Milliman Client Report

Milliman Client Report The Part VII transfer of the long-term insurance business of Rothesay Assurance Limited to Rothesay Life Limited. The policyholders summary of the report of the Independent Expert Prepared by: Oliver Gillespie, FIA July 2015

CONTENTS 1. Background... 2 The Independent Expert... 2 The governance of UK long-term insurers... 2 The current UK regulatory regime for life insurance companies... 2 The Solvency II regulatory regime... 3 My supplementary report... 3 2. : the companies concerned in the proposed transfer... 3 RLL... 3 RAL... 4 The products of... 4 A firm s internal capital policy... 4 3. The proposed transfer... 4 4. The effect of the Proposed Transfer on the RLL policies... 4 The security of benefits under the RLL policies... 5 The reasonable benefit expectations of the RLL policyholders... 5 Conclusions for the RLL policies... 5 5. The effect of the proposed transfer on the RAL policies... 6 The security of benefits under the RAL policies... 6 The reasonable benefit expectations of the RLL policyholders... 6 Conclusion for the RAL policies... 6 6. Other considerations arising from the proposed transfer... 7 The approach to communication with policyholders... 7 Current and future transactions for RLL... 7 What if the proposed transfer does not proceed?... 7 Tax... 7 Policyholders rights under the FSCS and FOS... 7 7. Conclusions... 8 July 2015

1. BACKGROUND The Independent Expert 1.1 When an insurance company decides to transfer some or all of its long-term insurance business to another insurance company, the law in the UK requires such a transfer to be approved by the High Court ( the Court ), and an Independent Expert is appointed to report to the Court on the terms of the transfer and, in particular, to consider the effects on the holders of policies affected by the transfer. 1.2 I have been appointed by Rothesay Life Limited ( RLL ) and Rothesay Assurance Limited ( RAL ) to report as Independent Expert on the proposed transfer of the long-term insurance business of RAL to RLL. 1.3 I am a Fellow of the Institute and Faculty of Actuaries in the UK and a partner in Milliman LLP. I am an approved person on the Financial Services Register and I currently hold a number of Actuarial Function Holder ( AFH ) roles. I have fulfilled the role of Independent Expert in relation to a number of Part VII transfers that have subsequently been approved by the Court. 1.4 My appointment as the Independent Expert was approved by the Prudential Regulation Authority ( PRA ) after consultation with the Financial Conduct Authority ( FCA ) in a letter dated 4 September 2014 to RLL. 1.5 This is a summary of a more detailed report that I have written on the proposed transfer. The more detailed report is entitled: The Part VII transfer of the long-term business of Rothesay Assurance Life to Rothesay Life Limited: The report of the Independent Expert and is available on request from Rothesay Life Limited ( RLL ) or to download from the company website (www.rothesaylife.com). In this summary report, I refer to the more detailed report as my main report. 1.6 The scope of my main report was agreed with the UK regulators: the PRA and the FCA, and I need to consider how the different groups of policyholders are likely to be affected by the proposed transfer. In particular I need to consider the effect of the transfer on: The security of the contractual rights of the policyholders of, including the likelihood and potential effects should the insurer become insolvent; and The benefit expectations of the policyholders, including the service standards and governance applicable to policyholders. 1.7 I am not required to consider alternative possible structures of the transfer. The governance of UK long-term insurers 1.8 The Board of Directors of a long-term insurer is the firm s governing body and is ultimately responsible for setting the strategic direction of the firm, overseeing the activities of the firm s day-to-day management and approving the firm s financial statements. 1.9 Almost all life insurance companies must appoint an actuary to perform the actuarial function in respect of its long-term insurance business. This individual is known as the AFH, and his responsibilities include advising the firm s management on the risks the firm runs in so far as they may have a material impact on the firm s ability to meet its liabilities to long-term policyholders and on the capital needed to support the business. The current UK regulatory regime for life insurance companies 1.10 Under current UK regulations, UK shareholder-owned life insurance companies must keep the assets and investments that have been earmarked to pay the benefits of its long-term policies notionally separate from its other assets, i.e. those available for distribution to the company s shareholders. The long-term insurance business fund ( LTF ) holds the assets and liabilities attributable to the company s long-term policies and the shareholders fund ( SHF ) contains the assets and liabilities not allocated to the long-term insurance business. The SHF is available to provide support for the LTF and the assets in the SHF can be used to cover the capital requirements of a particular capital adequacy regime. July 2015 2

1.11 Prior to 1 April 2013, regulation of insurance companies was the responsibility of the Financial Services Authority ( FSA ). Since 1 April 2013, responsibility for the regulation of such companies has been split between the Prudential Regulation Authority and the Financial Conduct Authority. 1.12 The PRA is part of the Bank of England, and carries out the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. 1.13 The FCA regulates the conduct of all financial services firms in relation to consumer protection, industry stability and the promotion of healthy competition between providers. 1.14 In general terms, the PRA s objectives can be advanced by seeking to ensure that regulated insurers have resilience against failure and that the disruption to the UK financial system from regulated insurers is minimised. The current regulatory reporting requirements for life insurers in the UK require financial information to be provided under two regimes, commonly referred to as Pillar I and Pillar II. 1.15 I summarise the requirements under these two regimes in section 3 of my main report. The Solvency II regulatory regime 1.16 New regulatory solvency reporting requirements for the European Union ( EU ) insurance and reinsurance industry are due to come into effect on 1 January 2016. This new regime is known as Solvency II and aims to introduce solvency requirements that better reflect the risks that insurers and reinsurers actually face and to introduce consistency across the EU. 1.17 I provide more detail on the Solvency II regime in Section 3 of my main report. My supplementary report 1.18 I will be preparing a further report (the Supplementary Report ) prior to the final Court Hearing to provide an update for 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 my main report. 1.19 My Supplementary Report will be available to policyholders on the RLL website. 2. RLL AND RAL: THE COMPANIES CONCERNED IN THE PROPOSED TRANSFER RLL 2.1 RLL was established in 2007 and, until 2013, RLL s ultimate parent company was The Goldman Sachs Group, Inc. ( Goldman Sachs ). But, on 18 December 2013, Goldman Sachs completed a partial sale of RLL and the shareholders are now (figures as at 30 June 2014): Goldman Sachs (36% stake); Blackstone (28.5% stake); GIC Private Limited (28.5% stake); and MassMutual (7% stake). 2.2 RLL currently has a shareholders fund (the RLL SHF ) and a long-term insurance fund (the RLL LTF ). 2.3 RAL is a wholly owned subsidiary of the RLL SHF. 2.4 Since its first transaction in 2008, RLL has grown rapidly with the number of underlying scheme members rising from approximately 19,000 at the end of 2008 to the current 135,000 as at 31 December 2014. In that time the assets under management have grown from 418 million to 10.1 billion. July 2015 3

RAL 2.5 MetLife Newco Limited was established in January 2007 and in July 2007 changed its name to MetLife Assurance Limited ( MAL ). MAL was wholly owned by MetLife European Holdings Limited, which is a wholly owned subsidiary of MetLife Inc. 2.6 RLL acquired MAL on 16 May 2014 and on 23 June 2014 MAL changed its name to RAL. RAL is wholly owned by the RLL SHF. 2.7 RAL currently has a shareholders fund (the RAL SHF ) and a long-term insurance business fund (the RAL LTF ). 2.8 Since being established in 2007, RAL has grown steadily with the number of underlying scheme members rising from approximately 7,000 at the end of 2008 to the current 20,000. In that time the assets under management have grown from 394 million to the current 3.1 billion. The products of 2.9 The long-term business written by comprises non-profit pension business written in the UK. Both companies provide de-risking solutions of various types to pension schemes in the UK and, in RAL s case, the Republic of Ireland. The particular product types that have been issued by are described in Section 3 of my main report. A firm s internal capital policy 2.10 In order to ensure that day to day fluctuations in markets and experience do not lead to a breach of their regulatory capital requirements firms set out, in their internal capital policy, the level of capital they will hold in excess of the regulatory minimum. 2.11 As set out in Section 4 of my main report, have the same internal capital policy which remains under regular review by the Board and any changes to the capital policy require appropriate consultation with the PRA and approval of both the Boards. 3. THE PROPOSED TRANSFER 3.1 Following the acquisition of RAL by RLL, and given the similarities between the long-term business written by RAL and RLL, the Board of RLL has decided to merge the long-term business of RAL with that of RLL. This will have a number of advantages and in particular will simplify the group structure and enable cost efficiencies and capital efficiencies to be achieved. 3.2 It is proposed that, on the Effective Date (currently expected to be 30 November 2015): All of the policies of RAL, and the assets attributed to them, will be transferred to the RLL LTF; and The assets and liabilities currently in the RAL SHF will be transferred to the RLL SHF. 3.3 After the transfer, RAL will have no long-term insurance business and eventually RAL will be de-authorised and liquidated, at which point the assets remaining in RAL will be transferred into RLL. 3.4 There is a fuller description of the proposed transfer in Section 5 of my main report. 4. THE EFFECT OF THE PROPOSED TRANSFER ON THE RLL POLICIES 4.1 In Section 6 of my main report, I consider the effect of the proposed transfer on the RLL policies. In particular, I consider the likely effects of the proposed transfer on the security of the guaranteed benefits and on the benefit expectations in respect of these policies. 4.2 Under the proposed transfer, the RLL policies will remain in the RLL LTF and the RAL policies will be transferred into the RLL LTF. Therefore, for the RLL policyholders I need to consider the effect on their security of benefits and on their benefit expectations of the transfer into RLL of the RAL policies, assets and other liabilities. July 2015 4

The security of benefits under the RLL policies 4.3 I am satisfied that the proposed transfer will not have a material effect on the security of benefits of the RLL policyholders because the transfer will have no material impact on: The value of the assets held by RLL to back the current RLL policies. The margins for prudence in the mathematical reserves held in respect of the current RLL policies. The regulatory capital requirements of RLL. The internal capital policy of RLL. 4.4 Although the transfer of a significant volume of policies into RLL may change the risk profile to which the policies in the RLL LTF are exposed, the RLL policyholders are already, to a large extent, exposed to the risks from the RAL policies due to RAL being a subsidiary of RLL, and in any case I am satisfied that the assets being transferred across from RAL compensate for any change in risk exposure. 4.5 There is still some uncertainty regarding the precise requirements of Solvency II and it is not possible to reliably establish the financial positions of under Solvency II, or the projected impact of the transfer under Solvency II. 4.6 However, I have seen the current draft Solvency II figures for as at 31 December 2014 on a number of scenarios in respect of Solvency II and under each scenario the projected position of RLL after the transfer is similar to that before the transfer. 4.7 The capital policy that will apply to RLL when Solvency II is introduced has not been finalised at this time but the RLL Board has given assurance that their post Solvency II capital policy will reflect a similar likelihood of remaining able to pay policyholder benefits and will therefore provide policyholders with at least the same level of protection as currently. 4.8 Subject to this, I am satisfied that the transfer will not have a material effect on the security of the guaranteed benefits of the existing RLL business. The reasonable benefit expectations of the RLL policyholders 4.9 The transfer will not have a material effect on: The contract terms and conditions of the RLL policies. The firms and personnel responsible for the administration and servicing of the policies. The principles and practices used in the management of RLL policies. The management or the governance of the RLL policies. 4.10 Therefore, I am satisfied that the proposed transfer will not have a material effect on the reasonable benefit expectations of the RLL policyholders. Conclusions for the RLL policies 4.11 I am satisfied that the proposed transfer will not have a material effect on: The security of benefits under the RLL policies; The reasonable benefit expectations of the RLL policyholders; or The service standards and governance applicable to the RLL policies July 2015 5

5. THE EFFECT OF THE PROPOSED TRANSFER ON THE RAL POLICIES 5.1 In Section 7 of my main report, I consider the effects of the proposed transfer on the RAL policies. In particular, I consider the likely effects of the proposed transfer on the security of the guaranteed benefits and on the benefit expectations in respect of these policies. 5.2 Under the proposed transfer, the RAL policies will be transferred to the RLL LTF. Therefore, for the RAL policyholders I need to consider the effect on their security of benefits and on their benefit expectations of the transfer into RLL. The security of benefits under the RAL policies 5.3 I am satisfied that the proposed transfer will not have a material effect on the security of the benefits under the RAL policies because, after the transfer: The RAL policies will have been transferred into the (larger) RLL LTF and will have a higher absolute amount of capital available to provide support. The financial strength available to provide support remains high. The margins for prudence in the mathematical reserves held in respect of the RAL policies will not change. There will be no change to the internal capital policy. There will be no material change to the profile of risks to which the RAL policies are exposed. 5.4 As stated for the RLL policies, there remains considerable uncertainty regarding the precise requirements of Solvency II and it is therefore not possible to reliably establish the financial positions of under Solvency II, or the projected impact of the transfer under Solvency II. 5.5 However, I have seen the current draft Solvency II figures for as at 31 December 2014 on a number of scenarios in respect of Solvency II and under each scenario the projected position of RLL after the transfer is similar to that before the transfer. 5.6 The capital policy that will apply to RLL when Solvency II is introduced has not been finalised at this time but the RLL Board has given assurance that their post Solvency II capital policy will reflect a similar likelihood of remaining able to pay policyholder benefits and will therefore provide policyholders with at least the same level of protection as currently. 5.7 Subject to this, I am satisfied that the transfer will not have a material effect on the security of the guaranteed benefits of the existing RAL business. The reasonable benefit expectations of the RLL policyholders 5.8 The transfer will not have a material effect on: The contract terms and conditions of the RAL policies. The firms and personnel responsible for the administration and servicing of the RAL policies. The principles and practices used in the management of RAL policies. The management or the governance of the RAL policies. 5.9 Therefore, I am satisfied that the proposed transfer will not have a material effect on the reasonable benefit expectations of the RAL policyholders. Conclusion for the RAL policies 5.10 I am satisfied that the proposed transfer will not have a material adverse effect on: The security of benefits under the RAL policies; July 2015 6

The reasonable benefit expectations of the RAL policyholders; or The service standards and governance applicable to the RAL policies. 6. OTHER CONSIDERATIONS ARISING FROM THE PROPOSED TRANSFER The approach to communication with policyholders 6.1 RLL proposes to send a communication pack to all the RAL policyholders (other than underlying members of pension schemes) where RAL has a valid address. The pack will include an explanatory letter, the formal notice intimating the transfer, a summary of my report, and information on the options available if policyholders have any concerns about the transfer. Current and future transactions for RLL 6.2 There have been a number of transactions since the date of the financial figures in this report (31 December 2014) the most significant are those with: The Lehman Brothers Pension Scheme for approximately 675 million annuity liabilities. Zurich UK Life for approximately 1.2 billion of annuity liabilities. 6.3 These transactions are not currently reflected in the financials shown in the appendices to my main report. 6.4 There is the potential for such transactions to reduce the excess assets in RLL but although I have not reviewed the terms of these transactions, I am satisfied that the governance and sign-off processes regarding the pricing and acceptance of new business are robust and that a transaction would not be undertaken without non-objection from the PRA. 6.5 I shall present figures including the effect of these transactions, and any other subsequent transactions, and reevaluate the effect of the proposed transfer on the different groups of affected policyholders in my Supplementary Report. What if the proposed transfer does not proceed? 6.6 If the proposed transfer does not proceed for any reason, then the RAL policies will not become policies of RLL and RAL will remain a separate life insurance company and a wholly owned subsidiary of the RLL SHF. Tax 6.7 I have been informed by the management of that the overall level of taxation of the group is not expected to be materially affected by the proposed transfer. 6.8 All appropriate tax clearances will be applied for from the relevant authorities and RLL has been informed by HM Revenue & Customs that these are expected to be granted. Policyholders rights under the FSCS and FOS 6.9 The proposed transfer will have no impact on the rights of the policyholders of RLL or RAL in relation to the Financial Services Compensation Scheme ( FSCS ) or Financial Ombudsman Service ( FOS ). July 2015 7

7. CONCLUSIONS 7.1 I am satisfied that the proposed transfer will not have a material adverse effect on: The security of benefits of the policyholders of RAL and RLL; The reasonable benefit expectations of the policyholders of RAL and RLL; or The service standards and governance applicable to the RAL and RLL policies. 7.2 I am satisfied that the proposed transfer is equitable to all classes and generations of policyholders. Oliver Gillespie 1 July 2015 Fellow of the Institute and Faculty of Actuaries July 2015 8