confirm whether R&Q Insurance (Malta) Limited ( Newco ) has signed up to the voluntary jurisdiction of the FOS;

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1 1 Introduction 1.1 I, Gary G Wells, prepared a report to the court, dated 8 October 2013, entitled, Report of the Independent Expert on the proposed transfer of the insurance business of Chevanstell Limited to R&Q Insurance (Malta) Limited (the Report). 1.2 In the Report I stated that shortly before the date of the Court hearing at which an order sanctioning the Scheme will be sought, I would prepare a Supplemental Report covering any relevant matters which might have arisen since the date of the Report. In particular, I stated that I would:- confirm whether R&Q Insurance (Malta) Limited ( Newco ) has signed up to the voluntary jurisdiction of the FOS; consider the extent to which the operational plans of Newco and/or Chevanstell Limited ( Chevanstell ) have altered (relative to the position at the Date of the Report); consider the actual changes in assets and liabilities (relative to the position as at 31 December 2012) and changes in capital requirements measured on ICA and prototype Solvency II standard formula bases (relative to the position as at 30 June 2012); review any amendments to the proposed capital undertaking; and based on the updated information, assess whether there have been any changes (including those associated with current economic conditions) that would affect my overall opinion as expressed in the Report. 1.3 I set out below my considerations with regard to all of these matters, and I also comment on other relevant developments. 1.4 In order to provide this Supplemental Report, the management of the Randall and Quilter Group (the Group ), of which both Chevanstell and Newco are a part, has provided me with additional information, including updated financial information. The additional data provided is set out in Appendix A. 1.5 This Supplemental Report should be read in conjunction with the Report. This Supplemental Report has been produced on the same bases as set out at Section 1 of the Report. In particular, it has the same scope, and is subject to the same reliances and limitations. Terms used in this Supplemental Report have the same meanings as in the Report. 1.6 Reliance has also been placed upon, but is not limited to, the additional information detailed in Appendix A. My opinions depend on the substantial accuracy of this data, information and the underlying calculations. The Group has confirmed to me in writing that to the best of its knowledge and belief all data and information they have provided to me is accurate and complete (see Letter of Representation, Appendix B). 1.7 The conclusions set out in this Supplemental Report are based largely on unaudited management accounts provided by the Group as at 30 September 2013, and unaudited capital projections, based on data as at 30 June In all cases I have requested the most recent data available. The Group has informed me that there have been no developments since the latest data made available to me which are relevant to the Scheme. Page No December 2013

2 1.8 This Supplemental Report has been prepared in accordance with the following applicable Technical Actuarial Standards ( TASs ), as issued by the Financial Reporting Council: Insurance TAS, Transformations TAS and TAS-R (Reports); and to the extent relevant TAS-D (Data) and TAS-M (Modelling). This Supplemental Report, together with the Report, is intended to form an aggregate report as defined in TAS-R. 2 Changes in Liabilities and Assets up to the Effective Date 2.1 The Group has provided me with unaudited management accounts for Chevanstell and Newco as at 30 September Table 2.1 below provides a summary of the balance sheets of Chevanstell and Newco as at 30 September 2013 together with projected balance sheets for the two companies immediately after the Scheme, if it is sanctioned, based on the figures as at 30 September Table 2.1 Simplified Balance Sheets for Chevanstell and Newco pre- and post-transfer 000s Chevanstell pre-transfer Newco pre-transfer Chevanstell post-transfer Newco post-transfer Assets Investments 13, ,364 Reinsurers' share of technical provisions 12, ,586 Debtors 24,347 3,141 3,750 23,739 Cash-in-hand 1, ,548 Other Assets Liabilities 52,222 3,685 3,750 52,157 Capital & Reserves 27,663 3,667 3,750 27,581 Technical provisions 21, ,765 Provisions for run-off costs Creditors 2, ,322 Other liabilities ,222 3,685 3,750 52, Since 31 December 2012 the amount of shareholders funds in Chevanstell has reduced by around 1.1m. The profit and loss account for the period shows that the main drivers behind this reduction were management expenses of 3.2m, offset (in part) by a reduction in ultimate claims of 1.0m and investment returns of 1.1m. Gross technical provisions reduced from 24.1m to 21.8m and net technical provisions from 10.8m to 9.2m. The composition of Chevanstell s assets has also changed. The amount of financial investments reduced from 17.7m to 13.4m, while group loans increased from 19.2m to 23.1m. The make-up of the financial assets has also changed. As at 31 December 2012, Chevanstell held a portfolio of sterling-denominated bonds with a market value of 3.9m, mostly issued by UK building societies. These bonds were sold, and had been replaced with a portfolio of slightly longer dated mortgage-backed bonds that were on the company s balance sheet as at 30 June 2013 (and were, therefore, taken account of in the updated capital calculations described below), but were all sold by 30 September Chevanstell continues to hold a UCITS portfolio of short duration US floating rate bonds (albeit reduced by $1.7m over the 9 months), Australian mortgage-backed bonds (reduced by 0.7m) and a portfolio of equities. Since 31 December 2012, Chevanstell has invested about 1.7m in euro-denominated mortgage-backed bonds. Page No December 2013

3 2.3 The management accounts as at 30 September 2013 include an analysis of the incurred development of claims over the 9 month period since 31 December In updating its reserve estimates, aside from some specific adjustments, it has essentially re-valued claims for changes in exchange rates and adjusted the IBNR reserve according to incurred movements in the period. The profit and loss account shows net payments of around 0.6m in the period and net case reserves reduced by around 0.5m. There was therefore little incurred development in the 9 months. Adjustments have been made to the IBNR in respect of two specific claims: a reduction of 0.25m in respect of the Foseco asbestos claim following an internal actuarial review of that claim, and a further reduction of $0.25m in respect of the Keystone claim reflecting the latest advice from Chevanstell s lawyers. A further release of 0.325m has been taken in respect of releases of cash held by brokers, while $0.15m has been written off in respect of aged inwards balances on the Arran and Lennox accounts. 2.4 I have been provided with a draft report prepared by external actuaries on their review of Chevanstell s reserve as at 30 September 2013 (this being prepared subsequent to the production of the 30 September 2013 management accounts). I have also been provided with a paper prepared by the Group Actuary comparing the held reserves to those recommended by the external actuaries. The methodology used by the external actuaries is broadly similar to that used in their review as at 30 September 2012, and discussed in my Report. My review of the external actuaries report, and the comments made by the Group Actuary in his paper, and my subsequent conversations with him have led me to conclude that the reserves held by Chevanstell, as shown in their 30 September 2013 management accounts, continue to appear reasonable, whilst continuing to note that there is a considerable degree of uncertainty attached to the ultimate value of Chevanstell s claims. 2.5 The Group has updated its ICA for Chevanstell, as at 30 June 2013, and has also updated its estimate of the prototype Solvency II standard formula SCR for Chevanstell, also as at 30 June Furthermore, the Group has updated its financial projections for both the Chevanstell business, and the new business forecast to be written in Newco for the period The Company has used these financial projections to update its estimates of the development of the Chevanstell ICA over the period , and also the prototype Solvency II standard formula SCR, both including and excluding the new business expected to be written in Newco. 2.6 The Group has used the same approach to undertaking the 30 June 2013 ICA for Chevanstell as was used for its ICA as at 30 June 2012 (my review of which was outlined in the Report). The changes in the ICA reflect changes in the balance sheet of Chevanstell over the period, in particular reduced technical provisions, as described above, and a different mix of assets. Overall, the ICA for Chevanstell has increased. The charge for reserve risk has reduced, reflecting the diminished reserves. Market risk has increased due to greater holdings in equities, group loans, and a relatively longer duration bond portfolio. As shareholders funds for Chevanstell have also increased in the year to 30 June 2013, owing primarily to investment returns and reduced reserves, the amount of capital held by Chevanstell in excess of its ICA has also increased. Relative to its ICA as at 30 June 2013, Chevanstell can still be regarded as being a very well capitalised company (as defined in paragraph 7.24 of the Report). 2.7 Chevanstell s updated estimate as at 30 June 2013 of its prototype Solvency II standard formula SCR also continues to indicate that Chevanstell is a very well capitalised company. The estimate is reduced overall compared to that as at 30 June Non-life underwriting risk is reduced due to reducing reserves, but also because geographical diversification has been allowed for, which had not been the case in the previous estimate as at 30 June Counterparty risk is also reduced due to falling outstanding reinsurance recoveries. Market risk, much like for the ICA (which uses the standard formula approach for most of the components of market risk) is increased reflecting changes in the composition of assets. Page No December 2013

4 2.8 The amount of surplus capital (own funds in Solvency II terminology) of Chevanstell relative to the standard formula SCR is slightly less than the surplus of shareholders funds over the ICA. Whilst the absolute amount of the SCR is less than the ICA, own funds are estimated to be less than shareholders funds, more than offsetting the difference between the ICA and SCR. Therefore, complying with its undertaking to hold at least 110% of the prototype Solvency II standard formula SCR would give Newco less scope to make distributions of capital than currently, relative to complying with its ICA. 2.9 The ICA amount is greater than the prototype Solvency II standard formula SCR primarily due to greater reserve risk and operational risk charges (the market risk charges being very similar). Chevanstell also make an explicit addition to its ICA for the best estimate of the expenses of running off the business, and subtracts from the ICA the time value of money discount associated with the claims reserves. The provision for run-off expenses and the time value of money discount are, however, reflected in the prototype Solvency II technical provisions and are therefore a cause of the own funds amount being less than shareholders funds. The prototype Solvency II technical provisions also include an explicit risk margin which further reduces own funds relative to shareholder funds As noted above, the Group has also updated its financial projections for the business forecast over the period The projections allow for the run-off of the Chevanstell business using a similar pattern of development to the original projections, but starting from the Chevanstell balance sheet as at 30 June The projections of the new business expected to be written in Newco are similar to those in the original projections made by the Group, but the timings of the transfers of business are later than in the original projections, as it was originally expected that the Scheme might take place earlier in All the projections suggest that Chevanstell/Newco will have a significant surplus of capital over its ICA and prototype Solvency II standard formula SCR capital requirements, such that it could be considered to be a very well capitalised company. Furthermore, the projections also suggest that the surplus of own funds over the SCR of Chevanstell would continue to be less than the surplus of shareholder funds over its ICA As noted in paragraph 2.2 above, there have been some changes to the composition of Chevanstell s asset holdings subsequent to 30 June 2013 (the effective date of its updated ICA and standard formula SCR estimates). If Chevanstell had held a similar portfolio of assets at 30 June 2013 as it did as at 30 September 2013, the market risk charge, in both the ICA and standard formula SCR, would have been slightly less. The biggest driver of this being the sale of the long dated bonds, which would have reduced the spread risk charge considerably. Page No December 2013

5 2.13 I also asked the Group to provide me with updated ECR and MCR figures, together with the corresponding available capital amount. The Group has provided me with these figures as at 30 September Due to the increased amounts of group loans held by Chevanstell and the admissibility rules under Solvency I regarding large holdings in individual investments, the amount of available capital in Chevanstell fell to just 2.4m as at 30 September This amount is less than both the MCR and ECR calculated as at 30 September I am informed by the Group that this situation occurred accidentally due to an oversight by the finance team in recalculating the company s General Business Amount 1 following the increased amounts of group loans. This resulted in the Directors of the company being shown a pro-forma solvency statement which incorrectly showed that the company had positive headroom over the MCR/ECR. The Group has informed the Regulator of this situation, and have provided me with a copy of the note it sent to the PRA describing the reasons why the situation occurred, together with the relevant formal notification form submitted to the Regulator regarding the breach and an sent by the Group to the PRA detailing the enhancements the Group has made to its procedures for monitoring solvency. The documents submitted to the PRA state that, having become aware of the breach, the position was rectified by the repayment of some of the group loans, sufficient that Chevanstell s available capital is in excess of both the MCR and ECR. I have also been provided with a copy of the letter from the PRA to Chevanstell, dated 26 November 2013, giving the PRA s formal response to the MCR/ECR breach, and its decision to take no further steps on this matter at this time While noting the MCR/ECR breach and its subsequent rectification, my review of the changes in the assets and liabilities of Chevanstell, including changes in the technical provisions and capital requirements, has not given me reason to change any of the conclusions set out in the Report. 3 Changes in Operational Plans 3.1 I have asked the management of the Group to provide me with details of any changes to the operational plans of Chevanstell and Newco that I was not aware of at the time of writing the Report. The management of the Group has confirmed that there have been no changes in the operational plans. If the Scheme is sanctioned, Chevanstell will be wound up and the Group will seek to transfer other Group business (initially that of Alma and Principle) into Newco as well as take on additional external transfers as indicated in its updated three year business plan. 4 Other matters Membership of the Voluntary Jurisdiction of FOS 4.1 In the Report I noted that Newco intended to join the voluntary jurisdiction of the Financial Ombudsman Service ( FOS ) prior to the Court hearing to sanction the Scheme. I have been provided with a copy of a letter from the FOS to Newco, dated 28 November 2013 confirming that it has been accepted into the voluntary jurisdiction of the FOS. Given that Newco s application has been accepted by the FOS prior to the Effective Date, I affirm the conclusions I set out in the Report that were premised on Newco operating under the voluntary jurisdiction of the FOS. 1 The General Business Amount is calculated as the sum of insurance liabilities (gross of reinsurance) and other liabilities plus the higher of the MCR (presently 3.7m) and the net admissible assets. Page No December 2013

6 Tax Implications of the Scheme 4.2 The Group has provided me with a copy of a tax opinion it has received concerning the UK tax implications of the transfer. The conclusion of the opinion is there is likely to be little or no tax implications of the Scheme in the UK. As I indicated in the Report, the Group has also sought advice from Maltese tax advisors concerning the tax implications of the Scheme in Malta. This advice indicates that there will be no tax implications of the Scheme in Malta either. Policyholder Notification 4.3 I am informed by the Group that no objections to the Scheme have been received from policyholders or other parties at the date of this Supplemental Report. The Group has kept a log of enquiries made by policyholders and other parties about the Scheme, and I have been provided with a copy of the log updated as at 11 December I have also reviewed a sample of the responses received. All of these enquiries have been of a general nature and no material concerns have been raised about the effect of the Scheme. 4.4 Based on there being no objections to the Scheme (at the date of this Supplemental Report) and my review of the responses from policyholders, I have no reason to change any of the conclusions I set out in the Report. Capital Undertaking 4.5 As set out in full in paragraph 7.59 of the Report, Newco is to give an undertaking to the Court concerning the amount of capital it holds. Essentially this will require Newco to hold capital of at least 110% of its prototype Solvency II standard formula SCR until such time as Solvency II is implemented in Malta. The wording of the undertaking is unchanged from that presented in the Report, and will be given to the Court at the hearing to sanction the Scheme. 4.6 Some of the conclusions I made regarding the effects of the Scheme, as set out in the Report, relied upon risk-based capital adequacy test provided for in the undertaking to the Court being implemented. Given that the form of the wording of the undertaking to be made to the Court is unchanged from that presented in the Report, and based on my review of the updated capital requirements of Chevanstell as outlined above, I do not have reason to change any of these conclusions set out in the Report. 5 Expert Opinion Confirmation of Opinion 5.1 I have further considered the effect of the proposed Scheme on the transferring policyholders of Chevanstell in the light of the updated information available to me seen the time of writing the Report. I confirm that my overall opinion and conclusions as set out in Section 9 of the Report are unchanged. 5.2 In reaching this opinion I have complied in all material respects with the principles of the Transformations TAS. Duty to the Court 5.3 As required by Part 35 of the Civil Procedure Rules, I hereby confirm that I understand my duty to the Court and have complied with that duty. Page No December 2013

7 Statement of Truth 5.4 I confirm that, insofar as the facts stated in this Supplemental Report are within my own knowledge, I have made clear which they are and I believe them to be true, and that the opinions I have expressed represent my true and complete professional opinion. Gary G Wells Fellow of the Institute and Faculty of Actuaries Fellow of the Society of Actuaries in Ireland Independent Expert Milliman LLP 11 Old Jewry London EC2R 8DU 16 December 2013 Page No December 2013

8 APPENDIX A DATA AND OTHER INFORMATION CONSIDERED A.1 I have used the following additional documents, reports, data and other information provided by the Group: Management accounts for Chevanstell and Newco for 6 months to 30 June 2013 and 9 months to 30 September Management accounts for Newco for the period 28 February 2013 to 30 September Spreadsheets showing the calculation of the ICA and prototype Solvency II standard formula SCR for Chevanstell as at 30 June 2013, projected SCR and ICA amounts for the year-ends for the Chevanstell business only, and projected SCR amounts for Newco (including new business) as at year ends A spreadsheet showing the projected balance sheet for Newco (and underlying assumptions) over the period An from tax advisers to the Group, dated 8 November 2013, giving an opinion on the UK tax implications of the Scheme. A schedule of investments held by Chevanstell as at 30 September Spreadsheets showing the calculation of the MCR, ECR and available capital amounts for Chevanstell as at 30 September A note prepared by the Group, dated 15 November 2013, detailing the circumstances of the breach of the MCR as at 30 September The notification form submitted to Regulator, dated 18 November 2013, formally notifying the MCR breach. An from the Group to the PRA, dated 21 November 2013, outlining enhancements to the Group s procedures for monitoring solvency. A copy of the letter from the PRA to Chevanstell, dated 26 November 2013, giving their formal response in relation to the Solvency I breach of the MCR. A copy of the application by Newco to FOS, dated 25 November 2013, to come under the voluntary jurisdiction of the FOS. A copy of a letter from the FOS, dated 28 November 2013, confirming acceptance of Newco into the voluntary jurisdiction of the FOS. A draft external actuarial review, dated 28 November 2013, of Chevanstell s claims as at 30 September A draft paper prepared by the Group Actuary for the Chevanstell board concerning reserves as at 30 September A.2 Information was also gathered in telephone conversations and correspondence with staff of the Group. Page No December 2013

9 APPENDIX B LETTER OF REPRESENTATION Page No December 2013

10 Page No December 2013

11 Page No December 2013

12 Page No December 2013

2.1 QIEL has provided me with a copy of its audited report and accounts for the year ending 31 December 2016.

2.1 QIEL has provided me with a copy of its audited report and accounts for the year ending 31 December 2016. 1 Introduction 1.1 I, Gary G Wells, prepared a report to the court, dated 9 March 2017, entitled, Report of the Independent Expert on the proposed transfer of the Czech, Hungarian and Slovakian branches