Proposed Scheme to Transfer the Long-Term Insurance Business of the Maltese Branch of Eagle Star Insurance Company Limited ( ESI ) to the Maltese Branch of Zurich Assurance Ltd ( ZAL ) Supplementary Report of ESI s and ZAL s With-Profits Actuary on the proposed transfer of business pursuant to Part VII of the Financial Services and Markets Act (2000) ( FSMA ). Martin Godwin, FIA With-Profits Actuary 2 September 2015 1
Contents 1 Introduction... 3 1.1 Background... 3 1.2 Compliance with Technical Actuarial Standards... 3 1.3 Definitions and abbreviations... 4 2 Developments... 5 2.1 Changes to the Scheme... 5 2.2 Business... 5 2.3 Policyholder communications... 5 3 The effect of the Scheme on with-profits policyholders... 6 3.1 Security of policyholder benefits... 6 3.2 Benefit expectations... 6 3.3 Governance... 6 3.4 Service standards... 6 3.5 Taxation... 6 4 Conclusion... 7 2
1 Introduction 1.1 Background 1.1.1 I prepared a report to the High Court dated 20 May 2015 to describe the impact on the withprofits policyholders of Zurich Assurance Ltd ( ZAL ) and of Eagle Star Insurance Company Limited ( ESI ) of a Part VII Scheme under the Financial Services and Markets Act 2000 (the ESI Scheme or Scheme ), the objective of which is to transfer the long-term insurance business of the Maltese branch of ESI to the Maltese branch of ZAL. 1.1.2 In particular, that report states how it will affect the security of the with-profits policyholder s benefits and their reasonable benefit expectations, and how, in my view, the Scheme is consistent with the requirements to treat customers fairly. The conclusions of that report were based on financial information up to 31 December 2014. 1.1.3 The purpose of this Supplementary Report is to consider any developments since I issued my main Report that might materially affect with-profits policyholders in the two companies, and to consider updated financial information and whether this has affected the conclusions in my main Report. 1.1.4 I am writing this report in my capacity as the With-Profits Actuary (WPA) for both ZAL and ESI. It should be read in conjunction with the Scheme, the Actuarial Function Holder s (AFH s) Reports on the Scheme, and the Independent Expert s (IE s) Reports on the Scheme. 1.1.5 This report places reliance on the calculations and projections considered by the AFH in his reports on the Scheme. While I have reviewed those calculations and projections, I have not sought to reproduce them here. Consequently, this Report should be read with reference to the financial position presented in the AFH s reports on the Scheme. 1.2 Compliance with Technical Actuarial Standards 1.2.1 The Financial Reporting Council has issued standards known as Technical Actuarial Standards (TAS). Four standards applicable to this Report were in effect at the date of its preparation: Technical Actuarial Standard R: Reporting Actuarial Information (TAS R) version 2, effective 1 April 2010 Technical Actuarial Standard D: Data (TAS D) version 1, effective 1 July 2010 Technical Actuarial Standard M: Modelling (TAS M) version 1, effective 1 April 2011 The Insurance Technical Actuarial Standard (The Insurance TAS) version 1, effective 1 October 2011 This report, and the work which supports it, has been prepared in accordance with these standards. 3
1.3 Definitions and abbreviations 1.3.1 Terms used in this Supplementary Report have the same meanings and definitions as in my original Report. 4
2 Developments 2.1 Changes to the Scheme 2.1.1 The Directions Hearing was held on 2 June 2015. At this hearing the Order of Directions was approved with no objections raised. There have been no changes to the Scheme subsequent to the Directions Hearing. 2.2 Business 2.2.1 Since I prepared my original report, the with-profits portfolios are little changed, running off broadly in line with assumptions. 2.2.2 The main business development relates to ZAL which has signed an agreement to transfer its legacy portfolio of immediate annuities to Rothesay Life, but apart from strengthening the solvency position of ZAL somewhat, this does not directly affect the with-profits policyholders. 2.2.3 In addition, ZAL paid a dividend during the period of 230m which has reduced the company s excess capital resources. I considered the impact of this dividend payment in forming the opinion given in my earlier report. ZAL s capital resources remain in line with its capital management policy. 2.3 Policyholder communications 2.3.1 Following the directions hearing on 2 June 2015, ESI and ZAL communicated details of the Scheme to all of their Maltese branch policyholders. 2.3.2 In addition, the website provides copies of the Scheme and the reports prepared for the Courts by the Independent Expert, AFH and WPA. In addition, it provides copies of the covering letters sent to ESI and ZAL notified policyholders, the policyholder information booklet and the Q&A sheet. 2.3.3 As a result of this communications exercise, as at 13 August 2015, 82 policyholders had contacted the companies by phone, largely seeking reassurance that the Scheme would not affect their policy s maturity value. As at the same date, one e-mail and one letter had been received, the former not relating to the Scheme and the latter concerning a technical point of Maltese law which does not apply in the case of the ESI Scheme which is subject to English law. There were no complaints or objections. 2.3.4 I have been provided with summaries of the communications and have reviewed all the communications and responses provided to me up to the date of this report. I see no reason to change my conclusions as a result of any of the issues raised in those communications. 5
3 The effect of the Scheme on with-profits policyholders 3.1 Security of policyholder benefits 3.1.1 Based upon unaudited Pillar I financial information as at 30 June 2015 (set out in the AFH Supplementary Report) and Pillar II information as at 31 December 2014 (supplied to me by the Capital team), I have not changed my conclusions regarding the security of guaranteed benefits of both ESI and ZAL with-profits policyholders stated in my original report. 3.1.2 Regarding the new solvency regime ( Solvency II ) coming into effect on 1 January 2016, discussions with the PRA regarding ZAL s implementation of the regime have not yet been fully concluded and the impact of the transfer on capital requirements cannot be completely certain. In particular, there are ongoing discussions about the treatment of the UK Staff Pension Scheme. If ZAL were to move to a treatment of the pension scheme risk in line with that agreed with the PRA for Pillar 2, while this would increase the Solvency II capital requirements of ZAL significantly, free assets under Solvency II would still be greater than under Pillar 1. For this reason it is reasonable to continue to consider the Scheme primarily on a Pillar 1 basis. 3.1.3 In my opinion, based upon the relative financial position of ESI and ZAL at 30 June 2015 and the provisions of the Scheme, the security of the guaranteed benefits of both ESI and ZAL with-profits policyholders is unlikely to be materially adversely affected as a result of the Scheme. 3.2 Benefit expectations 3.2.1 I have not changed the conclusions stated in my original report regarding the impact of the Scheme on the reasonable benefit expectations of both ESI and ZAL with-profits policyholders. In my opinion, the Scheme is unlikely to have a materially adverse effect on the reasonable benefit expectations of any group of with-profits policyholders. 3.3 Governance 3.3.1 I have not changed the conclusions stated in my original report that it is reasonable to rely upon the governance procedures of the ZAL 90:10 with-profits fund to look after the interests of the with-profits policyholders of both ESI and ZAL. 3.4 Service standards 3.4.1 I have not changed the conclusions stated in my original report that the service standards applied to both ESI and ZAL with-profits policyholders remain unchanged by the transfer. 3.5 Taxation 3.5.1 I have not changed the conclusions stated in my original report that there is not expected to be any impact on the tax position of both ESI and ZAL with-profits policyholders as a result of the Scheme. 6
4 Conclusion 4.1.1 My opinion is that there have been no developments in the position of either ZAL or ESI that would cause me to revise my original conclusions on the impact of the ESI Scheme on both ESI and ZAL policyholders, namely that the ESI Scheme will not have a material impact on: The benefit expectations of the with-profits policyholders in both ZAL and ESI; The security of benefits for the with-profits policyholders in both ZAL and ESI; The principles or practices of financial management by which the ZAL 90:10 with-profits fund is managed; The administration and management of policies and treatment of both the ZAL and ESI with-profits policyholders. Therefore, it is my opinion that the conclusions of my original report remain valid. Martin Godwin, FIA With-Profits Actuary 2 September 2015 7