Milliman Client Report

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Transfer of non-profit annuity business from The Equitable Life Assurance

Society to Canada Life Limited.

The report of the Independent Expert

7 October 2015

Prepared by:

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1. INTRODUCTION

The Independent Expert

1.1 When an application is made to the High Court of Justice of England and Wales (the “Court”) for an order to sanction the transfer of long-term insurance business from one insurer to another, the application is subject to Part VII of the Financial Services and Markets Act 2000 (“FSMA”) and approval by the Court under Section 111 of FSMA. FSMA requires the application to be accompanied by a report on the terms of the Scheme by an Independent Expert.

1.2 I have been instructed by The Equitable Life Assurance Society (“ELAS”) and Canada Life Limited (“CLL”) to report in the capacity of Independent Expert pursuant to Section 109 of FSMA on the terms of the proposed transfer of certain non-profit annuity insurance business of ELAS to CLL. ELAS is a mutual insurance company and CLL is a proprietary insurance company.

1.3 My terms of reference have been reviewed by the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”).

1.4 My fees will be met equally by CLL (from shareholder resources) and ELAS (which, being a mutual company, has no shareholders).

1.5 In this report I refer to this proposed scheme as the “Scheme” and throughout the remainder of this report, this term is used to cover all the proposals included in the scheme of transfer, including any documents referred to therein relating to the proposed implementation and operation of the scheme of transfer.

1.6 It is intended that the majority of the non-profit annuity business of ELAS will transfer pursuant to the terms of the Scheme other than business carried on in Jersey (the “Jersey Policies”) which will transfer pursuant to a Jersey scheme of transfer (the “Jersey Scheme”) and policies which were issued in the course of carrying on business in or from within the Bailiwick of Guernsey, or issued under Guernsey law or issued to residents of the Bailiwick of Guernsey (the “Guernsey Policies”) which will transfer pursuant to a Guernsey scheme of transfer (the “Guernsey

Scheme”). The Jersey Scheme and the Guernsey Scheme will be similar to the Scheme; however, implementation

of the Scheme is not conditional on the approval of the Jersey Scheme or the Guernsey Scheme.

1.7 For the purpose of this report, references to the Scheme also include the Jersey Scheme and the Guernsey Scheme, unless otherwise stated.

1.8 The effective date of the Scheme (the “Effective Date”) is expected to be 19 February 2016. The purpose and scope of my report

1.9 The purpose of this report is to review the proposed transfer of certain non-profit annuity business of ELAS to CLL following its prior reinsurance (excluding the unit-linked annuities) to CLL. In particular, I consider the effects of the proposed transfer on the security of the benefits and on the reasonable benefit expectations of the transferring and non-transferring long-term policyholders of ELAS and the existing long-term policyholders of CLL. I have also considered the implications for the relevant parties if the Scheme were not to go ahead.

1.10 My report has been prepared under the terms of the guidance set out in the Policy Statement “The Prudential Regulation Authority’s approach to insurance business transfers” (the “PRA Policy Statement”) and in Chapter 18 of the Supervision Manual (“SUP 18”) contained in the FCA Handbook. My report will be presented to the Court and will be made available to policyholders and others via the ELAS and CLL websites. The PRA, in consultation with the FCA, has also approved the form of this report. Holders of transferring policies will be sent a guide to the transfer (“the Guide”) together with a summary of the Scheme and a summary of my report, which I collectively refer to as the “Explanatory Booklets”. The Explanatory Booklets will also be made available on the ELAS and CLL websites.

1.11 In assessing the impact of the implementation of the Scheme on the policyholders of ELAS and CLL, and whether those policyholders are being treated fairly as a result of the implementation of the Scheme, I have had regard to:  The likely effect of the implementation of the Scheme on the security of policyholders’ contractual benefits and on the benefit expectations of policyholders created by past practices employed, or statements made, by each company;

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 The reports of the Actuarial Function Holders (“AFHs”) of ELAS and CLL on the impact of the implementation of the proposed Scheme; and

 The reports of the With-Profits Actuaries (“WPAs”) of ELAS and CLL on the impact of the implementation of the proposed Scheme.

1.12 There are no documents or other items of information that I have requested and have not been provided. Appendix 3 contains a list of the main sources of data upon which I have relied.

1.13 As far as I am aware, there are no matters that I have not taken into account in undertaking my assessment of the Scheme and in preparing my report, which nonetheless should be drawn to the attention of the Court in its consideration of the terms of the Scheme.

1.14 I have only considered the terms of the Scheme presented to me, and am not required to consider possible alternative schemes in forming my opinions.

1.15 I have also reviewed and considered the contents of the letter (the “Policyholder Letter”) and Explanatory Booklets describing the proposals which, subject to the waivers sought by ELAS and CLL being granted by the Court, are intended to be sent to all transferring policyholders of ELAS. Non transferring policyholders of ELAS will be sent a version of the Policyholder Letter only.

1.16 Advanced drafts of the Policyholder Letter and Explanatory Booklets were available to me at the date of this report. 1.17 This report and its conclusions apply equally to Jersey Policies and the Guernsey Policies as it does to the other long-term insurance business of ELAS, and may therefore be used to satisfy the requirement for a report by an independent actuary on the terms of the Guernsey Scheme and the Jersey Scheme.

Qualifications and disclosures

1.18 I am a Fellow of the Institute and Faculty of Actuaries, having qualified in 1982, and hold a certificate issued by the Institute and Faculty of Actuaries to act as a Life Actuary (including with-profits).

1.19 I am a partner of Milliman LLP (“Milliman”) and I am based in its UK Life Insurance and Financial Services practice. I am an approved person on the FCA’s Financial Register and I am currently Actuarial Function Holder for two UK life companies. I have fulfilled the role of Independent Expert on over 20 insurance business transfers that have been approved by the Court.

1.20 My appointment as the Independent Expert has been approved by the PRA (after consulting with the FCA) in a letter dated 22 April 2015 to ELAS and CLL.

1.21 A statement providing detailsof all connections between myself and ELAS and CLL, and between Milliman and ELAS and CLL, is attached as Appendix 1. I confirm that I do not have any direct or indirect interest in ELAS, CLL or other related firms that could influence my independence.

Limitations

1.22 This report, and any extract or summary thereof has been prepared particularly for the use of the bodies or persons listed below:

 The Court;

 The Royal Court of Guernsey;  The Royal Court of Jersey;

 The Directors and senior management of ELAS;  The Directors and senior management of CLL;

 The FCA and the PRA, and any governmental department or agency having responsibility for the regulation of insurance companies in the UK;

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 The Jersey Financial Services Commission; and  The professional advisers of any of the above.

1.23 In accordance with the legal requirements under FSMA, copies of my report may be made available to the policyholders of ELAS and CLL and to other interested parties.

1.24 In preparing my report, I have had access to certain documentary evidence provided by ELAS and CLL and I have had access to, and discussions with, senior management of ELAS and CLL. My conclusions depend on the substantial accuracy of this information without independent verification. The principal documents which I have reviewed in respect of ELAS and CLL are listed in Appendix 3. I have considered, and am satisfied with, the reasonableness of this information based upon my own experience of UK life assurance business.

1.25 This report must be considered in its entirety as individual sections, if considered in isolation, may be misleading. Draft versions of this report should not be relied upon for any purpose. I have provided a summary of my report for inclusion in the Explanatory Booklets and for publication on the ELAS and CLL websites (and, where relevant, distribution to any persons requesting a copy of it); other than this, no summary of my report may be made without my express consent.

1.26 This report has been prepared on an agreed basis for the Court, ELAS and CLL in the context of the Scheme and must not be relied upon for any other purpose. No liability will be accepted by Milliman, or me, for any application of my report to a purpose for which it was not intended, nor for the results of any misunderstanding by any user of any aspect of the report. In particular, no liability will be accepted by Milliman or me under the terms of the Contracts (Rights of Third Parties) Act 1999.

Technical Actuarial Standards (“TAS”)

1.27 My report has been prepared having regard to the terms of the TAS applicable to Transformations (“Transformations TAS”) issued by the Financial Reporting Council. In my opinion, my report complies with the Transformations TAS and is compliant with those elements of the TASs on Data, Modelling, Reporting and Insurance that are applicable to transformations. In complying with these requirements, I note that a number of the key documents listed in Appendix 3 have been prepared or reviewed by individuals who were subject to professional standards in undertaking their work, including, where appropriate, TAS requirements.

The Actuarial Profession Standards (“APS”)

1.28 APS X2 issued by the Institute and Faculty of Actuaries requires members to consider whether their work requires an independent peer review.

1.29 In my view this report does require independent peer review, and this has been carried out by a senior actuary in Milliman who has not been part of the team working on this assignment.

The structure of my report

1.30 Section 2 of this report provides some information on the considerations of the Independent Expert and Section 3 gives some background information on the current regulatory regime in the UK and the UK life insurance market, including a description of the non-profit annuity product types relevant to this report.

1.31 Section 4 of this report provides some background to ELAS and CLL, and Section 5 provides some background to the Scheme and summarises the key aspects of the Scheme.

1.32 The effects of the implementation of the Scheme on the policies of ELAS and CLL and on the holders of these policies are covered in Sections 6, 7 and 8. Section 9 outlines a number of other considerations and Section 10 contains my conclusions on the Scheme.

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2. GENERAL CONSIDERATIONS OF THE INDEPENDENT EXPERT

The role of the Independent Expert

2.1 I have compiled this report in accordance with paragraphs 2.27 to 2.37 of the PRA Policy Statement and with paragraphs 31 to 41 of section 2 of SUP 18, which give guidance on the form of the Scheme Report.

2.2 In considering the proposed Scheme, the concept of treating customers fairly (“TCF”) 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 perspective of the policyholders, the successful implementation of the Scheme must be on the basis that their benefits and fair treatment are not materially adversely affected.

2.3 As described in Section 1 of this report, the Scheme concerns two life insurance companies: ELAS and CLL. I need to consider the terms of the Scheme generally and how the different groups of policyholders of ELAS and CLL are likely to be affected by the implementation of the Scheme. In particular I need to consider:

 The effect of the implementation of the Scheme on the security of the policyholders’ contractual rights, including the likelihood and potential effects of the insolvency of the insurer;

 The effect of the implementation of the Scheme on the reasonable benefit expectations of policyholders; and  The effect of the implementation of the Scheme on the service standards and governance applicable to

policyholders.

2.4 I am only required to comment on the effects of the implementation of the proposed Scheme on policyholders who enter into contracts with ELAS and CLL prior to the Effective Date of the Scheme.

2.5 In this report I have not restricted my assessment of the Scheme to adverse effects.

2.6 The type of policy held by a policyholder will be a key determinant of the risks to which the policyholder is exposed. Other than this, the key determinants of the policyholder’s risk exposure will be the characteristics of the company in which the policy is held, for example:

 The size of the company;

 The amount and quality of capital resources available, other calls on those capital resources and capital support currently available to the company;

 The investment strategy of the company;  The mix of business of the company;

 The company’s strategy, e.g. whether the company is open or closed to new business, its acquisitions strategy; and

 Other factors, such as operational risks faced by the company, reinsurance arrangements of the company, the company’s governance framework and its tax position.

2.7 Some of these risks are company-specific, for example risks arising from the particular mix of business written or from the company’s strategy, and some are common to various different groups of policyholders across the companies subject to the Scheme.

Security of policyholder benefits

2.8 As part of my role as Independent Expert for the Scheme, I need to consider the security of policyholder benefits, that is, the effect of the implementation of the Scheme on the likelihood that policyholders will receive their guaranteed benefits when these are due.

2.9 In considering and commenting upon policyholder security, I shall primarily consider policyholders’ guaranteed benefits. The amount by which the long-term insurance fund assets exceed the long-term insurance fund liabilities (including the mathematical reserves) of a company provides security for guaranteed benefits. Security is also provided by the margins for prudence in the assumptions used to calculate the long-term insurance fund liabilities and by the capital resources in the shareholders’ fund (if applicable).

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Treating customers fairly

2.10 I also need to consider the proposals in the context of the regulatory obligation on both companies to treat their customers fairly and, in particular, the effect of the implementation of the Scheme on policyholders’ reasonable benefit expectations.

2.11 This involves considering the effect of the implementation of the Scheme on any areas where discretion is involved on behalf of the relevant insurance company, for example in determining the charges applied to a policy and the benefits granted to the policyholder, as well as consideration of the effect of the implementation of the Scheme on the management, service and governance standards of the company in question.

The conclusions of the Independent Expert

2.12 As Independent Expert, my assessment of the impact of the proposed Scheme on the various affected policies is ultimately a matter of actuarial judgement regarding the likelihood and impact of future possible events. Given the inherent uncertainty of the outcome of such future events and that the effects may differ across different groups of policies, it is not possible to be certain in respect of their effect on the policies.

2.13 In order to acknowledge this inherent uncertainty, the conclusions of the Independent Expert in respect of Part VII transfers of long-term insurance business are usually framed using a materiality threshold. If the potential impact under consideration is very unlikely to happen and does not have a large impact, or is likely to happen but has a small impact, then it is not considered to have a material effect on the policies.

2.14 The setting of my conclusions in this framework is a consequence of the Court’s consideration of prior schemes. In particular, principles stated by Evans-Lombe J. in Re AXA Equity & Law Life Assurance Society plc and Axa Sun Life plc (2001) (based on principles outlined by Hoffman J. in Re London Life Association Ltd (1989)) are often used as the basis for the consideration of insurance business transfers by the Independent Expert and by the Court.

2.15 In particular, Evans-Lombe J. stated in Re AXA Equity and Law that “the court is concerned whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme”. He went on to state: “That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected”. The most common interpretation of these (and other relevant) statements has been that a conclusion that “no group of policyholders is materially adversely affected by the Scheme” provides a sufficient condition to conclude that the fairness of the Scheme as a whole has been demonstrated.

2.16 This is therefore the framework within which I undertake my consideration of the proposed Scheme. The supplementary report

2.17 As envisaged by paragraph 2.39 of the PRA Policy Statement, I will also prepare a further report (the “Supplementary Report”) in January 2016, prior to the final Court hearing, to provide an update for the Court on my conclusions in the light of any significant events subsequent to the date of the finalisation of this report. 2.18 The Supplementary Report will be available on the ELAS and CLL websites.

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3. THE UK LIFE INSURANCE MARKET AND REGULATORY ENVIRONMENT

The current UK regulatory regime

3.1 Under current UK regulations, UK shareholder-owned life insurance companies, such as CLL, must maintain separate funds in order to segregate the assets and liabilities attributable to shareholders and policyholders: the shareholders’ fund (“SHF”), and the long-term insurance business fund (“LTF”).

3.2 The LTF contains the liabilities of the long-term insurance contracts issued by the insurance company and the assets allocated to these contracts. The 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, in particular, can be used to cover the capital requirements of a particular capital adequacy regime.

3.3 There is no such fund structure requirement for mutual companies such as ELAS, as there are no shareholders. 3.4 Prior to 1 April 2013, regulation of UK 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 PRA and the FCA.

3.5 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.

3.6 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.

3.7 With respect to the insurers it regulates, the PRA has statutory objectives to promote their safety and soundness, and to contribute to ensuring that policyholders are appropriately protected. More generally, these statutory objectives can be advanced by seeking to ensure that regulated insurers have resilience against failure and that disruption to the stability of the UK financial system from regulated insurers is minimised.

3.8 At the 2004 year end the FSA introduced a new capital framework under which insurance companies are required to assess solvency under two regimes, commonly referred to as Pillar I and Pillar II.

Pillar I

3.9 Under Pillar I, assets are, broadly speaking, valued at market value and are subject to various admissibility criteria. 3.10 Long-term insurance liabilities are calculated as the present value of expected future net outgo, where prudent

assumptions are used to project future cash flows.

3.11 In addition to holding reserves to cover future expected liabilities, companies must hold additional amounts of capital to protect against adverse future experience and one-off shocks to investment performance. The overall capital requirement under the Pillar I regime is called the Capital Resources Requirement (“CRR”) and, under Pillar I rules, has a minimum of the Base Capital Resources Requirement (“BCRR”) (set at €3.7 million at the date of this report).

3.12 The CRR is defined to be the sum of the Long-Term Insurance Capital Requirement (“LTICR”) and the Resilience Capital Requirement (“RCR”), subject to a minimum of the BCRR.

3.13 The LTICR is calculated using a formula that takes into account, among other things, the type of business in the company, the reserves (gross and net of reinsurance), the sum at risk and the expense levels of the company. 3.14 The RCR is the amount of capital a company needs to hold in order to be able to withstand a set of shocks to equity

values, property values and interest rates, and is calculated in accordance with PRA rules.

3.15 Additional solvency and reporting requirements are imposed under Pillar I on firms that have significant volumes of with-profits business (commonly known as realistic reporting). ELAS is subject to this additional requirement, but CLL is not.

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Pillar II

3.16 The capital that must be held under Pillar II is an amount set by the Individual Capital Assessment (“ICA”), which is the company’s own assessment of its risk exposures and the amount and type of capital required to mitigate those risks. Pillar II is intended to provide a more realistic and complete view of the risks to which the company is exposed and to establish a framework within which the company should be managed.

3.17 The PRA requires firms, when preparing their ICA, to identify the major risks they face and, where capital is appropriate to mitigate those risks, to determine the amount and type of capital that is appropriate. The PRA expects firms to conduct stress tests and scenario analyses to estimate the losses that might arise in severe adverse circumstances in respect of each risk. The capital requirements so determined are then aggregated, allowing for any diversification benefits deemed achievable between those risks that are not perfectly correlated. These stress tests and scenario analyses, together with the supporting analysis, must be documented and, along with the results, submitted to the PRA (on request) as the ICA. The company is not required to make public the results, or any other details, of its Pillar II exercise.

3.18 The PRA will review the ICA periodically and may prescribe an additional amount of capital that must be held by the firm in addition to the amount determined in the ICA exercise. The total amount of Pillar II capital prescribed by the PRA is usually expressed as a percentage of the ICA capital requirement determined by the firm, and is called Individual Capital Guidance (“ICG”).

3.19 As part of the ICA exercise, a firm will assess the amount of capital it needs to hold to remain able to meet its liabilities as they fall due in all but the most extreme circumstances. The PRA prescribes ICG taking into consideration the capital requirement consistent with a 99.5% confidence level that the firm will be able to meet its liabilities over a one year timeframe or, if appropriate to the firm’s business, an equivalent lower confidence level over a longer timeframe.

Governance of UK long-term insurers

3.20 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.

3.21 Every UK long-term insurer (other than certain categories of friendly society) must appoint an actuary to perform the “actuarial function” in respect of its long-term insurance business. This individual is known as the Actuarial Function Holder or Head of Actuarial Function (“AFH”), and his/her responsibilities include advising the firm’s management on the risks that 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. In addition, those firms with with-profits business must appoint an actuary (or actuaries) to perform the “with-profits actuary function”. This individual is the With-Profits Actuary (“WPA”), and his/her responsibilities include advising the firm’s management on the key aspects of the discretion to be exercised affecting those classes of the with-profits business of the firm in respect of which he or she has been appointed.

3.22 The actuary or actuaries performing the AFH and WPA roles must have the required skill and experience to perform the relevant function and should not perform any other role within the firm that could give rise to a significant conflict of interest.

3.23 The responsibilities of the AFH and WPA are set out in the PRA Handbook and FCA Handbook, in section 4.3 of the Supervision Manual (“SUP 4.3”).

3.24 In relation to each with-profits fund, firms must appoint a with-profits committee (“WPC”) (or a “with-profits advisory arrangement” if appropriate given the size, nature and complexity of the fund in question). The WPC’s role is to advise and provide recommendations to the firm’s governing body on the management of the with-profits business, and to act as a means by which the interests of with-profits policyholders are appropriately considered within a firm’s governance structures.

3.25 In the management of with-profits funds the implications of TCF and policyholders’ reasonable expectations (“PRE”) are likely to be greater than for non-profit business given the more extensive nature of a firm’s discretionary powers in relation to with-profits business. PRE can be formalised from a number of different sources, including past practice, communications made to policyholders at the point of sale and ongoing, or by statements of practice. A detailed description of the financial management of with-profits business is set out in the statement of “Principles

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and Practices of Financial Management” (“PPFM”) which with-profits companies must maintain and make available to policyholders.

3.26 In the PPFM, “Principles” are overarching statements of the intended terms for the management of with-profits business and these are unlikely to change very frequently. If changes (other than minor editorial changes to improve clarity) are required, policyholders must be notified before the changes take effect. The statement of the “Practices” reflects the application of the Principles currently adopted by the company. Practices may be expected to change more frequently than Principles reflecting changing circumstances. Changes to the Practices must be consistent with the Principles but do not require pre-notification to policyholders.

Solvency II

3.27 New regulatory solvency reporting requirements for the European Union (“EU”) insurance and reinsurance industry are due to be introduced with effect from 1 January 2016. The 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. All but the smallest EU insurance companies will be required to adhere to a set of new, risk-based capital requirements and, in contrast to the current UK Pillar II requirements, the results will be shared with the public.

3.28 Solvency II is a principles-based regime and is based on three pillars:

 Under Pillar 1, quantitative requirements define a market consistent1_{framework for valuing the company’s}

assets and liabilities.

 Under Pillar 2, insurers must meet minimum standards for their corporate governance and their risk and capital management. There is a requirement for permanent internal audit and actuarial functions. Insurers must regularly complete an Own Risk and Solvency Assessment (“ORSA”), and senior management must demonstrate that the ORSA actively informs business planning, management actions and risk mitigation.  Under Pillar 3, there are explicit requirements governing disclosures to supervisors and policyholders. In

addition to the detailed Pillar 1 financial information required to be publicly disclosed, firms will produce a private annual report to supervisors and a public solvency and financial condition report.

3.29 Under Solvency II, a company’s liabilities must include a “risk margin”, which is an adjustment designed to bring the value of the liabilities up to the amount that another insurance or reinsurance undertaking would be expected to require in order to take over and meet the insurance obligations.

3.30 The Solvency Capital Requirement (“SCR”) under Solvency II is the capital requirement under Pillar 1, and is intended to be the amount required to ensure continued solvency over a 1 year time frame with a probability of 99.5%.

3.31 The Minimum Capital Requirement (“MCR”), which will be lower than the SCR, defines the point of intensive regulatory intervention. The MCR calculation is simpler, more formulaic and less risk-sensitive than the SCR calculation.

3.32 The European Insurance and Occupational Pensions Authority (“EIOPA”) has prescribed a “standard formula” to be used for the calculation of the SCR. However, Solvency II also permits firms to use their own internal models (or a combination of a “partial internal model” and the standard formula) to derive their SCR. These internal models and partial internal models are subject to approval the relevant regulator – in the UK this is the PRA.

3.33 In order to allow companies, regulators and the European Commission to consider the likely effects of the new regime on insurers and reinsurers, the industry has undertaken a number of trial runs and impact assessments, and has produced results under the Solvency II rules as they have developed.

3.34 On March 9 2015, the Solvency II Regulations 2015 were published by the UK Government, which, in part, implement the Solvency II Directive and the subsequent Omnibus II Directive into UK law. The remainder of the Solvency II directive will be implemented by the PRA and the FCA. The PRA has issued final rules on the

1_{A market-consistent framework requires the values placed on assets and liabilities to be consistent with the market prices of} listed securities and traded derivative instruments.

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transposition of the Directives into the UK national regulatory framework. These set out its approach to the prudential regulation, and its expectations, of firms subject to Solvency II.

3.35 Consultation by EIOPA on implementing technical standards (“ITS”) and guidelines for the new regime is currently underway and most of the draft ITS and guidelines have now been published and are awaiting endorsement by the European Commission. Once endorsed, these will become legally binding and apply to all national regulators under the scope of Solvency II without any further transposition into local frameworks.

3.36 Any UK firms intending to use an internal model, transitional measures, a matching adjustment or a volatility adjustment must formally apply to the PRA for approval. The PRA has issued a number of consultation papers and other communications which provide further clarity on the approval processes and set out the PRA’s expectations of firms.

The products and long-term business relevant to this report

3.37 The proposed Scheme provides for the transfer of non-profit annuity business written by ELAS from establishments in the UK, Guernsey, Germany and the Republic of Ireland and consisting of:

 Conventional (i.e. non-linked) annuities, which pay a level or increasing income (at a fixed rate of increase per annum) for the lifetime of the annuitant(s);

 Index-linked annuities, which pay an increasing income, but where the increases are calculated with reference to a published index, such as the Retail Prices Index; and

 Unit-linked annuities, which pay an annuity which may vary according to the investment performance of the underlying unit-linked funds;

3.38 Some of these annuities may include additional optional benefits, such as spouses or other dependants’ annuities to be paid on the death of the main policyholder, and a guaranteed return on death of the main policyholder during a specified guarantee period (typically 5 to 10 years).

3.39 For the avoidance of doubt, none of the annuities to be transferred under the Scheme include any profit-sharing or participating features.

The financial information in this report

3.40 The Pillar I balance sheets as at 31 December 2014 are shown in Section 4 of this report. Based on discussions with the ELAS and CLL senior management, I am satisfied that these figures are consistent with the published and externally audited financial statements for ELAS and CLL. I am therefore satisfied that it is appropriate to rely on this financial information.

3.41 My comments in this report with respect to Pillar II capital requirements are based on the Pillar II results as at 31 December 2014, including ICG as applicable.

3.42 As noted above, Pillar II financial information is not published and remains private between the PRA and the company. I have therefore not included any Pillar II figures in this report, but have provided qualitative comments on the Pillar II position of each company.

3.43 Solvency II is due to be implemented on 1 January 2016, and so its implementation will fall between the date of this report and the Effective Date. From 1 January 2016, the current solvency regime will no longer apply, and hence the bases of calculation of the financial positions shown in this report will no longer be applicable.

3.44 As noted in paragraphs 3.34 and 3.36, the Solvency II regulations are finalised, but some of the options around methodologies to be used require regulatory approval. Therefore, at the time of preparation of this report, there is still some uncertainty as to precisely how the financial position of ELAS and CLL will be determined. However, ELAS and CLL have shared their internal Solvency II calculations and estimates with me, and we have discussed the possible ranges of outcomes.

3.45 Hence, although my report contains no quantitative Solvency II financial information, I describe briefly, in respect of both ELAS and CLL policies, why I am comfortable that the implementation of Solvency II is unlikely to alter my conclusions concerning the Scheme.

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4. BACKGROUND ON THE COMPANIES CONCERNED IN THE SCHEME

ELAS Background

4.1 ELAS was established as a mutual life assurance company in 1762. It was set up and run for its members and retains its mutual status today. The company has approximately 515,000 policies in force and around £6 billion of funds under management as at 31 December 2014.

4.2 ELAS closed to new business in December 2000.

4.3 ELAS’s strategy is to seek to rebuild policyholder value, and it aims to deliver this by:

 Reducing risks, leading to lower solvency capital requirements, so increasing the amount available for distribution.

 Distributing all of the assets among with-profits policyholders as fairly and as soon as possible.

 Ensuring that with-profits policyholders leaving ELAS receive their fair share of capital, provided there is enough left for those who remain.

 Carefully managing solvency to enable capital distribution and only then seeking to maximise return.  Reducing the cost base in line with run off while delivering a trusted and valued service.

ELAS’s long-term business

4.4 ELAS’s long-term business consists of managing the policies of approximately 340,000 with-profits policyholders, 145,000 unit-linked policyholders and 30,000 conventional non-profit annuity policyholders.

4.5 The business within ELAS comprises protection products (including life cover and critical illness) for groups and individuals, retirement income planning products and annuities.

4.6 The vast majority of ELAS’s business was written in the UK, although some business was written by branches in Guernsey, the Republic of Ireland and Germany.

4.7 The Jersey Policies were written through ELAS’s branch in Guernsey.

4.8 ELAS currently has one fund, the Ordinary Long Term Fund (the “ELAS OLTF”).

4.9 ELAS is authorised by the PRA to undertake long-term insurance business in Classes I, II, III, IV, VI and VII2_{, as}

set out in Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Membership

4.10 As a mutual company, ELAS has no shareholders and is owned by its members.

4.11 The precise definition of membership is set out in the ELAS Memorandum and Articles of Association, but in broad terms, owners of with-profits policies which are still in force and which continue to participate in the profits of ELAS are members. However, for joint life policies, only the first named policyholder is a member. Membership is non-transferrable, and specifically does not transfer on the death of the original member.

4.12 ELAS is an unlimited company and accordingly its members are liable for its debts. However, the policies issued by ELAS state that ELAS’s liabilities cannot exceed its assets. The purpose of this provision is to prevent members being called upon to meet its liabilities to policyholders (whether under with-profits or non-profit policies). However, under certain adverse circumstances, it is possible that policyholders could receive lower benefits under their policies than would normally be guaranteed.

2_{Classification of long-term insurance business: I – life and annuity, II – marriage and birth, III – linked long-term, IV –}

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Recent relevant events Closure to new business in 2000

4.13 ELAS closed to new business in December 2000 following a House of Lords ruling that its approach to guaranteed annuity rates (“GARs”) attaching to with-profits pension policies was unlawful. Since the closure, the only new business has been in respect of increments to existing policies where there was a contractual or regulatory obligation to provide such increments, and in respect of annuities arising out of existing pension policies.

Reinsurance of non-profit and unit-linked business to Halifax Life Limited in 2001

4.14 In 2001, the economic interest in the ELAS non-profit business (other than immediate annuities) and unit-linked business was transferred to Halifax Life Limited (now part of the Lloyds Banking Group) by way of a reassurance agreement. In addition, Halifax Life agreed to acquire the majority of the operating assets of ELAS along with the administration services for the reinsured policies.

GAR Compromise Scheme in 2002

4.15 In 2002, following a vote by members, the Court approved a compromise scheme under which the majority of policyholders with GARs gave up their right to those GARs in return for an uplift to their guaranteed benefits and policy values. Some policies with GARs were excluded and these policies, together with non-GAR policies, received a lower uplift.

The transfer of ELAS non-profit annuities to CLL in 2007

4.16 In February 2007, ELAS transferred the majority of its non-profit annuity business to CLL. This represented approximately £4.6bn of non-profit annuities and approximately 130,000 policies.

Sale of University Life to Reliance Mutual in 2007

4.17 In June 2007, ELAS sold University Life Assurance Society, a wholly owned subsidiary, to Reliance Mutual Insurance Society Limited.

The transfer of all of ELAS’s with-profits annuity business to Prudential in 2008

4.18 In January 2008, ELAS transferred all of its with-profits annuity business to The Prudential Assurance Company Limited equating to the acquisition of approximately £1.8bn in assets. This transferred approximately 60,000 annuities representing approximately 50,000 annuitants.

Recapture of the unit-linked business in 2015

4.19 In July 2014, ELAS agreed with Halifax Life Limited to recapture the unit-linked business which had previously been reinsured in 2001 (see paragraph 4.14), and this exercise was completed in March 2015.

Reinsurance of non-profit annuity business in 2015

4.20 On 2 March 2015, ELAS entered into a reinsurance agreement (the “Reassurance Arrangement”) with CLL to reinsure the conventional non-profit annuity business expected to be transferred by the Scheme, but excluding any unit-linked annuities. The Reassurance Arrangement was effective from 1 January 2015, and covered approximately 30,000 policies. The premium payable to CLL under the Reassurance Arrangement comprised assets of approximately £850m. These assets transferred were deposited back with ELAS to provide security to ELAS. In addition, ELAS entered into a transfer agreement (“the Transfer Agreement”) with CLL, which sets out how the business reinsured under the Reassurance Arrangement and the unit-linked annuities of ELAS will transfer to CLL under the Scheme.

4.21 If the Scheme proceeds to completion as intended, the Reassurance Arrangement will terminate and associated assets held on deposit will be transferred to CLL. Any non-profit annuities (including unit-linked) that cannot be transferred to CLL via the Scheme will be reinsured by a “Residual Policies Reassurance Arrangement”. If the

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Scheme has not become effective by 31 December 2016, both ELAS and CLL have the option to terminate the Reassurance Arrangement.

Financial Condition

4.22 As mentioned in section 3.15, additional solvency and reporting requirements are imposed under Pillar I on firms that have significant volumes of with-profits business. ELAS is subject to this additional requirement, and therefore is required to publish its solvency position using the “twin peaks” approach. Under this approach firms are required to carry out a regulatory (“Peak 1”) and realistic (“Peak 2”) calculation in respect of its funds that contain with-profits business and hold capital to cover the more onerous of these two peaks. These calculations are therefore required for ELAS’s sole fund, the ELAS OLTF.

4.23 As ELAS is a closed with-profits mutual company, the published solvency position within the PRA returns is complex; the company must show liabilities (including capital requirements) equal to its total assets and as a result the reported surplus in both the regulatory and realistic peak is zero. The rationale behind this is that all assets in a closed with-profits fund are earmarked for distribution to the with-profits policyholders. However, for the purposes of this report this is an unhelpful presentation, and hence I use alternative presentations below which better illustrate the company’s solvency position.

4.24 ELAS must also report to the PRA under the Pillar II regime on its own risks and capital required to meet those risks.

4.25 I have considered both the Pillar I and Pillar II financial positions in my assessment. However, as the Pillar II disclosures are submitted privately to the PRA, I am unable to directly quote the financial position. Consequently, the financial positions set out in tables 4.1 and 4.2 are on a Pillar I basis only.

4.26 The Pillar I regulatory basis (Peak 1) balance sheet as at 31 December 2014 (and 31 December 2013) for ELAS is shown in Table 4.1 below.

Table 4.1: ELAS regulatory balance sheet

ELAS Regulatory Balance Sheet (£m) 31 December 2014 31 December 2013

Admissible Assets 5,985 5,627 Non-profit Liabilities 946 857 With-profits Liabilities 4,497 4,253 Other Liabilities 56 67 Total Liabilities 5,499 5,177

Excess of assets over liabilities (A) 486 450

CRR (=LTICR) (B) 223 211

CRR Cover (A/B) 218% 214%

4.27 The Pillar I realistic basis (Peak 2) balance sheet as at 31 December 2014 (and 31 December 2013) for ELAS is shown in Table 4.2 below.

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Table 4.2: ELAS realistic balance sheet

ELAS Realistic Balance Sheet (£m) 31 December 2014 31 December 2013

Regulatory Value of Assets 5,985 5,627

Assets backing non-profit business (989) (897)

Value of future profits on non-profit business 45 24

Realistic Value of assets backing with-profits business 5,042 4,754

With-profits benefit reserve (3,004) (3,168)

Planned deductions for guarantees 249 265

Planned deductions for other costs 0 11

Future cost of guarantees (1,188) (877)

Future cost of financial options (7) (5)

Provisions for other liabilities (238) (223)

Realistic value of current liabilities (56) (67)

Realistic value of with-profits liabilities (4,246) (4,063)

Excess of Assets over Liabilities 796 691

Risk Capital Margin 36 62

Surplus Assets 760 629

as a % of realistic value of with-profits liabilities 17.9% 15.5% Notes to Table 4.2:

1. The “with-profits benefit reserve” is the starting point for calculating the with-profit business liabilities. It represents the total Policy Values (see section 4.36) or their equivalent measures for the with-profits business.

2. The “planned deductions for guarantees” represents the present value of projected future deductions from the total Policy Values or their equivalent measures for the cost of guarantees.

3. The “planned deductions for other costs” represents the present value of deductions for surrenders from the total Policy Values or their equivalent measures.

4. The “future cost of guarantees” is the present value of the projected future cost of guarantees in excess of the “planned deductions for guarantees”.

5. The “future cost of financial options” represents the present value of the future cost of guaranteed annuity rates.

6. The “provisions for other liabilities” comprise a number of provisions for future liabilities including regular expenses, exceptional expenses and, for 2013 only, legal claims.

7. The “Risk Capital Margin” (“RCM”) is a regulatory minimum level of capital derived by considering the impact of certain stressed scenarios.

4.28 As noted above, the reported surplus under the realistic peak will be shown as zero in the PRA returns. This is a result of actuarial guidance that requires closed with-profits funds to reclassify any surplus as additional liabilities within the PRA returns under the heading “planned enhancements to with-profits benefit reserve”. The presentation in table 4.2 shows these planned enhancement liabilities as surplus assets.

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Reinsurance arrangements

4.30 In addition to the recently agreed annuity reinsurance with CLL referred to in paragraph 4.20, ELAS has a number of reinsurance agreements in place with companies in Lloyds Banking Group plc. The reinsurance agreements are placed with Halifax Life Limited, Clerical Medical Managed Funds Limited, and Clerical Medical Investment Group Limited. I understand that Lloyds Banking Group is separately undertaking a restructure of its insurance businesses, but this should have no impact on the considerations for this Scheme, since there is no intended change to the nature or level of reassurance cover and none of these reinsurance agreements is transferring under the terms of the Scheme.

The risk profile of ELAS

4.31 ELAS’s main risks arise from guarantees to policyholders and:  Assets under management: market, credit, and interest rate risk;  Counterparty default risk from its reinsurance counterparties;  Longevity risk on its annuity liabilities; and

 Expense risk arising from the need to reduce expenses in line with the run off of the business.

4.32 The Pillar II assessment aims to assess appropriately the risks inherent in the company’s business profile, by having regard to the economic capital needs of the firm that arise from a variety of different risk exposures. The Pillar II results are submitted privately to the PRA and it is not appropriate for me to disclose the financial position in detail, but I have considered in detail the nature of the risks and their relative contribution to the risk profile of ELAS. Figure 4.3 shows the pre-diversification profile of ELAS as at 31 December 2014 under its Pillar II basis. Figure 4.3: ELAS Pre-Diversification Pillar II Position as at 31 December 2014

Source: ELAS ICA as at 31 December 2014

4.33 ELAS reduced its exposure to market and longevity risk in 2013 by means of a buy-out of its staff pension fund liabilities. Apart from this, the risk profile of ELAS has remained broadly stable over recent years in terms of the relative balance between which risks are most material.

4.34 The majority of longevity risk from its non-profit annuity liabilities has been transferred to CLL via the Reassurance Arrangement. This risk transfer will be perfected by the subsequent transfer of the annuity business to CLL under this Scheme.

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4.35 Other less material risks include:  Inflation risk;

 Operational risk;  Liquidity risk;  Strategic risk; and  Regulatory risk.

With-Profits and Capital Management

4.36 ELAS uses the concept of “Policy Values” to manage the vast majority of its with-profits policies. A Policy Value normally represents a smoothed investment return (net of charges and other adjustments) applied to the premiums paid into the policy. Policy Values are used to determine payout levels in relation to with-profits benefits and, over the medium to long term would, other things being equal, be related to the growth on the underlying investments. 4.37 Policy Values are not guaranteed, and can be reduced as well as increased, and can be more or less than the

value of guarantees under a policy. They are kept regularly under review, and changes are determined by the ELAS Board.

4.38 For a minority of with-profits policies a Policy Value is not calculated, but other equivalent methodologies are applied to achieve a similar effect.

4.39 ELAS intends to distribute all of its assets among with-profits policies as fairly as possible over the lifetime of those policies. In order to ensure fairness between policies leaving and those remaining in the fund, ELAS needs to ensure that payout levels distribute a fair share of the solvency capital of the fund as soon as possible, while also leaving sufficient capital for the remaining policies.

4.40 At least annually, ELAS calculates a “Capital Distribution Amount”, or enhancement, as a proportion of Policy Values at a certain date, and which is paid on top of Policy Values to determine payouts. This Capital Distribution Amount and the way it is applied represent the ELAS Board’s view of the prudent share of solvency capital that can be earmarked for policyholders. The Capital Distribution Amount is not guaranteed, and can be removed, reduced or increased at any time, without prior notice to policyholders.

4.41 The levels of required and available solvency capital are strongly influenced, over the longer term, by the Total With-Profits Policy Values (the sum of Policy Values and equivalent measures for policies for which Policy Values are not calculated) and Capital Distribution Amounts. ELAS expects that the Total With-Profits Policy Values and Capital Distribution Amounts are kept at such a level that it can maintain cover in excess of 120% of its ICA capital requirement (or ICG if higher). In circumstances where the cover falls below 150%, ELAS will consider reducing Total With-Profits Policy Values and Capital Distribution Amounts to restore solvency in line with its target cover. If the ratio fell below 120%, such action would almost certainly be taken.

4.42 ELAS’s need for capital is determined by the level of risk it faces from time to time. If its risks increase, it needs to hold more capital and vice versa. This is in contrast to the Policy Values, which tend to grow broadly in line with investment performance.

4.43 Implementation of ELAS’s strategy to distribute capital to policyholders is therefore dependent on how successful it is in reducing risks. As risks are reduced or eliminated, capital will be returned to policyholders.

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CLL

Background

4.45 CLL is a proprietary company that is a wholly owned subsidiary of The Canada Life Group (U.K.) Limited which in turn is owned by Canada Life Financial Corporation. Since July 2003, Canada Life Financial Corporation has been a wholly owned subsidiary of Great-West Lifeco Inc.

4.46 Figure 4.4 shows the organisation structure of Great-West Lifeco Inc. and the position of CLL within that structure. Figure 4.4 – Simplified Organisational Structure of Great-West Lifeco Inc.

Source: CLL

100%

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4.47 CLL offers protection products (including life cover, income protection and critical illness) for groups and individuals, and retirement income planning products, annuities, pension bonds, savings and investments, investment bonds and inheritance tax planning products.

4.48 CLL’s UK long-term insurance business consists of business written mainly in the UK, with approximately 650,000 policies in force as at 31 December 2014.

Recent Relevant Events

4.49 In 2005 CLL purchased a portfolio of 58,000 non-profit annuity policies from Phoenix & London Assurance Limited (“PALAL”) (formerly known as Sun Alliance and London Assurance Company), for a purchase price of £2.2 billion. This was effected by way of a Part VII transfer in December 2005.

4.50 In 2007, CLL acquired the non-profit annuity business of ELAS (see paragraph 4.16).

4.51 In July 2013, CLL acquired the Irish Life Group Limited. At the same time, an internal group restructuring took place that saw CLL acquire Canada Life Assurance (Ireland) Limited from CLL’s parent Canada Life Group (U.K.) Limited. Canada Life Assurance (Ireland) Limited was incorporated into the Irish Life Group, and its long term business was transferred to Irish Life Assurance plc (“Irish Life”) on 1 January 2014.

4.52 In July 2015, Canada Life Group (U.K.) Limited completed the acquisition of Legal & General International (Ireland) Limited.

4.53 As discussed in paragraph 4.20, in March 2015, CLL entered into the Reassurance Arrangement and Transfer Agreement to reinsure almost all of ELAS’s non-profit annuities (other than the unit-linked annuities) and subsequently to transfer those annuities, together with the unit-linked annuities, to CLL.

CLL’s Structure and Operations

4.54 CLL is authorised by the PRA to undertake long-term insurance business in Classes I, II, III, IV, VI and VII, as set out in Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. 4.55 CLL maintains a shareholder’s fund (“CLL SHF”) and a Long Term Business Fund (“CLL LTBF”).

4.56 The CLL LTBF is divided into three sub-funds:

 The CLL Non-Profit Fund (“CLL NPF”) contains a range of non-profit non-linked and non-profit linked business;

 The CLL Manulife Fund contains conventional with-profits savings, with-profits pension business, non-profit protection business and non-profit annuity business originally written by the UK operation of Manulife; and  The CLL With-Profits Fund contains conventional with-profits savings and with-profits pension business. The CLL Manulife Fund and the CLL With-Profits Fund are both closed to new business and are in run-off. 4.57 All profits arising in the CLL NPF may be retained in that fund or transferred to the CLL SHF where they may be

available to be paid as a dividend to CLL’s shareholder, subject to any legal or regulatory constraints which may apply (e.g., there being sufficient distributable earnings under the Companies Act or to ensure that adequate solvency margin coverage is maintained). profits policyholders in the CLL Manulife Fund and the CLL With-Profits Fund are entitled to all distributable profits arising in their respective funds.

Financial Condition

4.58 CLL reports its statutory financial position to the PRA under the Pillar I Peak 1 regime. CLL is not required to report under the realistic basis (“Peak 2”) as it does not have with-profits liabilities above the relevant threshold level. CLL must also report to the PRA under the Pillar II regime on its own risks and capital required to meet those risks. 4.59 I have considered both the Pillar I and Pillar II financial positions in my assessment. However, as the Pillar II

disclosures are submitted privately to the PRA, I am unable to directly quote the financial position. Consequently, the financial position set out in Table 4.5 is on a Pillar I basis only.

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4.60 Pillar I is the more onerous basis for CLL, in that under Pillar I the level of excess assets is lower than under Pillar II. This relative position has been the case in more recent years and is expected to remain so until Solvency II becomes effective.

Table 4.5: CLL regulatory balance sheet

CLL Regulatory Balance Sheet (£m) 31-Dec-14 31-Dec-13

NPF* WPF Manulife LTBF SHF TOTAL TOTAL

Admissible assets 22,305 58 202 22,566 1,696 24,262 22,506 Mathematical reserves 19,202 39 164 19,405 0 19,405 17,936 Other liabilities 2,542 2 13 2,557 12 2,569 2,467 Total Liabilities 21,744 41 177 21,962 12 21,974 20,404

Excess of assets over liabilities (A) 562 17 25 604 1,684 2,288 2,103

LTICR 757 0 757 699 RCR 212 0 212 167 Irish Life CRR 0 409 409 416 CLL CRR (B) 969 409 1,378 1,283 CRR Cover (A/B) 166% 164% Notes to Table 4.5:

* The above figures assume a cash transfer of £155m from the NPF to the SHF

4.61 The Pillar I coverage for CLL as at end-December 2014 was 166% (31 December 2013: 164%). CLL aims to operate at a level of cover of 140% and within a range of 126% to 154%; as shown, CLL exceeded the upper end of this range at 31 December 2014, partly because of the potential effects of, and uncertainty surrounding, Solvency II.

4.62 The CLL SHF assets shown in table 4.5 include £330 million in respect of subordinated debt provided by other companies within the wider Canada Life group. There are various tranches of this debt, which are subject to different terms and conditions, and with different interest rates payable. The terms of the debt are that interest and repayments can only be made if, in the opinion of the CLL AFH, to do so would not put the company in breach of its required margin of solvency. The debt is immediately repayable in the event of any steps being taken to wind up the company. The lender may only petition for the winding up of the company following the second anniversary of the default of the terms of the agreement by CLL. In a winding up, no amount will be paid in respect of the subordinated debt until all policyholders and other creditors have been paid in full. Other than in these circumstances, the lender cannot call for repayment of the loan within the term of the loan (some is undated). Repayment of the subordinated debt is subject to no objection from the PRA, and for some tranches 5 years’ notice to the PRA.

4.63 We understand from CLL that the subordinated debt is expected to continue to qualify as capital under Solvency II and I will provide an update on this point in my Supplementary Report. The treatment of the subordinated debt under Solvency II will not be affected by the Scheme.

4.64 Also included in the CLL SHF assets is the regulatory value of Irish Life at £852 million, along with its CRR of £409 million. Therefore Irish Life contributes £443 million to CLL assets in excess of its CRR. If the regulatory value and CRR of Irish Life were excluded, the cover for CLL’s Capital Resources Requirement at 31 December 2014 would fall to 148%, still within the target range.

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Products

4.65 As mentioned in paragraph 4.47, CLL has a wide range of product types in force.

4.66 The CLL Manulife Fund and the CLL With-Profits Fund contain with-profits business. The CLL NPF is the only fund of CLL that is open to new business.

4.67 Table 4.6 shows the breakdown of CLL’s in-force business by fund and broad product category as at 31 December 2014:

Table 4.6: CLL In-force Business at 31 December 2014

No. Policyholders/ Members* Annual Office Premium (Gross) £m Reserve (Gross) in £m Reinsurance ceded in £m Reserve (Net) in £m

With Profit Fund

non-linked Life 3,515 1 38 0 38 non-linked Pension 46 0 1 0 1 3,561 1 39 0 39 Manulife Fund non-linked WP Life 13,043 1 133 0 133 non-linked NP Life 1,401 0 3 0 3 non-linked WP Pension 72 0 1 0 1 non-linked NP Pension 2,482 0 28 0 28 16,998 1 164 0 164

Non Profit Fund

non-linked Life 601,469 113 754 105 650 non-linked Pension 2,250,202 262 14,218 1,830 12,388 linked-Life 274,879 77 2,507 15 2,492 linked-Pension 182,240 41 3,983 311 3,672 3,308,790 493 21,463 2,261 19,202 Total 3,329,349 495 21,666 2,261 19,405

Source: CLL PRA Returns 2014

* includes individual policyholders and members of group pension policies.

4.68 Table 4.6 shows that the vast majority of CLL’s in-force business, representing approximately 99% of reserves (net of reinsurance) of the company, is in the CLL NPF. The largest product line within the CLL NPF is non-profit annuity in payment business, which accounts for approximately 72% of CLL business by reserves (net of reinsurance). 4.69 Table 4.7 shows the level of new business written by CLL over 2014. All of the new business is written into the CLL

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Table 4.7: CLL New Business 2014 No. Policyholders/ Members* Regular Premium (in £'000) Single Premium (in £'000) Life non-linked 57,979 15,397 13,689 linked 20,667 5,499 134,918 78,646 20,896 148,607 Pension non-linked 193,875 24,246 576,128 linked 5,021 679 21,604 198,896 24,925 597,732 Total 277,542 45,821 746,339

Source: PRA Returns 2014

* includes individual policyholders and members of group pension policies.

4.70 CLL continues to write both life and pensions new business, with the majority of the new business sales, approximately 70% on an annual premium equivalent basis (where single premiums are divided by 10 and added to the regular premiums), being in respect of CLL’s annuity product in 2014.

Reinsurance and financing arrangements

4.71 CLL has in place a number of reinsurance arrangements with Canada Life International Re and Canada Life Assurance Company (Barbados branch), both Canada Life group companies, which together represent approximately 90% of CLL’s total reinsurance ceded.

4.72 The reinsurance with Canada Life International Re is a quota share reinsurance arrangement covering 60% of CLL’s group life business, with ceded mathematical reserves of approximately £50 million as at 31 December 2014. 4.73 The reinsurance with Canada Life Assurance Company (Barbados branch) consisted of two quota share arrangements as at 31 December 2014. The first is covered 40% of the PALAL annuities (see paragraph 4.49), while the second covered 40% of the ELAS annuities acquired in 2007 (see paragraph 4.50). The combined mathematical reserves ceded total £1.95 billion as at 31 December 2014. CLL has recently (June 2015) increased the percentage reinsured under both of these arrangements to 90%.

4.74 Under each of these intra-group reinsurance arrangements, an amount equal to the ceded reserves is deposited back to CLL by the relevant reinsurer to provide security to CLL in the event of financial difficulty of that reinsurer. 4.75 There are also external reinsurance arrangements with Royal Bank of Canada Insurance Company Limited,

Hannover Ruckversicherung, Munich Re and Swiss Re Europe S.A.

4.76 CLL also has in place an “analogous non-reinsurance financing agreement” with J.P. Morgan Ventures Corporation which limits CLL’s longevity exposure until June 2048 on approximately 13% of the ELAS annuities that were acquired in February 2007. This type of arrangement is commonly known as a “longevity swap”, whereby CLL will pay a predetermined amount each year to J.P. Morgan Ventures Corporation based on the expected annuity outgo schedule at the time the agreement was entered into, and will receive in return the actual amounts required to pay the annuities.

Milliman Client Report

Transfer of non-profit annuity business from The Equitable Life Assurance

Society to Canada Life Limited.

The report of the Independent Expert

7 October 2015

CONTENTS

1.

INTRODUCTION

2.

GENERAL CONSIDERATIONS OF THE INDEPENDENT EXPERT

3.

THE UK LIFE INSURANCE MARKET AND REGULATORY ENVIRONMENT

4.

BACKGROUND ON THE COMPANIES CONCERNED IN THE SCHEME