Peer Review of Actuarial Report on Scheme Transfer Chubb Insurance Company of Australia Limited, and ACE Insurance Limited 2016 Finity Consulting Pty Limited
17 Mr John French Country President Australia and New Zealand ACE Insurance Limited 28-34 O Connell Street SYDNEY NSW 2000 Dear John Peer Review of Actuarial Report on Scheme Transfer In accordance with our engagement letter dated 9 May 2016, I have undertaken an independent peer review of the actuarial report on the proposed transfer of insurance business from Chubb Insurance Company of Australia Limited to ACE Insurance Limited. This report presents my findings and opinions, in addition to describing the information I have received and the approach I have followed. Please do not hesitate to contact me if you have any questions. Yours sincerely Tim Andrews Fellow of the Institute of Actuaries of Australia
Peer Review of Actuarial Report on Scheme Transfer 1 Introduction and Scope... 3 1.1 Outline of Transaction... 3 1.2 Scope of Work... 3 1.3 Information Provided... 4 1.4 Reliances and Limitations... 4 1.5 Federal Court Practice Note... 4 2 Key Findings of Actuarial Report... 5 2.1 Policyholder Interests... 5 2.2 Scheme Actuaries Findings... 5 3 Peer Review Comments... 6 3.1 Methodology... 6 3.2 Comments on Capital Adequacy... 6 3.3 Conclusion... 6 Appendices... 8 Curriculum Vitae Tim Andrews... 8
1 Introduction and Scope Finity Consulting Pty Ltd (Finity) has been engaged by ACE Insurance Limited (AIL) to undertake an independent peer review of the actuarial report on the proposed transfer of the assets and liabilities relating to the insurance business of Chubb Insurance Company of Australia (CICAL) to AIL. The report was prepared jointly by Mr Stephen Wilson and Mr Steven Faulkes (the Scheme Actuaries) in their capacities as the Appointed Actuaries of AIL and CICAL respectively. This report has been prepared by Mr Tim Andrews, an experienced actuary and a Director of Finity, in accordance with a letter of engagement dated 9 May 2016. A CV for Tim is included as an appendix to this report. 1.1 Outline of Transaction AIL and CICAL are both wholly-owned subsidiaries of Chubb Holdings Australia Pty Limited (CHAPL), whose ultimate parent is Chubb Limited. My understanding of the details of the Scheme can be summarised as follows: The assets and liabilities relating to the insurance business of CICAL will be transferred to AIL on the effective date. We have been advised by the Scheme Actuaries that CICAL plans to pay a dividend of $100 million during 2016, prior to the Scheme effective date and subject to APRA approval. AIL will be renamed Chubb Insurance Australia Limited (CIAL). For the purpose of the Scheme, the insurance liabilities will be measured on an APRA basis. This includes using Premium Liabilities in place of the unearned premium reserve and using a 75% probability of sufficiency. All Australian insurance contracts entered into by CICAL prior to the effective date will remain unchanged, except for the substitution of CIAL for CICAL as the insurer. The rights and obligations of CICAL under these contracts will become the rights and obligations of CIAL. After the transfer, $10 million of issued capital and $10 million in assets (cash) will remain in CICAL, together with some business liabilities (including corporate and indirect taxes) and equivalent assets. APRA s approval will be sought to revoke CICAL s licence. 1.2 Scope of Work The purpose of the peer review is to give an additional objective view to APRA and the Court on the Scheme Actuaries report on the proposed scheme. The peer review does not constitute an audit or verification of any of the factual information provided in the report or other documents relied on by the Appointed Actuaries. In undertaking the peer review, I have: reviewed the methodology adopted by the Scheme Actuaries considered whether the conclusions reached by the Scheme Actuaries are soundly based considered whether there are any other issues or views to which I should draw attention. Page 3 of 8
I understand that this report will be provided to APRA and to the Court, and may be provided to affected policyholders on request. 1.3 Information Provided I was provided with the following information for the purpose of carrying out the peer review: The actuarial report prepared by the Scheme Actuaries dated 17 titled Actuarial Report on Scheme for Transfer. A draft Transfer Deed, dated 27 July 2016. A draft Scheme, dated 27 July 2016. A draft Summary of Scheme, dated 27 July 2016. A draft Notice of Intention, dated 10 May 2016. The Financial Condition Reports of both AIL and CICAL at 31 December 2015. I also had discussions with the Scheme Actuaries. 1.4 Reliances and Limitations I have relied on the information provided as being complete and have accepted all information as valid. I have not verified the accuracy of the information provided to me or relied on by the Scheme Actuaries. This report has been prepared solely for the use of AIL, CICAL, and their legal advisers for the stated purpose. Permission is granted for distribution of this report to APRA, the relevant Federal Minister, the Federal Court, and any affected policyholders of AIL or CICAL (collectively referred to as the Authorised Third Parties) for the stated purpose. Third parties, whether authorised or not to receive this report, should recognise that the furnishing of the report is not a substitute for their own due diligence and should place no reliance on the report or the data contained herein which would result in the creation of any duty or liability by Finity to the third party. No other use of, nor reference to, this report should be made without prior written consent from Finity, nor should the whole or part of this report be disclosed to any other person. This report should be considered as a whole. I am available to answer any queries, and the reader should seek that advice before drawing conclusions on issues in doubt. 1.5 Federal Court Practice Note I acknowledge that I have read, understood and complied with the Federal Court of Australia s Practice Note CM 7: Expert Witnesses in Proceedings in the Federal Court of Australia. Page 4 of 8
2 Key Findings of Actuarial Report 2.1 Policyholder Interests ACE Insurance Limited & Chubb Insurance Company of Australia Limited The Scheme Actuaries consider the impact of the proposed transfer on the policyholder interests in terms of its impact on the following areas: Financial security (both current and prospective) Policy terms and conditions Claims handling Reinsurance arrangements Risk profile. 2.2 Scheme Actuaries Findings The Scheme Actuaries conclusions can be summarised as: CIAL will have a strong capital position immediately after the transfer, and can reasonably be expected to have a robust capital position prospectively. While the Prescribed Capital Amount (PCA) Coverage Ratio of CIAL will be lower than that of CICAL (193% v 238%), the greater size and diversification of the integrated entity, together with the lower reinsurance retentions, mean that the lower post-transfer PCA Coverage Ratio will not materially change the degree of certainty and security for CICAL policyholders. Furthermore, the capital resources of the parent would provide a potential source of significant financial support, should it be required. There will be no changes to policyholder and claimant entitlements. The policyholders of AIL and CICAL are currently having their claims managed by the same claims team. The transfer will not change this and therefore, there is no adverse impact in relation to claims handling. The Scheme will not reduce the amount of reinsurance protection in respect of past liabilities of either insurer. The risk profiles of AIL and CICAL are similar, and any changes as a result of the transfer would not materially affect the interests of either group of policyholders. On this basis, the Scheme Actuaries conclude that the transfer should not adversely affect the interests of policyholders in any material way. Page 5 of 8
3 Peer Review Comments ACE Insurance Limited & Chubb Insurance Company of Australia Limited 3.1 Methodology In my opinion the areas the Scheme Actuaries have dealt with in their review adequately addresses the relevant interests of the policyholders. Further I am satisfied that the methodology adopted by the Scheme Actuaries considers those areas appropriately. 3.2 Comments on Capital Adequacy With regards to capital adequacy, the Scheme Actuaries have considered capital adequacy as measured using APRA s capital framework. The comparison of the capital adequacy positions pre- and posttransfer was performed using information as at 31 December 2015. Table 1 summarises the impact of the transfer on the capital adequacy of each insurer. The figures are those calculated by the Scheme Actuaries. Table 1 Capital Adequacy as at 31 December 2015 ($ million) Pre-Transfer Post-Transfer AIL 1 CICAL CIAL Prescribed Capital Amount (PCA) 134.8 230.2 337.6 Capital Base 202.4 548.0 650.4 PCA Coverage Ratio 150% 238% 193% 1 The figures show n for AIL relate to its immediate parent, CHAPL. Because of an intercompany loan betw een CHAPL and AIL,CHAPL's capital adequacy is low er, and so the assessment of capital adequacy focuses on CHAPL. Financial security (as measured by APRA s PCA Coverage Ratio) will be higher post-transfer for AIL policyholders and lower for CICAL policyholders. On the face of it, this appears to suggest a lower level of protection for CICAL policyholders compared to current levels, notwithstanding that the PCA Coverage Ratio is only one element of the assessment of financial security. It is important to recognise that: All else being equal, a larger insurer has less volatile results and thus can operate with a lower PCA Coverage Ratio. A PCA Coverage Ratio of 193% provides a substantial level of protection in its own right. The insurers are profitable and are projected to continue to remain so in most circumstances, providing a further buffer. While difficult to assess precisely, there is only a remote possibility of there being insufficient funds to pay claims. Post-transfer, all policyholders will still be within a company owned by CHAPL, and will continue to have the backing of the same large and diversified ultimate parent (Chubb Limited). Hence, I am satisfied that the Scheme Actuaries view that the transfer does not materially adversely affect the CICAL policyholders is reasonable, despite the reduction in the PCA Coverage Ratio. 3.3 Conclusion Given the information provided to the Scheme Actuaries, their conclusions are fully supported. In my opinion, the actuarial report on the proposed transfer is sound, and on the basis of the information presented in that report, I concur with the opinion of the Scheme Actuaries that there is no material detriment or disadvantage to the policyholders of AIL or CICAL from the transfer. Page 6 of 8
The Scheme Actuaries report includes data as at 31 December 2015. Prior to the confirmation of the Scheme by the Court, it would be prudent to confirm that there have been no major changes to the financial position of either company, and if changes have occurred, that these do not impact the conclusions made. There are no other matters that I regard as relevant to the assessment of the transfer and that I believe should have been addressed in the Scheme Actuaries report. Page 7 of 8
Appendices Curriculum Vitae Tim Andrews Tim Andrews is a Director of Finity Consulting, the specialist insurance and actuarial consulting firm. Tim has worked in insurance for more than 30 years. He qualified as a Fellow of the Institute of Actuaries of Australia in 1987. Since that time his work experience has included: 30 years as a consultant to the general insurance industry, based at different times in London, Hong Kong (1997-2001) and Sydney. Five years as the internal actuary for NZI Insurance Australia. He has extensive experience of claim reserving for direct and reinsurance companies, pricing and portfolio management. He is currently the Appointed Actuary for four insurers in Australia. He has prepared the Scheme Actuary s report for a number of past insurance transfers. Tim has spoken at numerous industry and professional seminars and has written papers across a range of topics. Qualifications Fellow of the Institute of Actuaries of Australia, 1987. Page 8 of 8