INDEPENDENT EXPERT REPORT OF PHILIP TIPPIN FIA In the matters of

Transcription

1 INDEPENDENT EXPERT REPORT OF PHILIP TIPPIN FIA In the matters of AXA INSURANCE UK PLC AND RIVERSTONE INSURANCE (UK) LIMITED AND IN THE MATTER OF PART VII OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 IN THE HIGH COURT OF JUSTICE DATED 13 APRIL KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

2 Contents 1. INTRODUCTION 4 The Proposed Transfer 4 Scope and Purpose of this Report 5 The Independent Expert 6 Reliances 6 Use and limitations 7 Professional guidance 7 Terminology 8 2. EXECUTIVE SUMMARY & CONCLUSIONS 9 Overview of the Transfer 9 Approach 11 Key Assumptions and Dependencies 12 Findings 13 Expert s declaration BACKGROUND 15 RiverStone Insurance ( RIUK ) 15 AXA Insurance UK plc ( AXA ) 17 Insurance business of the Transfer Companies 19 Outwards reinsurance programmes 21 Employers Liability Tracing Office ( ELTO ) system 22 Prudential capital requirements 22 Capital management policy 23 Guarantees / risk sharing arrangements 23 Pension Scheme Obligations EFFECTS OF THE TRANSFER 25 Financial effects of the Transfer 25 Effect of the Transfer on RiverStone Europe Group and AXA Group structure 25 Effect of the Transfer on Transfer Company balance sheets 25 Cost and tax impact of the Transfer 27 New reinsurance as part of Project Arven 27 Outward reinsurance 28 Pension Scheme Obligations 28 Dividends and capital structure 28 Guarantees/risk sharing arrangements 29 Non-financial effects of the Transfer 29 Future intentions of AXA and RIUK 29 Impact of the Transfer on competition POTENTIAL IMPACT OF TRANSFER ON STAKEHOLDERS 33 Overview of analysis performed 33 Identification of policyholder groups 33 Financial resources available to pay policyholder claims 35 Impact on existing reinsurers 39 Pension Scheme Obligations 39 Consideration of capital and risk 39 Impact of Transfer on capital available to policyholders 43 Treating Customers Fairly 47 KPMG LLP. All rights reserved Page 2 of 90 13/04/2018

3 The ease of presenting a new claim 49 Protection of customer data 50 The impact of Brexit 50 Other Considerations METHODOLOGY, STRESS AND SCENARIO ANALYSIS 52 Overview 52 Loss modelling approach 52 Stress test analysis SUMMARY OF FINDINGS FOR PROJECT ARVEN 60 Summary of changes in circumstances of existing RIUK policyholders 60 Summary of changes in circumstances of Transferring policyholders 60 Summary of changes in circumstances of remaining AXA policyholders whose policies will be reinsured by RIUK under Project Arven 61 Summary of changes in circumstances of remaining AXA policyholders whose policies will not be reinsured by RIUK under Project Arven reinsurances EFFECTS OF PROJECT FANDANGO 62 Effect of Project Fandango and Project Arven on RiverStone Europe Group structure 62 Effect of Project Fandango on RIUK balance sheets 63 Cost and tax impact of Project Fandango 65 Changes in reinsurance protections 65 Outward Reinsurance 66 Pension Scheme Obligations 66 Dividends and capital structure 66 Guarantees/risk sharing arrangements 66 Non-financial effect of Project Fandango SUMMARY OF FINDINGS FOR PROJECT ARVEN AND PROJECT FANDANGO 68 APPENDIX 1 CURRICULUM VITAE OF THE INDEPENDENT EXPERT 69 APPENDIX 2 EXTRACT FROM LETTER OF ENGAGEMENT 70 APPENDIX 3 LETTERS OF REPRESENTATION 71 APPENDIX 4 LIST OF INFORMATION PROVIDED 75 APPENDIX 5 GLOSSARY OF TERMS AND DEFINITIONS 77 APPENDIX 6 LIST OF INTERVIEWS CARRIED OUT 84 APPENDIX 7 DETAILS OF PROPOSED POLICYHOLDER COMMUNICATION (SUMMARISED FROM WITNESS STATEMENTS) 85 APPENDIX 8 DEFINITION OF DISEASE, ABUSE AND STRESS (DAS) CLAIMS 88 APPENDIX 9 SUMMARY OF REINSURANCE ARRANGEMENTS 89 KPMG LLP. All rights reserved Page 3 of 90 13/04/2018

4 1. Introduction The Proposed Transfer 1.1 RiverStone Insurance ( RIUK ) is a subsidiary of RiverStone Holdings Limited and is part of the Fairfax Financial Holdings Limited ( Fairfax ) group, a Canadian-based holding company engaged in property and casualty insurance and reinsurance business and investment management. RIUK is a non-life insurer which has not written new business since 1999, instead focusing on the acquisition of run-off business. It is based in the UK. AXA Insurance UK plc ( AXA ) is a UK-regulated non-life insurance company and is part of the AXA Group, a worldwide leader in insurance and asset management. AXA actively underwrites commercial and personal lines insurance in the UK, direct to customers and via brokers, aggregators and in conjunction with corporate partners. AXA is based in the UK and can trace its business back to RIUK and AXA have signed an agreement to transfer a portfolio of commercial Employers Liability ( EL ) and Public Liability ( PL ) policies (together with their associated reinsurance protections) that were underwritten by AXA prior to 2002 (or by a predecessor company prior to 2002, where those policies have transferred to AXA) in respect of policies concluded in the United Kingdom, the Channel Islands or the Isle of Man providing cover in respect of risks located in the UK, and/or the Channel Islands and/or Isle of Man from AXA to RIUK under the provisions of Part VII of the Financial Services and Markets Act 2000 ( FSMA ) under a transfer to be sanctioned by the High Court of Justice of England and Wales ( the Court ). In addition, RIUK and AXA have signed a reinsurance agreement under which RIUK will reinsure AXA against all Disease, Abuse and Stress claims ( DAS Claims ) as agreed by RIUK and AXA (see Appendix 8 for details of what constitutes DAS Claims) under EL and PL policies underwritten by AXA between 1 January 2002 and 31 December 2014 (or by a predecessor company between those two dates, where those policies have transferred to AXA) in respect of risks located in the UK, Channel Islands or Isle of Man. Finally, RIUK and AXA have also signed a reinsurance agreement which reinsures RIUK against deterioration of reserves (associated with DAS Claims subject to the Part VII transfer and the DAS Claims reinsurance) beyond a cap, and another which reinsures back to AXA any non-das claims that emerge on the transferring portfolio (these reinsurances are described in more detail in section 2.1, and all reinsurance arrangements discussed in this report are summarised in Appendix 9 for ease of reference). These reinsurance agreements are separate from the Part VII transfer, but conditional on the Part VII transfer being sanctioned by the Court. These reinsurances, together with the proposed Part VII transfer, are referred to as Project Arven. Claims under policies that will transfer from AXA to RIUK under Project Arven are currently administered by another member of the AXA Group, AXA Liabilities Managers SAS ( AXA LM ). AXA LM is incorporated in France, but operates through its UK branch in handling such claims. Upon the Transfer taking effect, it is planned that the staff at AXA LM currently handling claims under the policies that will transfer from AXA to RIUK will transfer over to RiverStone Management Limited ( RSML ), a service company within the RiverStone Europe Group which is a wholly-owned subsidiary of RiverStone Holdings Limited, under the Transfer of Undertakings (Protection of Employment) Regulations 2006 ( TUPE ). The staff transferring from AXA LM to RSML under TUPE will continue to administer claims arising under the AXA policies that are part of Project Arven (i.e. those which are reinsured by RIUK as well as the policies that have transferred to RIUK). In addition to the UK transfer, a parallel transfer to RIUK is proposed in Jersey in respect of EL and PL policies underwritten by AXA in Jersey prior to 2002 (or by a predecessor company prior to 2002, where those policies have transferred to AXA). The transfer of insurance business carried on in or from within Jersey must be approved by the Royal Court of Jersey. For the avoidance of doubt, I have specifically considered the position of Jersey policyholders and my conclusions equally apply to those policyholders affected by the Jersey transfer. I refer in this report to the transfer of the insurance portfolio from AXA to RIUK as the Transfer. I refer to AXA and RIUK as the Transfer Companies. KPMG LLP. All rights reserved Page 4 of 90 13/04/2018

5 1.2 Separately, it is proposed that all of RiverStone Insurance Limited s ( RIL ) liabilities will be transferred to RIUK as a reorganisation of the RiverStone Europe Group to simplify it and reduce the number of underwriting entities. The RiverStone Europe Group consists of RiverStone Holdings Limited and its subsidiaries, which include RIUK and RIL. RIL was acquired by RiverStone Holdings Limited under its former name Brit Insurance Limited and is a UK-based non-life insurer with several lines of business. RIL was incorporated in 1992 and started writing business in It ceased writing new business in 2012 and is now in run-off. This transfer will similarly take place under the provisions of Part VII of the FSMA under a transfer to be sanctioned by the Court; I refer to this transfer as Project Fandango. For the avoidance of doubt, the sanction of Project Arven by the Court is not conditional on its sanction of Project Fandango, nor is the sanction of Project Fandango by the Court conditional on the sanction of Project Arven. The proposed date for Project Arven to become effective is 1 October The proposed date for Project Fandango to become effective is 28 September Additional terms used in this report are set out in the glossary of terms at Appendix 5 (see section 1.21). Scope and Purpose of this Report 1.3 Under FSMA, a proposed transfer of (re)insurance business from one entity to another can only take place if it has been sanctioned by the Court for the appropriate jurisdictions. As part of the approval process a report is required from an expert (the Independent Expert ) to aid the relevant Court in their deliberations. This report is the Independent Expert s report. 1.4 As Independent Expert, it is my duty to the Court to consider the impact of the Transfer on the policyholders of the Transfer Companies, along with any other policyholders affected by the Transfer. In particular, it is my duty to consider the impact on the security and service levels for their benefits as set out in the excerpt from my engagement letter shown in Appendix 2. In this instance, I have not identified any policyholders other than those of the Transfer Companies to be potentially affected. I confirm that the comments and conclusions in this report apply to all policyholders of AXA and RIUK, irrespective of their place of residence and/or the jurisdiction within which the business is said to be carried on or in which their policy was issued. 1.5 I have prepared this report to address the Part VII transfer of the AXA portfolio into RIUK. I have prepared a separate report to address the Part VII transfer of the business of RIL into RIUK. As the transfers are expected to happen within a short time of each other, I comment in this report on my conclusions as to the impact on policyholders of the proposed Project Arven Part VII Transfer both in the case that Project Fandango is sanctioned by the Court, and in the case that it is not. 1.6 This report does not consider any possible alternative arrangements to those referred to in sections 1.1 and 1.2. RIUK has informed me of a further proposed Part VII transfer that is proposed to take place around June This is described in more detail in section 4.17, but I do not consider it further in this report as it will be subject to a separate Court process to consider the impact of that proposed transfer on policyholders. 1.7 This report is organised into nine sections as follows: Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 The purpose of this report and the role of the Independent Expert Executive summary and conclusions Relevant background information on each of the Transfer Companies Setting out the effect of the Transfer on the Transfer Companies Discussion of the potential impact of the Transfer on stakeholders Consideration of the appropriateness of the information provided to me which informs my opinion, including consideration of methodologies for calculations KPMG LLP. All rights reserved Page 5 of 90 13/04/2018

6 Section 7 Section 8 Section 9 used in provision of data and scenarios following the Transfer taking effect that may affect policyholder security Summary of findings on Project Arven Discussion of additional impact if Project Fandango were also to be sanctioned by the Court Summary of findings on Project Arven and Project Fandango combined The Independent Expert 1.8 I, Philip Tippin, am a partner in the actuarial practice of KPMG LLP ( KPMG ). I have been a Fellow of the Institute and Faculty of Actuaries for 19 years. My detailed curriculum vitae is included in Appendix I have been appointed by RIUK and AXA to act as the Independent Expert in connection with the Transfer. My appointment has subsequently been approved by the Prudential Regulation Authority ( PRA ) on 9 June 2017, following consultation with the Financial Conduct Authority ( FCA ) To the best of my knowledge, information and belief, I have no conflicts of interest in connection with the parties involved in the proposed Transfer and I therefore consider myself able to act as an Independent Expert on this transaction I confirm that I have no financial interest in the Transfer Companies, nor do I work for any entity belonging to the RiverStone Europe Group or AXA Group. Neither I, nor any of my immediate team assisting me in producing this report, have carried out any work with the Transfer Companies or any companies directly linked with RIUK and AXA over the last three years I confirm that the contribution of neither the RiverStone Europe Group nor the AXA Group (including all of their respective subsidiaries) to KPMG s global fee income has exceeded 0.1% over the last 3 years The costs and expenses associated with my appointment as Independent Expert and the production of this report will be charged to RIUK and AXA. For the avoidance of doubt, I note that no costs of the Transfer will be borne by policyholders In reporting to the Court on the proposed Transfer, my overriding duty is to the Court. This duty applies irrespective of any person or firm from whom I have been instructed or paid. Reliances 1.15 My role is to produce a report in a form approved by the PRA in consultation with the FCA for submission to the Court. Whilst I have been assisted by my team, the report is written in the first person singular and the opinions expressed are my own My work has been based on the data and other information made available to me by the Transfer Companies. A list of data and other information that I have considered is shown in Appendix 4. I have not sought independent verification of data and information provided to me by the Transfer Companies, nor does my work constitute an audit of the financial and other information provided to me. Where indicated, I have reviewed the information provided for reasonableness and consistency and with the benefit of my experience this has not raised any concerns. I note that the information has been provided to me by members of the senior management of the Transfer Companies or by responsible senior professionals from the Transfer Companies advisors. Where possible, I have obtained audited financial information, and have received reports from independent third parties. In any case, I have considered the sources of all data I have received before placing any reliance on it, and have sought representations where I consider it appropriate. I have met in person or conducted conference calls with representatives of the Transfer Companies to discuss the information provided to me and specific matters arising out of the KPMG LLP. All rights reserved Page 6 of 90 13/04/2018

7 considerations and analysis conducted. This includes the legal advisers and the tax advisers to the Transfer Companies, where appropriate. Where significant pieces of information have been provided orally I have requested and received written confirmation. There are no documents or other information that I have requested that have not been provided to me. Appendix 4 contains a list of the information upon which I have relied. I note that I have reviewed the Legal Scheme Documents referred to in Appendix 4 and I am comfortable with their contents. As far as I am aware, there are no matters that I have not taken into account in undertaking my assessment of the proposed Transfer and in preparing my report, which should be drawn to the attention of policyholders in their consideration of the terms of the proposed Transfer. Use and limitations 1.17 This report must be read in its entirety. Reading individual sections in isolation may be misleading Copies of this report will be sent to the relevant UK financial regulators: the PRA and the FCA. This report will be used in evidence in the applications submitted to the Court. It will also be made available to policyholders and other members of the public as required by the relevant legislation and will be made available on a dedicated website. A summary of the report will also be included in the pack sent to policyholders and other interested parties (see Appendix 7 for further details). This report has been prepared under section 109 of FSMA, in a form approved by the PRA on 29 March 2018 in consultation with the FCA. This report is prepared solely in connection with, and for the purposes of, informing the Court, the PRA, the FCA and policyholders of the Transfer Companies of my findings in respect of the impact of the Transfer on the security of, and service levels to, policyholders (including, for the avoidance of doubt, those who benefit from the cover provided under the relevant insurance policies) and may only be relied on for this purpose. This report is subject to the terms and limitations, including limitation of liability, set out in my firm s engagement letter of 18 July An extract from this letter describing the scope of my work is contained in Appendix 2. This report should not be regarded as suitable to be used or relied on by any party wishing to acquire any right to bring action against KPMG LLP in connection with any other use or reliance. To the fullest extent permitted by law, KPMG LLP will accept no responsibility or liability in respect of this report to any other party, other than as defined in my firm s engagement letter referenced above In the normal course of conducting my role as Independent Expert, I have been provided with a significant and appropriate amount of information and data about the Transfer Companies activities and performance. In forming my view as set out in this report, this information has served a necessary and vital contribution. Due to a combination of legal, regulatory and commercial sensitivities, some of the information I have relied upon to reach my conclusions cannot be disclosed in a public report such as this. However, I can confirm that appropriate detailed information has been provided to me to enable me to form the opinions I express to the Court in this report. Professional guidance 1.20 This report has been prepared in accordance with the guidance set out in Part 35 of the Civil Procedure Rules and the accompanying practice direction, including the protocol/guidance for the instruction of experts to give evidence in civil claims (2014) issued by the Civil Justice Council. This report also complies with the guidance for transfer reports set out in the Statement of Policy issued by the PRA in April 2015 entitled The Prudential Regulation Authority s Approach to Insurance Business Transfers and in Chapter 18 of the Supervision Manual of the FCA KPMG LLP. All rights reserved Page 7 of 90 13/04/2018

8 Handbook, in particular, sections to inclusive, regarding the content and considerations of the report. In preparing this report I have taken into account the requirements of the Technical Actuarial Standards ( TAS s ) issued by the Financial Reporting Council. The TAS s which apply to the work performed in preparing this report are Principles for Technical Actuarial Work ( TAS 100 ) and Insurance ( TAS 200 ). In my opinion, there are no material departures from any of these TASs in my performance of this work and this report. I have also followed the guidance set out in APS X2: Review of Actuarial Work and this report has been peer reviewed by the reviewer approved by the PRA and FCA in accordance with this guidance. I understand that my duty in preparing my report is to help the Court on all matters within my expertise and that this duty overrides any obligations I have to those instructing me and/or paying my fee. I confirm that I have complied with this. Terminology 1.21 In my discussion of the effects of the proposed Transfer on the Transfer Companies concerned, I use various technical terms. The definitions of these terms as used in this report are contained in the Glossary in Appendix 5. In considering the proposed Transfer, the FCA s Treating Customers Fairly ( TCF ) principles should be applied. To ensure that customers are treated fairly in the future, it is necessary to establish the ways in which customers have been treated in the past. From the policyholders perspective, the successful implementation of the Transfer must be on the basis that their benefits and fair treatment are not materially adversely affected I make reference throughout this report to financial items or events that are material or immaterial. I consider an event immaterial if the expected impact of the event is very small, such that it would not influence the decisions of a reader, either on its own or in conjunction with other immaterial events. This could be because the event has a very low probability of occurring, a very low financial impact if it did occur, or a combination of these. Similarly a financial item (such as an insurance claim reserve for a particular line of business) is immaterial if its value is very small in the context of the whole, and the probability of significant variability in the value of that item in the context of the whole is similarly small. Conversely, material items and events would be of such a size that they could influence the decisions of a reader of this report, and where I have identified these I have considered them specifically in my discussion of the effects of the proposed Transfer. KPMG LLP. All rights reserved Page 8 of 90 13/04/2018

9 2. Executive Summary & Conclusions Overview of the Transfer 2.1 This report considers the impact of the proposed Transfer, along with the associated reinsurance arrangements that will be put in place at the same time (as detailed below in this section) on affected policyholder groups. It also considers the impact of a further proposed Part VII transfer, Project Fandango, on those policyholder groups should both be sanctioned by the Court. The intention of Project Arven is for RIUK to assume economic responsibility ( economic as the legal responsibility of the reinsured Arven policies will remain with AXA, though RIUK will also assume legal responsibility for the policies transferred by the Transfer) for DAS Claims (as defined by AXA and RIUK see appendix 8 for details) under AXA s portfolio of EL and PL policies issued on or prior to 31 December 2014 in place of AXA. This includes policies underwritten by AXA and policies originally underwritten by other insurance companies that have been transferred to AXA. As such, the Transfer Companies are proposing to enter into four principal arrangements in connection with Project Arven: (1) The Transfer, under which all commercial policies underwritten by AXA prior to 2002 (or by a predecessor company prior to 2002, where those policies have transferred to AXA) in the UK, Channel Islands or Isle of Man which provide cover for EL and/or PL, in respect of risks located in the UK and/or the Channel Islands and/or Isle of Man, will transfer from AXA to RIUK. (2) A 100% quota share reinsurance by AXA of RIUK to cover non-das Claims subsequently reported on any of the policies included within the Transfer (under (1) above). (3) A 100% quota share reinsurance by RIUK of AXA for all DAS Claims arising under policies underwritten by AXA between 1 January 2002 and 31 December 2014 (or by a predecessor company between those two dates, where those policies have transferred to AXA) which provide cover for EL and/or PL in respect of risks located in the UK, Channel Islands or Isle of Man. (4) An excess of loss reinsurance by AXA of RIUK, with the effect of limiting RIUK s total liability in respect of DAS Claims arising under the policies included within the Transfer (under (1) above) and policies reinsured by RIUK (under (3) above), which will be triggered if the aggregate losses under all such policies (being sums actually paid or which RIUK or AXA (as applicable) is liable to pay) exceed 250% of the Gross Claims Reserves valuation as at 31 December 2014 (less the value of claims paid following that date up to the Effective Date) for DAS Claims (after which, any liability above this threshold will reinsure back to AXA). These arrangements are illustrated in the chart in section 3.5. I refer to the group of AXA liabilities transferring and being reinsured as Project Arven Liabilities. The decision to use the split mechanism of the Part VII transfer (under (1) above) and reinsurance (under (3) above) was taken so that policies that still have a significant potential for non-das Claims will not transfer and will continue to be underwritten by AXA and remain on the AXA balance sheet. The policies written in years 2001 and prior are sufficiently old that the only claims emerging on these for the last few years have been DAS Claims, and these policies will be subject to the Transfer. The reinsurance arrangements (noted at (2), (3) and (4) above) have been entered into on the basis that they will take effect on the date on which the Transfer is completed. In the event that the Transfer is not sanctioned by the Court, the reinsurance arrangements (noted at (2), (3) and (4) above) will never take effect. KPMG LLP. All rights reserved Page 9 of 90 13/04/2018

10 2.2 Jersey policies issued by AXA (or by a predecessor company, where those policies have transferred to AXA) will not transfer, unless the Jersey transfer is approved by the Royal Court of Jersey. AXA and RIUK have taken advice from Mourant Ozannes ( MO ), a law firm based in Jersey, on the application of the laws of Jersey. MO has advised that it will be necessary to undertake a separate transfer scheme in Jersey under the Insurance Business (Jersey) Law 1996 ( the Jersey Scheme ) in respect of any transferring policy which was effected or carried out as part of insurance business carried on in, or from within, Jersey and in respect of which any liability remains unsatisfied or outstanding at the Effective Date ( the Jersey Policies ). In broad terms the Jersey Policies will only be transferred to RIUK if and when the Jersey Scheme has been sanctioned by the Royal Court of Jersey and comes into effect. The Jersey Scheme will be implemented on the same timetable as the UK Scheme, with the Jersey hearing at which the Royal Court of Jersey will be asked to sanction the transfer of the Jersey Policies being held shortly after the equivalent UK hearing. If the Jersey Scheme has not been sanctioned by the Royal Court of Jersey or otherwise has not become effective at the Effective Date, then the Jersey Policies will become Excluded Policies under the terms of the UK Scheme Document. In such circumstances, the Jersey Policies will, therefore, not transfer to RIUK under the Jersey Scheme or the UK Scheme on the Effective Date. Until AXA and RIUK can arrange for the Jersey Scheme to be subsequently sanctioned and the Jersey Policies transfer to RIUK, the Jersey Policies will be reinsured by RIUK under the terms of the reinsurance agreement entered into between AXA and RIUK and any assets relating to the Jersey Policies will be treated as Residual Assets under the UK Transfer, meaning: AXA will hold them as RIUK s trustee; AXA will comply with RIUK s lawful directions in relation to them; RIUK will have the power to act as AXA s attorney in relation to them; and RIUK will indemnify AXA in relation to them under the terms of the UK Scheme. 2.3 From RIUK s perspective, the transfer of the Project Arven Liabilities is in line with their business objective of seeking acquisition opportunities of legacy business with the aim of performing a timely, orderly and economically viable run-off of the portfolios. AXA believe these long tail liabilities represent a non-core part of their business and as such are looking to divest them to ensure that they are focusing on their core business and ensuring that AXA s remaining policyholders continue to receive an appropriate level of attention. 2.4 The Transferring policyholders will all have EL and/or PL cover. They are thus all businesses of some kind and some may even be sole traders or partnerships. There are also other parties involved who will have a particular interest in EL cover as beneficiaries of the policies. For the avoidance of doubt, where I refer to the interests of policyholders I mean all direct EL and PL policyholders and third party claimants. I consider their interests to be aligned for the purposes of this report. The EL cover provided by the transferring AXA polices now responds to claims for industrial disease. The latent nature of this type of liability means that whilst there are many repeat claims from the same workplace or employer, those policyholders who have never made claims and future claimants cannot know that their interests are considered by this report and will not be notified individually of the Transfer. 2.5 AXA and RIUK intend to communicate details of the Transfer to AXA policyholders. AXA propose to notify their policyholders directly (with the exclusion of specific groups listed below) and also plan to advertise the Transfer through publications and via insurance brokers and claimant solicitors who may be able to contact affected AXA policyholders and third party claimants. The advertisements will contain details of a dedicated website from which documentation relating to the Transfer can be downloaded. Contact details for queries or requests will also be provided on the website. Further details of the proposed communications approach are set out in Appendix 7. KPMG LLP. All rights reserved Page 10 of 90 13/04/2018

11 Waivers are being sought in respect of the following groups of policyholders and outwards reinsurers, meaning that they will not be notified of the Transfer individually: Policyholders of AXA that are not transferring under Project Arven; Transferring policyholders of AXA for whom there are no current claims or who have not had any claims closed since 1 January 2013; Transferring policyholders of AXA for whom there is a current claim or any claim closed since 1 January 2013, but for whom the address cannot be traced or verified; Reinsurers of AXA for whom the address cannot be traced or verified; and Policyholders of RIUK that do not have a current open claim, or for whom the address cannot be traced or verified. 2.6 Although it is not within the scope of my role as Independent Expert, I have been asked to comment on the appropriateness of the communications waivers requested in connection with the Transfer. I provide my reasoning in Appendix 7. I note and accept though that the Court is the ultimate arbiter on the communications required and any waivers in respect of the same, and that the PRA and FCA will also have their own opinions on these issues. When considering the proposed approach to communications, I have considered a number of factors; including the likelihood of a policyholder having a claim, whether the policyholder s policy is transferring and the impact of the Transfer on the security of the policyholders. I have also considered the practicality of notifying policyholders. I consider the proposed approach to communicating the Transfer to be appropriate, reasonable and proportionate. I consider that the non-circularisation to the policyholders of RIUK without open claims and the specific groups of policyholders of AXA (as set out above in summary and in Appendix 7 in detail) is appropriate, reasonable and proportionate given the circumstances of those policyholders. 2.7 The Transfer provides for the possibility of there being a limited number of policies which may not be capable of being transferred by law under the Transfer ( Excluded Policies ). This may occur if the Court, or the Royal Court of Jersey with regard to the Jersey policyholders, for any reason determines not to transfer certain policies. If there are such policies, they will remain with AXA, but will be subject to the reinsurance arrangements noted in section 2.1. Approach 2.8 My approach to assessing the likely effects of the Transfer on policyholders is to: Understand the businesses of the entities affected by the Transfer; and Understand the effect of the Transfer on the assets and liabilities of the companies and businesses involved. The above stages are contained in sections 3 and 4 of this report. Having identified the effects of the Transfer on the various companies and businesses, I then do the following in section 5: Identify the relevant groups of policyholders within each of the Transfer Companies; Consider the impact of the Transfer on the security of each group of policyholders and other stakeholders (where appropriate); and Consider other non-financial aspects of the impact of the Transfer (for example, policyholder service and the claims handling process). KPMG LLP. All rights reserved Page 11 of 90 13/04/2018

12 I further consider the impact on the policyholders within the scope of the Transfer of the potential for Project Fandango to be sanctioned as well. 2.9 Financial and economic information considered In order to consider the effect of the proposed Transfer on each of the entities and groups of policyholders concerned, I have been provided with comparative information for each legal entity, including: Accounting (UK GAAP) and Solvency II Balance sheet information based on the most recently audited balance sheet figures as at 31 December 2016 and the unaudited accounts as at 30 June 2017 for RIUK and AXA; Actuarial reserve reports for RIUK and AXA Own Risk and Solvency Assessments ( ORSA ) for RIUK and AXA Calculations of the regulatory capital required for each of the Transfer Companies as at 31 December 2016; and Internal management information provided over the course of preparing this report. I will issue a supplemental report containing the most up-to-date financial information prior to the final hearing, at which sanction to proceed with the Transfer will be sought from the Court. This will provide an update to the Court on my conclusions in respect of the effect of the proposed Transfer on the different groups of policyholders, in light of any significant events subsequent to the date of the finalisation of this main report. In forming my opinion, I have conducted a number of interviews with key personnel responsible for core functions in the Transfer Companies (a complete list of interviewees is provided in Appendix 6), and I have placed reliance on, amongst other information, estimates of the capital required to be held by the Transfer Companies (such that the companies are able to fulfil their policyholder obligations in the event of an extreme event or scenario) provided by the Transfer Companies. I describe how I have used this information in performing my analysis in more detail in section 5.1. In order to satisfy myself that these estimates are an appropriate basis on which to form an opinion, I have considered: The appropriateness of the methods used by the Transfer Companies to calculate the capital requirements; and The impact of a set of specific severe adverse events on each of the Transfer Companies pre and post Transfer in order to gain comfort that, at a high level, the capital estimates are reasonable. The above stages are contained in section 6 of this report. Key Assumptions and Dependencies 2.10 In conducting my analysis, I have assumed the following: A capital injection which at a minimum brings the RIUK post Transfer capital cover (as a proportion of the regulatory requirement) to 110% is made to RIUK before the Effective Date of this Transfer. It is proposed that this is provided by means of a dividend from RIL. The payment of a dividend from RIL would be subject to regulatory approval and an application has been made by RIL in this regard. If the approval is not granted, RiverStone Holdings Limited will source the required amount from Fairfax. I have received written confirmation from an officer of Fairfax confirming that Fairfax are willing to supply this KPMG LLP. All rights reserved Page 12 of 90 13/04/2018

13 Findings additional capital should the necessary amount of dividends not be approved before the Effective Date of the Transfer. Whilst this is not legally binding, it comes from someone with the authority to make such commitments, and as such I see no reason to doubt the intent of Fairfax to ensure that RIUK is capitalised to 110% of its regulatory capital requirement after the Transfer. I note that the capital injection is required to be made as a condition of the Transfer and therefore the Transfer will not proceed unless the required amount of capital is in place at RIUK. The Transfer is to be broadly tax neutral for all of the Transfer Companies. Details on the advice provided by specialist tax advisors is contained in section 4.6. In the unlikely event of the UK leaving the European Union ( EU ) before the Effective Date, it is likely that the UK will still follow the EU-wide prudential regulatory regime known as Solvency II, or an equivalent, going forward. I note though that the negotiations to lead to any exit of the EU can last up to two years from the point at which the UK Government formally gave notice to leave by triggering Article 50 on 29 March 2017, which most likely extends beyond the proposed Effective Date of this Transfer. RIUK will continue to operate after the Transfer. The above assumptions underlie the analysis and conclusions in my report. If these assumptions were to change, my opinion may also change. At the time of writing my report, the above assumptions are the current intentions for the Transfer and the Transfer Companies and I have received written representations from the Transfer Companies substantially similar to Appendix 3 confirming my understanding The findings of my report are summarised below. The detailed explanation behind these conclusions follows in the body of this report: I have identified four distinct policyholder groups. These are: i) Existing RIUK policyholders; ii) Transferring policyholders; iii) Remaining AXA policyholders whose policies will be reinsured by RIUK under Project Arven; and iv) Remaining AXA policyholders whose policies will not be reinsured by RIUK under Project Arven. Given the levels of capital cover (as a proportion of the regulatory requirement) held by both Transfer Companies, I expect the chance that either of them would not be able to meet its respective future obligations in full to be remote as long as the capital injection has been made to RIUK, and I therefore conclude on this assumption that no existing, or transferring policyholder will suffer detriment to their security if the Transfer proceeds. With respect to the existing policyholders of RIUK, I consider there to be no material adverse impact on these policyholders in terms of security as a result of the proposed Transfer. With respect to the transferring AXA policyholders, I consider there to be no material adverse impact on these policyholders in terms of security as a result of the proposed Transfer. KPMG LLP. All rights reserved Page 13 of 90 13/04/2018

14 With respect to the remaining policyholders of AXA subject to the Project Arven reinsurances, I consider there to be a positive impact on these policyholders in terms of security as a result of the proposed Transfer. With respect to the remaining policyholders of AXA not subject to the Project Arven reinsurances, I consider there to be a positive impact on these policyholders in terms of security as a result of the proposed Transfer. In terms of regulatory supervision, and the protections available to policyholders of the Transfer Companies, in the event of the failure to pay claims of one of the Transfer Companies, there is no change for any policyholder groups as the Transfer Companies will continue to be supervised by the PRA and FCA and policyholders will have the same access to the Financial Services Compensation Scheme and Financial Ombudsman Service that they would have had before the Transfer. There will be no substantial change in the standards of service which the policyholders of the Transfer Companies will receive as a consequence of the Transfer. After the Transfer, complaints will be handled by RSML s Complaints Manager, which is an equivalent regulated service to that available to AXA policyholders prior to the Transfer. There will be no material impact on the ability for policyholders to present new claims, and no material impact on the protection of customer data as a consequence of the Transfer I have considered the Transfer and its likely effect on each of the policyholder groups. I have concluded that the risk of any policyholder being adversely affected by the proposed Transfer is sufficiently remote for it to be appropriate to proceed with the proposed Transfer as described in this report. This is also the case if Project Fandango is sanctioned as well. Expert s declaration 2.13 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. Philip Tippin Fellow of the Institute of Actuaries Partner, KPMG LLP 13 April 2018 KPMG LLP. All rights reserved Page 14 of 90 13/04/2018

15 3. Background RiverStone Insurance ( RIUK ) 3.1 RIUK is a wholly-owned subsidiary of RiverStone Holdings Limited and forms part of the RiverStone Europe Group. RiverStone Holdings Limited is a subsidiary of Fairfax, a Canadianbased holding company which is listed on the Toronto Stock Exchange and is engaged in property and casualty insurance and reinsurance business, and investment management. RIUK is a non-life insurer which ceased writing live business in 1999, instead focusing on the acquisition of run-off business. The staff that manage the business of RIUK are employed by RSML, which is also a whollyowned subsidiary of RiverStone Holdings Limited, and is authorised by the FCA. RIUK is authorised to carry on all types of general insurance business. RIUK has had a diverse portfolio of run-off business which has included Marine, Aviation, Transport, Property, Casualty, Fire, Liability, Excess of Loss, Personal Lines, Professional Indemnity, Financial Institutions, Accident & Health and Motor classes. The majority of the remaining exposure exists on the longer tailed classes such as European Motor, US Asbestos and Italian Medical Malpractice. The portfolio includes both reinsurance and direct insurance policies, with reinsurance being predominant. Policyholders of reinsurance products tend to be insurers rather than individuals or businesses, which means that they are more likely to receive information about the proposed Transfer from the trade press and through intermediaries. Policyholders are based in the UK, Europe and USA, with smaller exposure across the rest of the world. RIUK fully reinsures Lloyd s Syndicate RiverStone Corporate Capital Limited ( RCCL ) is the sole corporate member of Syndicate RiverStone Managing Agency Limited ( RSMA ) is a Lloyd s Managing Agent, appointed by RCCL to manage Syndicate Both RCCL and RSMA are subsidiaries of RiverStone Holdings Limited. Syndicate 3500 was set up with the purpose of accepting Reinsurance to Close ( RITC ) from a number of syndicates which include various years of Syndicates 271, 506, 2112, 376, 3330, 535 and RITC is an agreement under the Lloyd s three-year accounting system, where a closing year of account of a syndicate is reinsured to another party. This party will then assume responsibility for handling and paying all known and unknown liabilities in relation to insurance business written in the closing year. The chart below shows the current structure of relevant entities and syndicate in RiverStone Europe Group immediately before the time of the proposed Transfer. 3.2 RIUK is authorised by the PRA, regulated by the PRA and the FCA, and as a consequence is a member of the FSCS. KPMG LLP. All rights reserved Page 15 of 90 13/04/2018

16 The FSCS is a statutory scheme funded by members of the UK financial services industry. It provides compensation to individual holders of policies issued by UK insurers in the UK or another EEA state who are eligible for compensation under the FSCS in the event of an insurer s default. Under current FSCS rules, liability claims which are subject to compulsory insurance or professional indemnity insurance or claims which arise from death or incapacity of a policyholder due to injury to sickness are 100% protected and other types of policies are 90% protected. Reinsurance contracts, as well as Goods in Transit, Marine, Aviation and Credit Insurance are not covered by the FSCS. 3.3 The table below provides an overview of the annual financial performance of RIUK from 31 December 2013 to 2016 as well as the unaudited accounts as at Q2 2017, on a UK GAAP basis. Note that RIUK presents its financial statements in its functional currency of US dollars and in the table below the Q conversion rate was used for Q and the Q rate was used for 2016 and prior years. RIUK ( 000's) Q Net Earned Premium - - 1,619 1,535 - Profit/(Loss) after tax 22,310 (3,496) (1,894) 12,096 40,237 Gross Insurance Liabilities (282,637) (304,303) (345,668) (352,041) (382,882) Total Liabilities (333,858) (357,364) (400,943) (409,296) (401,034) Reinsurance Assets 89,315 95, ,787 90,774 52,580 Other Assets 518, , , , ,661 Total Assets 607, , , , ,241 Net Assets 274, , , , ,206 Source: Financial Statements; UK GAAP; Management Accounts RIUK s assets and liabilities have been steadily decreasing over the past few years which is reasonable given that the business is in run-off. Q shows a slight increase in net assets, which is due to the excess of investment return over operating expenses for 2017 to date. The large drop in net assets between 2013 and 2014 was due to the payment of a $65m dividend. 3.4 The table below provides an overview of the Solvency II balance sheet of RIUK as at 31 December 2016 and 30 June The Solvency II balance sheet values assets and liabilities on a different basis to UK GAAP. This is discussed further in sections 3.18 and 5.9. RIUK ( 000's) Q Q Gross Solvency II Technical Provisions (295,673) (325,310) Risk Margin (17,378) (19,199) Other Liabilities (48,625) (48,311) Total Liabilities (361,675) (392,820) Reinsurance Assets 101, ,790 Other Assets 505, ,270 Total Assets 606, ,059 Net Assets 244, ,240 SCR 159, ,534 Capital Cover Ratio 147% 131% Source: Financial Statements; YE16 and Q217 SII balance sheet As can be seen, RIUK is well capitalised as it has a material excess of assets over liabilities. The Solvency II regulatory capital requirement ( SCR ) and ratio of available capital to the capital requirement ( Capital Cover Ratio ) for each entity are discussed further in section 5.9. KPMG LLP. All rights reserved Page 16 of 90 13/04/2018

17 AXA Insurance UK plc ( AXA ) 3.5 AXA is a wholly-owned subsidiary of AXA Insurance plc and is a member of the AXA Group. AXA is authorised by the PRA and regulated by the PRA and FCA, with eligible policies also covered by the FSCS. It writes a wide range of insurance, both on the personal and commercial side. Personal products offered include: Motor, Home and Travel, whilst commercial products offered include: Motor, Property, EL, PL and Professional Indemnity. AXA s largest portfolios are the Motor and Property books, both on the commercial and personal side. The AXA UK plc group, which includes AXA and the private health insurance provider, AXA PPP healthcare Limited, and is part of the wider AXA Group, has over 10 million customers in the UK. Many of the policies within the scope of Project Arven stem from the acquisitions by AXA of Guardian Royal Exchange plc in 1999 and Provincial Insurance plc in AXA split their EL portfolio into two groups: 1. Continued Business Unit ( CBU ) which consists of policies written from Provincial branches and Guardian Royal Exchange UK non-life companies, which focused on writing small to medium sized enterprise ( SME ) risks. 2. Discontinued Business Unit ( DBU ) which mainly consists of a. The Guardian Non-Marine portfolio which contains business mainly written during the 1970s and 1980s. Writing of this portfolio ceased in 1999, with some extensions being covered until b. The Timber and General portfolio, comprising the share of insurance business for which AXA Insurance plc agreed to be responsible, under a consortium deed entered into in 2010 with a number of other insurers, in the market rescue of Timber & General Mutual Accident Insurance Association Limited, who ceased underwriting in AXA agreed to perform all of AXA Insurance plc s obligations under the consortium deed under a separate deed entered into between AXA and AXA Insurance plc and AXA s obligations under this deed will be included in the Transfer. The outstanding exposure under this portfolio mainly relates to Asbestos and Noise-Induced Hearing Loss from EL claims. c. Travelers business portfolio, comprising business originally written on a fronting basis in the UK by Guardian Royal Exchange plc. This business was originally acquired by and reinsured back to Travelers Insurance Co (a US corporation) and AXA subsequently assumed responsibility for this business (as successor to Guardian Royal Exchange plc) following the commutation of the reinsurance arrangement. The policies written in 2001 and prior years which are proposed to be transferring to RIUK under the Transfer will mainly originate from the CBU account with a small number from the DBU account. The claims which are being reinsured by RIUK under Project Arven originate from the CBU account (which are those stemming from policies written between 1 January 2002 and 31 December 2014). KPMG LLP. All rights reserved Page 17 of 90 13/04/2018

18 The chart below shows the structure of the proposed Transfer and reinsurance arrangements between AXA and RIUK following Project Arven. 3.6 The table below provides an overview of the annual financial performance of AXA from 1 January 2013 to 31 December 2016 as well as the unaudited balance sheet accounts as at Q on a UK GAAP basis. I note that AXA produces its income statement on an annual basis. AXA ( ms) Q Net Earned Premium N/A 2,112 1,990 1,993 1,982 Profit/(Loss) after tax N/A Gross Insurance Liabilities (4,409) (4,276) (4,141) (4,075) (4,009) Total Liabilities (4,904) (4,758) (4,574) (4,570) (5,353) Reinsurance Assets Other Assets 7,705 7,391 6,957 6,823 6,992 Total Assets 7,885 7,570 7,094 6,973 7,147 Net Assets 2,981 2,812 2,520 2,403 1,795 Source: Financial Statements; UK GAAP; Management Accounts AXA's balance sheet is much larger than RIUK s, which is to be expected of a large company actively writing new business compared to a run-off business. 3.7 The table below provides an overview of the Solvency II balance sheet as at 31 December 2016 and 30 June AXA ( ms) Q Q Gross Solvency II Technical Provisions (3,348) (3,344) Risk Margin (636) (646) Other Liabilities (355) (531) Total Liabilities (4,339) (4,521) Reinsurance Assets Other Assets 6,640 6,585 Total Assets 6,871 6,708 Net Assets 2,532 2,187 SCR 1,776 1,776 Capital Cover Ratio 143% 123% Source: YE16 SII balance sheet and Management Information AXA has an excess of assets over liabilities and is also well capitalised. The SCR and Capital Cover Ratio for each entity are discussed further in section 5.9. KPMG LLP. All rights reserved Page 18 of 90 13/04/2018

19 Insurance business of the Transfer Companies 3.8 The table below shows comparative metrics for the Transfer Companies. Open claims information is provided in order to give an indication of the outstanding claim volumes transferring to RIUK as at the last audited date. Transfer Companies' Business Profile as at 31 December 2016 ( ms; number of open claims and policies in units) RIUK AXA Project Arven portfolio Gross Claims Outstanding 304 3, Net Claims Outstanding 209 3, Number of Open Claims 7, ,078 11,372 In-force Policies - 8,240,607 - Source: Management and UK GAAP accounts 3.9 Business written by RIUK RIUK has both insurance and reinsurance business across London Market and European portfolios. The classes of insurance RIUK s policies cover include Marine, Aviation, Transport, Property, Casualty, Fire, Liability, Excess of Loss, Personal Lines, Professional Indemnity, Financial Institutions, Accident & Health and Motor classes. Significant portfolios include Genoa, Eagle Star and Terra Nova legacy Asbestos and Pollution portfolios, a European Motor segment of reinsurance contracts, and the reinsurance of Lloyd s Syndicate Genoa is a quota share reinsurance of Brit Syndicate Limited s Italian Medical Malpractice book. The Eagle Star portfolio comes from Eagle Star Insurance Company Limited, Home & Overseas Insurance Company Limited and City of London Insurance Company Limited, which were wholly owned by Zurich Insurance Group and were based in the UK, and transferred their remaining general insurance business to RIUK under Part VII of FSMA. They were reinsured by RIUK in December 2012 before being transferred to RIUK at the end of The transferring book consisted of its remaining general insurance business, most of which relates to US asbestos, pollution and health risks. The Terra Nova book was owned by Markel International Insurance Company Limited and consisted primarily of legacy US Asbestos and Pollution liabilities for the period 1970 to 1992 inclusive. It was reinsured by RIUK in 2015 and transferred to RIUK in 2017 under Part VII of FSMA. The European Motor book, which consists of solely reinsurance business, consists of a number of large personal injury claims in the EU, with a small amount of Medical Malpractice and claims of a general liability nature. The majority of the exposure of this book relate to France, Germany and Belgium. RIUK fully reinsures Lloyd s Syndicate 3500 which holds a variety of run-off portfolios including Engineering, Marine and Aviation, and General Liability Noteworthy liability types in RIUK RIUK has exposure to Asbestos, Pollution and Health Hazard ( APH ) losses in the United States from its run off book of business, which cover any losses due to health hazards employees are exposed to in the work place. The nature of these health issues means that previously unknown claims can develop from expired policies. Given the age of the liabilities, it can be difficult for some companies to identify all of the potentially affected policyholders. I discuss the APH liabilities further in section RIUK has exposure to annuity-like payments for large claims from the European Motor book in France and Germany. These are reserved for on an undiscounted basis. KPMG LLP. All rights reserved Page 19 of 90 13/04/2018

20 3.11 Business written by AXA AXA writes a wide range of insurance; personal lines covering Motor, Home, and Travel, and a number of business focused insurance types including EL and PL, Professional Indemnity, Fleet and Haulage, and commercial and residential Landlords Building Insurance. AXA also provides a number of packaged products for businesses which combine elements of the above to suit specific business needs. AXA writes both direct and a minor amount of inwards reinsurance business across their portfolio, which is targeted to UK risks. The transferring AXA portfolio of policies cover both EL and PL. The main claim types in the Transferring policies are in respect of Mesothelioma, Noise-Induced Hearing Loss, and other diseases, as defined and agreed between the Transfer Companies, such as Vibration White Finger, Pleural Plaques, Pleural Thickening, Lung Cancer, Repetitive Strain Injury, Stress and Abuse Noteworthy liability types in AXA The transferring AXA portfolio has exposure to industrial DAS Claims, which cover losses due to health hazards employees are exposed to in the work place. The nature of these health issues mean that previously unknown claims can develop on previously issued policies. Given the age of the liabilities, it can be difficult for some companies to identify all of the potentially affected policyholders. The injuries and illnesses arising from DAS Claims are often the same as those from US APH claims, and the long-term emergence of them is the same. The US APH and UK DAS Claims occur however in different legal jurisdictions, which means that the claims presented to insurers emerge and develop fundamentally differently, and are affected by different factors. The remaining AXA portfolio is exposed to Periodic Payment Orders ( PPOs ) which provide for an annuity in the event of catastrophic injuries. Payments made under PPOs have the potential to be made for in excess of 50 years. I note that, in some cases, the amount payable under a PPO can be changed following review by the UK Courts. As is common for PPOs, they are reserved for on a discounted basis Business mix PPOs, annuity-like liabilities and APH liabilities have a substantially longer payment tail (and associated reserve uncertainty) than the majority of general insurance liabilities, and, therefore, their existence in a portfolio is often considered to increase the uncertainty for other policyholders. The below table shows the size of APH liabilities, annuity-like liabilities and PPOs for the Transfer Companies as at 31 December 2016: Transfer Companies' Risk Mix Business Profile (as at 31 December 2016) RIUK AXA (incl Arven portfolio) Project Arven portfolio As discussed above, RIUK manages a sizeable amount of US APH liabilities. It is a specialist in this market, so I am comfortable with this percentage. As shown, AXA holds reserves for PPOs, though they will not be transferring. The Project Arven Liabilities are all related to DAS Claims (other than the non-das Claims reinsured back to AXA) and will be moving to a specialist run-off insurer which does not have PPOs, though does hold some annuity-like liabilities. Therefore the Project Arven liabilities will remain exposed to broadly the same types of risk as before the Transfer. I also note that around 42% of RIUK s APH reserves have reached the limit of their liability, so they cannot deteriorate further. Net RIUK AXA (incl Arven portfolio) Project Arven portfolio Claims Reserves ( m) , , PPO Reserves ( m) Annuity-like Reserves ( m) APH Reserves ( m) DAS Claims Reserves ( m) PPO Reserves (% of total) 0% 10% 0% 0% 9% 0% Annuity-like Reserves (% of total) 17% 0% 0% 25% 0% 0% APH Reserves (% of total) 40% 18% 0% 35% 20% 0% DAS Claims Reserves (% of total) 0% 17% 100% 0% 16% 100% Source: Management Information Gross KPMG LLP. All rights reserved Page 20 of 90 13/04/2018

21 Given the amount of very long-tail liabilities in both AXA and RIUK, there is no material change in risk profile of the remaining liabilities for the Transferring policyholders. Outwards reinsurance programmes 3.14 The Transfer Companies have purchased outwards reinsurance protections to mitigate their insurance risks. These protections are typical of those used by other insurance companies for the types of insurance business underwritten by the Transfer Companies The key risk protections are as follows: AXA has limited outwards reinsurance currently in place for the transferring portfolio. There are currently two existing treaty reinsurance programmes, one facultative reinsurance policy and a small number of captive arrangements covering the policies within this portfolio under which AXA believes there is any realistic prospect of recoveries becoming collectable. It is intended that these treaty reinsurance programmes and the captive arrangements (and any other outwards reinsurance for the benefit of AXA as reinsured) will all transfer to RIUK upon the Transfer taking effect, to the extent that they relate to the transferring portfolio (unless commuted beforehand) as will the facultative reinsurance. To give effect to this, to the extent that a treaty reinsurance programme (or other outwards reinsurance) currently attaches to both transferring and remaining AXA policies, it will be split under a mechanism of the Transfer, such that: that part of the relevant agreement that relates to the transferring business will transfer to RIUK (unless commuted beforehand); that part of the relevant agreement that relates to the non-transferring business will remain with AXA; and the terms and conditions of such split agreements will apply as a whole (in aggregate) across both parties, including, where applicable, the deductibles, limits and all other limitations under the agreement. The practical effect of this splitting will be that one reinsurance agreement will be deemed to become two reinsurance agreements (one in favour of RIUK and the other of AXA), although they will share limits, deductibles, and other contractual obligations, between them. AXA and RIUK are currently agreeing the approach that they will take in order to enact this sharing and the basis upon which they will be split between the Transfer Companies. I will comment further on this in my supplemental report. Any element of cover under intra-group reinsurance arrangements pursuant to which AXA is reinsured by any other AXA Group company will not transfer to RIUK in connection with Project Arven and RIUK will not have any right (either direct or via AXA) to any protection under the same. However, AXA does not believe that there is any realistic prospect of recoveries becoming collectable under such intra-group reinsurance arrangements, due to the high retention limits (the amount beyond which the reinsurance responds, for any claims below such limits no reinsurance recoveries would be collectable). I have assumed that there will be no future recoveries on the AXA outwards reinsurances other than where it is deemed there is a realistic prospect of recoveries becoming collectable (as noted above); I note that there may be splitting as described above under some of these other outwards reinsurance policies, though I do not comment further on this for these policies. TIG Insurance (Barbados) Limited ( TIG Barbados ), another member of the Fairfax group which also specialises in run-off business, provides unlimited reinsurance protection for certain specified lines of RIUK s business. These arrangements are collateralised and KPMG LLP. All rights reserved Page 21 of 90 13/04/2018

22 supported by guarantees from Fairfax. The collateral requirement is a minimum of 100% or 105% of the UK GAAP reserves, dependent on the portfolio in question. RIUK also have some external reinsurance in place, but the recovery of the asset is not impacted by the proposed Transfer. Employers Liability Tracing Office ( ELTO ) system 3.16 ELTO is set up to provide claimants, insurers, policyholders and other interested parties with access to a database of EL policies through an online search engine. The system can be used, for example, to find the insurer of a previous employer, where the claimant has suffered from injury or disease caused by employment. ELTO requires all insurers to upload the details on all new and renewed EL policies post April 2011 and any policies prior to that which have had claims made against them since that date. Both RIUK and AXA are members of ELTO and adhere to its processes and procedures Many EL disease claims come through from claimants and their solicitors using ELTO. AXA is currently improving its ELTO process based on FCA remediation feedback (this is mainly concerned with obtaining historic policy records from certain insurance brokers to whom AXA had previously delegated aspects of underwriting authority to, where, in connection with such delegated authority, the brokers concerned had issued and administered certain insurance policies on AXA s behalf). RIUK has received positive audit scores from ELTO in 2017 and is in the top band of ratings for this (rated green for all RSML managed entities). AXA and RIUK have agreed that RIUK will continue to work on any ELTO remediation points which are outstanding upon the Transfer with assistance from AXA. I note that AXA will maintain governance over ELTO activity and claims handling for the reinsured portfolio, as it will continue to be the insurer. Prudential capital requirements 3.18 The Transfer Companies are currently subject to a prudential capital regime which requires them to meet a solvency capital requirement calibrated to ensure that policyholders are secure at the 99.5% confidence level of potential future liability outcomes over a single year. This is part of the EU-wide regulatory regime for insurance companies known as Solvency II, which was introduced with effect from 1 January Other key requirements of this regime are as follows: Insurance entities must calculate their Solvency II capital requirement ( Solvency Capital Requirement or SCR ) either using a set of rules specified in EU legislation (the Standard Formula ), or, subject to the approval of their regulator, using an internally developed economic capital model (an Internal Model ). In either case, the determinants of the SCR relate to the nature of the risks within the regulated entity, including market related investment risk, insurance risk arising from new business or existing liabilities, and other business risks including credit risk and operational risk. RIUK currently use the Standard Formula to calculate their SCR. I note that RIUK also makes use of an unapproved economic capital model ( ECM ) for its ORSA and for internal purposes and believes that the Standard Formula overstates its capital requirement. It believes it is not inappropriate to use the Standard Formula however given that it leads to a more prudent SCR. AXA use an approved group Internal Model, the Short Term Economic Capital ( STEC ) model, to calculate its economic and regulatory capital requirements for Solvency II, for a one-year time horizon of shocks. To calculate the capital requirements on an ultimate horizon, such as is required for ORSA purposes, AXA use proxy models to project these requirements, based on the current estimation from the STEC model over the next one year. AXA also produce a Standard Formula estimate of their capital requirements for internal purposes. KPMG LLP. All rights reserved Page 22 of 90 13/04/2018

23 Regulatory capital requirements are defined in terms of an SCR and a Minimum Capital Requirement ( MCR ). The SCR requirements are calculated based on an Internal Model, or on the Standard Formula which is a complex model based on items including the technical provisions, written premiums, reinsurance, deferred tax and administrative expenses. The method with which insurance entity balance sheets and the definition of capital are calculated for regulatory purposes is now based largely on economic measures of assets and liabilities, rather than accounting based measures. A range of minimum standards relating to insurance entity governance and disclosure have been introduced (known as Pillar II and Pillar III ), including a requirement to perform and document an ORSA. If an insurer's available resources fall below the SCR, then supervisors are required to take action with the aim of restoring the insurer s finances back to the level of the SCR as soon as possible. If, however, the financial situation of the insurer continues to deteriorate, then the level of supervisory intervention will be progressively intensified. The aim of this 'supervisory ladder' of intervention is to identify any ailing insurers before a serious threat to policyholders' interests is realised. If, despite supervisory intervention, the available resources of the insurer fall below the MCR, then 'ultimate supervisory action' will be triggered. This means that the insurer's liabilities could be transferred to another insurer, the licence of the insurer withdrawn, the insurer closed to new business and its in-force business liquidated. I note that: I have reviewed the results of the Solvency II Standard Formula, Internal Model and ECM calculations of the Transfer Companies to compare the relative difference in policyholder positions before and after the transfer of the Project Arven Liabilities. The appropriateness of this approach and more detailed description of this analysis can be found in sections 5.8 and 6.2 below. I have considered the stress tests included within the ORSAs produced by each of the Transfer Companies in determining the stress tests to apply when considering the policyholder security for each policyholder group in section 6 below. Capital management policy 3.19 AXA and RIUK both hold an excess amount of capital over the regulatory capital required to be maintained. RIUK does not have a policy of paying regular dividends and currently has no plan to distribute any dividends in the foreseeable future. RIUK tends to keep any surplus in the company for acquisition purposes, but did pay a dividend of $65m in AXA has a policy in place such that it will maintain a defined level of coverage over its SCR, above which excess capital may be paid out in the form of dividends to its shareholders, subject to certain internal criteria being met The minimum regulatory capital cover levels implied by the risk appetites within the intended capital management policy are sufficiently in excess of the regulatory minimum such that the probability of the insurer defaulting on the policyholder remains a remote possibility. Guarantees / risk sharing arrangements 3.21 Fairfax guarantee all obligations of TIG Barbados to RIUK in relation to their reinsurance of the Terra Nova and Genoa portfolios, although there are some limits of liability in place around the reinsurance relating to the Genoa portfolio which are reflected in the Fairfax guarantee, and reflect the fact that RIUK s gross exposure to the Genoa portfolio is limited. RIUK also holds a KPMG LLP. All rights reserved Page 23 of 90 13/04/2018

24 loan note issued by Fairfax (Barbados) International Corp. ( Fairfax Barbados ). This loan note is subject to an unlimited parental guarantee, provided to RIUK by Fairfax AXA is party to a deed of mutual guarantee with a number of other AXA UK plc group companies, under which the payment of general insurance liabilities of AXA (and other such companies) is mutually guaranteed. They also have a group credit facility available to them as part of the AXA UK plc group. However, these will not transfer over to RIUK, nor will RIUK benefit from this arrangement in any way. Pension Scheme Obligations 3.23 RiverStone Holdings Limited is the principal employer for the RiverStone Europe Group s defined benefit scheme, which has been closed to new members from 1 January RSML employs the staff who manage the business of RIUK and other entities within the RiverStone Europe Group. RSML pay contributions into the scheme and this cost is recharged to RIUK and other involved entities in accordance with administration outsource agreements which are in place. At 31 December 2016, on a UK GAAP accounting basis, the funding position of the pension scheme was a small surplus and hence the pension scheme obligations were classed as an asset on both the RIUK and RIL balance sheets. For each entity the amount accounted for the pension asset is allocated in proportion to the allocation of the contributions paid by each, which are recharged from RSML. All AXA staff and all AXA LM staff are members of the AXA UK plc group pension scheme which is also the pension scheme for a number of other AXA UK entities. The scheme has both defined benefit and defined contribution sections; the defined benefit section is now closed to future accrual. On the defined benefit section, there was a small deficit as at 31 December 2016 on an IFRS accounting basis, though from 30 June 2017 this was a small surplus. KPMG LLP. All rights reserved Page 24 of 90 13/04/2018

25 4. Effects of the Transfer Financial effects of the Transfer Effect of the Transfer on RiverStone Europe Group and AXA Group structure 4.1 As a consequence of the Transfer the 2001 and prior EL and PL policies of AXA will transfer to RIUK. Neither the RiverStone Europe Group nor the AXA Group structure will change and no companies are being dissolved as a consequence of Project Arven. Effect of the Transfer on Transfer Company balance sheets 4.2 I have carried out my analyses based on figures as at 31 December 2016 for the purposes of this Independent Expert Report. However, I will update the analyses to 31 December 2017 (which will be audited figures) and the latest quarterly figures (using management accounts) in a supplemental report when these updated figures are available. 4.3 There are no material differences between the accounting treatments of items in the statutory accounts of the Transfer Companies as presented in section 3, with all figures reported on a UK GAAP basis. 4.4 The tables below illustrate the UK GAAP financial position of the Transfer Companies following the Transfer, based on the financial position of the Transfer Companies at 31 December 2016, assuming that all transferring assets and liabilities at that date were to transfer from AXA to RIUK: As At 31 December 2016 RIUK (pre Transfer) AXA (pre Transfer) RIUK (post Transfer without capital injection) RIUK (post Transfer with capital AXA (post injection) Transfer) UK GAAP Balance Sheet ( ms) Assets Financial Investments 257 5, ,316 Cash Capital Injection n/a n/a n/a 69 n/a Reinsurance Assets - Intra Group Reinsurance Assets - Other Insurance Debtors Reinsurance Debtors Other Assets Total Assets 622 7,570 1,174 1,243 7,053 Liabilities Unearned Premium Reserve - 1, ,050 Outstanding claims 304 3, ,723 Other Technical Provisions Reinsurance Creditors Other Liabilities Total Liabilities 357 4, ,255 Net Assets 264 2, ,798 Source: Financial statements; UK GAAP. Management information. I note that the RIUK post Transfer position as at 31 December 2016 includes a capital injection of $85.8 million (the 69million seen in the above table), which is required to meet the targeted 110% regulatory capital cover in RIUK. An injection is being sourced from RiverStone Holdings Limited, by way of a dividend paid from RIL, to RiverStone Holdings Limited, which would be contributed as capital to RIUK. As I note in section 2.10, this is subject to regulatory approval, and if this is not granted, RiverStone Holdings Limited will source the required amount from Fairfax, who have indicated their willingness to provide it at this time, though this commitment is not legally binding. I note that the capital injection is required to be made as a condition of KPMG LLP. All rights reserved Page 25 of 90 13/04/2018

26 the Transfer and therefore the Transfer will not proceed unless the required amount of capital is in place at RIUK. I note that the required injection would have reduced to $46.7 million as at 30 June 2017, as RIUK s operations generated additional capital from investment returns since 31 December The final amount of the capital injection required will be determined on execution. As part of my supplemental report, I will perform analyses to reaffirm the reserve level at the date of execution of the capital injection, in order to become comfortable with the amount that has been contributed. A dividend of 90 million has been agreed by the Board of RIL, which is more than enough to cover the required capital injections shown here and as such would provide a greater level of coverage than presented above, and in the tables throughout my Report. I note for avoidance of doubt that above, and in the rest of the tables throughout my Report, I have assumed for prudence that only the capital needed to get to 110% has come across, rather than the 90 million that has been submitted for regulatory approval. If the full 90 million injection is approved then the security of all RIUK policyholders post-transfer will be higher than indicated in the rest of my Report, which would be to their benefit. I note that I include the RIUK post Transfer position without the capital injection, as well as with the capital injection, throughout my Report to show the effect clearly. However, I note that one of my key assumptions (as noted in section 2.10) is that the capital injection will take place as my conclusions are based on a minimum capital coverage in RIUK after the Transfer of 110% of regulatory capital requirements, and this is dependent on the injection. Therefore, I do not comment on RIUK s financial position without the injection here nor through the rest of my Report. I will consider updated numbers in my supplemental report at which time the actual capital injection amount will be known. 4.5 The tables below illustrate the Solvency II financial position of the Transfer Companies following the Transfer based on the Solvency II balance sheet of the Transfer Companies at 31 December 2016, assuming that all transferring assets and liabilities at that date had transferred from AXA to RIUK: As At 31 December 2016 RIUK (pre Transfer) AXA (pre Transfer) RIUK (post Transfer without capital injection) RIUK (post Transfer with capital injection) AXA (post Transfer) Solvency II Balance Sheet ( ms) Assets Investments and Cash 310 5, ,356 Capital Injection n/a n/a n/a 69 n/a Reinsurer's Share of Provisions - Intra Group Reinsurer's Share of Provisions - Other Other Assets Total Assets 617 6,708 1,159 1,228 6,145 Liabilities Gross Solvency II Best Estimate Liabilities 325 3, ,903 Risk Margin Other Liabilities Total Liabilities 393 4, ,778 Net Assets 224 2, ,367 Ring-Fenced Funds Restriction Eligible Own Funds 211 2, ,367 SCR 162 1, ,547 Capital Cover Ratio 131% 123% 81% 110% 153% Source: 2016 Q4 SII Balance Sheets. Management information. The table also highlights the Eligible Own Funds of each entity. The ring-fenced funds restriction encompasses funds in the net asset surplus that are not deemed to be permitted to be included in the Eligible Own Funds (i.e. the available capital that is used for calculating the capital coverage under Solvency II regulatory purposes). As mentioned in section 4.4, the RIUK post Transfer position includes an assumed capital injection which is needed to maintain solvency KPMG LLP. All rights reserved Page 26 of 90 13/04/2018

27 coverage at 110% of the regulatory requirement and which is required to be made in order for the Transfer to take effect. The SCR and Capital Cover Ratio for each entity are discussed further in section 5.9. I note that the AXA risk margin decreases substantially more than the RIUK risk margin increases as a result of the Transfer. By their nature, risk margins are not additive as they take into account the diversification of risks in the business in question, and moving risks from one to another will change that diversification. Part of the reason for the drop is that the risk margin is calculated based on net of reinsurance solvency II technical provisions, and the additional reinsurances established to benefit RIUK as a result of the Transfer reduce the risk margin requirement materially. As AXA use their Internal Model to calculate their risk margin and RIUK use the Standard Formula to calculate theirs the two calculations are not directly comparable either. I have reviewed the document which contains the calculation of the RIUK risk margin and the figures used in this are sensible when compared to those I have been provided for use in my Report. I note that the methodology of calculation for the risk margin must follow Solvency II regulations and that the calculation pre-transfer at 31 December 2016 has been subject to audit. The risk margin is intended to cover the cost of capital required to cover technical provision related risks to their ultimate position. As such it is helpful to consider it as a percentage of the SCR. As a consequence of the Transfer AXA s risk margin reduces from 36% of SCR to 22% of SCR (a decrease of 14%), and RIUK s increases from 12% to 26% (an increase of 14%). I have considered this, and also considered benchmarks from other companies, and conclude that the risk margins post-transfer appear reasonable despite the significant overall difference. Were both companies calculations to be carried out on the same basis (for example if both were to use the Standard Formula) then it is likely that the observed gap would be much smaller. Cost and tax impact of the Transfer 4.6 I have received confirmation from the management of the Transfer Companies that no significant VAT liabilities will be realised as the result of the Transfer. I have received this information from RIUK, following advice from independent advisers, and AXA following advice from their in-house tax team and independent legal advisers. To the extent that the Transfer creates an additional accounting profit in either Transfer Company this will incur a tax liability as in the normal course of business. As a result, I am satisfied that there should not be any unanticipated tax charge that would be material enough to change my conclusions in this report for policyholders of either Transfer Company. 4.7 I understand that most costs associated with the Transfer will be incurred whether or not the Transfer proceeds, as the majority of these costs relate to activities occurring prior to the sanction hearing (for example, with respect to legal fees and policyholder communications). Therefore I identify no significant additional costs arising from the implementation of the Transfer. RIUK and AXA will meet these costs. New reinsurance as part of Project Arven 4.8 RIUK will assume economic liability for DAS Claims originating from policies written between 1 January 2002 and 31 December 2014 through a reinsurance deal, supported by a secured collateral account. These claims represent about 5% of the total Project Arven portfolio (Part VII and reinsurance). This will happen simultaneously with the Transfer and is contingent on the Transfer occurring. 4.9 Also, upon the Transfer taking effect, AXA will reinsure RIUK on a 100% quota share basis for any non-das Claims under policies which are transferred under the Transfer AXA will provide RIUK with excess of loss reinsurance in respect of any possible reserve depletion (due to deterioration) in excess of 250% of the total gross reserves of the Project Arven portfolio (Part VII and reinsurance) as at 31 December 2014, less the value of claims paid following that date up to the Effective Date. I note that, even in extreme scenarios, the likelihood of this reinsurance being called upon is very remote; it provides a limit to extreme downside risk to RIUK but any potential loss under the cover would not have a material impact KPMG LLP. All rights reserved Page 27 of 90 13/04/2018

28 on AXA s balance sheet. In fact, AXA is already liable for the liability covered by this reinsurance if the Transfer were not to occur Wentworth Insurance Company Limited ( Wentworth ), which is a Fairfax group company, will reinsure 50% of the total liabilities transferred to RIUK and this will be retroceded from Wentworth to TIG Barbados. The reinsurance will be secured by a collateral account held by TIG Barbados, which Wentworth will ensure is topped up quarterly to 100% of best estimate reserves, as well as a guarantee by Fairfax of which I have seen evidence and reviewed. Under the terms of the guarantee, Fairfax guarantees, unconditionally and irrevocably, the due and punctual performance by Wentworth of all its obligations and liabilities to RIUK under the reinsurance agreement between them. This includes any expenses or associated losses caused by Wentworth s failure to pay fully and/or punctually. The guarantee will not be affected by any act that would reduce the obligations of Fairfax; it requires that any payments needed are paid with no requirement for arbitration, and if no payment has been received after 60 days from the original due date (which gives RIUK and Wentworth time to resolve any such matter), then Fairfax must pay this on demand. The guarantee will remain active until the last of the liabilities that it covers is run off. Wentworth and TIG Barbados are insurance companies registered and licensed in Barbados; I note, for avoidance of doubt, that the agreements under Project Arven will be (and will continue to be, even in the unlikely event of the insolvency of TIG Barbados and/or Wentworth) interpreted under English and Welsh Law. This structure of protection is not new to RIUK; TIG Barbados already reinsures a number of RIUK contracts, with a Fairfax guarantee, as discussed in section Outward reinsurance 4.12 In a Part VII transfer where outward reinsurance is being transferred, there is a risk that nongroup reinsurers of the Transfer Companies whose contracts are not governed by English and Welsh Law may not recognise the Transfer and decline payment of future reinsurance recoveries. Only a small amount of the outwards reinsurance transferring to RIUK is outside of the UK (around 4.8 million of case reserves based on the 31 December 2014 reserve position), with no US reinsurers being involved with the transferring business against whom there is any realistic prospect of recovery. In addition, I understand that, to the best of AXA s knowledge and belief, all outwards reinsurance involved in the splitting arrangements as I describe them in section 3.15 are either expressly governed under English and Welsh Law or allow AXA to choose that they are governed under English and Welsh Law. Pension Scheme Obligations 4.13 It is not intended that RIUK will take on any extra pension liabilities as part of the Transfer. Liabilities under the AXA UK plc group pension scheme will not transfer to RIUK under TUPE as a result of the Transfer. However, it is possible that RIUK may assume responsibility for early retirement pension rights, following the decision of the European Court of Justice in Beckman and Martin (often referred to as Beckman liabilities ). In this event, AXA will be contractually liable for such liabilities. Dividends and capital structure 4.14 The assets that will be passed from AXA to RIUK along with the liabilities under Project Arven have been agreed by both Transfer Companies. As mentioned in section 3.19, RIUK has no plans to distribute dividends in the foreseeable future and AXA has a policy in place such that even if dividends are distributed, AXA will maintain its capital cover level. AXA s target level of capital cover remains the same pre and post Transfer and there are no changes to the AXA capital management policy as a result of Project Arven. KPMG LLP. All rights reserved Page 28 of 90 13/04/2018

29 Guarantees/risk sharing arrangements 4.15 The benefit of any intra-group guarantees currently in place between AXA and other members of the AXA Group will not transfer to RIUK as a result of the Transfer, nor will RIUK benefit from such guarantees in any way. Non-financial effects of the Transfer 4.16 I consider in sections 4.17 to 4.25 the areas that a policyholder may have considered in their decision to buy their original policy and would therefore have reasonable expectations with regard to on an ongoing basis. In particular I have considered the executive management (in that it sets the tone and culture for the company), claims handling, the ease of access to the company for complaints or policy administration, cyber security insofar as it protects the customer s data, and the regulatory protections that the policyholder benefits from. Future intentions of AXA and RIUK 4.17 As discussed in section 2.2 of this Report, the Transfer is in line with RIUK s business objective of seeking acquisition opportunities of legacy business with the aim of performing an economically viable run-off of the acquired business. AXA are seeking to divest the transferring policies in order to ensure they are focusing their attention on what they consider to be more core business to their business strategy. There is no current intention to discontinue or deregister the operation of RIUK or AXA. On 9 November 2017, RIUK signed a Framework Agreement with an overseas insurer ( Insurer X ), for the transfer to RIUK of a portfolio of three main groups of contracts and reserves: World Trade Center ( WTC ) Aviation, Non-WTC Aviation and general APH. There is a small balance of miscellaneous business. Insurer X will establish a UK branch within 6 to 9 months into which the portfolio will be transferred. A Part VII transfer process ( Transfer X ) will then commence and it is currently anticipated that the High Court hearing to transfer the portfolio from the UK branch to RIUK will take place around June 2019 with the transfer of assets and liabilities likely to take place two weeks or so after the hearing. The quantum of reserves transferring is expected to be in the region of $150 million. The reserves are mainly in respect of US asbestos related claims, which RIUK has experience in handling. I note that Transfer X is expected to conclude substantially later than Project Arven and Project Fandango, and is subject to the same Part VII process before it can be completed. As such, I do not consider this any further in this report, as the Court will have another opportunity to consider the impact of that proposed Transfer in the future. Impact of the Transfer on competition 4.18 I am only concerned about the impact of changes on existing policyholders, unless the Transfer results in a material reduction in the size of the wider market for certain types of policy that could meet a policyholder s requirements. This is because a future potential policyholder that is unhappy with the product, service, or any other aspect of the service they experience post Transfer has the opportunity to buy their next policy elsewhere. In this case the policies being transferred are very old, and AXA will continue to write both EL and PL business after the Transfer, so I see no impact on the competitive environment that would affect the different policyholder groups as a consequence of this Transfer. KPMG LLP. All rights reserved Page 29 of 90 13/04/2018

30 Executive management 4.19 Only AXA LM claims handling staff who specialise in handling the transferring DAS Claims will be transferred to RSML. As only staff (and not their executives) are transferring, there will have to be a change to the executive management upon transfer (and hence potentially organisational culture) for the policies that are transferring under the Transfer. The Transfer Companies do not anticipate any changes with regard to executive management for remaining AXA policies that are not covered under Project Arven or existing RIUK policies as a result of Project Arven. As shown in section 3.8, I note that Project Arven will bring over a comparatively large amount of business to RIUK. I note however that while only AXA LM claims handling staff and not their executives will be moving, and thus there will be no increase to the number of executives at RSML, the executives of RSML have experience of managing business with a much larger number of open claims than the business currently has, as they have been managing claims at RIL for a number of years and it is not long since claim volumes were materially higher here. ELTO system 4.20 Currently, RIUK has a stronger level of compliance with ELTO than AXA based on ELTO reviews and its Directors' Certificate of Compliance. Post Transfer, RIUK will inherit AXA's obligation to trace EL coverage for the transferred business, and while AXA will remain ultimately responsible for the reinsured business, RIUK will take on the work in tracing EL coverage for the reinsured business as well. This will be managed by the transfer of the AXA LM specialist DAS Claims handling team to RSML. Any outstanding FCA remediation points relating to ELTO will continue to be dealt with post Transfer. I understand that the Transfer Companies have agreed in principle (and will be agreeing in writing) that any EL policy records relating to the transferring policies identified by AXA post Transfer will be passed to RIUK. Administration of the business 4.21 As mentioned in section 4.19 above, it is planned that AXA LM s current specialist claims team will be transferring to RSML. RSML is actively seeking office space in Ipswich so that the transferring staff do not have a material change in their commuting arrangements. RSML and the landlord of an office space in Ipswich have reached an agreed position in principle in respect of both an agreement to enter into a lease and the terms of the lease itself; they expect to exchange contracts after the Directions Hearing. RSML expect to have this space functional by July I will provide an update on this in my supplemental report. I note that RSML also have experience in acquiring and managing offices outside of their current locations as part of previous acquisitions. I note that individuals within the AXA LM team may opt out of the transfer to RSML under TUPE. The existing RSML team have experience of handling this type of business and are receiving further training, so in the case of a small shortfall in transferring AXA LM staff, they will be able to step in. If there is a larger shortfall in transferring AXA LM staff, RIUK has arrangements to temporarily call on outsource service providers who are experienced in this type of business until the shortfall is met. However, I note that both of the Transfer Companies intend that the AXA LM specialist claims team will transfer to RSML. RIUK will maintain all AXA contact details where appropriate, for a minimum of 6 months, so that there is minimal change in how policyholders make contact. I note that contact details for complaints handling will change and discuss this is section AXA s policyholder data, which is stored on the Eclipse software used by AXA LM, will also be transferred across to RIUK, so that RIUK will have access to all of AXA s relevant policyholder information. AXA will also preserve access to certain historic coverage data sources relating to non-das Claims to ensure that Transferring policyholders get the same service before and after the Transfer. In addition to the above-mentioned transfer of the AXA LM specialist claims team, RSML has employed one additional actuary, previously employed by AXA, who specialises in disease reserving. I also note that the transferring AXA LM claims team employees work almost solely on the Project Arven business. Therefore, there will be minimal changes in claims teams for the remaining AXA policyholders not involved in Project Arven. KPMG LLP. All rights reserved Page 30 of 90 13/04/2018

31 Contractual arrangements 4.22 The Transfer is to have no impact on contractual terms of transferring insurance policies, other than changing the party to the contract from AXA to RIUK. Regulatory arrangements 4.23 RIUK and AXA s primary regulators are currently the PRA and the FCA, so there will be no supervisory change for them as a result of the Transfer. I note that RIUK has applied for an insurance permit to become licensed in Jersey by the Jersey Financial Services Commission. Subject to the insurance permit being granted, this means there will be no change to the supervisory body for any of the policyholders in respect of the Jersey Scheme. If the insurance permit is not granted by the Effective Date, the Jersey Policies will be treated as Residual Assets under the UK Transfer (as described in section 2.2 above). The implementation of the Transfer will not change eligibility for compensation from the FSCS for either transferring policyholders or non-transferring policyholders. In addition to this, the implementation of Project Arven will have no impact on the rights of the policyholders of AXA or RIUK in relation to the Financial Ombudsman Service ( FOS ). The FOS is an independent public body that aims to resolve disputes between individuals and UK financial services companies. It may make compensation awards in favour of policyholders. Only holders of policies that constitute business carried on in the UK are permitted to bring complaints to the FOS. In circumstances where AXA currently refers policyholders to the FOS, RIUK will continue to do so following implementation of the Transfer. Complaints handling for transferring policies will transfer to RSML s dedicated Complaints Manager, who is part of the Compliance function and, as such, is independent from the claims team. No material differences in service level agreements are expected. The new contact details for making complaints will be available online, enabling any policyholders who wish to make a complaint to contact RIUK. Any transferring AXA policyholders who inadvertently directed a complaint to AXA would be redirected to RIUK. Any AXA complaints that are in process when the Transfer occurs will also be transferred to RIUK post Transfer. No issues were found in regard to RIUK s complaints handling in the conduct review undertaken by AXA in April Cyber security risk 4.24 Cyber security risk is a relatively new and increasing threat to businesses today. Cyber-attacks on companies are becoming more frequent. These attacks can take forms such as gaining access to and selling or publicising customers data, or preventing the business from operating as usual. Cyber security is, therefore, becoming ever more paramount. It is a reasonable expectation of a customer that their insurer should take appropriate steps to protect their confidential data. RIUK carry out ongoing in-depth security and vulnerability reviews of security standards and processes, endorsed by multiple external audits with additional annual re-accreditation of the UK Government Cyber Essentials Plus standard. RSML s IT department regularly roll out extensive cyber training which involves annual training for all staff, alongside ad hoc testing and extra training for specific staff when deemed necessary. AXA carry out at least annual penetration tests to find any vulnerabilities and are accredited under the Payment Card Industry Data Security Standard ( PCI accredited ), which is an information security standard for organisations that accept credit cards. There is also mandatory security training for staff and daily monitoring of checks and balance software to ensure credit card details are protected. At the request of AXA, RIUK is completing a Risk Matrix and Security questionnaire to determine whether they have appropriate levels of cyber security in place for the transferring portfolio. KPMG LLP. All rights reserved Page 31 of 90 13/04/2018

32 Conduct risk 4.25 AXA have completed a review of RIUK s conduct standards to ensure that they are of an appropriate standard for the transferring business. I discuss this further in section Both RIUK and AXA have policies and procedures in place for the management of conduct risk and the fair treatment of customers. AXA and RIUK currently use the same platform for recording complaints, and AXA, AXA LM and RIUK operate similar processes for recording complaints. KPMG LLP. All rights reserved Page 32 of 90 13/04/2018

33 5. Potential impact of Transfer on stakeholders Overview of analysis performed 5.1 In considering the impact of the proposed Transfer on the security of policyholders, I have considered both the impact of the Transfer on the financial resources available to support policyholders and also a number of non-financial impacts (as listed under iii) below) on how a customer s experience may change as a result of the Transfer. I have followed the following steps: (i) I have considered the specific circumstances of different types of policyholder and divided them into distinct groups with similar characteristics. (ii) I have considered the management and governance framework in place and the future intentions and strategies adopted by the Transfer Companies. (iii) I have compared the position of each policyholder group in the event the Transfer proceeds with the position that they would be in if the Transfer does not proceed under the following headings: (a) Financial resources available to pay future policyholder claims; (b) Treating Customers Fairly (with a particular focus on handling of claims); (c) The ease of presenting a new claim; (d) Protection of customer data; (e) The impact of Brexit; and (f) Other considerations. (iv) I have further compared the position of policyholders before and after the Transfer under a variety of stressed scenarios, to consider the ability of the Transfer Companies to deal with adverse scenarios. (v) Having considered the change for each policyholder group under each of these categories, and considering the results of the stress scenarios, I have formed an opinion on the impact of the Transfer on each of the policyholder groups. Bullets (i) to (iii) of the above follow here in this section. The stress testing (bullet (iv)) is in section 6, and my conclusions (bullet (v)) are presented in section 7. Identification of policyholder groups 5.2 Consideration of Policyholder groupings Policyholder characteristics I have identified a number of policyholder characteristics that could influence the impact of the Transfer on customers. The policyholder characteristics that I have considered include: The Transfer Company that the (re)insurance policy was covered by before the Transfer, and separately the Transfer Company that will provide the cover after the Transfer. The nature of the regulatory regime and other policyholder protections which apply before and after the Transfer to different groups of policyholders. Whether the new reinsurances could change the policyholders customer experience. KPMG LLP. All rights reserved Page 33 of 90 13/04/2018

34 The nature of the type of business written and whether policyholders are: i) Insurance or Reinsurance policyholders; ii) Policyholders of compulsory or non-compulsory insurance; or iii) Policyholders related to legacy risks or those with products that continue to be underwritten. The length of time that policyholders are likely to continue to receive benefits under the terms of their policies. The ability of policyholders to access the financial resources of each Transfer Company in the event of them entering administration, rehabilitation or insolvency and how this changes as a result of the Transfer Reasoning for policyholder groupings In selecting appropriate groupings of policyholders for my analysis, I have considered the following: Under Title IV of the Solvency II Directive, reinsurance policyholders rank behind insurance policyholders in the event of the insolvency of an insurance business. The distinction then between reinsurance and insurance policyholders becomes important if there is a significant risk that one or both of the Transfer Companies could become insolvent in the short term. This is an important consideration in the case of this Transfer as if sanctioned, the numbers of insurance policyholders of RIUK will increase fairly significantly. However, given the levels of regulatory capital coverage that all of the Transfer Companies enjoy I consider the possibility of insolvency to be remote. I also note that, given the age of the policies that are reinsurance rather than insurance, reinsurance policyholders are likely to receive their payment much quicker than the Transferring AXA policyholders (whose claims are expected to emerge over 30 or more years). Therefore, even in the insolvency scenario, I do not consider reinsurance policyholders to have the potential to be any worse off than insurance policyholders. I therefore do not distinguish between reinsurance and insurance policyholders in my analysis. Both Transfer Companies are within an environment regulated by the PRA and FCA. Similarly, the types of policies protected by the FSCS (outlined in section 3.2) before the Transfer will continue to benefit from that protection after the Transfer. As such, all policyholders will have the same protections and will be subject to the same regulatory regime following the Transfer as would apply if the Transfer did not occur. I have, therefore, decided not to distinguish between compulsory and non-compulsory product policyholders, nor between retail and commercial policyholders, within different policyholder groups in this report. Project Arven moves legacy liabilities from AXA to a legacy specialist with no live business. Whilst there will doubtless remain some liabilities within AXA that AXA would consider to be legacy exposures, this reduces the exposure of remaining AXA policyholders to legacy risks and allows management to focus more on the policies that continue to be underwritten by AXA. RIUK is a legacy specialist, and there are no live policies insured by RIUK, so there is no change in focus for its business. As a result, I have not distinguished between run-off and ongoing policyholders within different policyholder groups in this report. As I have mentioned in section 2.1, RIUK will hold economic responsibility for the AXA policyholders whose policies will be reinsured by it under Project Arven; therefore I KPMG LLP. All rights reserved Page 34 of 90 13/04/2018

35 distinguish them from the remaining AXA policyholders who are neither reinsured by or transferring to RIUK Policyholder groupings chosen Based on my analysis of policyholder characteristics and the fact that there is no practical change in regulation as a result of the Transfer, I have identified the following four major policyholder groups. These are: Existing RIUK policyholders; Transferring policyholders; Remaining AXA policyholders whose policies will be reinsured by RIUK under Project Arven; and Remaining AXA Policyholders whose policies will not be reinsured by RIUK under Project Arven. Financial resources available to pay policyholder claims 5.3 Approach to assessing the impact of the Transfer on available financial resources In the sections that follow, I consider a number of items that contribute to the change in financial resources for the different policyholder groups as a consequence of Project Arven. First of all, I consider in detail the changes to the assets and liabilities (in the form of asset mix, claims reserving, reinsurance arrangements and pension liabilities) that will affect the GAAP and Solvency II balance sheets of the Transfer Companies. Then, I consider the changes to the capital requirements of the Transfer Companies as a consequence of the Transfer and consider how easily they are met. Finally, I consider the impact of the specific structuring of Project Arven on how easy it is to call on the financial resources available to protect policyholders in the event of a claim, and consider the risks associated with this structuring. 5.4 Consideration of the nature of assets available to meet policyholder obligations In assessing the impact of the Transfer, I have considered the nature of assets within each Transfer Company before and after the Transfer occurs. The assets of AXA and RIUK fall into four broad categories. Equities RIUK hold a fairly significant amount of equities. AXA hold a smaller proportion of equities in comparison to RIUK. Other investments and cash Financial investments held by the Transfer Companies are mainly held in bonds. Both RIUK and AXA hold a fairly limited amount of cash and this is not expected to change significantly after the Transfer. Therefore I do not consider the Transfer to have a material effect on the liquidity of the Transfer Companies. Reinsurance share of provisions Subject to the specific terms of the relevant reinsurance contracts, reinsurance assets have the capacity to absorb losses arising from the underlying reinsured insurance liabilities, thereby reducing financial risk. AXA have a smaller proportion of reinsurance assets compared to RIUK. I also show the split of intragroup reinsurance assets for RIUK. I note that it will increase materially post Transfer. This shifts some of the asset risk from the risk of investments not performing as well as expected, to that of the reinsurance failing. I discuss further the Fairfax intragroup reinsurance and the consequences of the remote potential for its failure in section 5.10, and also include further stress tests in section 6 on the intragroup reinsurance (sections 6.12 and 6.13 in particular). As I describe in these sections, I consider this failure to be a very remote possibility, given that it requires three separate Fairfax group companies to KPMG LLP. All rights reserved Page 35 of 90 13/04/2018

36 default, and therefore I am comfortable with the nature and level of utilisation of such arrangements for RIUK. Other assets Other balance sheet assets include mortgages and loans, sundry assets arising in the normal course of business, such as accounts receivable, accrued interest and rent and intercompany balances due from other members of RiverStone Europe Group largely arising as a consequence of recharges of expenses between group companies. AXA also have a small asset in regards to deferred tax. These balances are in line with my expectations for a business of this nature. The table below shows each asset group as a percentage of the total assets for RIUK and AXA as at 31 December 2016 before the Transfer, and estimated percentages post Transfer. Nature of assets as % of balance sheet I note that while RIUK do hold a large proportion of bonds and little cash, significant values of the bonds are short-term in nature and therefore do not have any of the potential illiquidity problems that longer dated bonds may be exposed to. For example, there were $156m of US Treasury Bills in RIUK at 31 December 2016, which accounted for 20% of RIUK s total assets, with maturities of less than one year. The post Transfer assets for AXA are not shown above as AXA are currently working through how their post Arven asset portfolio will be formed. However, they do not expect there to be any material change to the strategic asset allocations of their investments. The increase in intra-group reinsurance assets post Transfer for RIUK is a direct consequence of the new Wentworth reinsurance policy described in section I do not identify any matter arising from balance sheet assets held by the Transfer Companies that would cause me to perform specific further additional analysis. I note that the asset mix may change with the Project Arven reinsurance agreement, but no change in the strategic asset allocations of investments of the Transfer Companies is planned as a direct consequence of the Transfer. 5.5 Valuation of insurance liabilities Pre Transfer Post Transfer RIUK AXA RIUK Equities 15% 3% 14% Investments (excl. equities) and cash 50% 86% 47% Bonds 30% 58% 35% Cash 5% 2% 4% Other 15% 26% 7% Reinsurance share of provisions 14% 2% 29% Intra-group reinsurance 12% 2% 28% Other reinsurance 2% 0% 1% Other assets 21% 9% 10% Source: UK GAAP and Management Information Note: rounding differences account for the slight discrepancies where they exist when adding within each column I have considered the valuation of insurance liabilities included in each Transfer Company balance sheet. The process of estimating insurance liabilities is inherently uncertain due to unknown future events or circumstances and the effect these may have on the frequency and cost of claims. For example, future legal changes may increase the number of claims to which insurers are exposed, inflation may change the costs of remediation of insured events and new types of claim may emerge which are not currently anticipated. Recent examples of this uncertainty include the market-observed significant increase in the number of claims reported to EL policies for Noise-Induced Hearing Loss, or the increasing costs to the market of PPO claims. KPMG LLP. All rights reserved Page 36 of 90 13/04/2018

37 In performing my analysis of the relative impact of the Transfer on different policyholder groups I have considered the appropriateness of the methods and assumptions used by the Transfer Companies to value their insurance liabilities. The Actuarial Function for RIUK historically outsourced actuarial work to a third-party actuarial consultancy firm. Actuarial work undertaken by the outsourced provider includes the full reserving process and production of the RIUK reserve reports. As of April 2016, RIUK has an in-house Chief Actuary, with the plan to migrate from a total outsourced actuarial function to an in-house actuarial function over time. The Chief Actuary oversees all of the outsourced provider s work for RIUK, and provides a level of peer review. Final responsibility resides with the Chief Actuary. A quarterly actual versus expected analysis on the reserves is performed inhouse for management reporting purposes. There will be no change to the reserving process as a result of the Transfer. The reserving process for RIUK has well controlled governance. Actuarial reserve recommendations are subject to multiple reviews, including two levels of actuarial peer review, executive management review as well as a review by the RIUK Board before they approve the reserve levels. As previously noted, the transferring AXA portfolio is separated in two sections, CBU and DBU. The reserving is carried out by AXA in the UK for CBU and the AXA LM team in France for DBU. The reserving approach is consistent between CBU and DBU, however the exposure periods are different (with DBU being more mature and developed), so the resulting assumptions from adopting the same approach will be different. All reserving is performed on a best estimate basis and then various applicable margins are added for both IFRS and Solvency II reporting purposes. AXA typically reserve on an average cost per claim basis for each claim type and supplement their reserving with data from the Institute and Faculty of Actuaries working parties on asbestos claims where necessary. AXA have a two line defence work stream when reserving; the reserves go through the Board Risk Committee quarterly and then go to the Audit Committee for the annual year-end audit sign-off. Following the Transfer, the reserving approach for AXA s transferring portfolios will change to RIUK s reserving approach. I have reviewed the key methodology followed currently by AXA for the DAS Claims and compared it to that used by RIUK. I have also conducted interviews with key personnel responsible for estimating the value of insurance liabilities within the actuarial and claims management functions of both AXA and RIUK. Asbestos-related liabilities These liabilities make up approximately 75% of the Project Arven Liabilities. Both of the Transfer Companies use the model developed by the UK asbestos working party of the Institute and Faculty of Actuaries as the basis for their Mesothelioma claims, and extend that to other asbestos-related liabilities. Within this model there are a number of options and key assumptions that need to be made. AXA do not deviate from the suggested model significantly, while RIUK include more of their own, and other recognised, data and survey information to adjust where they see the model limitations falling. Whilst the reserving teams of the Transfer Companies currently apply slightly different assumptions within this model framework, these assumptions are similar enough in practice such that I would consider both result in answers that make reasonable provision for these asbestos-related liabilities given the uncertainties around future claims emergence. The model framework relies on assumptions including the inflation rate, how likely people are to claim, the number of claims which are expected in the near future, and the average cost of those claims. Due to the time period in which asbestos was in use ending some time ago, it is expected that the number of asbestos claims is due to fall as time goes on. Therefore, there is also often an assumption around the speed at which this may happen; the decay of claims. In section 6, I take as one of my stress tests the scenario where UK EL Mesothelioma-related reserves deteriorate by 80%. I estimate that to see this level of deterioration (if all else was held stable in each case) either inflation would need to increase by around 3.75%, the number of claims would need to be decaying at least 70% slower year on year (due to either more claims emerging or people being more likely to attempt to claim, i.e. an increased propensity to claim), the number or average cost of claims would need to rise by 80% more than that previously KPMG LLP. All rights reserved Page 37 of 90 13/04/2018

38 assumed, or some combination of lesser stresses. Given the advanced age of the liabilities, most of these illustrative changes required to reach the stress could be considered unlikely, as claims emergence is expected by 2018 (from the latest UK asbestos working party update of the Institute and Faculty of Actuaries) to be at or around its peak and there are deflationary pressures on claim costs beginning to emerge (as loss of earnings and similar components of claims reduce over time as claimants age naturally). This stress is estimated to have a probability of occurrence of roughly 1 in 200, in line with the regulatory capital requirements, and so remains plausible. I describe the drivers of the stress for illustrative purposes, and to provide context to the model used. Other DAS liabilities Whilst there is no recommended reserving model for other DAS liabilities like the UK asbestos working party model, both AXA and RIUK follow widely used methodologies for estimating the reserves for the remaining DAS liabilities. Again, the approaches used differ, but the key reserving judgments made by the two companies are similar, and both meet the criteria that I would consider make reasonable provision for the liabilities, given the uncertainty around future claims emergence. Discounting of liabilities The methods that I have discussed briefly above are all used to derive undiscounted reserve amounts for the Project Arven Liabilities. Given the very long latency period of some of the DAS Claims, investment return on the reserves over the course of their pay-out is expected to be material. Under UK GAAP, the Project Arven reserves will not be discounted, in effect creating a margin of prudence for the transferring reserves on the UK GAAP balance sheet. Under Solvency II, the economic balance sheet includes the reserves on a discounted basis for the future investment return, which reduces the amount required to be held (before the addition of a risk margin). The discount rate for the Solvency II balance sheet is prescribed by regulation, so there are no material differences between the approach taken by RIUK and AXA. Impact on the different policyholder groups Under the commercial terms agreed between the Transfer Companies on Project Arven, the amount paid to RIUK by AXA will be less than the sum of the undiscounted best estimate liabilities as recorded by AXA as at 31 December 2014, less the amount of claims paid between then and the Effective Date. This amount is higher than the amount currently estimated as being required to be carried on both the UK GAAP and Solvency II economic balance sheets for the Project Arven Liabilities, so there is no economic shortfall in reserves that needs to be made up by RIUK after the Transfer, and the transferring AXA policyholders should not therefore suffer as a result. AXA will also pay an additional amount to RIUK for expenses. As the liabilities are being transferred with the same case reserves as carried on the AXA balance sheet there should be no exposure to any of the remaining policyholders at AXA (reinsured or otherwise) as a result of any difference between reserving bases and methodologies. The amounts transferring exceed those required for the Solvency II economic balance sheet, and therefore make reasonable provision for the liabilities in RIUK after the Transfer, and also do not, therefore, expose the existing policyholders of RIUK to material levels of new reserving risk. Therefore, I identify no material impact on the security of the transferring policyholders as a result of the difference in reserving approach between AXA and RIUK. Observations on reserve developments in RIUK and AXA Over 2016 there has been better than expected experience seen over the whole RIUK portfolio, particularly from the Terra Nova segment. Due to this, RIUK has seen a reduction in ultimate claim values in the year. Favourable claims experience has continued through to Q Over 2016, AXA CBU has seen a decrease in notifications of deafness claims but an increase in notification of Mesothelioma claims. DBU business has also benefited from the decrease in deafness claim notifications. KPMG LLP. All rights reserved Page 38 of 90 13/04/2018

39 Impact on existing reinsurers 5.6 Outwards reinsurance arrangements Reinsurance assets will transfer along with the liabilities associated with them under the Transfer with the reinsured party changing from AXA to RIUK. The existing reinsurance asset for the Project Arven Liabilities is small in the context of the transferring reserves (around 5.8 million at the 31 December 2014 reserving estimate; I note that this is the value of ceded outstanding claims i.e. they do not include IBNR). As I note in section 3.15, where AXA holds reinsurance that attaches to both transferring and remaining AXA policies, the reinsurance in question will in effect be split from one into two contracts. I note that this ensures that both the remaining and transferring policyholders of AXA receive at least the same reinsurance protection post Transfer as pre Transfer. The Transfer has no further effect on the coverage provided by current or historic reinsurers of the Transfer Companies, creating neither an increase nor decrease in the exposure of reinsurers of the Transfer Companies. Existing reinsurers of RIUK will not be liable for any claims under the policies subject to the Transfer, which will instead continue to be reinsured by the relevant AXA reinsurers under the reinsurance agreements in favour of AXA that will transfer under the Transfer (unless such reinsurance is commuted beforehand). As I note in section 4.12, the amount of outwards reinsurance transferring to RIUK under Project Arven from reinsurers outside of the UK (around 4.8 million) is small, with no US reinsurers being involved with the transferring business against whom there is any realistic prospect of recovery. Even if this entire asset were to be lost it does not represent an amount large enough to reduce materially the security of any of the groups of policyholders considered in my analysis. Given the above, I identify no material adverse impact to any policyholders of the Transfer Companies from the Transfer due to transferring reinsurance arrangements. Pension Scheme Obligations 5.7 As discussed in section 4.13, there should be no change to the pension liabilities of either party caused by the Transfer. Therefore, I identity no effect from pension scheme obligations on RIUK or AXA policyholders as a result of the Transfer. Consideration of capital and risk 5.8 Measures of capital I have considered the value of each Transfer Company s net assets compared with the risk that each Transfer Company is exposed to by reference to its regulatory capital measure. The Internal Model is the measure which is used by AXA to assess their regulatory capital requirement, and its results are disclosed in its Solvency and Financial Condition Report ( SFCR ); however, the details of the Internal Model are not public. The Standard Formula is the measure which is used by RIUK to assess their regulatory capital requirement, and it is disclosed in RIUK s SFCR. I have considered AXA s Internal Model and RIUK s Standard Formula results as at 31 December 2016 for comparison purposes in my analysis. The Internal Model and Standard Formula reflect the Transfer Companies estimates of the amount of capital required to ensure that policyholders are secure at the 99.5% confidence level, over one year, under the Solvency II regime. The risks considered in these estimates include: Potential changes in the ultimate cost from existing insurance liabilities; Potential losses from investments; Potential losses arising from new underwriting exposure over the following year; KPMG LLP. All rights reserved Page 39 of 90 13/04/2018

40 Potential losses arising from the failure of third parties to which each of the Transfer Companies has exposure; and Potential losses arising from operational risks. I note that these estimates: Have been produced by suitably qualified individuals from within the Transfer Companies; Have been reviewed and agreed by the Boards of the Transfer Companies; and Are consistent with the estimates submitted to the PRA, where relevant. Reasonableness of capital calculations I have not performed a detailed verification of the calculations performed by the Transfer Companies. For RIUK the Standard Formula calculation as at 31 December 2016 was subject to an external audit. In order to satisfy myself that each of the SCR estimates are reasonable, I have performed stress tests on the areas I consider material to the Transfer Companies assessment of available and required capital, or where other market participants have to my knowledge experienced deteriorations recently and to which one or both of the Transfer Companies are exposed. These stresses are intended to describe real life scenarios that are conceptually easier to understand than, for example, a 1 in 200 year event. In each scenario except the final one (section 6.13), the Transfer Companies would each be left with sufficient capital to ensure that their existing policyholder liabilities could be met in full. Whilst this does not constitute a formal re-estimation of the capital required for each of these scenarios, the fact that each scenario is contained within the capital amounts estimated under the Transfer Companies SCR calculations reassures me that these estimates are capturing and covering the appropriate risks. I note that I consider the scenario in section 6.13 to be considerably less likely than that of a 1 in 200 year event, but include it to illustrate the circumstances under which the Fairfax guarantee would be called upon. I discuss the results of this analysis in sections Different measures of capital As noted above, RIUK uses the Standard Formula to set its SCR under Solvency II at present, while AXA uses the Internal Model. RIUK do have an ECM used for Economic Capital and ORSA purposes (using different bases and probabilities in each case) which derives a lower capital requirement and as such, RIUK believes that the use of the Standard Formula is not inappropriate given that it overstates what they believe to be the necessary capital for policyholder protection of the required level. I note though that the RIUK ECM has not completed the PRA s approval process, and there is no intention to do so in the near future, so it cannot be used for regulatory capital setting. AXA produce a Standard Formula estimate of their capital requirements annually, though this is not used for setting regulatory capital requirements. With the Standard Formula being based on the insurance risks within the average insurance company, it will not reflect the risk profile of any company perfectly. As AXA use an approved Internal Model, I do not discuss their Standard Formula estimates in further detail here. But because the RIUK ECM is not a regulatory approved one at present, and is used for Economic Capital and ORSA purposes, it is important to consider how it differs from the Standard Formula estimate of SCR for RIUK and AXA s Internal Model for the Project Arven Liabilities. I note that RIUK produce ECM figures on a number of bases for different purposes; below, and throughout my Report, I discuss that which is on the basis most similar to the regulatory requirements for capital estimates. In this case, this is a model basis which calculates capital to ensure policyholders are secure at the 99.5% confidence level (which is the requirement under KPMG LLP. All rights reserved Page 40 of 90 13/04/2018

41 Solvency II) though considering liabilities to their ultimate position, rather than over a one-year time horizon (as Solvency II requires). Differences between RIUK s Standard Formula and ECM While noting that RIUK s ECM is not suitable to underpin regulatory capital, RIUK s Standard Formula and ECM derive different results, with the Standard Formula calculating a higher, more prudent SCR. In particular, RIUK believe that the Standard Formula calculation of Insurance Risk may not be completely appropriate as it does not completely reflect the risk profile of RIUK, resulting in a higher required amount for this risk. The Standard Formula calculation of Insurance Risk is higher than for the ECM because of: Higher correlations applied between Solvency II classes of business; The methodology applied to allocate future expense provisions to Solvency II technical provisions; The reserve risk factors being higher than that used in the ECM, and the variability applied on losses on which there is little to no downside risk this stems from the reduced variability of the reserves due to the run-off nature of the business and the existence of material structured settlements in the portfolio where the total amount of claims to be paid out is already known, which is not captured adequately under the Standard Formula. As the RIUK ECM is not approved by the PRA and the differences with regard to insurance risk in particular are large, I have given consideration as to whether it is appropriate to take account of the additional diversification between risk types that it displays. I note that: Approximately 70% of the existing RIUK gross insurance liabilities are either US APH related, WTC Aviation related, European Motor related, or Italian Medical Malpractice related. The remainder of the liabilities are a mixture of very old claims, many of which have not been pursued for some time. US APH claims are exposed to risks of changes in the awards made by US Courts, medical developments in the US health system, and US claimant behaviour (though I note that the US is one of the more litigious countries in the world and propensity to claim is already very high). WTC Aviation claims are exposed in terms of value at risk to the result of one very specific piece of outstanding litigation in the US. European Motor claims are primarily annuity related and are exposed to changes to injury awards and investment conditions (mainly France and Germany). Italian Medical Malpractice claims are exposed to Court rulings in Italy and claimant behaviour in Italy (there is a history of late reporting and reopening claims in some of these run-off portfolios). In contrast the DAS Claims under policies transferring into RIUK are exposed to changes in personal injury awards in the UK Courts, UK claimant behaviour, and medical developments in the UK health system (as recent increases in Mesothelioma claims have been driven, in large part, by improved life expectancy from other diseases, meaning that the exposed individual has longer to develop the disease). There is no obvious reason why these risks should all materialise together, as the drivers of the risks are fundamentally different, and in most cases are dependent on decisions in different countries and legal systems. As a result, I conclude that, whilst the RIUK ECM is not approved and therefore may or may not, as an absolute indicator of capital KPMG LLP. All rights reserved Page 41 of 90 13/04/2018

42 requirements, capture all of the risks appropriate for a regulatory measure of capital, there is good reason to believe that the existing RIUK portfolio is better diversified by geography and risk driver than would perhaps be allowed for in the Standard Formula calculation, and that the introduction of the DAS Claims does not materially increase the aggregate exposure to one or more of these existing geographies or risk drivers. As the incoming portfolio is large relative to the existing RIUK one it is not immediately obvious to what extent the Transfer would provide further diversification benefit to RIUK s capital requirements beyond the level assumed in the Standard Formula calculation. These observations only note that the diversification appears real; I have not performed a validation of the RIUK ECM assumptions and do not rely on them directly to form my conclusions. Notwithstanding that the risk profile of RIUK is not going to be perfectly captured through use of the Standard Formula, it is the current, and only approved mechanism for assessing the required regulatory capital for the RIUK business. I note that I focus my analysis on the Standard Formula; the ECM is not suitable to underpin regulatory capital and as such I only refer to it where relevant as additional support to my conclusions following analysis of the Standard Formula. I also note that the capital requirement for RIUK, both before and after the Transfer, is materially lower under the RIUK ECM than under the Standard Formula. Differences between AXA Internal Model and RIUK ECM for the Project Arven Liabilities As the actual liabilities moving from AXA to RIUK under Project Arven remain the same before and after the Transfer, it is important to consider whether the different approaches to estimating the capital requirements for this portfolio used in the AXA Internal Model and the RIUK ECM could (under certain circumstances) produce materially different capital requirement estimates for the same portfolio that could result in the detriment of one or more groups of policyholders. This is important because if the Transfer caused the capital requirements for the Transferring policies to drop materially then the long-term security of those policyholders could be put at risk were the RIUK ECM to be approved in the future for the purpose of setting their SCR. To this end I have conducted a series of interviews with key personnel of both AXA and RIUK (and their advisers) to understand how each Transfer Company estimates the capital required to support the Project Arven Liabilities at the 1 in 200 year event level. As would be expected the models are different between the two companies. However, there is much about them that is similar: Both AXA and RIUK apply variability to the key assumptions identified within the Institute and Faculty of Actuaries UK asbestos working party model. These key assumptions include assumptions I have discussed in section 5.5 and also the latency of Mesothelioma, the population exposure, and the age profile. Both Transfer Companies model the CBU and DBU liabilities separately to recognise the different mix and exposure period of these liabilities. Both select a distribution for repudiation rates based on the historical data from the portfolio, and select average costs using historical data too. Both model variability of inflation on the claim amounts, primarily through the market risk module of the AXA Internal Model and RIUK ECM, and include an element of the expected inflation within the insurance risk module of their models. They each model the variability of the non-mesothelioma asbestos liabilities in a similar fashion to one another. The final output of this preliminary modelling is used to parameterise a statistical distribution in their main Internal Model (and both companies use the same type of distribution following comparative testing of the others). KPMG LLP. All rights reserved Page 42 of 90 13/04/2018

43 The methods and assumptions used by both Transfer Companies are in line with market and actuarial practice. There are some differences in approach, mainly around the smaller non-asbestos related element of the Project Arven Liabilities. However, having compared the approaches and considered the amount of capital that each Transfer Company has implicitly allocated to the Project Arven Liabilities in the analysis of pre Transfer and post Transfer balance sheets, I am satisfied that the insurance risk modelling approaches of the AXA Internal Model and the RIUK ECM for DAS claims are sufficiently similar that there is no material adverse effect on any of the identified policyholder groups associated with the change in modelling approach following the proposed Transfer, even assuming the RIUK ECM were to be approved at a later date. In making this statement I note again that the RIUK ECM and AXA internal model are calibrated to different measures of risk so results are not directly comparable the commentary above only compares the approaches to modelling the DAS risks. Impact of Transfer on capital available to policyholders 5.9 Change in Solvency II Capital Cover Ratios The tables below summarise the Solvency II balance sheet assets and liabilities for the Transfer Companies before and after the Transfer as shown in section 4.5. As above, please note that net Solvency II Technical Provisions refers to Technical Provisions net of reinsurance. Reinsurance assets are included within total assets. The most important measure to consider is how the eligible own funds compare to the regulatory capital requirements (i.e. the SCR ) and I show this for RIUK and AXA below. I also note the MCR for completeness. I note that the RIUK post Transfer balance sheets assume that a capital injection of $85.8m at 31 December 2016 has taken place, to ensure that RIUK post Transfer would maintain a 110% Capital Cover Ratio though as I note in sections 4.4 the final amount of this injection will be determined on execution. As in previous tables, I have carried out my analyses based on figures as at 31 December 2016 for the purposes of this report. However, I will update the analyses to 31 December 2017 (which will be audited figures) and the latest quarterly figures (using management accounts) in a supplemental report when these updated figures are available. RIUK (pre Transfer) AXA (pre Transfer) RIUK (post Transfer without capital injection) RIUK (post Transfer with capital injection) AXA (post Transfer) Solvency II Balance Sheet ( ms) Eligible Own Funds 211 2, ,367 Total Assets 617 6,708 1,159 1,228 6,145 Net Best Estimate SII liabilities 218 3, ,741 Risk margin Total Liabilities 393 4, ,778 SCR 162 1, ,547 Capital Cover Ratio 131% 123% 81% 110% 153% MCR Source: 2016 Q4 SII Balance Sheets. Management information. As At 31 December 2016 I consider the impact of the Transfer in terms of the ratio of available capital to the capital requirement (i.e. the Capital Cover Ratio ) calculated by reference to the Standard Formula for RIUK and the Internal Model for AXA. I have considered the SCR for both companies, and the view of the Transfer Companies on how the combined SCR may have looked if the Transfer had taken place at 31 December I observe the following: Before the Transfer, the AXA policyholders are insured by a business that has a comfortable buffer over the regulatory requirements, such that it would be considered wellcapitalised. KPMG LLP. All rights reserved Page 43 of 90 13/04/2018

44 Before the Transfer, RIUK policyholders are insured by a business that is capitalised with a buffer over the regulatory requirement. After the Transfer, the eligible own funds of AXA increase, and the regulatory capital requirement decreases. The eligible own funds increase, despite the payment to RIUK in consideration for the Transfer, because the best estimate liabilities are also transferred, and the Solvency II risk margin associated with these liabilities also disappears from the balance sheet. The Internal Model capital requirement for AXA drops because of the transfer of the DAS liabilities from the balance sheet. The effect of this is to increase the regulatory capital coverage for remaining AXA policyholders, and for the Project Arven policyholders that will be reinsured by RIUK. Therefore, I conclude that from a capital perspective neither of these groups of policyholders is materially adversely affected by the Transfer, as, in fact, their capital coverage would increase. After the Transfer, the Capital Cover Ratio for RIUK has decreased, though it is still suitably secure. I note that the consideration paid by AXA for the Transfer includes a buffer over and above the discounted value of the liabilities, which increases the eligible own funds available to RIUK. o Whilst RIUK already has many long-tail run-off liabilities on its balance sheet, it does not currently have any material exposure to DAS Claims (as defined in Appendix 8; I note for avoidance of doubt that DAS Claims are UK policies only). This means that the introduction of the Project Arven portfolio brings with it increased diversification of risks within the liabilities, a fact which is not reflected in the Standard Formula calculation as the DAS Claims are just added to existing provisioning groups under that method. As a result of this, the RIUK Internal Model (which can reflect this increased diversification) shows an improved Capital Coverage Ratio as a result of the Transfer in contrast to the Standard Formula, though I note that I do not rely on this to form my conclusions. o I note however that the new business transferring in to RIUK materially increases the volume of reserves, and similarly increases the overall uncertainty in those reserves. It is this additional uncertainty that leads to the increased capital requirements from RIUK after the Transfer. In section 6 I consider stress tests to determine whether this additional uncertainty causes a material adverse effect on policyholder security. o Whilst the regulatory coverage of capital requirements would appear to deteriorate as a result of the Transfer for RIUK policyholders, it remains at a reasonable buffer above the regulatory requirement, is sufficient to meet policyholder and regulatory obligations, and there is evidence that the additional benefits of diversification (as discussed in section 5.8 in the Differences between RIUK s Standard Formula and ECM ) not recognised in the Standard Formula calculation mean that the observed reduction in capital coverage could be exaggerated. This reduction in regulatory capital coverage does not therefore negate my overall conclusions that there is no material adverse impact on the capital security of existing RIUK policyholders as a consequence of the Transfer. For policyholders transferring from AXA to RIUK as part of the Transfer, the situation is less immediately obvious. The regulatory Capital Cover Ratio for these policyholders drops, but remains above 100% (with the capital injection), and as described above for existing RIUK policyholders, this security is stronger than perhaps it appears on simple public metrics. The capital calculations used to make this statement are not directly comparable though, and there is the added complexity of the reinsurance structure that RIUK is putting in place to support the Transfer, and how that changes security for policyholders. I consider the impact that this reinsurance structure has on the availability of capital resources below. KPMG LLP. All rights reserved Page 44 of 90 13/04/2018

45 Impact of the Project Arven structure on the risks to Transferring policyholders 5.10 Alongside the transfer of assets and liabilities from AXA to RIUK under Project Arven, reinsurance arrangements and guarantees will be put in place within the Fairfax group of companies to protect the RIUK balance sheet after the Transfer. These new arrangements do change the risks that could impact the policyholders whose policies are transferring from AXA to RIUK, so I consider these changes further below. I note that I consider a wider range of stresses to the Transfer Companies in section 6. After the Transfer, as outlined in section 4.11, a premium will be paid to an A rated reinsurer in the Fairfax group, Wentworth, in return for a 50% quota share reinsurance of the transferring business. Wentworth further reinsures the liability with TIG Barbados, another Fairfax group reinsurer, which will provide collateral to RIUK to cover the reinsurance recoveries due from Wentworth. Fairfax then provides a financial guarantee over the performance of Wentworth in this transaction. This structure shares the ultimate liabilities over a number of Fairfax group companies, some of which are able to invest with more freedom than RIUK itself. This therefore by implication allows for the assets to be invested with the potential for greater return than would be achievable without the reinsurance structure, which is attractive because of the very long duration of the DAS Claims liabilities. It also serves to reduce the potential downside risk of Project Arven to RIUK policyholders. Following the Transfer, RIUK will review the financial positions of Wentworth, TIG Barbados and Fairfax quarterly, and the timeliness of payment of funds from TIG Barbados and Wentworth to RIUK on an ongoing basis. The collateral posted will be contractually topped-up quarterly to 100% of the undiscounted best estimate of the ultimate Wentworth liabilities under the quota share reinsurance as calculated by RIUK and is invested within agreed investment guidelines. In the event of any failure by TIG Barbados to comply with its obligations under the reinsurance agreement, any breach by Wentworth of the Wentworth reinsurance agreements, which is not remedied within 10 business days of the earlier of RIUK notifying Wentworth, or of Wentworth becoming aware of the failure to comply, or an Insolvency Event related to TIG Barbados or Wentworth, all as defined in the legal agreements underlying the relationship, RIUK can take immediate control of the collateral fund in order to use it to pay future claims. In addition, if the collateral fund value falls to more than 25% below its required value, RIUK can take immediate control of the collateral fund. The combination of reinsurance and the potential for more volatile investment strategies than would be used by RIUK on its own balance sheet to be deployed does mean that there are two new scenarios that would compromise the ability of RIUK to pay claims on the Project Arven Liabilities. Both of these arise from situations where the collateral, a large asset supporting the RIUK exposure, is depleted and cannot or will not be refilled. These scenarios both involve multiple trigger events, and are as follows: 1) The collateral fund collapses in value at some point while the Project Arven Liabilities remain outstanding and is unable to be topped up as TIG Barbados does not have sufficient assets and the Fairfax financial guarantee does not respond. In addition Wentworth itself would need to have insufficient assets to make payments on the reinsurance contract (in effect the failure of all three of Wentworth, TIG Barbados and Fairfax). This causes a permanent change in the funds available for funding liabilities. KPMG LLP. All rights reserved Page 45 of 90 13/04/2018

46 2) The collateral fund collapses in value at some point and this coincides with a massive and sudden increase, (a spike ) in claims payments by RIUK (Project Arven related or otherwise) such that the capital resources of RIUK are exhausted before the collateral fund can be replenished at the end of the quarter. This causes a temporary change in the funds available (i.e. a liquidity shock) for funding liabilities. There are other scenarios that can lead to the inability of RIUK to meet the Project Arven Liabilities (such as a substantial deterioration of the DAS Claim liabilities beyond their expected value) but these are not introduced by the Project Arven transaction itself. As mentioned above, I consider these more general stress scenarios in section 6. However, because these two risks, remote as they would appear at first sight, are introduced by the reinsurance structuring, I consider them here. My analysis of the two scenarios is as follows: 1) In this scenario, the available funds for the gross Project Arven Liabilities (and RIUK's other gross liabilities) would be a combination of what was left in the collateral account, RIUK's reserves and available funds. I assume that there is a 90% drop in the value of the collateral fund, such that RIUK s assets would be equal to those shown in the Solvency II balance sheet in section 4.5, less 90% of the value of the collateral fund. Under this scenario there remain sufficient assets within RIUK to pay all policyholder liabilities in full, assuming that the capital injection required at 31 December 2016 has been made. 2) In this scenario, the available funds for the spike in the gross claims needing to be paid would be a combination of what was left in the collateral account, and RIUK's available funds. I assume that: a) there is a 90% drop in the value of the collateral fund; b) that the reserves held are covering the "normal level" of claims exactly, so that the extra increase must be covered by what was left in the collateral account and RIUK s available own funds; c) that the "normal level" of claims needing to be paid would mirror an average of that over the last 2.5 years (I note that I have confirmed with the Transfer Companies that claims paid over the last 2.5 years have not been unreasonably lower than normal); and d) available funds are equal to their eligible own funds under the regulatory Standard Formula model. Under these assumptions, claims under policies transferred to or reinsured by RIUK requiring payment within the quarter under Project Arven would need to spike by around 4000% within that quarter, claims under existing RIUK policies requiring payment within the quarter would need to spike by around 3250% within that quarter, or both categories of claims requiring payment would need to spike by around 1750% within that quarter, before the funds were depleted. This shows that a liquidity shock following an asset value drop needs to be extremely large, relative to historical payments, in order to compromise the solvency of RIUK before the next contractual top up of the collateral fund is due. The impact of these two scenarios is effectively identical at the point that they occur. In the second case above the reduction in RIUK s capital would be temporary as the collateral would be topped up again at the end of the quarter. In the first case, where the failure of Wentworth, KPMG LLP. All rights reserved Page 46 of 90 13/04/2018

47 TIG Barbados and Fairfax all fail to meet their commitments, the capital reduction would be permanent. Both of these scenarios involve the collateral fund experiencing a massive loss of value, most likely as a consequence of adopting riskier investment strategies than the average insurer would. In recognition of this, certain limits have been placed on the sorts of investments that the collateral fund can make. These limits cover investment categories, quality constraints on each category, and a stated asset mix structure. I note that in particular 20% of the collateral account has to be held in cash, which would make the 90% drop assumed above even more unlikely. These limits help to mitigate the risk of a short-term collapse in asset value that cannot be reinstated through either the reinsurance or Fairfax guarantee mechanisms. Taking the above analysis into consideration, I note that whilst the reinsurance structure and investment guidelines backing the collateral fund implemented by RIUK alongside Project Arven (as noted above) introduces new risks to the Transferring policyholders, I consider these new risks to be extremely remote. The reserving and capital analysis above leads me to conclude that, whilst the Transfer Companies have different strategies and run their businesses in different ways, the protections and safeguards put in place around the access to the collateral fund by RIUK, and the restrictions imposed on the investment of that collateral, mean that the probability of policyholder detriment as a result of these arrangements is extremely remote. Further, I note that the reinsurance structure implemented by RIUK alongside Project Arven (as noted above) effectively allows RIUK to call in part on the surplus assets of Wentworth if the Project Arven Liabilities deteriorate materially, and those of TIG Barbados, should Wentworth not have sufficient capital resources, and through the guarantee from Fairfax if TIG Barbados should also fail to perform. This means that the policyholders whose policies will be transferred to RIUK under Project Arven are in effect being protected by a much broader pool of assets than if they simply transferred to RIUK without the reinsurance. Wentworth had net assets of $252m as at 31 December 2016, and TIG Barbados and Fairfax had net assets of $228m and $11,820m respectively at the same date. This means that, despite the lower regulatory Capital Cover Ratio that RIUK will have, compared with AXA after the Transfer, the security backing the Project Arven Liabilities remains strong such that the scenarios which can result in reduced payment of liabilities when they are due are remote. As such, I conclude that there is no material adverse effect on policyholder security for the Project Arven Transferring policyholders as a result of the Transfer. Treating Customers Fairly Claims and policy administration 5.11 As discussed in section 4.21, it is planned that the AXA LM DAS Claims handling team that currently provide the claims service in relation to policies within the scope of Project Arven will be transferring to RSML (and there are contingency plans should there be any issues in this regard). Meetings, presentations and regular visits have been held with the transferring members of staff to explain the situation, answer queries and provide comfort; their contractual terms and conditions of employment will stay exactly as they are and at this stage there is no evidence to suggest that any of the selected team will decide not to transfer. Claims handling manuals encompassing substantially the same procedures and service levels as are currently followed by the transferring AXA LM claims team, as reviewed by RIUK and AXA, are already in place at RSML. This means that the transferring AXA LM claims team will be able to provide at least the same service to the AXA policyholders that will transfer to RIUK following the Effective Date as they currently provide. AXA policyholders whose policies are reinsured by RIUK under Project Arven will also have their DAS Claims managed by RSML post Transfer, though again these will be managed by the former AXA LM claims team. These AXA LM DAS Claims handling specialists are clearly key individuals in continuing the same customer experience for policyholders after the Transfer. As noted in section 4.21, RSML KPMG LLP. All rights reserved Page 47 of 90 13/04/2018

48 expects to exchange contracts on an office space in Ipswich after the Directions Hearing and have the space functional by July By sourcing office space in Ipswich, this will minimise the disruption to their commuting arrangements, which should help to reduce the key person risk that could be assumed in the period immediately after the Transfer. In any case, these individuals will be joining an experienced and established claims team in RSML, with substantially the same procedures and service levels, which helps to reduce this risk further. As part of the integration, the current AXA LM workflow processes for tracking and managing DAS Claims will be replicated within RSML. The IT systems to be used by the transferring AXA LM claims team are long established within RSML and are simpler to use than the existing AXA systems. Extensive user training on the RSML systems will be provided in advance of the Transfer. This means that any policyholders with DAS Claims under policies covered within the scope of Project Arven can expect to receive the same levels of service as they did prior to the Transfer. There will continue to be DAS Claims notified to AXA on policies not included in Project Arven. EL and PL policies written by AXA after 2014 continue to have exposure to these claims, though the vast majority of the liability under policies transferring to RIUK under Project Arven is asbestos-related and should not be observed in future claims on the 2015 and subsequent years of underwriting. Whilst the fact that the AXA LM DAS Claims handling team is transferring to RSML could be considered a loss of expertise in handling ongoing DAS Claims under policies written by AXA after 2014, the AXA staff that formerly managed the CBU part of the business are not moving to RSML, and will remain available to continue to manage claims on the ongoing portfolio. I conclude then that the policyholders remaining in AXA are not materially adversely affected by the changes in claims handling arrangements. Current policyholders of RIUK should see no change in the service they receive as they will continue to have their claims managed by the RSML claims team after the Transfer. Conduct risk 5.12 As discussed in section 4.25, AXA have completed a review of RIUK s conduct standards to ensure that they are of an appropriate standard for the transferring business and found no material issues of concern. Nevertheless, they suggested some areas where they felt improvements could be made. Following this, RIUK took the following steps to comply with the suggested improvements: Implementing enhanced documented policies and procedures in relation to the identification and treatment of vulnerable customers. Ensuring that a fuller record is made explaining decisions made (such as explanations for declinature) in order to be able to use this information if these decisions are later challenged. Ensuring that they will continue to maintain and develop appropriate policies and procedures to manage conduct risk and ensure the fair treatment of customers whose policies are transferred to or reinsured by RIUK under Project Arven. Ensuring that key AXA LM claims handling staff who transfer to RSML when the Transfer takes effect, by operation of TUPE, will be deployed to work in the business of RIUK, specifically on the portfolio assumed by RIUK under Project Arven (Part VII and reinsurance). RSML has plans in place to deal with the scenario where transferring key AXA LM staff subsequently choose to leave RSML s employment. In July 2017, RIUK confirmed to AXA that the suggested improvements had been addressed and RIUK provided AXA with the updated conduct risk strategy and guidelines. KPMG LLP. All rights reserved Page 48 of 90 13/04/2018

49 Regardless of the above, conduct risk is relatively low, both for existing RIUK policyholders and AXA Transferring policyholders as they are all old policies, and, furthermore, the transferring AXA policyholders will no longer be exposed to the risk involved with the live policies held by AXA. In summary, the Transfer does not expose policyholders to materially greater conduct risk because no new business is transferring. For AXA policyholders whose policies are not being transferred to or reinsured by RIUK under Project Arven the same conduct regime will apply both before and after the Transfer, so there is no change in circumstance for these policyholders. As discussed in section 4.23, the only change in complaints procedures seen by any group of policyholders will be the contact details for policies that Transfer, and these will be available on the RSML website and will be notified to Transferring policyholders as part of the communication strategy agreed by the Court (see Appendix 7). The complaints process will therefore be similar following the Transfer. As a result, I do not believe there will be any material adverse impact upon any of the policyholder groups as a result of the Transfer. The ease of presenting a new claim 5.13 For AXA policyholders whose policies are not being transferred to or reinsured by RIUK under Project Arven, and for existing RIUK policyholders, there is no change in the way that claimants present a new claim as a consequence of the Transfer. Both of these groups of policyholders will notice no difference in this regard For both the AXA Transferring policyholders moving to RIUK under the Transfer and for the AXA policyholders that remain with AXA but whose policies will be reinsured to RIUK there will be a change in claims handler that needs to be notified of a claim (whilst the individuals may remain the same, the notification will need to be made to RSML rather than AXA). This change in claims handler will be communicated to policyholders as part of the communication strategy (see Appendix 7) In reality though, new DAS Claims are not usually presented by policyholders themselves, but by the solicitors representing the third party claimants. These solicitors use ELTO to identify the insurers to pursue claims against. AXA and RIUK are already engaged with ELTO on this matter, and I understand that it is straightforward for ELTO to update both the insurer for a given policy and the appropriate claims handler (and the two can be changed independently). As a result, as long as the relevant policies have been identified and submitted to ELTO, any claimant solicitor should have no problem in identifying where to present claims after the Transfer. Any policies that have not been identified and submitted to ELTO will be equally difficult to trace before and after the Transfer. So the ease of identifying where to present a DAS Claim will not change as a result of the Transfer As discussed in section 4.20, post Transfer, RIUK will inherit AXA s obligation to trace EL coverage under policies transferred to it under Project Arven. RIUK has agreed with AXA that it will also undertake tracing for EL coverage on the policies reinsured by RIUK under Project Arven, although AXA will retain legal responsibility for this as the insurer. EL tracing will be managed by the transferring AXA LM specialist DAS Claims handling team following the Transfer. Any outstanding FCA remediation points relating to ELTO will continue to be dealt with post Transfer by RIUK with support from AXA and I note that for the portfolio that will be reinsured by RIUK under Project Arven, AXA will continue to deal with any outstanding FCA remediation points with support from RIUK. As RIUK have a stronger ELTO compliance than AXA based on ELTO audits and Directors Certificates of Compliance, there is no reason to suggest that ELTO compliance will reduce as a result of the Transfer I do not, therefore, identify any adverse impact on the ease of presenting new claims for any of the policyholder groups as a result of the Transfer. KPMG LLP. All rights reserved Page 49 of 90 13/04/2018

50 Protection of customer data 5.18 As discussed in section 4.24 both AXA and RIUK have established cyber security arrangements to protect against system breaches and data loss. There is no expectation that the protection of any policyholder s data transferred to RIUK in connection with Project Arven will diminish as a result of the Transfer. Cyber-attacks are attempted on businesses all the time, so there is always the risk that one may be successful, but the Transfer does not appear to increase that risk in any way AXA policyholders whose policies are not covered by Project Arven will see no change in the cyber security arrangements that protect their data, and neither will existing policyholders of RIUK. AXA policyholders whose policies will be reinsured by RIUK under Project Arven will now have data about them stored on both AXA and RIUK systems, but given my observations in section 5.18 I do not believe that this adds materially to the risk of data loss for those policyholders As a result I do not identify any materially adverse change to the risk of customer data loss for any of the identified policyholder groups. The impact of Brexit 5.21 On 23 June 2016, the UK held a nationwide referendum which asked the electorate whether they wanted the UK to remain part of or to leave the EU. The referendum resulted in a majority vote to leave the EU, a situation commonly referred to as Brexit, and the consequences of this vote are still uncertain. The UK formally served notice under Article 50 of the Lisbon Treaty on 29th March 2017 and has now entered a prescribed period of up to two years to negotiate on the terms of its exit from the EU. In the unlikely event of the UK leaving the EU before the Effective Date, I assume that the UK will still follow the EU-wide prudential regulatory regime known as Solvency II, or an equivalent, going forward. At the time of this Report there remains much political and economic uncertainty within the UK surrounding Brexit. Whilst there are many potential consequences (including the stock market and foreign exchange market instability witnessed during June and July of 2016), the one with the most potential to affect the business models of the Transfer Companies is the risk that UK insurance businesses would lose their rights under EU law to do business across the European single market (and that European insurance businesses could lose their right to trade in the UK). These rights under EU law are known as passporting rights. As the invoking of Article 50 triggered a negotiation period of up to two years, it is unlikely to be clear what the ultimate position on passporting rights will be before the Effective Date The portfolio of policies moving from AXA to RIUK under the Transfer is almost entirely made up of UK exposure. 99.9% of the outstanding claims under these policies relate to transferring policyholders in the UK (the other 0.1% relating to transferring policyholders in the Channel Islands or Isle of Man). All of the transferring policies were written in one of these jurisdictions too, so there is no transferring exposure in any other EEA state. As these policies are not therefore, written under passporting rights or a freedom of services arrangement under EU law, and both AXA and RIUK are UK companies, Brexit will have no impact on the management and servicing of these policies or claims under them, either before or after the Transfer. The policies that are to be reinsured to RIUK from AXA under Project Arven will remain with AXA, so to the extent that there could be any impact on these policyholders as a result of Brexit, that impact will not change. This applies equally to the AXA policyholders whose policies are not covered under Project Arven. AXA expect their exposure to Brexit-related passporting rights issues to be minimal as the business is established as the UK insurance carrier for the wider AXA Group, and there are other EU subsidiaries in the wider AXA Group that perform the local EU underwriting in the EU state in which they are established. RIUK, however, does currently make use of passporting rights to enable them to pay claims in other EEA states and any loss of passporting rights may require RIUK to seek individual authorisation in each of the EEA states to continue servicing the affected policies. This may require RIUK to set up branches or subsidiaries in these states. Again, for existing RIUK KPMG LLP. All rights reserved Page 50 of 90 13/04/2018

51 policyholders, RIUK will remain the insurer of those policies, and so they are in no worse position with respect to Brexit after the Transfer than they are before it. RIUK does however have a material number of EU policies and outstanding claims under them, so their Brexit contingency planning is worthy of further consideration. It is domiciled in the UK so no additional permissions will be required to operate in the UK. RIUK currently has a subsidiary company, RiverStone Luxembourg Sárl (based in Luxembourg), which they are considering changing the status of from Sárl ( société à responsabilité limitée - a company with limited liability) to SA ( société anonyme - a public limited liability company) which would enable it to act as an insurance carrier and thus a European subsidiary of RIUK. This will enable it to accommodate EU business in the future, as part of RIUK s Brexit planning contingency. As noted above though, none of the identified policyholder groups is any more exposed to the risk of not being able to have their policies or claims serviced as a consequence of Brexit after the Transfer than they would have been before it. As such, I conclude that no policyholder group is materially adversely affected over this issue as a consequence of the Transfer. In the event that material new information as to the consequences of Brexit emerges before the date of the Sanction Hearing, I will consider this in my supplemental report. Other Considerations 5.23 Regulatory framework, executive management and governance Each of the Transfer Companies is domiciled in the UK and regulated by the PRA and FCA. As such, the same regulatory framework applies to each of the Transfer Companies both before and after the Transfer. There is no change in entitlement to protection under the FSCS for any group of policyholders, and there is no change in access to the FOS. Each Transfer Company has executive management who are approved to act in their roles by either the PRA or FCA, and has to comply with requirements around governance of the businesses. Each has independent, non-executive directors on their Board. As noted elsewhere in my Report, RIUK are a specialist run-off insurer and this Transfer is in line with their business objective of seeking acquisition opportunities of run-off business, which also exposes them to increased liability amounts on their books from time to time as described in section Therefore, I do not believe that the extra business that management will be overseeing as a result of the Transfer will cause any adverse impact on Transferring policyholders or existing RIUK policyholders. For policyholders whose policies remain with AXA (whether reinsured to RIUK under Project Arven or otherwise), and for existing RIUK policyholders, there will be no change in any of the executive management, governance arrangements or regulatory regime as a result of Project Arven, and hence no risk of material adverse impact on these policyholders that might otherwise have arisen following such changes. For policyholders that transfer from AXA to RIUK under Project Arven, I note that the protections provided by the regulatory regime are such that, despite their policies moving to a new insurance carrier, there is very little risk of any change to their customer experience as a consequence of the differences in executive managements and governance arrangements between AXA and RIUK. KPMG LLP. All rights reserved Page 51 of 90 13/04/2018

52 6. Methodology, stress and scenario analysis Overview 6.1 In performing my analysis of the impact of the proposed Transfer, I have considered estimates prepared by the Transfer Companies of the maximum losses each of the Transfer Companies would face under a number of stress scenarios. In order to satisfy myself that these estimates are an appropriate basis on which to form an opinion, I have performed further analysis in three main areas: Modelling approach I have considered the methods used by the Transfer Companies to calculate the estimate of insured losses at differing levels of confidence, allowing me to have confidence that the results of the model prepared by the Transfer Companies are based on appropriate assumptions and capture the relevant aspects of each Transfer Company s risk. Analysis of the sensitivity of the model estimates to alternative assumptions I have considered how sensitive my opinion is to variations in the underlying assumptions used by the Transfer Companies, and whether the reasoning behind my opinion would be different using alternative assumptions. Stress test analysis I have considered the impact of a set of specific severe adverse events on each of the Transfer Companies, allowing me to gain comfort at a high level that the economic loss estimates used in my analysis are meaningful when compared with realworld loss assumptions. Loss modelling approach 6.2 Modelling approach For the purpose of reviewing stress scenarios on the Transfer Companies, I have focussed on the approaches underlying the ORSAs that each company has produced, as these are the documents referred to for the ongoing management of the businesses. In the discussion that follows, I have considered the increase in losses that would be experienced by the Transfer Companies under a number of stress scenarios (using the same basis as their ORSA) and considered how such a stress would affect the solvency position of the Transfer Companies based on their existing regulatory requirements (that is, the Standard Formula for RIUK and the AXA Internal Model). The Transfer Companies have applied standard actuarial methods to generate their calculations of potential losses for each entity. The required capital figures that have been provided to me as at 31 December 2016 have been subject to full internal review and governance processes, and are audited. The most significant risks contributing to RIUK s required capital relate to: a) the underlying general insurance business and associated uncertainties relating to the value of existing insurance liabilities and potential for adverse outcomes to that expected in the reserves currently set, particularly in Medical Malpractice, asbestos related claims and European Motor. b) market risk; particularly equity risk, due to the investment strategies employed and concentration risk due to the exposure to the intra-group loan note held. The most significant risks contributing to AXA s required capital relate to: a) the underlying general insurance business and associated uncertainties relating to the value of existing insurance liabilities and potential for adverse outcomes to that expected in the reserves currently set, particularly in the liabilities that would be expected to settle over a longer time period (particularly disease related claims and motor injury reserves). KPMG LLP. All rights reserved Page 52 of 90 13/04/2018

53 AXA is also exposed to future accumulation risks from weather catastrophe losses on its property portfolio. b) market risk driven by the investment strategies employed and the pension scheme. The relative contribution of different risk types to the required capital estimates for RIUK and AXA are consistent with my understanding of the underlying business and in line with my expectations. RIUK and AXA s Internal Model details are not in the public domain so I do not discuss them further here. Whilst I have not performed a detailed validation of RIUK or AXA s Internal Model results, the assumptions, methodology and outputs from their models are consistent with my expectations for business of this nature and I am satisfied that they are informative as to the change in risk which would occur following the Transfer compared with the position assuming no Transfer occurs. I note that while the assumptions, processes and methodologies used by AXA and RIUK to derive their Internal Model results differ in various ways, they both use similar levels of complexity and prudence, and I am satisfied that the change for AXA policyholders after the Transfer will not be adverse. Stress test analysis 6.3 I have considered a variety of severe adverse scenarios that could have a material impact on the financial security of policyholders. I have performed this analysis in order to: Quantify the impact of a stress event on the capital positions of the Transfer Companies and hence policyholder security; and Satisfy myself that the required capital estimates produced by the Transfer Companies on the basis of their Solvency II Internal Model and Standard Formula calculations, respectively, together with the resulting Capital Cover Ratios, are reasonable when compared with the impact of a combination of specific adverse events. The estimates of capital required from the Internal Model and Standard Formula calculations prepared by the Transfer Companies are intended to represent the full range of realistic economic risks that each Transfer Company could experience, and represent a more complete consideration of business risk than an analysis of specific stress events. However, such estimates are based on multiple modelling assumptions which rely on expert judgement. By contrast, my consideration of specific adverse stresses provides qualitative information on the security of policyholders in a single defined scenario. Such specific severe adverse scenario testing does not rely on expert judgements regarding the frequency and range of uncertainty, and provides an alternative source of information from which I can gain insight into the levels of security of policyholders. I have used capital data as at 30 June 2017 for RIUK, and as at 31 December 2016 for AXA. This is due to the availability of their stressed models; RIUK do not have stress tests reported as at 31 December I am not concerned about the discrepancy in dates, as such unlikely events as these stresses are unlikely to differ greatly in impact over six months. I note that the output from the Transfer Companies capital models (in their varying levels of sophistication) is consistent with the results of my analysis of specific severe adverse stresses. 6.4 I have considered a variety of potential severe adverse circumstances or extreme events that could affect the Transfer Companies, all of which represent stresses that fall outside the normal course of business. In selecting the scenarios to model, I have considered: Current developments occurring in the insurance markets in which each Transfer Company operates. The typical risks faced by an insurance business. KPMG LLP. All rights reserved Page 53 of 90 13/04/2018

54 My overall understanding of each Transfer Company, including its portfolio mix, structure and business model. The key risks identified by each Transfer Company in its estimates of required economic capital from its ORSA. The scenarios identified by each Transfer Company as part of its normal risk management processes. I have considered each stress by assuming the outcomes of what might happen given each scenario, looking at how this would affect the entities both individually and post Transfer based on their business and coverage, and consequently how this would affect each of their capital. I have then compared the lower capital position that would be in effect should each scenario (in isolation) happen to the capital requirements of each Transfer Company. As discussed in sections 3.18 and 5.8, the capital requirements under the Solvency II regime are based on policyholders being secure at the 99.5% confidence level. Whilst these stresses do not represent an exhaustive list of all adverse events that could impact the Transfer Companies, they include those risks I consider most material and relevant to my analysis. I note that the Transfer Companies perform such stress testing as part of their business as usual risk management processes as expected under Solvency II. I note that I have considered more extreme stress tests on the potential for Fairfax intra-group reinsurance failure in section 5.10 and so do not discuss this again here. I note that none of the tests cause the activation of the excess of loss reinsurance which AXA will provide RIUK in respect of reserve depletion (in respect of deterioration) in excess of 250% of the total gross reserves of the portfolio transferring under Project Arven (Part VII and reinsurance) as at 31 December 2014, less the value of claims paid following that date up to the Effective Date. As I note in section 4.10, the likelihood of making a claim under this reinsurance is very remote. For the avoidance of doubt, though the Solvency II regulatory basis requires a capital estimate to ensure security over the time horizon of one year, due to the nature of the stress and scenario testing this looks at the consequences of a given scenario over the long term. I note that, as the Transfer Companies use different regulatory models (i.e. an Internal Model and the Standard Formula) there are slight, expected, differences in the way in which they parameterise their tests. I do not consider this to be an issue. Taking the base financial projections provided by the Transfer Companies as a starting point, the severe adverse scenarios I have considered include: Deterioration in existing UK EL reserves: A legal ruling that causes UK EL Mesothelioma-related reserves to rise by 80%; Deterioration on US APH reserves: Events that cause a 30% deterioration on US APH claims; Deterioration on US APH and UK EL reserves: A combination of the last two stresses; events that cause UK EL Mesothelioma-related reserves to rise by 80% and a 30% deterioration on US APH claims; New disease: Emergence of a new type of disease similar to Mesothelioma; Equity crash: A change in market conditions causes equities to deteriorate by 45%; FX shock: A change in market conditions causes an unfavourable movement in US dollars and euros; KPMG LLP. All rights reserved Page 54 of 90 13/04/2018

55 Ogden change: The Ogden discount rate is reduced from -0.75% to -2%; TIG Barbados and Fairfax failure: Failure of TIG Barbados and the associated Fairfax guarantee to perform, along with loss of value of assets held in the collateral security account; and TIG Barbados and Fairfax failure and deterioration on UK EL reserves: A combination of the two of the above stresses; events that cause UK EL Mesothelioma-related reserves to rise by 80% and the failure of TIG Barbados and the associated Fairfax guarantee to perform, along with loss of value of assets held in the collateral security account. 6.5 Severe adverse stress: Deterioration in existing UK EL reserves I consider a scenario in which there is a legal ruling on asbestos related reserves, which causes UK EL Mesothelioma-related reserves to increase by 80%. This impacts AXA pre Transfer and RIUK post Transfer, as it will affect the Project Arven Liabilities. AXA will be unaffected after the Transfer (as will RIUK pre Transfer), as it will no longer hold disease related liabilities in relation to the Project Arven Liabilities. RIUK post Transfer will be affected greatly. However, I note that even so, RIUK post Transfer capital remains above the MCR. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Deterioration of existing UK EL reserves 147% 109% 42% 153% Source: Management information. 6.6 Severe adverse stress: Deterioration on US APH reserves I consider a scenario in which legal rulings over US business cause a new wave of US APH claims. This causes deterioration in reserves of 30%. This affects both AXA and RIUK both pre and post Transfer, though AXA only slightly. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Deterioration on APH claims 133% 122% 101% 152% Source: Management information. 6.7 Severe adverse stress: Deterioration on US APH and UK EL reserves I consider a combination of the stresses in sections 6.5 and 6.6; a scenario in which legal rulings over both UK and US business cause a new wave of US and UK claims causing deterioration of 30% in US APH reserves, and an increase of 80% in UK EL Mesothelioma-related reserves. KPMG LLP. All rights reserved Page 55 of 90 13/04/2018

56 This affects both AXA and RIUK both pre and post Transfer, having a large effect on RIUK post Transfer as it has taken on the UK EL Project Arven liabilities as well as having existing US APH liabilities. However, RIUK post Transfer capital still remains above the MCR. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Deterioration on US APH and UK EL reserves 133% 109% 35% 152% Source: Management information. 6.8 Severe adverse stress: New disease. I consider a scenario in which a new type of disease emerges with similar latent qualities to Mesothelioma. The type of disease is such that it impacts the Project Arven Liabilities but not those held by RIUK. Once RIUK takes on the Project Arven Liabilities post Transfer, it will also be subject to this stress. AXA will be unaffected after the Transfer, as it will no longer hold disease related liabilities in relation to the Project Arven Liabilities. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Emergence of a new type of disease similar to Mesothelioma 147% 116% 74% 153% Source: Management information. 6.9 Severe adverse stress: Equity crash. I consider a scenario in which a change in market conditions causes equities to deteriorate by 45%. This affects both Transfer Companies, though AXA to a more limited extent due to their asset portfolio. AXA will be affected to the same extent pre and post Transfer. RIUK will be more heavily affected post Transfer than pre due to the increase in the size of their asset portfolio following the Transfer. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Equity loss 132% 115% 85% 143% Source: Management information Severe adverse stress: FX shock. I consider a scenario in which a change in market conditions causes exchange rates to move unfavourably to the Transfer Companies. RIUK reports in US dollars, and is exposed to KPMG LLP. All rights reserved Page 56 of 90 13/04/2018

57 fluctuations in the exchange rate of currencies against US dollars. AXA holds a portfolio in US dollars and another in euros, which will both be affected by the shock (although AXA generally hedge currency risks). AXA will be affected to the same extent pre and post Transfer. RIUK will be affected slightly more post Transfer than pre Transfer. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Exchange rate shock of 25% 132% 120% 93% 150% Source: Management information Severe adverse stress: Ogden change I consider a scenario in which the Ogden discount rate is reduced from -0.75% to -2%. The Ogden discount rate is an interest rate set by the UK government that is used within the UK judicial system when awarding compensation to people who have suffered serious injuries. When awarding a lump sum, there needs to be an assumption made on how much interest the victim will be able to earn on the money. The higher the interest assumed, the lower the lump sum would need to be, and vice versa. Thus a fall in the Ogden discount rate would mean higher lump sum payouts being required to be made by insurers. This impacts AXA s business over a number of lines, including Motor, EL, and PL. AXA will be affected to the same extent pre and post Transfer. The effect on RIUK is immaterial pre Transfer though has a small effect post Transfer. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Reduction in Ogden discount rate to - 2.0% (with no reduction in PPO propensity) 147% 104% 106% 131% Source: Management information Severe adverse stress: Wentworth, TIG Barbados and Fairfax failure I consider a scenario in which TIG Barbados and the associated Fairfax guarantee fail to perform, along with loss of 40% of the value of assets held in the collateral security account. I consider this to be an extreme scenario, with a much more remote probability associated with it than the rest of the stress scenarios considered in section 6 so far, because it requires the failure of three other companies in the Fairfax group in addition to the asset stress. This affects only RIUK, and affects it far more post Transfer. I note that RIUK still holds capital above the MCR. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Wentworth, TIG Barbados and Fairfax failure 118% 123% 36% 153% Source: Management information. KPMG LLP. All rights reserved Page 57 of 90 13/04/2018

58 6.13 Severe adverse stress: Wentworth, TIG Barbados and Fairfax failure and deterioration on UK EL reserves The collateral account covers the expected DAS claims due from Wentworth and TIG Barbados, so the only scenarios which require the Fairfax guarantee to perform require that Wentworth and TIG Barbados fail to be able to maintain the collateral account, and that that account proves insufficient (through either a decline in asset values or a surge in claims). To illustrate a scenario where the Fairfax guarantee could come into play, I consider a combination of the stresses in sections 6.5 and 6.12; a scenario in which Wentworth, TIG Barbados and the associated Fairfax guarantee fail to perform, along with loss of a percentage of the value of assets held in the collateral security account (a 40% drop in line with 6.12), and a legal ruling over UK business causes an increase of 80% in UK EL Mesothelioma-related reserves. I consider this to be an even more extreme scenario by definition, with a far more remote probability associated with it than the rest of the stress scenarios considered. This has a slight effect on AXA pre Transfer, but is most detrimental to RIUK. Post Transfer, this combination stress depletes RIUK s eligible own funds and in theory would leave it short of the capital needed to pay claims. However I note that while we assume that the guarantee fails for this scenario, in practice, Fairfax would easily be able to cover the loss seen here with solely the cash it currently holds, and as such would have the liquidity and the means to resolve this without issue. RIUK (pre AXA (pre RIUK (post AXA (post Capital Cover Ratio Transfer) Transfer) Transfer) Transfer) Base Case 147% 123% 110% 153% Wentworth, TIG Barbados and Fairfax failure and deterioration on UK EL reserves 118% 109% -38% 153% Source: Management information Findings of stress test analysis Following these stress tests, excepting the final stress in the above section, each Transfer Company would be expected to meet its existing policyholder obligations in full, both before and after the Transfer. As noted earlier, this helps provide comfort that the capital requirement calculations provided by the Transfer Companies are at a reasonable level, and that the reduction in capital coverage for policyholders of RIUK post Transfer is not so large that there is material risk that their claims will not be met in full. In a number of these cases, the RIUK capital position would breach the SCR, but would not breach the MCR. This would result in some form of regulatory intervention and most probably prevent RIUK from taking on any new business until the capital position is improved. However, the company would remain solvent under each of these stress scenarios. For the final stress in section 6.13, as I noted above, I find this a highly remote possibility. If TIG Barbados and Wentworth were both to default, then the Fairfax guarantee would come into play with a value of 292million which would restore the capital cover to 42%. Fairfax holds $2.4billion of unencumbered cash at its holding company level as at 31 December 2017 and therefore would be able to meet this. A summary of the key elements of the guarantee is provided in section I note that these stresses assume that the investments of RIUK are held as they are at present; in reality, if extreme adverse scenarios were to occur, RIUK would move to holding a lower risk investment portfolio which would in turn mean the SCR would be lower, and thus capital coverage less severe than above. In addition, the extremely long emergence period for the liabilities should give plenty of time for resolution and recovery planning to occur. There is KPMG LLP. All rights reserved Page 58 of 90 13/04/2018

59 currently no formal documented plan for RIUK as they have not been required to produce one historically. I also note again here, as in section 2.10, that while the capital analyses in my Report are based on a post Transfer RIUK holding 110% capital cover, the Board of RIL have agreed a dividend of 90million, which would give a greater level of capital coverage than presented above. I will return to this stress test analysis in my supplemental report, by which time the final dividend coming into RIUK is likely to be known. KPMG LLP. All rights reserved Page 59 of 90 13/04/2018

60 7. Summary of findings for Project Arven Summary of changes in circumstances of existing RIUK policyholders 7.1 Based on the analysis that I have carried out in sections 5 and 6 of this report I note that: (a) The policies remain with RIUK after the Transfer; (b) (c) (d) (e) (f) The capital coverage of RIUK is reduced by the Transfer though still remains suitable; The risks introduced by the post Project Arven structure are sufficiently remote to not materially affect the likelihood of claim payment for existing RIUK policyholders; The claims handling does not materially change, as the existing RSML claims team will continue to service claims on these policies; The ability to make new claims, the protection of policyholder data, and any changes in the overall treatment of customers as a result of the Transfer do not have any material impact on the existing RIUK policyholders; and The Transfer does not give rise to any material change in the potential impact of Brexit and its consequences on existing RIUK policyholders. As a result, I consider there to be no material adverse impact on existing RIUK policyholders as a consequence of the Transfer. Summary of changes in circumstances of Transferring policyholders 7.2 This group of policyholders experiences the largest change because they are actually transferring from one insurer (AXA) to another (RIUK). I set out conclusions on the impacts of this below. Based on the analysis that I have carried out in sections 5 and 6 of this report I note that: (a) The reserving policy and process for the claim types being transferred is largely the same after the Transfer as it was before; (b) (c) (d) (e) (f) The methodology employed by RIUK to determine an economic estimate of capital required to support the reserving risk of the business subject to the Transfer is similar enough to the methodology employed by AXA such that there is no material artificial creation or tying-up of capital between the Transfer Companies. As such it follows that capital requirements are not being unnaturally raised or lowered for the same risks as a result of the Transfer; I am satisfied that the risks introduced by the post Project Arven reinsurance structure are sufficiently remote to not materially affect the likelihood of claim payment for transferring policyholders; The claims handling does not materially change as the AXA LM DAS Claims handling team is expected to transfer to RSML; The ability to make new claims, the protection of policyholder data, and any changes in the overall treatment of customers as a result of the Transfer do not have any material impact on the Transferring policyholders; and The Transfer does not give rise to any material change in the potential impact of Brexit and its consequences on the Transferring policyholders. KPMG LLP. All rights reserved Page 60 of 90 13/04/2018

61 As a result, I consider there to be no material adverse impact on Transferring policyholders as a consequence of the Transfer. Summary of changes in circumstances of remaining AXA policyholders whose policies will be reinsured by RIUK under Project Arven 7.3 Based on the analysis that I have carried out in sections 5 and 6 of this report I note that: (a) The relevant policies remain with AXA after the Transfer and see no change to claims handling arrangements as the individuals handling their claims will remain the same (albeit that they have changed employer); (b) (c) (d) The capital coverage of AXA increases as a result of the Transfer. In addition, these reinsured policyholders gain the additional security of a reinsurance protection from RIUK; The ability to make new claims, the protection of policyholder data, and any changes in the overall treatment of customers as a result of the Transfer do not have any material impact on these remaining, reinsured AXA policyholders; and The Transfer does not give rise to any material change in the potential impact of Brexit and its consequences on these remaining, reinsured AXA policyholders. As a result, I consider there to be a positive impact on remaining AXA policyholders whose policies will be reinsured by RIUK under Project Arven as a consequence of the Transfer. Summary of changes in circumstances of remaining AXA policyholders whose policies will not be reinsured by RIUK under Project Arven reinsurances 7.4 Based on the analysis that I have carried out in sections 5 and 6 of this report I note that: (a) The relevant policies remain with AXA after the Transfer and see no change to claims handling arrangements as the individuals handling their claims will remain the same; (b) (c) (d) The capital coverage of AXA increases as a result of the Transfer; The ability to make new claims, the protection of policyholder data, and any changes in the overall treatment of customers as a result of the Transfer do not have any material impact on these remaining AXA policyholders; and The Transfer does not give rise to any material change in the potential impact of Brexit and its consequences on these remaining AXA policyholders. As a result, I consider there to be a positive impact on these remaining AXA policyholders whose policies will not be reinsured by RIUK under Project Arven as a consequence of the Transfer. KPMG LLP. All rights reserved Page 61 of 90 13/04/2018

62 8. Effects of Project Fandango 8.1 Project Fandango is a separate Part VII Transfer being carried out independently of Project Arven, but within a similar timescale. It involves the transfer of all insurance and reinsurance business of RIL to RIUK. 8.2 As Project Fandango has no impact on any of the policyholders that remain with AXA, I do not consider them further in this section. Project Fandango could have a material impact on the balance sheet and capital strength of RIUK though, so the following analysis considers what further changes happen to RIUK following the potential sanction of Project Fandango and what impact this has on existing RIUK policyholders and transferring AXA policyholders over and above the impact of Project Arven. Effect of Project Fandango and Project Arven on RiverStone Europe Group structure 8.3 As a consequence of Project Fandango, the insurance and reinsurance obligations and certain other assets and liabilities of RIL will transfer to RIUK. The structure chart before and after Project Arven and Project Fandango shows RiverStone Europe Group structure (with relevant entities to the Transfer) highlighting which entities will retain insurance liabilities after the transfers. KPMG LLP. All rights reserved Page 62 of 90 13/04/2018

63 Effect of Project Fandango on RIUK balance sheets 8.4 I have carried out my analyses based on figures as at 31 December 2016 for the purposes of this report. However, I will update the analyses to 31 December 2017 (which will be audited figures) and the latest quarterly figures (using management accounts) in a supplemental report when these updated figures are available. 8.5 There are no material differences between the accounting treatments of items in the statutory accounts of RIUK, as presented in section 3, with all figures reported on a UK GAAP basis. 8.6 The table following illustrates the UK GAAP financial position of RIUK following Project Arven and Project Fandango, based on the financial position of RIUK at 31 December 2016 and 30 June 2017, assuming that all assets and liabilities at that date were to transfer to RIUK. I note that the final transfer of capital out of RIL is subject to regulatory approval. As part of the Project Fandango transaction, on the day before the Effective Date, RIUK s capital will be increased by an amount sufficient to cover the additional liabilities being transferred from RIL. RIUK s capital will be further increased when Project Fandango becomes effective, to result in an overall increase to RIUK s capital equal to the value of net assets being transferred from RIL. The exact mechanism for this will be decided before Project Fandango is sanctioned, and as such I will comment on this further in my supplemental report. I also note that unlike Project Arven, for Project Fandango, there is no need to raise capital from an external source. KPMG LLP. All rights reserved Page 63 of 90 13/04/2018

64 As At 31 December 2016 As At 30 June 2017 RIUK (post Arven without capital injection) RIUK (post Arven with capital injection) RIUK (post Fandango and Arven) RIUK (post Arven without capital injection) RIUK (post RIUK (post Arven with Fandango and capital injection) Arven) UK GAAP Balance Sheet ( ms) Assets Financial Investments Cash Capital Injection n/a n/a 36 n/a Reinsurance Assets - Intra Group Reinsurance Assets - Other Insurance Debtors Reinsurance Debtors Other Assets Total Assets 1,174 1,243 1,754 1,148 1,184 1,671 Liabilities Unearned Premium Reserve Outstanding claims , ,103 Other Technical Provisions Reinsurance Creditors Other Liabilities Total Liabilities , ,163 Net Assets Source: Financial statements; UK GAAP. Management information. As can be seen, if Project Fandango is also sanctioned, the net assets increase. I note that at 31 December 2016, the balance sheet positions including RIUK post Project Arven but not post Project Fandango require a capital injection of $85.8million (the 69 million seen in the above table), which would be sourced in the same way I described in section 2.10 and 4.4, to maintain a 110% coverage ratio over SCR. By 30 June 2017, this requirement has fallen to $46.7m (the 36 million seen in the above table) and nil respectively and by June 2018 it is projected to be $35.8m and nil respectively. This is due to investment returns and better than average performance of the insurance business. This is why the impact of Project Arven at different dates is different on a UK GAAP basis. 8.7 The table below illustrates the Solvency II financial position of RIUK following Project Fandango based on the Solvency II balance sheet of RIUK at 31 December 2016 and 30 June 2017, assuming that all assets and liabilities at that date had transferred: As At 31 December 2016 As At 30 June 2017 RIUK (post Arven without capital injection) RIUK (post Arven with capital injection) RIUK (post Arven and Fandango) RIUK (post Arven without capital injection) RIUK (post Arven with capital injection) RIUK (post Arven and Fandango) Solvency II Balance Sheet ( ms) Assets Investments and Cash Capital Injection n/a n/a 36 n/a Reinsurer's Share of Provisions - Intra Group Reinsurer's Share of Provisions - Other Other Assets Total Assets 1,159 1,228 1,720 1,140 1,176 1,651 Liabilities Gross Solvency II Best Estimate Liabilities , ,116 Risk Margin Other Liabilities Total Liabilities , ,238 Net Assets Ring-Fenced Funds Restriction Eligible Own Funds SCR Capital Cover Ratio 81% 110% 110% 95% 110% 118% Source: Management information. As can be seen, at both dates, the net assets increase when Project Fandango is included, and the Capital Cover Ratio increases from 30 June I also consider the results of my stress test analysis in section 6.14 should Project Fandango also occur. KPMG LLP. All rights reserved Page 64 of 90 13/04/2018

65 RIUK (post Capital Cover Ratio RIUK (post Arven) Fandango and Arven) Base Case 110% 118% Deterioration of existing UK EL reserves 42% 65% Deterioration on APH reserves 101% 111% Deterioration on US APH and UK EL reserves 35% 60% Emergence of a new type of disease similar to Mesothelioma 74% 91% Equity loss 85% 93% Exchange rate shock of 25% 93% 104% Reduction in Ogden discount rate to -2.0% (with no reduction in PPO propensity) 106% 115% TIG Barbados and Fairfax failure 36% 40% TIG Barbados and Fairfax failure and severe deterioration on UK EL reserves -38% -16% Source: Management information. The capital cover under each stress (except that of TIG Barbados and Fairfax failure) falls less in magnitude from its respective base level than it does assuming only Project Arven occurs. The capital cover under each stress is also higher in absolute terms assuming Project Fandango also takes place, indicating that Project Fandango will have a positive effect on the capital security. This is in line with the effects on capital in a non-stressed situation, as seen above. I also note that while the combination stress of TIG Barbados and Fairfax failure and deterioration on UK EL reserves still causes a negative Capital Cover Ratio assuming Project Fandango also takes place, due to the lower magnitude of this fall RIUK post Arven and Fandango would still have sufficient funds to settle all policyholder liabilities as their risk margin would absorb this loss. In addition, as I noted in section 6.14, if TIG Barbados and Wentworth were both to default, then the Fairfax guarantee would come into play; on this occasion with a value of 347million which would restore the capital cover to 65%. Cost and tax impact of Project Fandango 8.8 I have received confirmation from the management of RIUK that no significant tax liabilities will be realised as the result of Project Fandango, following advice from independent advisers; therefore, I am satisfied that they would not be sufficient to change any of my conclusions within this report. RIUK have performed due diligence, including commissioning analysis from specialist tax advisors on the tax implications of Project Fandango, which I have seen, in order to make this statement. 8.9 I understand that most costs associated with Project Arven and Project Fandango will be incurred whether or not Project Fandango proceeds, as the majority of these costs relate to activities occurring prior to the sanction hearing (for example, with respect to legal fees and policyholder communications). Therefore, I identify no significant additional costs arising from the implementation of Project Fandango. RIUK and RIL will meet these costs. Changes in reinsurance protections 8.10 There are no additional changes envisaged in reinsurance protections as part of Project Fandango. KPMG LLP. All rights reserved Page 65 of 90 13/04/2018

66 Outward Reinsurance 8.11 In a Part VII transfer where outwards reinsurance is being transferred, there is a risk that nongroup reinsurers of the Transfer Companies whose contracts are not governed by English and Welsh Law may not recognise the Transfer and decline payment of future reinsurance recoveries. Only a small amount of the transferring Project Fandango reinsurance is outside of the EU. The transfer of this reinsurance, as part of Project Fandango, will have no effect on the policyholders under Project Arven. Pension Scheme Obligations 8.12 The only change to RIUK s pension obligations as a result of Project Fandango will be that RIL s share of the plan will also be accounted for in RIUK. Therefore, I identify no additional effect from Project Fandango. Dividends and capital structure 8.13 Both RIL and RIUK have the same capital management policies and require an excess amount of capital over the regulatory capital to be maintained. I identify no additional effect here from Project Fandango. Guarantees/risk sharing arrangements 8.14 Fairfax guarantee all the obligations of TIG Barbados to RIL under a reinsurance arrangement, as if they were the principal counterparty. The RIL reinsurance arrangement will continue to be guaranteed by Fairfax after it transfers to RIUK under Project Fandango. I note, for avoidance of doubt, that this is a separate guarantee to the guarantee that Fairfax will grant RIUK on completion of the Transfer, as discussed in section I have seen evidence of both of these guarantees. The guarantee discussed in section 4.11 will be granted with or without the sanction of Project Fandango. Therefore, I identify no additional effect from Project Fandango. Non-financial effect of Project Fandango 8.15 I consider here the areas that a policyholder may have considered in their decision to buy their original policy and would therefore have reasonable expectations with regard to on an ongoing basis. In particular, I have considered the executive management (in that it sets the tone and culture for the company), claims handling, the ease of access to the company for complaints or policy administration, cyber security insofar as it protects the customer s data, and the regulatory protections that the policyholder benefits from Executive management There will be no additional impact on the executive management of RIUK as a result of Project Fandango ELTO system Project Fandango will have no additional impact on any changes made to the ELTO process as RIL and RIUK currently have the same ELTO process in place Administration of the business RIL and RIUK use the same IT systems, hence there will be no impact on transferring AXA policies from Project Fandango occurring. RSML is currently the service company to RIUK and RIL and will continue to provide the same service to the same standard and with the same staff, hence there will be no further impact as a result of Project Fandango Contractual arrangements Project Fandango is to have no impact on contractual terms to insurance policies, other than changing the party to the contract from RIL to RIUK. In addition, I understand that Project Fandango is intended to have no impact on contractual terms and arrangements under third KPMG LLP. All rights reserved Page 66 of 90 13/04/2018

67 party contracts to which RIL is party, other than changing the party to the contract from RIL to RIUK. For non-eea policyholders of the UK firms, there should not be any additional issues bringing claims as a result of Project Fandango. Furthermore, there will be no impact on policy administration as a result of Project Fandango, for any RIL policies transferring to RIUK Regulatory arrangements Like RIUK, RIL s primary regulators are currently the PRA and the FCA, so there will be no supervisory change for either of them as a result of Project Fandango. The policyholders of RIL that are eligible for protection under the FSCS will retain this protection in the event that claims cannot be paid in full out of current reserves, capital and reinsurance. Similarly no policyholder s right of access to the FOS will change as a result of Project Fandango. Hence there will be no impact on FSCS and FOS protection as a result of Project Fandango. RIL and RIUK have the same complaints procedure, hence there will be no further impact to the complaints procedure as a result of Project Fandango Cyber security risk Cyber security risk is a relatively new and increasing threat to businesses today. Cyber-attacks on companies are becoming more frequent. These attacks can take forms such as gaining access to and selling or publicising customers data, or preventing the business from operating as usual. Cyber security is therefore becoming ever more paramount. It is a reasonable expectation of a customer that their insurer should take appropriate steps to protect their confidential data. RIL have the same cyber security in place as RIUK, hence there should be no further impact as a result of Project Fandango Conduct risk RIL have the same conduct risk management and policies in place as RIUK. Therefore, there should be no additional impacts to conduct risk as a result of Project Fandango Implications of Brexit and Article 50 Both RIUK and RIL are domiciled in the UK, and both companies currently have both UK and EU liabilities. The Brexit contingency plan discussed in sections 5.21 and 5.22 remains the same after Project Fandango. Therefore, there are no further implications of Brexit arising from Project Fandango. KPMG LLP. All rights reserved Page 67 of 90 13/04/2018

68 9. Summary of findings for Project Arven and Project Fandango 9.1 The potential sanction of Project Fandango at or around the same time as Project Arven has no impact on policyholders that remain with AXA and whose policies will not be reinsured by RIUK under Project Arven. My conclusion with respect to these policyholders does not change. 9.2 For remaining AXA policyholders whose policies will be reinsured by RIUK under Project Arven, I see little change as a result of Project Fandango. The additional capital coverage that is seen in RIUK as a result of Project Fandango provides additional security to the reinsurance from RIUK supporting these policies, but the ultimate liabilities remain with AXA and hence my conclusion with respect to these policyholders does not change. 9.3 For policies that remain within RIUK or transfer to RIUK from AXA under Project Arven, Project Fandango provides a boost to the overall level of net assets and degree of capital coverage for RIUK. For these policyholder groups, the sanction of Project Fandango would therefore improve the security available to pay their claims. 9.4 Therefore I conclude that the further sanction of Project Fandango alongside Project Arven would not materially adversely affect any groups of policyholders involved in Project Arven. KPMG LLP. All rights reserved Page 68 of 90 13/04/2018

69 Appendix 1 Curriculum Vitae of the Independent Expert Philip Tippin is a non-life actuarial partner in KPMG. Philip Tippin has been an actuarial services partner since He joined in 2001 and has led KPMG s general insurance actuarial business for much of his time with the firm. He has worked on a number of previous Part VII transactions over this period. Philip qualified as a Fellow of the Institute of Actuaries in 1998 with Watson Wyatt, having specialised in general insurance actuarial work since the start of his career. Prior to joining KPMG Philip also worked as a consultant with Deloitte, and spent several years as a syndicate actuary in the Lloyd s Market with Venton (latterly Alleghany) Underwriting. Experience Philip has a wide range of experience in finance, insurance and reinsurance, covering both retail and wholesale markets, as well as having performed engagements looking at financial guarantee products. He has assisted clients in reserving, pricing, risk management, underwriting control, capital management and strategic consulting projects. His experience includes substantial exposure to UK and US law and regulation as they apply to insurance. Examples of recent assignments include: Acting as Independent Expert in general insurance Part VII business transfers. Undertaking the formal role of Scheme Actuary for a large number of Schemes of Arrangement, for both insolvent and solvent companies. Negotiation of commutations with policyholders and cedants on behalf of businesses in run-off. Expert witness appointment in the United States, covering reinsurance, reserving and pricing of specialist products, providing advice through the lifecycle of the case. Acting as independent expert for complex liability valuation determinations. Estimation of claim emergence and quantification of liabilities from environmental disasters in the United States. Gap analyses and development of implementation plans for Solvency II for large insurance groups. Review of credit risk liability models. Capital model design and review. Providing actuarial due diligence reporting for a number of major London Market acquisitions. Strategic reviews of business models for insurance risk management for providers and buyers of insurance. Providing statements of actuarial opinion for Lloyd s syndicates, including provision of opinions for US trust funds. Technical pricing of retail and commercial insurance products. Providing support to the audit of major UK and international insurance groups. Professional & Educational Philip is a Fellow of the Institute and Faculty of Actuaries (FIA). He holds a Practising Certificate to act as a Syndicate Actuary at Lloyd s, and has previously held a similar certificate to act for insurance and reinsurance entities in Ireland. He acted as an examiner and senior examiner for the general insurance papers of the Institute and Faculty of Actuaries exams for six years until He holds an MA in Mathematics and Philosophy from the University of Oxford. KPMG LLP. All rights reserved Page 69 of 90 13/04/2018

70 Appendix 2 Extract from Letter of Engagement Scope of the Independent Expert s work My role as Independent Expert will be to consider and to report to the Court on the proposed Transfer from the perspectives of the policyholders of the Transferor and Transferee, and to give a reasoned opinion on the likely effects of the Transfer on the policyholders of the Transferor and Transferee including whether any of their interests could be in any way (either directly or indirectly) adversely affected by any of the Transfer. Under the regulators guidance, the Reports must comply with the applicable rules on expert evidence. My understanding therefore is that the PRA expects an independent expert to prepare a report in accordance with Part 35 of the Civil Procedure Rules 1998 ( CPR ), the relevant Practice Direction and the protocol for the Instruction of Experts to give evidence in Civil Claims, to the extent relevant ( the Requirements ). I will therefore conduct my work as if the Requirements apply. In particular, I will owe an overriding duty to the Court to assist the Court and to give the Court independent expert evidence on the Transfer. For the Transfer, I expect that my work will include the following tasks in order for me to form my opinion: reviewing existing company documentation, [ ]; reviewing the documentation for the Scheme and, if necessary, suggesting amended drafting in order to eliminate any concerns; If a Scheme is required in Jersey, Isle of Man or in any other jurisdiction, produce Deliverables which comply with the requirements of any such additional Scheme; reviewing the Transfer, considering the effect on policyholders of the Transferor and Transferee, covering their contractual rights, benefit security, and benefit expectations; reviewing any changes to reinsurance arrangements in connection with the Transfer; reviewing the effects of the Transfer on the risks and policyholders remaining within the Transferor and the resources of that company to meet those risks; reviewing the effects of the Transfer on the risks within the Transferee and the resources of each entity to meet those risks; reviewing comparative solvency levels before and after the proposed transfer; liaising and raising issues and questions as necessary with the appropriate persons at the Transferor and Transferee; liaising and raising issues and questions as necessary with your advisers, including tax and legal advisers; considering any potential competition issues arising in connection with the Transfer (as expected by the FCA); such other tasks as you, I or the PRA and/or FCA consider reasonably necessary for the proper discharge of my role as independent expert. KPMG LLP. All rights reserved Page 70 of 90 13/04/2018

71 Appendix 3 Letters of Representation KPMG LLP. All rights reserved Page 71 of 90 13/04/2018

72 KPMG LLP. All rights reserved Page 72 of 90 13/04/2018

73 KPMG LLP. All rights reserved Page 73 of 90 13/04/2018