE LBGI GROUP Page 3 of 102

4 REPORT OF THE ACTUARIAL FUNCTION HOLDER 1. SUMMARY Purpose 1.1. The purpose of this report is to review the impact on policyholders in: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Clerical Medical Investment Group Limited ( CMIG ); Scottish Widows plc ( SW ); Scottish Widows Annuities Limited ( SWA ); Scottish Widows Unit Funds Limited ( SWUF ); Pensions Management (S.W.F.) Limited ( PMSWF ); Halifax Life Limited ( HLL ); St Andrew s Life Assurance plc ( SAL ); and Clerical Medical Managed Funds Limited ( CMMF ) (collectively the Companies ) of the proposed transfer (the Transfer ) of all the longterm insurance business of SW, SWA, SWUF, PMSWF, HLL, SAL, and CMMF (collectively the Transferors ) to CMIG (the Transferee ) All the Companies are insurance holdings of Lloyds Banking Group plc ( LBG ). All LBG s insurance holdings are collectively referred to as the LBG Insurance Group ( LBGI ). Scope of the Scheme 1.3. The Transfer will take effect by means of a court approved insurance business transfer scheme ( LBGI 2015 Scheme ) under Part VII of the Financial Services and Markets Act 2000 ( FSMA ) and will consist of the following: Assets and liabilities, rights and responsibilities of the Transferors will transfer to the Transferee, including the assets and liabilities in the With-Profits Fund ( WPF ) of SW ( SW WPF ) which will transfer to and be managed as a separate fund within the Transferee. The SW WPF will retain its current name; Assets and liabilities, rights and responsibilities of CMIG will remain in CMIG including the WPF ( CMIG WPF ) which will retain its current name and remain as a separate fund in the Transferee and, in particular, will remain distinct from the SW WPF At the same time as the LBGI 2015 Scheme takes effect, the Transferee will be renamed as Scottish Widows Limited and its registered office changed to 25 Gresham Street, London EC2V 7HN. Page 4 of 102

5 Key impacts of the Scheme 1.5. I have considered the impact of the transfer of business on policyholders and in my view, the key features to note are: Ref Outline of key features of the Transfer Relevant to policyholders in Practical aspects affecting the operation of policies and benefits due to policyholders (i) Policy terms, conditions and charges are unchanged. All Companies (ii) (iii) (iv) (v) (vi) The Companies are currently part of the same group and subject to common management. The administration and management of individual policies and the governance arrangements around the treatment of policyholders will remain essentially unchanged. This will provide continuity in terms of the interpretation of the fair treatment of customers whilst the position of having all business and risk in one company will make the risk exposure and financial position more transparent for both management and policyholders. There will be no material changes to the principles or practices by which the WPFs are managed or governed, including for the sake of clarity, no change in the eligibility for participation in distributions from these WPFs. The With-Profits Committee will continue to inform decision making in relation to the management of the CMIG and SW WPFs in accordance with its agreed terms of reference. The existing schemes of transfer, which established the postdemutualisation structures of CMIG ( CMIG Scheme ) and SW ( SW Scheme ) (together the Existing Schemes ) will cease to have effect following the implementation of the LBGI 2015 Scheme but the relevant provisions and protections from the Existing Schemes (amended where appropriate to reflect the new regulatory regime ( Solvency II ) that is to be introduced with effect from 1 January 2016) have been incorporated into the LBGI 2015 Scheme and redundant provisions or provisions which duplicate regulatory requirements have been removed. The LBGI 2015 Scheme results in the transfer of the SW WPF into the Transferee which already holds the CMIG WPF. Post Transfer, the SW WPF and the CMIG WPF will continue as separate WPFs in the Transferee and will continue to benefit from the capital support arrangements provided by the Existing Schemes (although, as noted above, the Existing Schemes will be updated to reflect the new Solvency II regulatory regime). No materially adverse impact on policyholder benefits should arise from changes in taxation as a result of the LBGI 2015 Scheme. All Companies SW and CMIG SW and CMIG SW and CMIG All Companies Page 5 of 102

6 Ref Outline of key features of the Transfer Relevant to policyholders in Aspects relating to financial strength and risk (i) (ii) (iii) (iv) (v) (vi) The post Transfer financial position of the Transferee is such that regulatory requirements are expected to be more than covered. Moreover, the Transferee will be subject to the same capital and risk appetite management policies as existed pre transfer which provides comfort that regulatory requirements will continue to be met in the future. Since, post transfer, all of the business of all of the Companies will be in the Transferee, all policyholders will become exposed to the same risks. This will lead to changes in the risk profile to which certain groups of policyholders will be exposed. However, after the Transfer, there will be greater scope to reallocate capital depending on which risks actually crystallise whilst, as noted above, the business will continue to be managed in the same sound and prudent manner with reference to the same capital and risk policies as exist pre Transfer. All Transferors will become directly exposed to the mis-selling claims risk which exists in the Transferee. However, in line with the applicable capital and risk appetite management policies of LBGI, significant capital is already held within the Transferee to provide for a materially adverse outcome in relation to this risk. All of the Companies will be exposed to the defined benefit obligation risks associated with the Scottish Widows Retirement Benefit Scheme (of which SW is currently the guarantor and of which the Transferee will become the guarantor). However, in line with the applicable capital and risk appetite management policies of LBGI, capital is already held to provide for a materially adverse outcome in relation to these risks. Currently some of the Companies have small amounts of in-force business or limited activities and are therefore subject to a limited amount of risk. However, as a result, these companies hold relatively small amounts of capital such that if risks were to materialise they could have a significant impact on the financial strength of those companies. By transferring the policies in these companies into the Transferee (which will receive the assets and liabilities relating to all policies in the Companies), these policies will become exposed to the aggregate risks of the Companies but will also benefit from a correspondingly larger capital base and more diverse risk profile. Currently certain of the Companies do not actively write new business and as such are exposed to some risk from diseconomies of scale. Post Transfer, the Transferee will be actively marketing new business which, whilst exposing policyholders to new business related risk, provides access to a source of future capital generation (from the profits earned on the future new business) and reduces exposure to diseconomies of scale. All Companies All companies All Companies except CMIG All Companies except SW SWA, SWUF, PMSWF, CMMF CMIG, HLL, SAL, CMMF, SWA, PMSWF Page 6 of 102

7 Conclusions on the Scheme 1.6. I have considered the potential impact of the LBGI 2015 Scheme on the security and benefit expectations of the policyholders in the Transferors and the Transferee prior to the Transfer. Based on this consideration and taking into account the key features of the Transfer outlined above (and the discussion of these and other matters contained in the remainder of this report), it is my view that: (i) (ii) (iii) Taking into account the assets and liabilities being transferred to the Transferee, the security of policyholder benefits will not be materially adversely impacted as a result of the LBGI 2015 Scheme. The LBGI capital and risk appetite policy provides further comfort that the security of policyholder benefits will not be materially adversely impacted at Transfer or going forwards. The LBGI 2015 Scheme will not result in material changes to the benefit expectations of any with-profits, non-profit or unit-linked policyholders I therefore conclude that the LBGI 2015 Scheme will not result in a materially adverse impact on the security of policyholders or their benefit expectations compared to the status quo I am also satisfied that there will be no significant impact on the servicing that policyholders will receive as a result of the LBGI 2015 Scheme and that the proposed communications plan is appropriate and has paid due regard to the interests of policyholders and the need to treat them fairly With regards to the requirement under paragraph of the existing SW Scheme, in line with the conclusions above, I am satisfied that the Transferee will be of sufficient creditworthiness to satisfy the reasonable expectations of holders of policies that were transferred to SWA under the SW Scheme. Page 7 of 102

8 2. INTRODUCTION 2.1. The purpose of this report is to review the impact on policyholders in: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Clerical Medical Investment Group Limited ( CMIG ); Scottish Widows plc ( SW ); Scottish Widows Annuities Limited ( SWA ); Scottish Widows Unit Funds Limited ( SWUF ); Pensions Management (S.W.F.) Limited ( PMSWF ); Halifax Life Limited ( HLL ); St Andrew s Life Assurance plc ( SAL ); and Clerical Medical Managed Funds Limited ( CMMF ) (collectively the Companies ) of the proposed transfer (the Transfer ) of all the longterm insurance business of SW, SWA, SWUF, PMSWF, HLL, SAL, and CMMF (collectively the Transferors ) to CMIG (the Transferee ) The Transfer will take effect by means of the LBGI 2015 Scheme, an insurance business transfer scheme under Part VII of FSMA. The LBGI 2015 Scheme will replace the Existing Schemes and become the governing Scheme for the SW WPF and CMIG WPF. The Scheme Effective Date will be 31 December In this report I consider the Transfer from the perspective of the policyholders (whether invested directly or by way of reinsurance) of the Transferors and the Transferee and whether the Transfer has any materially adverse impact on these policyholders I also provide a conclusion in relation to the requirement under paragraph of the existing SW Scheme for the creditworthiness of the Transferee to be assessed in relation to the reasonable expectations of the transferring SWA policyholders. However, in practice, I consider this to require the same considerations as outlined in Section 2.3 above and so I have not considered it necessary to include any specific additional analysis or commentary in relation to this SW Scheme requirement I note that if the Scheme were not to be effected for any reason, there would be no transfer of business between the Companies. The Companies would then continue to exist and have responsibility for the business that they have individually written. As the position would be no different to the current situation (albeit that changes to the existing SW and CMIG Schemes may still be required to ensure that they continue to function clearly and properly under Solvency II), I do not discuss this outcome further in this report This report is written for the Board of each of the Companies in my capacity as Actuarial Function Holder ( AFH ) for the Companies, and should be read in conjunction with the LBGI 2015 Scheme, the With-Profits Actuary ( WPA ) report and the report by the Independent Expert ( IE ). Page 8 of 102

9 Status and Disclosure 2.7. I am a Fellow of the Institute & Faculty of Actuaries, having qualified in 1992, and hold a Practising Certificate issued by the Institute & Faculty of Actuaries to act as an Actuarial Function Holder. I have over 25 years of experience working in the UK life assurance industry, and 14 years of working for LBGI or companies that are now within the LBGI group including acting, since 2010, as Actuarial Function Holder for life companies within the group I am an employee of HBOS plc, a subsidiary of Lloyds Banking Group I hold an individual non-profit protection insurance policy with SAL. I am also a member of the LBG defined contribution pension scheme. I have holdings in LBG shares. I am not a director of any of the Companies I consider myself to be free from conflict that would prevent me from assessing the impact of the 2015 LBGI Scheme on policyholder benefits and the security of those benefits. Other Advice and Opinions Mr D Murray of Deloitte MCS Limited has been retained in the capacity of IE and has been approved as such by the relevant regulatory bodies. In finalising my report, I have read a draft of his report on the terms of the LBGI 2015 Scheme and considered his conclusions. A copy of this report has also been provided to Mr Murray In addition, I have read and considered the report of the WPA, Mr K Doerr, assessing the impact of the LBGI 2015 Scheme on with-profits policyholders of the Companies. Definitions and Abbreviations A list of the defined terms and abbreviations used in this report is included in Annex A. Defined terms used but not defined in this report have the same meaning as those used in the LBGI 2015 Scheme document and the IE s Report unless otherwise highlighted. Compliance with Technical Actuarial Standards This report has been prepared in accordance with, and complies with, the Technical Actuarial Standards on Insurance, Data, Modelling, Transformations and Reporting issued by the Financial Reporting Council. Page 9 of 102

10 Structure of Report This report is structured as follows: - Sections 3-4 provide an overview of LBGI and the Companies; - Section 5 outlines the proposed LBGI 2015 Scheme; - Section 6 provides an outline of how the remainder of the report addresses the impact of the LBGI 2015 Scheme as it affects policyholder benefits and security; - Section 7 discusses the LBGI risk management policy; - Section 8 considers the financial position and risk profiles of the Companies before and after the Transfer; - Section 9 summarises the effect of the LBGI 2015 Scheme on policyholders of each of the Companies; - Section 10 contains consideration of the impact of the LBGI 2015 Scheme on Taxation, Administration and Governance and considers the process being adopted to notify policyholders of the intended transfer and Court process; - Section 11 sets out my conclusions; - Annex A lists the defined terms and abbreviations used in this report; - Annex B explains the various solvency calculation bases and how these are assessed in this report; and - Annex C summarises the relative risk exposures in the Companies pre and post Transfer. - Annex D provides LBGI group structure diagrams which illustrate the interim group structures that will arise as part of the wider restructuring that will take place alongside the Transfer of business. Page 10 of 102

11 3. LBGI STRUCTURE 3.1. The diagram below shows a summary of the structure of LBGI prior to the LBGI 2015 Scheme. The Companies are shown in the context of the wider LBGI structure. There are additional subsidiaries to the Companies which, for simplicity, are not shown as these are not UK life regulated companies party to the LBGI 2015 Scheme. Scottish Widows Group Ltd SWG Lloyds Bank General Insurance Holdings Ltd Scottish Widows Financial Services Holdings SWFSH Scottish Widows plc SW HBOS International Financial Services Holdings Ltd Pensions Management (S.W.F.) Limited PM Scottish Widows Annuities Limited SWA Scottish Widows Unit Funds Limited SWUF Clerical Medical Investment Group Limited CMIG Halifax Life Limited HLL Clerical Medical Managed Funds Limited CMMF KEY: LBG Insurance Main Holding Companies St Andrew s Life Assurance plc SAL Box represents scope of entities in scope of the 2015 LBGI Scheme transfer. Regulated UK Life Company 3.2. Scottish Widows Group ( SWG ) is the LBGI parent company and is a wholly owned subsidiary of Lloyds Bank plc as part of the wider LBG. SWG brings together: (i) (ii) Regulated life, pensions and investment business through its subsidiary Scottish Widows Financial Services Holdings Ltd ( SWFSH ). SWFSH is the holding company for UK life, pension and investment business through its subsidiary SW, and international business through its subsidiary HBOS International Financial Services Holdings Ltd; and Regulated general insurance business, through its subsidiary Lloyds Bank General Insurance Holdings Ltd. Business in general insurance and HBOS international companies is outside the scope of the Transfer so these structures are not expanded above CMIG, SWA, PMSWF and SWUF are wholly owned subsidiaries of SW. Page 11 of 102

12 3.4. HLL and CMMF are wholly owned subsidiaries of CMIG. SAL is a wholly owned subsidiary of HLL. These companies became part of LBG following the merger of Lloyds TSB and HBOS plc in Within this structure, the following features are noteworthy: SW and CMIG each contain a with-profits fund. The Companies are under common management. Whilst, for practical purposes, one board of directors currently covers SW, CMIG, SAL and SWA and another covers SWUF, PMSWF, HLL and CMMF, there is some commonality in the directorships across the two groups of boards. Below board level, there is commonality in the senior management of the Companies (for example, I am the Actuarial Function Holder for all of the Companies and there is a common Risk Function across the Companies). The Companies have shared systems, processes, policies and colleagues. Page 12 of 102

13 4. OVERVIEW OF THE COMPANIES 4.1. This section provides some information on the history and origins of the Companies to provide context for the discussion of the impact of the LBGI 2015 Scheme that is contained in later sections. It considers the Companies in the following order. Company Sections CMIG (Transferee) 4.3 to 4.20 SW (Transferor) 4.21 to 4.38 SWA (Transferor) 4.39 to 4.46 SWUF (Transferor) 4.47 to 4.53 PMSWF (Transferor) 4.54 to 4.60 HLL (Transferor) 4.61 to 4.71 SAL (Transferor) 4.72 to 4.80 CMMF (Transferor) 4.81 to It also summarises information on the current reinsurance arrangements and existing capital structure of the Companies. Page 13 of 102

14 CMIG (Transferee) Background 4.3. CMIG traces its origins back to 1824 with the formation of the Medical, Clerical and General Life Assurance Society. CMIG was incorporated on 2 May 1996, was acquired by Halifax in 1996 and, under the CMIG Scheme, demutualised from 1 January In September 2001, CMIG became part of HBOS plc through the merger of Halifax and the Bank of Scotland. With the Lloyds TSB acquisition of HBOS plc in January 2009, CMIG became part of LBGI CMIG is a wholly owned subsidiary of the shareholder fund ( SHF ) of SW CMMF, HLL and (via HLL) SAL are wholly owned subsidiaries of the SHF of CMIG. CMIG also owns a number of non-insurance subsidiaries. Summary of the Business 4.6. CMIG consists of a long-term fund ( LTF ) (comprising a with-profits fund ( WPF ) and a non-profits fund ( NPF )) and a SHF. The business of CMIG mainly consists of: Unit-linked individual pensions business sold mainly through intermediary sales channels; Unit linked savings business sold mainly through intermediary sales channels; With-profits business; Conventional pension annuities in payment; and Protection products providing cover against death, critical illness and sickness CMIG does not actively market new business. Any new business is limited predominantly to increments on existing business and conversion of existing pension contracts to annuities in payment. Therefore, the overall business in CMIG (including that business within the CMIG WPF) is expected to reduce in size over time Within CMIG's savings business (in particular within the CMIG WPF but also within the unit-linked business), a proportion of the business relates to sales made in Europe through CMIG's branch operations. In addition, a small amount of business relates to sales outside of the UK and Europe (primarily denominated in dollars) through CMIG's Hong Kong branch When Clerical Medical demutualised, a court scheme (the CMIG Scheme) specified certain provisions designed to protect the interests of policyholders who held policies at the time of the demutualisation. This Scheme established the CMIG WPF as a separate fund in the CMIG LTF and assigned conventional with-profits policies and unitised with-profits benefits to it. Under the provisions of the CMIG Scheme, the CMIG WPF has been maintained ever since and now contains business written both before and after demutualisation and both in the UK and overseas. The with-profits business contain policy guarantees which for certain types of policies written in the UK also includes attaching guaranteed annuity options ( GAOs ). Page 14 of 102

15 4.10. The requirements of the CMIG Scheme remain in effect and are reflected in the Principles and Practices of Financial Management ( PPFM ) that are published for the fund. Amongst other things, the CMIG Scheme and PPFM contain provisions: on how with-profits bonuses are set; on how the CMIG WPFs investment policy is determined; on how the CMIG WPFs estate is distributed to policyholders via final bonus enhancements; on the debits and credits that may be made to the CMIG WPF; and on how, in most circumstances, payouts will be met from the CMIG WPF but that with-profits policies can rely, in extreme circumstances, on support from assets of CMIG which are held outside the With-Profits Fund (ie in the CMIG NPF or CMIG SHF). The main existing provisions of the CMIG Scheme and how they are preserved or altered by the LBGI 2015 Scheme are discussed further in Section 5 (see in particular Sections , and Section 5.23) CMIG has received a number of mis-selling claims relating to policies sold by independent intermediaries principally in Germany but also in Austria and Italy during the late 1990s and early 2000s. CMIG holds provisions for mis-selling claims in both its accounts and regulatory reserves, which have been set taking into consideration the decisions in July 2012 from the Federal Court of Justice (FCJ) in Germany. However, the cost, which could be materially different to the provisions, will only be known once there is further clarity with respect to a range of legal issues involved in these claims and/or all relevant claims have been resolved Setting of these provisions requires significant judgement in determining appropriate assumptions, including the number of claims received, the proportion upheld, and resulting legal and administration costs. Compared to the assumptions used to set the accounting provision (of which 197m remained at 31 December 2014), the assumptions used in the setting of the Pillar 1 provision (which was 414m as at 31 December 2014) include significant margins for prudence relative to current experience. The risk is also covered by the LBGI capital and risk appetite policy (which is discussed further in Section 7 of this report). The total amount charged to the accounting provision up to 31 December 2014 was 320m which, allowing for the 197m outstanding provision at 31 December 2014 brings the total amount that has been provided for or charged to CMIG s accounts (up to and including 31 December 2014) to 517m Costs for this mis-selling claims risk are not charged to the CMIG WPF (being instead met from shareholder owned capital resources) CMIG s exposure to mortality and morbidity risk through its protection business is mitigated by external reinsurance arrangements. CMIG is also party to intra-group reinsurance arrangements, some with companies that are party to the LBGI 2015 Scheme. These arrangements are discussed further in Section 4.17 and 4.89 below Some former CMIG employees are members of the HBOS Final Salary Pension Scheme (which was formed by the merger of a number of different former Halifax Bank of Scotland schemes including the Bank of Scotland, Halifax and Birmingham Midshires schemes). However, the former Clerical Medical colleagues make up only a small proportion of the HBOS Pension Scheme and whilst CMIG is responsible for paying contributions to cover accruing benefits for these insurance colleagues LBG is responsible for paying contributions to cover funding deficits. Deficit funding in Page 15 of 102

16 relation to CMIG s former colleagues is therefore expected to be met by LBG rather than CMIG. Nonetheless, some capital is retained within CMIG to allow for the risk that LBG might seek some support for deficit funding from CMIG in respect of those former colleagues Other than its insurance subsidiaries (HLL, SAL and CMMF), CMIG does not have any material subsidiaries Below is a summary of the in-force business of CMIG as shown in the 31 December 2014 PRA Annual Return: CMIG (Transferee) Business Category Policyholder Numbers Notes: 1. As shown in the table above, reinsurance reduces CMIG s reserves by 1,004m. Of this reduction, 752m relates to internal reinsurances (almost all of which relates to arrangements with other Companies involved in the Transfer and, in particular, with CMMF) and 252m relates to external reinsurances. Further detail on these reinsurances is provided in Section The majority of the overseas business is written in Germany This indicates that the main business of CMIG comprises: Gross of reinsurance reserves ( m) Unit-linked business, in particular individual pensions business but also life (predominantly bond) business. With-profits business (predominantly unitised with-profits business). Net of reinsurance reserves ( m) WPF LIFE UK 57,346 1,295 1,293 WPF PENSIONS UK 67,808 2,244 2,244 WPF OVERSEAS 89,053 2,105 2,105 Sub-Total - WPF 214,206 5,644 5,642 NPF LIFE UK - Unit-Linked 54,650 2,950 2,949 NPF PENSION UK - Unit-Linked 281,570 7,653 6,874 NPF OVERSEAS - Unit-Linked 38, Sub-Total - NPF - Unit-Linked 374,575 10,952 10,161 NPF LIFE UK - Non-Unit-Linked 26, NPF PENSION UK - Non-Unit-Linked 95,132 2,696 2,696 NPF OVERSEAS - Non-Unit-Linked 2, Sub-Total - NPF - Non-Unit Linked 123,755 3,740 3,529 Total CMIG 712,536 20,336 19,332 Annuities in payment (which comprise the majority of policies and reserves in the NPF Pensions UK Non Unit Linked category in the table) In addition, the 31 December 2014 PRA Annual Return shows that CMIG had 21.7bn of admissible assets (net of current liabilities and excluding the value of its insurance subsidiaries). Page 16 of 102

17 4.20. As a consequence of this business mix (and as illustrated in Annex C), CMIG s risk profile is reasonably balanced and includes a mix of market, insurance (i.e. longevity, mortality and morbidity) and business (i.e. expense and persistency) risk. In addition, as discussed above, CMIG is exposed to overseas mis-selling claims risk. CMIG s risk profile and how it changes under the LBGI 2015 Scheme is illustrated in Annex C and discussed further in Sections to (with some of the issues discussed in those sections also being considered in Sections 8.37 to 8.69). Page 17 of 102

18 SW (Transferor) Background SW traces its origins back to 1815 with the formation of the Scottish Widows Fund and Life Assurance Society. SW was incorporated on 1 September 1999 and under the SW Scheme, the Society demutualised on 3 March 2000 becoming part of Lloyds TSB. With the creation of LBG in January 2009, SW became part of LBGI SW is a wholly owned subsidiary of SWFSH which is wholly owned by SWG. SWG is a wholly owned subsidiary of Lloyds Bank plc The SW SHF wholly owns SWA and CMIG. The SW long-term fund wholly owns PMSWF and SWUF. SW also owns a number of non-insurance subsidiaries. Summary of the Business SW consists of a LTF (comprising a WPF and a NPF) and a SHF. The business of SW consists mainly of: Unit-linked individual and group pensions business sold mainly through intermediary sales channels; Unit-linked savings business sold mainly through intermediary sales channels; Protection products providing cover against death, critical illness and sickness; With-profits business; and Conventional pension annuities in payment SW currently writes significant volumes of new (unit-linked, annuity and protection) business through intermediary and direct sales channels in the UK. Form 47 of the 31 December 2014 PRA Annual Return shows that in 2014 SW wrote the following amounts and types of new business: Type of business New regular premiums ( m) New single Premiums ( m) Annuities (including drawdown) Unitised individual pensions 45 1,148 Unitised group pensions Protection 52 6 Total SW 980 2, For some time, the number of new SW WPF policies has been low and so the size of the SW WPF is expected to continue to reduce over time. Page 18 of 102

19 4.27. When Scottish Widows demutualised in 2000, a court scheme (the SW Scheme) specified certain provisions designed to protect the interests of policyholders who held policies at the time of the demutualisation. This Scheme established the SW WPF as a separate fund in the SW LTF and assigned conventional with-profits policies and unitised with-profits benefits to it. Under the provisions of the SW Scheme, the SW WPF has been maintained ever since and now contains business written both before and after demutualisation 1 and with-profits and conventional nonprofit policies (the non-profit policies arising largely in connection with the issuance of annuities to maturing with-profit policyholders). The business was sold predominantly in the UK The main existing provisions of the SW Scheme and how they are preserved or altered by the LBGI 2015 Scheme are discussed further in Section 5 (see in particular Sections and Section 5.23). However, some significant features of the SW Scheme are that: Costs arising from certain policy guarantees (net of guarantee charges) and financial options such as GAOs are met by a memorandum account (the Additional Account ) held in the SW WPF in the first instance, although further support is available if required, from SW NPF capital (or failing that SW SHF capital). The SW Scheme provides further capital support arrangements to the SW WPF which, in certain circumstances, may limit transfers from the SW NPF to the SW SHF or require transfers to be made into the SW WPF. Investment policy for business written before demutualisation is set, as outlined in the published PPFM, with reference to the financial position of a notional company (the Notional Mutual ). This means that assets held outside of the SW WPF (the Support Account ) can be taken into account in determining the investment policy. Investment policy for business written after demutualisation is not covered by explicit requirements of the SW Scheme but is instead set by the SW Board in line with the published PPFM There are also provisions in the SW Scheme which define what items may be credited and debited to the WPF and which place limits on the amount of expenses charged to the SW WPF The SW Scheme does not prescribe the approach to be followed in determining withprofits payouts and as such payouts are determined by policy conditions and the with-profits bonuses that are declared by the SW Board in line with methodology provided in the fund s published PPFM. The SW Scheme does, however, require that the Additional Account (to the extent that it is not required to meet guarantee costs arising on business written before demutualisation), be used to enhance payouts to pre demutualisation business. Similarly, the SW Scheme requires the Retained Account (a further memorandum account held in the SW WPF) to be used to enhance payouts to pre demutualisation business. 1 At 31 December 2014, out of total asset shares of around 9.5bn, 8.5bn related to business written before demutualisation Page 19 of 102

20 4.31. SW s exposure to mortality and morbidity risk from its protection business is mitigated by external reinsurance arrangements. SW is also party to intra-group reinsurance arrangements, some with companies that are party to the LBGI 2015 Scheme. These arrangements are discussed further in Sections 4.35 and 4.89 below SW provides a guarantee to the trustees of the SW Retirement Benefits Scheme ( SWRBS ) to explicitly cover the minimum legal obligations imposed on the employer (Scottish Widows Services Limited) by Section 75 of the Pensions Act As a result, the Company may be liable for funding deficits in the SWRBS and therefore capital is retained within SW to allow for the risks associated with the SWRBS (being primarily market and longevity risk). The SWRBS is closed to new entrants but still accrues benefits for current active members of the scheme Other than its main insurance subsidiaries (SWA, SWUF and PMSWF), SW has a number of non-insurance subsidiaries 2. The most significant of these non-insurance subsidiaries (which are both owned by the SW SHF) are: Scottish Widows Unit Trust Managers Ltd ( SWUTM ) which acts as an Authorised Corporate Director for the management of Open Ended Investment Companies. Scottish Widows Services Limited ( SWS ) which acts as a service provider to the LBGI group. Liabilities relating to the SW Retirement Benefits Scheme sit within SWS but are financed by SW The other non-insurance subsidiaries of SW do not add significantly to SW's overall business profile with the purpose of many of the subsidiaries being to act as investment vehicles for policyholder investments (for example to provide access to property investments). 2 I note that the sale of SW s small insurance subsidiary in Jersey (Scottish Widows International Limited) was completed on 1 April The impact of this sale is not reflected in the financial positions included in Section 8 but is not material (SWI only contributed 6m to the solvency position of SW at 31 December 2014). Page 20 of 102

21 4.35. Below is a summary of the in-force business of SW as shown in the 31 December 2014 PRA Annual Return: SW (Transferor) Business Category Policyholder Numbers As shown in the table above, reinsurance reduces SW s reserves by 41,672m. Of this reduction, 28,602m relates to internal reinsurances (all of which relate to arrangements with other Companies involved in the Transfer and, in particular, with SWUF and CMIG) and 13,069m relates to external reinsurances. Further detail on these reinsurances is provided in Section This indicates that the main business of SW comprises: Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) WPF LIFE UK 60,766 1,418 1,394 WPF PENSIONS UK 119,869 9,611 9,606 WPF OVERSEAS Sub-Total - WPF 180,641 11,052 11,023 NPF LIFE UK - Unit-Linked 167,052 4,264 4,264 NPF PENSION UK - Unit-Linked 2,291,031 44,096 3,166 NPF OVERSEAS - Unit-Linked 1, Sub-Total - NPF - Unit-Linked 2,459,724 48,383 7,453 NPF LIFE UK - Non-Unit-Linked 3,704,028 1, NPF PENSION UK - Non-Unit-Linked 691,696 7,483 7,464 NPF OVERSEAS - Non-Unit-Linked Sub-Total - NPF - Non-Unit Linked 4,396,283 8,701 7,989 TOTAL SW 7,036,648 68,136 26,464 Unit-linked business, in particular individual and group pensions business but also life (predominantly bond) business. With-profits business (noting that the reserves shown above include c 2bn of reserves relating primarily conventional non-profit annuities in payment 3 ). Annuities in payment (which comprise the majority of policies and reserves in the NPF Pensions UK Non Unit Linked category in the table). Protection business (which comprise the majority of policies and reserves in the NPF Life UK Non Unit Linked category in the table) In addition, the 31 December 2014 PRA Annual Return shows that SW had 31.6bn of admissible assets (net of current liabilities and excluding the value of its insurance subsidiaries) As a consequence of this business mix, SW s risk profile is reasonably balanced and includes a mix of market, insurance (i.e. longevity, mortality and morbidity) and business (i.e. expense and persistency) risk. SW s risk profile and how it changes under the LBGI 2015 Scheme is illustrated in Annex C and is discussed further in Sections 9.5 to 9.10 (with some of the issues discussed in those sections also being considered in Sections 8.37 to 8.69). 3 I note that this annuity business has subsequently been transferred from the SW WPF to the SW NPF. The impact of this transfer is not reflected in the 31 December 2014 financial positions discussed in Section 8. I note, however, that I have considered the impact of this annuity transfer in reaching the conclusions set out in Sections 8.10 and 8.24 (i.e. in stating that I am not aware of any events since 31 December 2014 that would materially alter the view obtained on the impact of the LBGI 2015 Scheme) and in Section 8.29 (i.e. that the regulatory and internal risk appetite capital requirements are expected to be met by the Transferee at the Effective Date). I will provide more detail on this in my supplementary report as necessary. Page 21 of 102

22 SWA (Transferor) Background SWA was incorporated on 1 September 1999 and became part of Lloyds TSB with the demutualisation of the Scottish Widows Fund Life Assurance Society on 3 March With the creation of LBG in January 2009, SWA became part of LBGI SWA is a wholly owned subsidiary of the SHF of SW SWA has no subsidiaries. Summary of the Business SWA s business comprises non-profit pension annuities in payment and pension term assurances (written pre-demutualisation). SWA is closed to new business SWA s business has been reinsured to SW. Collateral is posted by SW to SWA to mitigate SWA s counterparty exposure to SW under this reinsurance arrangement Below is a summary of the in-force business of SWA as shown in the 31 December 2014 PRA Annual Return: SWA (Transferor) Business Category Policyholder Numbers Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) NPF PENSION UK - Non-Unit-Linked 136,133 1,889 0 TOTAL SWA 136,133 1, The 31 December 2014 PRA Annual Return shows that SWA had 0.1bn of admissible assets (net of current liabilities) A similar breakdown of business at 31 December 2012 would have shown net of reinsurance reserves in excess of 7bn. These additional reserves arose under a reinsurance agreement between SW and SWA under which annuity benefits written in SW were reinsured to SWA. This reinsurance was recaptured by SW on 1 January 2013 leaving SWA with significantly reduced amounts of in-force business. At the same time, SWA s directly written business was reinsured to SW. The net effect of these changes in reinsurance arrangements was to remove SWA s direct exposure to insurance liabilities (as illustrated by the zero net of reinsurance position shown in the table above). As a result of these changes to reinsurance, SWA is now exposed to little risk. SWA s risk profile and how it changes under the LBGI 2015 Scheme is illustrated in Annex C and is discussed further in Sections 9.27 to 9.34 (with some of the issues discussed in those sections also being considered in Sections 8.37 to 8.69). The activities undertaken to move risk to and from SWA also helps to highlight the interconnected nature of the activities of the companies in the LBGI group. Page 22 of 102

23 SWUF (Transferor) Background SWUF was incorporated on 13 May 1981 and became part of Lloyds TSB with the demutualisation of the Scottish Widows Fund Life Assurance Society on 3 March With the creation of LBG in January 2009, SWUF became part of LBGI SWUF is a wholly owned subsidiary of the long-term fund of SW. Summary of the Business SWUF is a reinsurer of some of the unit-linked funds underlying SW s unit-linked pension business and has no direct individual policyholders Below is a summary of the in-force business of SWUF as shown in the 31 December 2014 PRA Annual Return: SWUF (Transferor) Business Category Policyholder Numbers Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) NPF PENSION UK - Unit-Linked n/a* 28,225 28,225 TOTAL SWUF n/a* 28,225 28,225 * The number of policyholders is shown as n/a as SWUF has no direct individual policyholders. All of its business results from the reinsurance it accepts from SW The 31 December 2014 PRA Annual Return shows that SWUF had 28.3bn of admissible assets (net of current liabilities) A similar breakdown of reserves at 31 December 2012 would have shown a reserve of over 150m in relation to non-unit liabilities associated with the unit-linked business (these non-unit liabilities reserves being held to provide for any excess of future death and expense outgo above future charge income expected to be taken from the unit funds). These additional reserves arose under the previous reinsurance agreement between SW and SWUF under which the death and expense risk was also reinsured to SWUF. This aspect of the reinsurance was recaptured by SW on 1 January 2013 with the effect that this exposure to non-unit risk was removed from SWUF with effect from that date. As a result of these changes to reinsurance, SWUF is now exposed to little risk. The activities undertaken to move risk to and from SWUF also helps to highlight the interconnected nature of the activities of the companies in the LBGI group. SWUF s risk profile and how it changes under the LBGI 2015 Scheme is illustrated in Annex C and is discussed further in Sections 9.40 to SWUF has a number of non-insurance subsidiaries arising from units held in open ended investment companies. These do not add significantly to SWUF's risk profile. Page 23 of 102

24 PMSWF (Transferor) Background PMSWF was incorporated on 9 January 1968 and became part of Lloyds TSB with the demutualisation of the Scottish Widows Fund Life Assurance Society on 3 March With the creation of LBG in January 2009, PMSWF became part of LBGI PMSWF is a wholly owned subsidiary of the long-term fund of SW. PMSWF has no subsidiaries. Summary of the Business PMSWF provides investment and management services for pension funds via policies issued to trustees of retirement benefit schemes. Arrangements are in-force under which Aberdeen Asset Management provides investment management and marketing services to PMSWF and under which Scottish Widows Services Limited provides administration services to PMSWF. Investment accounting and unit pricing is carried out by State Street Bank and Trust Company ( State Street ) with the oversight of State Street s activities being carried out by Scottish Widows Administration Services Limited PMSWF also has some directly written annuity business. This is now fully reinsured to SW. Prior to 1 January 2013, this was reinsured to SWA; the redirection to SW being made as part of the wider simplification of the internal reinsurance arrangements described above for SWA and SWUF. Collateral is not posted under this reinsurance arrangement Below is a summary of the in-force business of PMSWF as shown in the 31 December 2014 PRA Annual Return: PM (Transferor) Business Category Policyholder Numbers Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) NPF PENSION UK - Unit-Linked n/a* 1,702 1,702 NPF PENSION UK - Non-Unit-Linked TOTAL PM 315 1,710 1,702 * As this business relates to managed fund business, the number of individual policyholders is not included in the PRA Return. However, the notes to the forms indicate that there were 441 Schemes being administered at 31 December The 31 December 2014 PRA Annual Return shows that PMSWF had 1.7bn of admissible assets (net of current liabilities) As a result of this business profile and arrangements with other companies in the group (for example, services are provided by Scottish Widows Services Limited (a subsidiary of Scottish Widows plc), in return for charges not exceeding the relevant services charges made to policyholders), PMSWF is exposed to little direct risk. PMSWF s risk profile and how it changes under the LBGI 2015 Scheme is illustrated in Annex C and discussed further in Sections 9.45 to 9.52 (with some of the issues discussed in those sections also being considered in Sections 8.37 to 8.69). Page 24 of 102

25 HLL (Transferor) Background HLL was incorporated on 22 March In September 2001, HLL became part of HBOS plc through the merger of Halifax and the Bank of Scotland. With the Lloyds TSB acquisition of HBOS plc in January 2009, HLL became part of LBGI HLL is a wholly owned subsidiary of the SHF of CMIG The HLL SHF wholly owns SAL. Summary of the Business HLL s primary business is unit-linked individual pensions business (mainly stakeholder pensions business) sold through direct and banking channels. It also holds deferred and immediate annuity business and small amounts of unit-linked life and protection business HLL has two intra-group reinsurance arrangements with companies that are party to the LBGI 2015 Scheme. Under the first arrangement, it reinsures a small amount of pension investment benefits to CMIG s with-profits fund (see the accumulating withprofits line in the table below). HLL, however, retains the non-unit risks (for example, expenses) relating to these benefits. Under the second arrangement, it accepts reinsurance of certain unit-linked funds from SAL. The non-unit risks relating to this business remain with SAL HLL provides reinsurance for business written by the Equitable Life Assurance Society (see Section 4.89 for further detail) HLL is closed to new business except for increments on existing policies Below is a summary of the in-force business of HLL as shown in the 31 December 2014 PRA Annual Return: HLL (Transferor) Business Category Policyholder Numbers Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) NPF LIFE UK - Unit-Linked NPF PENSION UK - Unit-Linked 91,091 4,779 4,779 Sub-Total - NPF - Unit-Linked 91,216 4,943 4,943 NPF PENSION UK - Accumulating with-profit 1, Sub-Total - NPF - Accumulating with-profit 1, NPF LIFE UK - Non-Unit-Linked 28, NPF PENSION UK - Non-Unit-Linked 23, Sub-Total - NPF - Non-Unit Linked 51, TOTAL HLL 143,436 5,441 5,429 Page 25 of 102

26 4.69. This indicates that the main business of HLL comprises: Unit-linked individual pensions business. Deferred annuities and annuities in payment (which comprise the majority of reserves in the NPF Pensions UK Non Unit Linked category in the table) The 31 December 2014 PRA Annual Return shows that HLL had 5.6bn of admissible assets (net of current liabilities and excluding the value of its insurance subsidiaries) As a consequence of this business mix, HLL s risk profile includes a mix of market, insurance (primarily longevity) and business (i.e. expense and persistency) risk. HLL s risk profile and how it changes under the LBGI 2015 Scheme is illustrated in Annex C and is discussed further in Sections 9.74 to 9.80 (with some of the issues discussed in those sections also being considered in Sections 8.37 to 8.69). Page 26 of 102

27 SAL (Transferor) Background SAL was incorporated on 15 September In September 2001, SAL became part of HBOS plc through the merger of Halifax and the Bank of Scotland. With the Lloyds TSB acquisition of HBOS plc in January 2009, SAL became part of LBGI SAL is a wholly owned subsidiary of the SHF of HLL. SAL has no subsidiaries. Summary of the Business SAL s business comprises unit-linked life savings bonds and protection business sold primarily through group banking channels SAL is closed to new business except for increments on existing contracts SAL s exposure to mortality and morbidity risk through its protection business is mitigated by external reinsurance arrangements. SAL is also party to an intra-group reinsurance arrangement of certain unit linked benefits with HLL. These arrangements are discussed further in Section Below is a summary of the in-force business of SAL as shown in the 31 December 2014 PRA Annual Return: SAL (Transferor) Business Category As shown in the table above, reinsurance reduces SAL s reserves by 119m. Of this reduction, 37m relates to internal reinsurances with HLL and 82m relates to external reinsurances. Further detail on these reinsurances is provided in Section This indicates that the main business of SAL comprises: Unit-linked life (bond) business. Policyholder Numbers Gross of reinsurance reserves ( m) Net of reinsurance reserves ( m) NPF LIFE UK - Unit-Linked 241,134 9,195 9,158 Sub-Total - NPF - Unit-Linked 241,134 9,195 9,158 NPF LIFE UK - Non-Unit-Linked 514, NPF Fund OVERSEAS - Non-Unit-Linked Sub-Total - NPF - Non-Unit Linked 514, TOTAL SAL 755,714 9,362 9,243 Protection business (which comprise the majority of policies and reserves in the NPF Life UK Non Unit Linked category in the table) Page 27 of 102