2012 07 AKG Offshore with Profits Bond Report

JULY 2012

OFFSHORE LIFE OFFICE WITH PROFITS BOND REPORT OFFSHORE LIFE OFFICE Copyright WITH PROFITS BOND REPORT

This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make such a report or ratings available.

The report contains assessment based on available information at the date as shown on the report’s cover and in its page footer. This includes prior regulatory data which may have an earlier date associated with it, but the report also takes into account all relevant events and information, available to and considered by AKG, which have occurred prior to this stated cover and footer date. Events and information subsequent to this date are not covered within it.

All rights reserved. This report is protected by copyright. This report and the data/information contained herein is provided on a single site multi user basis. It may therefore be utilised by a number of individuals within a location. If provided in paper form this may be as part of a physical library arrangement, but copying is prohibited under copyright. If provided in electronic form, this may be by means of a shared server environment, but copying or installation onto more than one computer is prohibited under copyright. Printing from electronic form is permitted for own (single location) use only and multiple printing for onward distribution is prohibited under copyright. Further distribution and uses of the report, either in its entirety or part thereof, may be permitted by separate agreement, under licence. Please contact AKG in this regard or with any questions: [email protected], Tel +44 (0) 1306 876439.

AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions.

AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service. OFFSHORE LIFE OFFICE Contents WITH PROFITS BOND REPORT

Contents Page

Introduction Purpose and Scope of Report 2

Availability of Information 2

With Profits Glossary 3

Company Analysis 4

Guide to AKG’s Rating System 4

AKG With Profits Fund Ratings 7

About AKG 8

Companies AEGON Ireland plc 9

Aviva Life International Ltd 15

AXA Isle of Man Ltd 23

CMI Insurance Company Ltd 33

Friends Provident International Ltd 46

LCL International Life Assurance Company Ltd 54

Prudential International Assurance plc 60

Scottish Mutual International Ltd 69

Purpose and Scope of Report

This is a new volume focusing on offshore Sterling with profits bond business, in response to market demand to consider this type of business using the same robust AKG framework and data set as onshore with profits business / variants. It is therefore intended as a companion to AKG’s UK Life Office With Profits Reports, which remain AKG’s most extensive reference resource in the context of with profits business.

For the purposes of this report, AKG’s definition of ‘offshore’ business is business marketed within the UK by life companies situated outside the UK.

In the 1990’s and early 2000’s the market for such offshore with profits bond business was substantial. AKG has identified eight current companies that contain such business - four domiciled in the Republic of Ireland and four in the Isle of Man*. In most instances, however, this type of business was designed to be reinsured back to an associated UK life company. The only exception being that part of the business written by Scottish Mutual International Ltd is retained offshore.

The main reason for investing offshore has always been the ability to benefit from a gross roll up of assets.

A significant proportion of the business originally written has now been surrendered, and only Prudential International Assurance plc continues to write new offshore with profits bond business in any material volume.

The volume of offshore with profits bonds remaining in force is still quite large, though, and the business has now been in force long enough for AKG to enquire about past performance achievements for a variety of durations up to 15 years in force.

*The Isle of Man is an internally self-governing dependency of the British Crown and its people are British citizens, and although it is part of the British Islands, it is not part of the United Kingdom.

Availability of Information

AKG has attempted to obtain as much detailed information (particularly of a product and financial nature) as possible about each of the companies profiled in this report. However, despite an overall improvement in recent years, the depth of information available to AKG in respect of offshore business varies quite a lot from one company to another, for the following reasons:

 the depth of information about offshore life companies which is available within the public domain varies greatly from one territory to another. In particular, the Isle of Man regime is less open than that in the Republic of Ireland.  the extent of additional information made available to commentators such as AKG (on a voluntary basis) varies greatly from one company to another.  some companies have disclosed information to AKG, but on a confidential basis, so that AKG are unable to publish it within the report.

This situation remains far from satisfactory as far as AKG's objective of providing informed commentary on financial strength issues is concerned, but it reflects the current status of the offshore market. In fact, it is fair to say that the privacy laws that operate in some jurisdictions form part of the appeal of the overall proposition for some investors.

The existence of reinsurance arrangements for offshore with profits bond business with UK life companies has helped AKG obtain some relevant information from those reinsurers, which are subject to a higher level of disclosure. Indeed it is the position of the reinsurer that is of primary importance in many respects for the business under consideration.

AKG's aim is to publish comparable information, presented in a consistent manner, for each company. AKG's approach to rating companies which do not supply relevant information is naturally much more cautious than for those that do.

With Profits Glossary

The glossary below defines a number of abbreviations which are used in explaining with profits business. Some are specific to with profits, but we have also included some wider abbreviations either related to with profits or often used in its broader insurance context.

This list does not purport to be exhaustive, but AKG hopes it contains the majority of abbreviations used within or related to with a profits context.

Conventional With Profits: Products characterised by a guaranteed sum assured to which regular (annual) bonuses, and possibly a terminal (final) bonus, are added. Few offices now offer conventional with profits, these having been superceded during the 1980's by unitised with profits products.

Unitised With Profits: The relevant part of the with profits fund is divided into units (similar to a unit linked fund) and the unit value is used to define individual policy values. Surplus is distributed by allocation of additional units or by incrementing the unit value.

Asset Share: The premiums paid by the policyholder, less deductions for expenses, tax and other charges, plus allocations of business profits, accumulated at the rate of investment return achieved. [Note: In practice, there is some variability as to which of the above elements are included, depending upon profit sharing philosophy].

Common Abbreviations A-Z:

CFPPFM Consumer Friendly Principles and Practices of Financial Management CMA Contractual Minimum Addition CPPI Constant Proportion Portfolio Insurance CRR Capital Resources Requirement CWP Conventional With Profits DA Deposit Administration EBR Equity Backing Ratio (including Property) FAR Free Asset Ratio FSA Financial Services Authority GAO Guaranteed Annuity Option GAR Guaranteed Annuity Rate GMP Guaranteed Minimum Pension IB Industrial Branch ICA Individual Capital Assessment ICG Individual Capital Guidance LTA Long Term Assets LTBF Long Term Business Fund MCR Minimum Capital Requirement MVR/MVA Market Value Reduction/Market Value Adjuster NPSF Non Profit Sub Fund OB Ordinary Branch PPFM Principles and Practices of Financial Management PRE Policyholder Reasonable Expectations RBS Realistic Balance Sheet RCM Risk Capital Margin RMM Required Minimum Margin TCF Treating Customers Fairly UWP Unitised With Profits WCR Working Capital Ratio WP With Profits WPB With Profits Bond WPC With Profits Committee WPFAR With Profits Free Asset Ratio WPICC With Profits Insurance Capital Component

Company Analysis

The analysis provided for each company (and any relevant reinsurance company) is based on information collated from a number of sources, including meetings with a number of the offices, a questionnaire completed by some of the companies, statutory accounts, statutory insurance company returns, PPFMs, CFPPFMs, reports to with profits policyholders, websites and any other available material, including AKG’s own company research archives.

Figures are shown for each of the last three years where possible.

AKG is grateful for the co-operation provided by many of the companies in the compilation of this report.

Guide to AKG’s Rating System

With Profits Financial Strength Ratings

The objective is to assess the overall strength of the with profits fund of the issuing company and/or the relevant reinsurer. The initial concern is the company's ability to meet its ongoing guaranteed, or promised, commitments, i.e. existing sum assured and bonuses. However, the company's ability to continue to compete successfully in the with profits market is also particularly relevant, given that closed funds are sometimes bad news for policyholders. In such situations, overall expenses tend to increase as a proportion of the fund and investment performance may well deteriorate. These, together with other factors, may make it difficult for companies in such situations to maintain competitive bonus rates at future declarations, although existing declared bonuses are not affected (other than possibly by MVRs).

The main criteria taken into account are:  Capital base and free asset position;  With Profits Realistic Balance Sheet position;  The amount of with profits business in-force;  Parental strength (and likely attitude towards supporting the company);  Image and strategy.

With Profits Future Performance Ratings

The potential for future performance is made up of a variety of different factors. The major factors are:  Past performance as a guide to potential future performance - It should be noted however that not all current leaders in past performance have always been top performers.  Current investment philosophy - With profits funds with high equity and property investments are likely to perform better over the longer term than, for instance, funds with a high proportion of fixed interest securities. It should be noted that this may not always be the case, but provided the policyholder accepts the basic premise that equities will, over the long term, out-perform fixed interest securities, this will be an important factor (i.e. funds with high equity ratios will perform better than funds with lower equity ratios).  Company free asset position (and valuation strength), together with the relevant With Profits Realistic Balance Sheet position - This will enable overall investment flexibility and give an investment return on those free assets that may be available to with profits policyholders.  Overall size of the company, its with profits fund and its capital base - The brand name (and ownership) and reputation of the company will indicate the company's ability to stay in the with profits market and sell new business at a profitable rate for the benefit of policyholders and shareholders.  Distribution efficiency - A sales distribution network, which will enable products to be sold profitably and in adequate volumes, is clearly important.

 Bonus philosophy - with respect to reversionary and terminal bonuses, is relevant, allied with the impact of future stock market growth. Terminal bonuses are not only dependent on the company's attitude to withholding (or otherwise) capital gain, but also the market potential (for equities and property) for on-going growth. Companies with a high terminal bonus ratio (as a percentage of payout) may find this 'high' payment difficult to maintain and, consequently, future performance may be affected.  Miscellaneous surplus - Some companies have with profits funds benefiting only from investment returns. However, in other with profits funds there is a contribution from other lines of business (e.g. non-profit and unit-linked surplus).  Estate distribution - A key element for closed funds that are running-off is the size of the fund's inherited estate, and the company's policy as to how it will be distributed over time.  Mutual or Proprietary status - There has been much debate on the 'strength' of mutual companies because of their potential inability to raise capital, should this be required. Most mutuals would contend that this is, in practical terms, not relevant. However, it has to be conceded that the public perception (of this constraint) does cause mutual companies some problems. A number of mutuals have now demutualised, often to the benefit of their policyholders. The big advantage that mutuals have, as far as policyholders are concerned, is that they pay 100% of all surplus back to policyholders so that bonuses are enhanced compared to their proprietary rivals. This is certainly true in some cases, though in general, actual results for mutual and proprietary companies are similar.

It must also be remembered that assessment of on-going performance is subjective, as the company's actual performance in 20 years, say, will be dependent on factors which cannot be accurately forecast, such as:  Whether or not the company has stayed in business, and in what form  Its ability to adapt to new market forces  Its investment results  Its overall profitability during that period

Nevertheless, those companies with good performance potential (as determined by the with profits factors above) have to start as favourites. Indeed, all Independent Financial Advisers must consider these factors (or their equivalent rating) when recommending a specific with profits contract to a potential policyholder.

AKG has therefore, using its judgement and experience, produced a single rating that combines, to a greater or lesser extent, the various factors outlined above.

With Profits Transparency Ratings

Transparency has become a significant issue, as a result of the breakdown of trust following general concerns about the opaqueness of the with profits market as it had traditionally grown up. Increasingly, policyholders and their advisers seek reassurance that they will be able to rely on a provider acting fairly in all circumstances, and that the provider's scope to apply discretion is clearly delineated and reasonable.

Nowadays, UK companies are required to produce PPFMs (and CFPPFMs) for each of their with profits funds. Some offshore companies voluntarily produce their own PPFMs and CFPPFMs, and in some cases a UK reinsurer’s publication covers the offshore business.

Much of the information contained within these PPFMs has, in the past, been made available by the more transparent companies, in their desire to develop a more consumer focused approach. For other companies, less at the forefront of any drive to greater transparency, the PPFM ensures at least a degree of compulsory disclosure.

The purpose of the AKG Transparency Rating is to give a simple quantitative rating for transparency, consistent with AKG's other industry measures.

Considerations of transparency feature prominently in the context of 'new-style' with profits products, where it is explicitly addressed in the product design and marketing material. Even with 'old-style' products, however, the degree of openness about the conduct of a provider's with profits funds is seen as a vital factor in provider selection.

In evaluating transparency and openness, and recognising that there is no current industry wide definition, AKG takes the following main criteria into account:  How open the mechanics of the fund are, and the extent of any discretion retained by the provider regarding key decisions about investment mix/bonus allocations/unit prices etc from day to day throughout the life of a policy.  The degree of discretion retained by the provider to change charges or other important contract terms.  The degree of discretion retained by the provider to make final adjustments to policy proceeds at the point of payout.  The amount, quality and timeliness of relevant information, about the operation of the fund and the company, made available to policyholders, advisers, and commentators. This particularly includes consideration of the depth, quality and clarity of information presented in PPFMs and on the company's website; as well as the extent of the provider's commitment to maintaining good standards of communication.  The extent to which a provider's with profits fund operations will be subject to independent review and challenge; in particular the makeup and role of its WPC.  For closed funds, the company's approach to run-off; in particular governance issues and whether its communication strategy enables policyholders to make informed decisions.

As levels of transparency develop within the industry, these criteria evolve and benchmarks are adjusted.

It is clear that there is a very wide spectrum of performance within the market at present, a fact borne out by the FSA With Profits Regime Review Report in June 2010. On the one hand, this identified a significant number of firms where with profits funds were being operated with due regard to the interests of policyholders and with appropriate practices in most aspects of their operation. On the other hand, though, it reported sector-wide weaknesses in governance and policyholder communications, involving both open and closed funds. Particular issues were how independent challenge is provided by with profits committees, and what firms are doing to ensure that policyholders receive sufficiently comprehensive, timely and clear information so they can take a reasonable view of the risk and reward balance of their policies.

Explanation of AKG's Fund Ratings

The main purpose of AKG's Fund Ratings is to show AKG's opinion of the relative merits of each Fund against its competitors. For each of the 3 categories of Fund Rating, AKG's aim is to sub-divide the whole market into 5 separate groups, each containing the funds that are deemed to be broadly comparable with each other. In each case, a rating of 5 represents the highest ranking group, whilst a rating of 1 represents the lowest ranking group.

It must be stressed that in arriving at each of the Fund Ratings published in this report, AKG has considered the full range of criteria detailed above. Considerable judgment is often required to assess the appropriate rating for a fund, particularly in situations where a fund exhibits a mixture of characteristics, some strong and some weak.

AKG With Profits Fund Ratings

AKG Rating (out of 5)

Financial Future Company Fund Strength Performance Transparency

AEGON Ireland plc With-Profits Growth Fund 3 5 5 With-Profits Cautious Fund 3 3 5

Aviva Life International Ltd Sterling With-Profit Fund 4 5 4 Sterling With-Profit Guarantee Fund 4 4 4 Sterling With-Profit Inflation Protected 4 4 4 Guarantee Fund

AXA Isle of Man Ltd International With Profits Bond Series 1 4 3 3 International With Profits Bond Series 2 4 3 3 International With Profits Bond Series 3 4 4 3

CMI Insurance Company Ltd Sterling OWP Funds 3 3 2 Sterling Guaranteed Growth Funds 1-6 3 3 2 Sterling Guaranteed Growth Fund 7 3 2 2

Friends Provident International Ltd With Profits Bond Series 1 3 3 3 With Profits Bond Series 2 3 3 3 With Profits Bond Series 3 3 3 3 With Profits Bond Series 5 3 2 3 With Profits Bond Series 6 3 1 3

LCL International Life Assurance With-Profits Fund 3 4 2 Company Ltd

Prudential International Assurance plc PAC Sterling With-Profits Fund 5 4 5 PruFund Growth (Sterling) Fund 5 4 5 PruFund Protected Growth (Sterling) Fund 5 3 5 PruFund Cautious (Sterling) Fund 5 3 5 PruFund Protected Cautious (Sterling) 5 2 5 Fund

Scottish Mutual International Ltd With Profit Series 1 Fund 2 2 2 SMI With Profits Sterling Fund Series 1 2 2 1 SMI With Profits Sterling Fund Series 2 2 2 1 SMI With Profits Sterling Fund Series 5 2 2 1

About AKG

AKG is an actuarially based consultancy specialising in the provision of ratings, information and market assistance to the financial services industry.

Assistance to Provider Companies

AKG assists Providers in:  Financial Strength analysis, ratings and presentation  Data and information provision  Actuarial consultancy  Distribution consultancy

Assistance to Financial Intermediaries

AKG assists Intermediaries in:  Financial Strength analysis  Best Advice panel services  Data and information provision  Actuarial and technical support

Regular Reports

AKG publishes the following additional reports to assist Providers and Intermediaries:

AKG Company Profile & Financial Strength Reports Covering UK long term Insurers/Providers.

AKG Offshore Profile & Financial Strength Reports Covering offshore life assurance companies.

AKG Platform Profile & Financial Strength Reports Covering platform operations.

AKG UK Life Office With Profits Reports Designed to provide further depth in the assessment of with profits funds.

For futher details on any of the above please contact AKG:

AKG Actuaries & Consultants Ltd Anderton House 92 South Street Dorking Surrey RH4 2EW

Tel: +44 (0)1306 876439 or email [email protected].

Company

AEGON Ireland plc [Registered in Ireland]

Ownership

AEGON NV [Registered in the Netherlands]

Group Background

AEGON NV is one of the world's largest listed insurance groups, with assets of €404bn and around 26,000 employees worldwide at 30 September 2011. Its core business focus is on life, pensions and asset management, and profitably growing its business in existing and developing markets. It is also involved in accident and health insurance, general insurance and limited banking activities. Its three major markets are the US, Netherlands and UK, but in recent years it has expanded into new growth markets in Asia, Central & Eastern Europe and Latin America. In July 2008, AEGON announced its "Unlocking the Global Potential" strategy, which has three strategic priorities: to reallocate capital toward businesses with higher growth and return prospects; to improve growth and returns from existing business; and to manage AEGON as an international group. AEGON's ambition is to be a leader in its chosen markets by 2015. Impacted by the global credit crunch, AEGON NV received a capital injection of €3bn from the Dutch government in October 2008. Having successfully raised €1bn through a rights issue in July 2009, it repaid €1bn in December 2009, €0.5bn in August 2010, fully repaying the debt, including interest of €1.1bn, on 15 June 2011. Transamerica Reinsurance was sold to SCOR in August 2011. In September 2011, AEGON announced plans to restructure in Holland.

In January 2010 the remaining business in Scottish Equitable (Managed Funds) Ltd was transferred into Scottish Equitable plc. In the UK, AEGON now operates in the At Retirement and Workplace Savings markets, augmented by offshore investment through AEGON Ireland under the AEGON brand. Guardian Financial Services was sold to Cinven in November 2011 for £275m. In June 2010, as part of a decision to focus on core areas, the group announced a major re-structure and cost-cutting for the UK operation. This has since been followed, in September 2010, by the announced closure of six regional offices and, in September 2011, by further restructuring, including the closure of AEGON Direct. AEGON HS Admin, a specialist third party administrator of occupational pension schemes was sold and AEGON Benefit Solutions Ltd was closed in 2011. Other group entities include AEGON UK Distribution Holdings, which owns and invests in IFA firms such as Positive Solutions and Origen. Kames Capital (rebranded from AEGON Asset Management UK in September 2011) is a sister company of AEGON UK and one of the UK's largest providers of institutional and retail fund services.

Company Background

Scottish Equitable International (Dublin) plc, based in Dublin was launched in 2002 to complement its already established Luxembourg based sister company, Scottish Equitable International S.A., thereby expanding the investment opportunities and solutions that Scottish Equitable International could offer, particularly to investors in the UK. Following a decision to focus on the UK intermediary market, it became the main life company within the offshore division when Scottish Equitable International S.A. closed to new business in 2004. In 2006 the Luxembourg company was subsequently sold to La Mondiale Europartner (in which AEGON NV has a 35% shareholding).

Having changed its name to AEGON Scottish Equitable International plc in April 2007, it was changed to AEGON Ireland plc in December 2009 as the group refocused on its global AEGON brand. In 2010, the company's reporting line was changed from being through the UK to a direct relationship with AEGON NV.

The company plans to expand into other EU countries, whilst continuing to write substantial volumes of Variable Annuity and International Bond new business in the UK and Dutch markets. The volume of with profits bond business in force is very small, though. The company technically remains open to new with profits sales, but 2011 premiums amounted to only £59,000.

Company Financial Strength

The company continues to receive capital support from the parent group as required. Solvency levels reduced in 2010 but remained satisfactory. The company has seen its Board significantly strengthened whilst at the same time continuing to establish and develop its operation with substantially less reliance on the UK. AKG would expect further explicit parental support as the company develops is presence not just in the UK but also within a wider European context.

With Profits Bond Products Marketed

Product Available from/to Open to New Business? Flexible Investment Plan 28th February 2003-Present Nominally, but not seriously promoted

With Profits Fund Links Available (Sterling denominated)

Two fund choices were made available on the company’s Flexible Investment Plan: the With-Profits Growth Fund and the With-Profits Cautious Fund.

Reinsurance of With Profits Business

All of the company’s with profits bonds are wholly reinsured into the With Profits Sub-Fund (WPSF) of the sister company, Scottish Equitable plc.

Reinsurance Company

Scottish Equitable plc [Registered in Scotland]

Reinsurance Company Background

Scottish Equitable plc (SE plc), which commenced trading in January 1994, was formed as a result of a joint-venture between the mutual office Scottish Equitable Life Assurance Society (SELAS), whose origins date back to 1831, and AEGON NV. SE plc's operation is governed by a Scheme of Transfer, under which all the assets and liabilities of SELAS were transferred to SE plc on 31 December 1993. In 1999, AEGON's stake in the company increased to 100%. The company had a unit linked subsidiary, Scottish Equitable (Managed Funds) Ltd, to which it reinsured its unit linked life business. This business was transferred to the company in January 2010, following which Scottish Equitable (Managed Funds) Ltd was deregulated.

Reinsurance Company Financial Strength

The company continues to operate with a low level of statutory Pillar 1 solvency position, albeit with parental support, in the form of a £50m capital injection in December 2010 and £200m in 2011 together with an, as yet unutilised, £200m contingent loan agreement. At the parental level, the AEGON group has been under significant pressure in the last two years but, having repaid the Dutch Government, does now appear to be through the worst of this and is more advanced in identifying the risks and problem areas within its spread of constituents. In part, as a

result of this, the UK business has belatedly adopted a more focused approach, concentrating on a tighter set of product niche competencies, albeit in a competitive sector of the market, together with an ambitious cost reduction programme. This refocusing represents something of a risk, but, having rejected the option of either selling up or closing down, the group now needs to make it work. Continued disposals of specific business blocks as part of this refocusing cannot be ruled out.

Flexible Investment Plan Product Outline

The company started marketing Flexible Investment Plans on 28th February 2003, linked to the With-Profits Growth Fund and the With-Profits Cautious Fund.

Both these funds mirror internal linked ‘New Generation’ funds in Scottish Equitable plc. The unit liability under the business written into the funds below is wholly reinsured into Scottish Equitable plc, and is linked to the value of the assets in the Scottish Equitable plc funds. The death benefit for contracts investing in the fund is also reinsured, subject to a maximum of 1% of the unit liability reinsured for each contract.

Both funds invest in all major asset classes and regions. The Growth Fund has a greater proportion invested in equities than the Cautious Fund.

Investment gains and losses in the above funds are smoothed over time. An expected growth rate for each fund is set by the company. The smoothed value of the fund is determined on each business day by increasing the previous smoothed value by an average of the expected growth rate and the actual growth rate for each fund.

The unit price is determined by dividing the smoothed value of the fund by the total number of units in force. This is then adjusted by a proportion of any smoothing profits and losses arising in the funds as a result of the cancellation of units. Such profits or losses would arise where the smoothed value of the fund differs from the value of the assets to which the fund is linked, and where cancellations are made at the unit price.

However, the company reserves the right at its absolute discretion to apply a smoothing adjustment on any cancellation of units. Such an adjustment would not exceed the difference between the cancellation value calculated using the unit price, and the value of the assets to which the cancelled units are linked.

There are no investment guarantees for the funds and all investment and smoothing gains or losses are allocated to the policyholders investing in the funds. Thus the unit liability is set equal to the value of the assets to which the fund is linked.

Both funds have an ongoing annual management charge of 1.00%. There are no initial charges associated with investment in the funds. Any investment expenses associated with the funds may be deducted from the value of the funds from time to time.

Current Bonus Scales - Flexible Investment Plan

There is no concept of bonuses under the New Generation funds and a smoothed unit price is calculated on a daily basis, which depends on the actual return achieved relative to a published expected return plus the daily smoothing profits and / or losses that arise on claims.

The unit price can fall as well as rise. Expected long term growth rates are agreed for the fund. These can be varied prospectively but are currently 4% p.a., (Growth) and 3.5% p.a. (Cautious) (reduced with effect from 1st July 2012 from 8% and 7% p.a. respectively) before the deduction of any annual management charge. These rates are then converted to daily equivalent rates and compared with the actual earned rate on each day. The unit price then increases / decreases on a daily basis by the expected daily growth plus / minus 50% of the difference between the actual and expected growth less the daily equivalent rate of the annual management charge. The figure of 50% can be varied prospectively.

MVRs

The company states that no MVRs apply to this contract but claim values may be adjusted by ‘smoothing increases’ or ‘smoothing reductions’ in certain circumstances.

No smoothing adjustments will currently be made provided that the ratio of smoothed unit values to the unsmoothed unit values is in the range 80% to 130% (NB no claims fell outside this range during 2009 or 2010).

The company states that this is necessary to maintain fund stability and to ensure that payouts to policyholders are fair in all circumstances.

Guarantees

There are no investment guarantees on this bond.

Investment

With-Profits Growth Fund

This fund aims to achieve long-term growth by investing mainly in UK and overseas equities, but also in fixed interest securities.

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 53.5% 69.2% 68.3% 67.1% Overseas Equities 20.4% 17.7% 16.8% 15.7% Property 0.0% 0.0% 0.0% 0.0% Fixed Interest 14.7% 12.3% 13.0% 13.7% Cash 3.4% 0.4% 1.6% 3.5% Other 8.1% 0.4% 0.4% 0.0%

With-Profits Cautious Fund

This fund aims to achieve capital growth by investing mainly in a wide range of UK and overseas fixed interest securities but can also invest up to 50% in equities.

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 25.5% 35.1% 33.4% 30.9% Overseas Equities 9.7% 9.0% 8.2% 7.1% Property 0.0% 0.0% 0.0% 0.0% Fixed Interest 58.9% 54.9% 56.1% 59.3% Cash 2.1% 0.8% 2.2% 2.6% Other 3.8% 0.2% 0.2% 0.0%

Past Performance - Flexible Investment Plan

Payouts on Surrender Values at 1 April 2012 Fund Term (yrs) Freq Premium Payout With-Profits Growth Fund 2 Single £10,000 £10,200 With-Profits Growth Fund 3 Single £10,000 £10,600 With-Profits Growth Fund 5 Single £10,000 £11,900 With-Profits Growth Fund 10 Single £10,000 £14,500 With-Profits Growth Fund 15 Single £10,000 £17,600

Investment Returns

Fund 2007 2008 2009 2010 2011 With-Profits Growth Fund 6.7% -10.1% 13.1% 10.7% 2.3% With-Profits Cautious Fund 4.8% -4.9% 9.5% 8.9% 3.7% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

AEGON and Scottish Equitable generally provide a good range of information to policyholders. The annual report to policyholders on compliance with the PPFM is good and the company generally provides detailed quarterly factsheets for each of the with profits sub-funds on its website.

Scottish Equitable’s PPFM document is surprisingly concise, given the complexity of the sub-fund arrangements within the WPSF. This probably reflects the high degree of discretion retained by the company on the older series of with profits sub-funds. The New Generation With Profits Funds were designed with transparency very much in mind. Quarterly factsheets ensure that performance can be closely monitored.

The Scottish Equitable Policyholders Trust Ltd, which effectively acts as a corporate With Profits Committee, provides an element of independent review of Scottish Equitable’s with profits activities, and its membership no longer includes any current AEGON UK executives.

AEGON co-operated fully with AKG in the production of this report.

With-Profits Growth Fund 5 With-Profits Cautious Fund 5

Future Performance

With-Profits Growth Fund 5

The future performance of the fund is largely dependent on the investment return on the assets backing the liabilities.

Whilst the offshore variant of the fund is very small, AKG feels that the future performance potential is good, given the substantial proportion of equities backing the fund.

With-Profits Cautious Fund 3

The future performance of the fund is largely dependent on the investment return behind the assets backing the liabilities. The main objective of this fund is to provide income and stable and predictable returns. The offshore variant of the fund is very small.

With Profits Financial Strength

3 AEGON Ireland only has a very small volume of with profits business in force, and, whilst nominally open to new with profits business, it is not seriously promoted and hence hardly any new business is currently being written.

The notes to the realistic balance sheet for the Scottish Equitable With Profits Sub-Fund as at 31 December 2011 reveal that, if the estate were not recognised as a realistic liability (as required by current actuarial guidance), working capital within the fund would have been £284m [2010: £358m, 2009 £413m, 2008: £378m; 2007: £389m], whilst the RCM would have been £nil [2010: £89m, 2009: £174m, 2008: £285m; 2007: £153m]. The working capital ratio would have been 4.3% [2010: 5.4%, 2009: 6.2%, 2008: 5.3%, 2007: 4.9%]

Scottish Equitable plc has carried out a de-risking exercise in the estate in recent years, which is reflected in the decrease in the RCM. This involved selling equities and corporate bonds and replacing them with gilts. Additionally, the fund has put in place a range of derivative protections. The fund remains secure and the company continues to manage the various risks and guarantees appropriately, distributing the estate as the fund runs off. Surrenders remained relatively high (and increased) and may dictate the pace of this distribution.

Assets in the Scottish Equitable plc NPSF and shareholder's fund are available to support WPSF solvency should there be insufficient assets within the fund to cover its liabilities and vice versa.

Company

Aviva Life International Ltd [Registered in Ireland]

Ownership

Aviva plc [Registered in England and Wales]

Group Background

Aviva, one of the world's largest insurance groups, operates in 21 countries in Europe, Asia Pacific and North America with the provision of long term savings, fund management and general insurance. Funds under management worldwide totalled £337bn at the end of 2011 [2010: £402bn]. Life insurance currently accounts for around 69% of the group's operating profits.

The UK operation rebranded itself Aviva, from Norwich Union, in June 2009, following a programme which had seen the Aviva brand already adopted in most other countries. A number of UK operating companies also took the Aviva name.

In March 2007 Aviva announced an administration outsourcing agreement with Swiss Re, under which 220 systems were decommissioned, with migration taking place between 2007 and 2010.

2009 also saw policyholder approval for the reattribution of the inherited estate of the with profits funds of CGNU Life Assurance Ltd (CGNU) and Commercial Union Life Assurance Company Ltd (CULAC) and this was followed, in October 2009, by the transfer of business of CGNU, CULAC and Norwich Union Life (RBS) Ltd into Aviva Life and Pensions UK Ltd (AVLAP).

At a global level, Aviva has made various disposals in recent years including the sale of its Australian business (including Navigator, its Australian wrap business), a partial IPO of Delta Lloyd (which raised €1.1bn), and the RAC (raising a further £1bn). It exited from 6 markets in 2011 (Australia, the UAE, Hungary, Romania, the Czech Republic and Slovakia).

These disposals reflect the group’s focus on investing its capital where it believes it can grow and earn the highest returns. In 2011 it allocated capital to what it deemed to be more profitable areas, such as unit linked and term assurance, and away from more capital intensive products such as with-profits in Europe.

Reported IGD solvency surplus fell back noticeably in 2011 to £2.2bn [2010: £3.8bn], although it had recovered to £3.2bn by the end of March 2012, as a result of market movements and actions taken in 2012.

The Group is currently searching for a new CEO, and in July 2012 it announced the results of a strategic review of all its businesses, with three main objectives – to narrow focus, build financial strength and to improve financial performance. It announced plans to dispose of 16 non-core segments out of the current 58 business segments it has – being those ‘that are currently producing or will prospectively produce returns below the group’s required return’. It is not yet clear whether Aviva Life International is one of the 16 planned disposals.

Company Background

The company was launched as Norwich Union International Ltd in 2000 by Norwich Union, prior to its merger with CGU, to provide investment products and services to investors who wished to have the tax benefits of international offshore investment. The merger of Norwich Union and CGU resulted in the formation of CGNU. In July 2002, CGNU plc was renamed Aviva plc.

The company wrote business in the UK, Italy and Spain on a freedom of services basis, and

through intermediaries in the Isle of Man and Channel Islands, and to expatriates in the Middle East. In 2001, its funds were made available in Ireland via a reinsurance link with Hibernian Life & Pensions Ltd, it decided to limit its presence in Spain, and it withdrew from the Middle East.

In 2002, the company decided to focus on the UK offshore market and it discontinued writing new business in Italy and Spain. It launched a sterling with profits bond to the UK offshore market, reinsured into Aviva’s UK with profits funds.

In 2003, the company added Euro and US Dollar variants of its with profits bond. In 2004 it launched Sterling, Euro and US Dollar versions of a new product called the Core Funds Bond, which allowed access to both unitised with profits and unit linked funds in the same policy.

In June 2009, when the UK operation rebranded itself as Aviva, the company was renamed as Aviva Life International Ltd.

Following a severe downturn in the offshore life market in 2009, and a significant decrease in sales, the company was closed to new business from 26 February 2010 and administration of the closed book was outsourced to Capita Life & Pensions (Ireland) Ltd, with systems migration being completed early in 2011.

Company Financial Strength

As a result of the severe downturn in its chosen market the company remained sub-scale in terms of its parent's aspirations for size and competitive position in each of its chosen markets. The company is therefore now in run-off mode, with a drastically pruned infrastructure. Presumably there is a high probability that it is one of the 16 non-core operations earmarked for disposal by Aviva following its July 2012 strategic review announcement.

AKG has not yet been able to obtain copies of the 2011 accounts for the company. Despite a capital contribution of €14.3m in 2009, shareholders’ funds reduced from €41.5m at the end of 2008 to €12.6m at the end of 2010, following losses incurred in both 2009 and 2010. The position should however have become more stable following the completion of the migration of systems to Capita in early 2011. Around 50% of the company’s business is reinsured to AVLAP.

A €50m contingent loan facility from Aviva specifically to fund new business strain was in place and as at December 2010 the amount outstanding stood at €17.2m.

With Profits Bond Products Marketed

Product Available from/to Open to New Business? International With-Profit Bond 30 Sep 2002 - 28 Feb 2010 No* * Ignoring top ups by existing customers

With Profits Fund Links Available (Sterling denominated)

Fund Available from/to Open to New Business? Sterling With-Profit Fund 30 Sep 2002 - 28 Feb 2010 No* Sterling With-Profit Guarantee Fund 7 Feb 2005 - 29 Jan 2006 No* Sterling With-Profit Inflation Protected 30 Jan 2006 - 30 Apr 2009 No* Guarantee Fund * Ignoring top ups by existing customers

Reinsurance of With Profits Business

All of Aviva Life International Ltd’s with profits policies are reinsured into the UK sister company, Aviva Life & Pensions UK Ltd. The returns on the business are therefore determined entirely by the terms of this reinsurance agreement.

On 1 October 2009, the insurance businesses of CGNU and CULAC (which previously reinsured the business) were transferred into Aviva Life & Pensions UK Ltd. As a result, all of Aviva Life International Ltd’s with profits policies are now reinsured into Aviva Life & Pensions UK Ltd.

As a result of the 2009 election:

 Eligible bonds whose holders voted ‘yes’ are reinsured into the Aviva Life & Pensions New With-Profits Sub Fund.  Eligible bonds whose holders voted ‘no’ are reinsured into the Aviva Life & Pensions Old With-Profits Sub Fund.  Ineligible bonds, including bonds written after 1 October 2009, are reinsured to both the Old and New With-Profits Sub Funds (in prescribed proportions).

Reinsurance Company

Aviva Life & Pensions UK Ltd [Registered in England and Wales]

Reinsurance Company Background

Norwich Union Life Insurance Society was established as a mutual in 1808.

In 1997, the Society demutualised, the bulk of its business being transferred to Norwich Union Life and Pensions Ltd - renamed Aviva Life & Pensions UK Ltd in June 2009. In 2000 Norwich Union merged with CGU (itself the combination of Commercial Union and General Accident in 1998) to form CGNU.

In 2005, the non profit long term funds of Norwich Union Linked Life Assurance Ltd, Fidelity Life Assurance Ltd, Tesco Personal Finance Ltd, CGU Insurance plc and Yorkshire Insurance Company Ltd were transferred into AVLAP, together with PHI business from CGNU and Commercial Union Life Assurance Company Ltd and former Provident Mutual business.

Further group restructuring saw, in October 2009, the business in both CGNU and CULAC transfer to AVLAP, followed, in December 2009 by Hamilton Life and in September 2011, by the business of National Westminster Life Assurance Ltd and Royal Scottish Assurance plc.

Reinsurance Company Financial Strength

The consolidation of CGNU and CULAC into AVLAP resulted in a life office of considerable size, with assets in excess of £89bn at the end of 2011. Financial reinsurance is running off and the company is maintaining a good level of solvency. It is operating profitably and resumed paying dividends in 2010 (£515m in 2010 and £235m in 2011).

Whilst the company and wider group face significant challenges stemming from both Solvency II and the Retail Distribution Review (RDR), with the possibility that these are accentuated by the scale and the complex historical evolution of the group, it retains a good degree of inherent strength.

Further, whilst painful in the short term, these major regulatory and market changes may well, in combination with the organisation's financial scale, position it positively for significant opportunities in the medium to long term.

International With-Profit Bond Product Outline

The International With-Profit Bond is a medium to long term single premium unitised with profits life assurance investment bond which offers the tax advantages of a Dublin-based bond combined with a range of selected funds, including a choice of guarantee options.

Due to Aviva Life International's Dublin location, the underlying funds are subject only to

withholding tax. Investments therefore have the potential to grow faster than in an onshore bond. The International With-Profit Bond offered a choice of fund links:  Three different funds with differing guarantee options - With-Profit Fund, With-Profit Guarantee Fund and With-Profit Inflation Protected Guarantee Fund  Three different currencies - Sterling, Euro and US Dollar

The main features include:  Guarantee options – a 10 year spot guarantee on the With-Profit Fund; a 5 year spot guarantee on the With-Profit Guarantee Fund and an inflation-linked guarantee at any time after five years on the With-Profit Inflation Protected Guarantee Fund  Regular withdrawals of up to 7.5% of the original investment, free of any early cash-in charges  One-off withdrawals permitted (minimum £1,000, €1,500 or US$1,500)  Death benefit 101% of surrender value (but with no MVR applied)  Minimum initial investment - £50,000, €75,000 or US$75,000  Top-ups not allowed

From 2004, the company also marketed an International Core Funds Bond, a single premium unitised investment bond linked to a range of ‘Core Funds’ including Sterling, Euro and Dollar With-Profit Funds. Its terms are virtually identical to those of the International With-Profit Bond, apart from the wider range of fund links and the fact that, as well as the life assurance basis, it offered a capital redemption option with a term of 99 years, suitable for trust investments. Where relevant, therefore, the remainder of this report applies equally to the International Core Funds Bond linked to the Sterling With-Profit Funds.

Current Bonus Scales - International With-Profit Bond

Annual Bonus Rates 1/1/2012 1/1/2011 Sterling International With-Profit Bond 2.75% 3.50%

Terminal Bonus Rates Year of unit Declared rate 1/1/12 Declared rate 1/7/11 Declared rate 1/1/11 purchase 2011 0% 1.75% 1.75% 2010 0% 5% 0% 2009 9% 16% 11% 2008 0% 2% 0% 2007 0% 0% 0% 2006 0% 0% 0% 2005 0% 4% 0% 2004 8% 15% 10% 2003 15% 22% 18% 2002 7% 14% 9%

MVRs

MVRs may be used to target payouts (after MVR) that represent 100% of the asset share less any required deductions to protect the interests of remaining policyholders on average. Payouts for individual policies may fall within the range 90% to 110% of asset share mainly as a result of accommodating short term market fluctuation. The company will look to rebalance MVR rates back to target payouts (after MVR) that represent 100% of asset share when there is a 5% movement in underlying market indicators and some sign of stability at that new level. However, payouts may lie outside these ranges on certain policies or in changing investment conditions. MVRs are currently determined by calendar month of unit purchase for life products.

In deciding on the application of an MVR, factors taken into account include:  The gap between the value of units (including final bonus).  The underlying value of investments supporting the plan.  The number and level of surrenders being experienced.

 An element of smoothing, taking into account the cost or surplus to the fund.  PRE as established by policy literature, statements and other communications.  The policy conditions.  The amount of the adjustment.  Regulatory solvency positions/scenarios.

In June 2005, AVLAP announced that it would in future write to policyholders whose policy includes an MVR free date, three months prior to that date. It also announced the facility whereby policyholders could carry forward to a later date the value of any MVR free guarantee until such time as they decide to cancel the policy.

MVRs are not applied on death or on regular withdrawals of up to 7.5% of the original investment.

In 2011, MVRs were applied for certain years of entry throughout the year.

Guarantees

Sterling With-Profit Fund

The guarantee offered by this fund is a guarantee that on the tenth anniversary (or during the following two weeks), the surrender value of a bond will be not less than the original investment.

Sterling With-Profit Guarantee Fund

The guarantee offered by this fund is a guarantee that on the fifth anniversary (or during the following two weeks), the surrender value of a bond will be not less than the original investment. Policies are subject to an additional 0.5% p.a. charge to asset shares for the first five years. Any profit or loss accrues to the inherited estate.

Sterling With-Profit Inflation Protected Guarantee Fund

The guarantee offered by this fund is an inflation protected guarantee, guaranteeing at least the initial investment increased in line with the RPI/CPI on surrender or death at any time after the fifth anniversary.

Policies are subject to an additional 0.5% p.a. charge to asset shares for the first ten years. Any profit or loss accrues to the inherited estate.

Investment

A single investment pool is maintained by AVLAP for the asset shares of UK and Channel Islands business in the Old and New With-Profits Sub Funds and the Stakeholder With Profits Sub Fund (including Sterling reinsurance business accepted from Aviva Life International Ltd).

The tables below shows the asset mix attributable to the asset shares of Sterling with profits business (figures are for CGNU and CULAC prior to the transfer to AVLAP). At the end of December 2011, the EBR was 63.7%, after falling to 55.7% at the end of 2008.

Sterling With-Profit Fund

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 24.2% 23.1% 32.2% 31.2% Overseas Equities 13.6% 16.6% 15.9% 14.2% Property 17.9% 17.6% 18.6% 18.3% Fixed Interest 42.5% 34.2% 31.1% 32.0% Cash 1.8% 8.5% 2.2% 4.3% Other 0.0% 0.0% 0.0% 0.0%

Sterling With-Profit Guarantee Fund

This fund was launched in February 2005, since when it has shared the same asset allocation as the other Sterling business in the parent fund. The company reserves the right to use a different asset mix in the future, however. Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 24.2% 23.1% 32.2% 31.2% Overseas Equities 13.6% 16.6% 15.9% 14.2% Property 17.9% 17.6% 18.6% 18.3% Fixed Interest 42.5% 34.2% 31.1% 32.0% Cash 1.8% 8.5% 2.2% 4.3% Other 0.0% 0.0% 0.0% 0.0%

Sterling With-Profit Inflation Protected Guarantee Fund

This fund was launched in February 2007, since when it has shared the same asset allocation as the other Sterling business in the parent fund. The company reserves the right to use a different asset mix in the future, however. Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 24.2% 23.1% 32.2% 31.2% Overseas Equities 13.6% 16.6% 15.9% 14.2% Property 17.9% 17.6% 18.6% 18.3% Fixed Interest 42.5% 34.2% 31.1% 32.0% Cash 1.8% 8.5% 2.2% 4.3% Other 0.0% 0.0% 0.0% 0.0%

Past Performance - International With-Profit Bond

The company declined to disclose any specimen past performance values to AKG.

Investment Returns

Fund 2007 2008 2009 2010 2011 Sterling With-Profit Fund 5.4% -16.1% 9.2% 12.6% -1% Sterling With-Profit Guarantee Fund 5.4% -16.1% 9.2% 12.6% -1% Sterling With-Profit Inflation Protected 5.4% -16.1% 9.2% 12.6% -1% Guarantee Fund Note: Returns shown above are investment returns gross of tax (where applicable) and charges.2011 returns are estimated.

Transparency

Aviva Life International Ltd issues PPFM and CFPPFM documents in its own right. The former document highlights for the International business the small number of variations which apply from the practices detailed in AVLAP’s PPFM for its Old and New With-Profits Sub Funds.

Aviva reissues its consumer friendly PPFMs to policyholders every year, including a detailed investment report and performance analysis. It publishes a comprehensive audit trail of changes to its PPFM documents, and its documents are written in a clear and concise style. Minor issues are that the annual report to with profits policyholders on compliance with the PPFM is relatively brief, and that the release of mid-year asset mix information is very patchy.

Aviva’s With Profits Committee now has a majority of completely independent members.

Whilst Aviva UK is generally very co-operative in providing information to AKG, Aviva International declined to co-operate with AKG’s information survey in connection with the preparation of this report.

Sterling With-Profit Fund 4 Sterling With-Profit Guarantee Fund 4 Sterling With-Profit Inflation Protected Guarantee Fund 4

Future Performance

Although Aviva Life International Ltd is now closed to all types of new business, its with profits bond business should benefit from the fact that it is reinsured into AVLAP’s Old and New With-Profits Sub Funds, which remain open to new business, as long as the same asset mix continues to apply to all types of Sterling with profits business within these funds.

In view of the reinsurance arrangements in place, it is appropriate to ‘look-through’ to the position within AVLAP’s Old and New With-Profits Sub Funds.

The future performance prospects for a policy reinsured to the Old With-Profits Sub Fund are expected to be slightly better than that for an equivalent one reinsured to the New With-Profits Sub Fund to the extent of any distribution of the Old With-Profits Sub Fund inherited estate - the policyholder in the New With-Profits Sub Fund having already benefited from the reattribution payment. However, the quantum and timing of any such distribution is unknown - other than not being expected to happen in the short to medium term.

There has been a reduction in EBR in the last couple of years, but AKG would not anticipate any further substantial reductions, assuming that the increased potential for conflict of interest (noted in the reattribution scheme documentation) does not drive the Old and New With-Profits Sub Funds to maintain a lower EBR.

Whilst AVLAP has remained fairly committed to the with profits concept in recent years, the group’s focus on investing its capital where it believes it can grow and earn the highest returns has led to a shift of capital away from more capital intensive products such as with-profits in Europe.

Sterling With-Profit Fund 5

Sterling With-Profit Guarantee Fund 4

The performance of the fund is likely to lag that of its parent fund, given the presence of the additional 0.5% charge over the first five years.

Sterling With-Profit Inflation Protected Guarantee Fund 4

The performance of the fund is likely to lag that of its parent fund, given the presence of the additional 0.5% charge over the first ten years.

With Profits Financial Strength

4 Aviva Life International is closed to new business, and there is a big question mark over its future within the Aviva group following Aviva’s July 2012 strategic review announcement.

In view of the reinsurance arrangements in place, though, it is appropriate to also ‘look-through’ to the position within AVLAP’s Old and New With-Profits Sub Funds.

The strength of AVLAP’s Old and New With-Profits Sub Funds derives from the strength of the predecessor CGNU and CULAC with profit funds. Their strength had reduced substantially prior to the reattribution, due to the impact of the group's £2.1bn Special Bonus declaration and the significant investment market falls in 2008. Nevertheless, the realistic balance sheet for the Old With-Profits Sub Fund at the end of 2011 reveals a working capital ratio of 7.5% [2010: 6.6%] and an RCM coverage of 3.3 times [2010: 3.8 times] - both measures being slightly higher than

those of the NWPSF due to the retention of the appropriate proportion of the inherited estate within this fund at the time of the reattribution exercise. The realistic balance sheet for the New With-Profits Sub Fund at the end of 2011 reveals a working capital ratio of 4.8% [2010: 5.1%] and an RCM coverage of 2.6 times [2010: 2.6 times].

AVLAP now has a very substantial presence in the UK with-profits market, and it remains an active writer of new with profits business. Whilst the Old With-Profits Sub Fund is much smaller than the New With-Profits Sub Fund, their fortunes are inextricably linked, due to the arrangements for the sharing of new business and the intention to maintain the same investment strategies. Hence both funds play an important part in Aviva's current strategy.

The part of the inherited estates of CGNU and CULAC which were transferred to AVLAP's Non Profit Sub Fund (the RIEESA) is not immediately available for distribution to shareholders, instead it is 'locked-in' to provide support for the transferring with profits policies in the Old and New With-Profits Sub Funds. The funds make no recourse to capital outside the long-term fund.

Company

AXA Isle of Man Ltd [Registered in the Isle of Man]

Ownership

AXA SA [Registered in France]

Group Background

AXA is a worldwide insurance group operating in 57 countries with assets under management of around €1trn at 31 December 2011. Its key markets are in Western Europe, North America and Asia-Pacific. It now employs around 163,000 people including tied agents and salesforces.

AXA originates from the amalgamation of several French regional mutual insurance companies and it has operated under the AXA name since 1985. Following a series of acquisitions, its 1997 merger with UAP saw it significantly increase in size. The group has continued to regularly acquire and sell off subsidiary companies, including financial advisory networks, banking, health and insurance operations. Having recently strengthened its position in Central and Eastern Europe, AXA is looking to do the same in Asia-Pacific.

In 2006, AXA acquired the Swiss financial services group Winterthur (which had its own highly regarded UK subsidiary operation). Winterthur Swiss Insurance purchased 25% of Provident Life in 1969 (100% from 1981) and renamed it Winterthur Life UK Ltd in 1995. In 1997 the Winterthur Group merged with Credit Suisse Group and in June 2000 Winterthur Life UK Ltd acquired the UK business of the Australian insurer Colonial Life, comprising Colonial Life (UK) Ltd and Colonial Pension Funds (UK) Ltd.

July 2008 saw the bringing together of the AXA and Winterthur Wealth Management operations under the AXA Winterthur Wealth Management brand. In November 2006 AXA acquired a controlling interest in IFA Thinc Group Ltd and in 2008 it acquired the SBJ Group. These organisations were brought together and re-branded as Bluefin during 2009.

On 16 September 2010, AXA Sun Life Holdings Ltd was acquired by Resolution Ltd which also acquired Winterthur Life UK Ltd in late 2011, following a post-completion reorganisation. The deal, costing around £2.75bn, involved most of AXA's UK Life Insurance business and the transfer of around 2,200 staff.

AXA now operates in the UK as a much smaller but more focused entity, trading as AXA Wealth, complemented by AXA Bancassurance and Sun Life Direct. Winterthur Pension Funds UK Ltd was renamed as AXA Wealth Ltd in September 2010 and it became AXA's sole UK life company in late 2011, when it received a transfer of unit linked Wealth business from Winterthur Life UK Ltd (i.e. the with profits and other legacy business of Winterthur Life UK Ltd was transferred to Resolution).

AXA Isle of Man Limited is part of the AXA Wealth Division. Its target market is high net worth UK residents and UK ex-pats serviced by fully regulated IFAs in the UK, Channel Islands and the Isle of Man. It operates alongside its Dublin based sister company, AXA Life Europe Ltd.

Company Background

The company was established in 1991 and commenced business in 1992 as Sun Life International (IOM) Limited. In 2000, a review of operations following the merger of AXA Equity and Law with Sun Life in the UK led to the company ceasing to operate through 'international' IFAs, and only selling via IFAs in the UK, Channel Islands and the Isle of Man.

In 2001, the company was renamed AXA Isle of Man Limited. Sales commenced through carefully selected representatives of AXA’s UK direct sales force in 2002, although these have remained a small proportion of the business.

When established, the company was owned 80% by the Long Term Business Fund of Sun Life Assurance Society (in effect the With Profits policyholders) and 20% by PanEuroLife. In 1998, AXA sold PanEuroLife, and ownership became 100% by the SLAS Long Term Business Fund.

On 1 January 2004, the AXA shareholders bought the company from the SLAS Long Term Business Fund.

Company Financial Strength

The company is well established, with long term assets of over £7.5bn at the end of 2011, and a leading market position. It sits as an integral component of AXA's future plans, in the UK and wider markets, within the recently restructured and re-invigorated AXA Wealth brand. It operates profitably, maintains a good level of solvency and has recently commenced paying dividends to its parent. It continues to enjoy a good level of parental support and AKG would expect this to continue.

With Profits Bond Products Marketed

Product Available from/to Open to New Business? International With Profits Bond Series 1 2 Jul 1998 – 17 Jul 2001 No* International With Profits Bond Series 2 12 Jul 1999 – 3 Sep 2001 No* International With Profits Bond Series 3 23 May 2001 – 2 Aug 2002 No* * Ignoring sales to/top ups by existing customers

With Profits Fund Links Available (Sterling denominated)

Series 1 & 2: Reinsured to Friends Life Assurance Society Ltd With Profit Fund Series 3: Reinsured to Friends Life Company Ltd Old/New With Profits Funds*

*The New With Profits Fund was established in April 2001, in connection with the financial reorganisation of AXA Sun Life and AXA Equity & Law, and the consequential reattribution of the inherited estate.

Existing policyholders who had eligible with profits policies were able to elect to have their policies allocated to the New With Profits Fund. Policyholders who chose not to elect their policies from 1 April 2001 were offered a further opportunity to elect them from 1 January 2002.

Following both election opportunities, with profits policies that were in force on 1 April 2001 and were not elected policies were allocated to the Old With Profits Fund.

New with profits business written since April 2001 has been allocated to the New With Profits Fund, with around 13% being reinsured to the Old With Profits Fund.

Reinsurance of With Profits Business

All of AXA Isle of Man’s with profits business is reinsured 100% to either Friends Life Assurance Society Ltd (FLAS) - previously called Sun Life Assurance Society - or Friends Life Company Ltd (FLC) - previously called AXA Sun Life – which now are both owned by Resolution.

In general, business written before the 2001 transfer of AXA Equity & Law Life Assurance Society’s business into AXA Sun Life is reinsured to FLAS. Business post this transfer is reinsured into FLC, apart from capital redemption business, which is reinsured into FLAS.

Reinsurance Company

Series 1 & 2: Friends Life Assurance Society Ltd; Series 3: Friends Life Company Ltd [Both registered in England and Wales]

Reinsurance Company Background - Friends Life Assurance Society Ltd

The company was established as Sun Life Assurance Society Ltd in 1810 and in 1900 it was the first company to offer contracts without medical examination. It has achieved several other notable firsts, for example in 1977 it was the first established office to offer unit linked business, in 1979 the first office to launch a Distribution Fund and in 1984 the first office to offer unitised with profits for both life and pension contracts.

In 1995, it became a member of the UAP Group, which in turn became part of the AXA Group in 1997. The company remained the main writer of annuity new business in the AXA group until July 2004, when AXA Sun Life (now Friends Life Company Ltd - FLC) started to provide all vesting pensions annuities. The company continues to accept incremental new business on in-force business including new members to group schemes.

The company reinsures the bulk of its unit linked business (£7.3bn) to FLC, in addition to 100% of all life annuities and 50% of most pension annuities. A further 47.5% of pension annuity liabilities were reinsured external to the group in July 2010.

In August 2009 the company announced the closure of its with profits fund to new business.

The company became a wholly owned subsidiary of Friends Provident Life and Pensions Ltd in March 2011 when it was acquired by Resolution. It subsequently changed its name to Friends Life Assurance Society Ltd.

Reinsurance Company Financial Strength – Friends Life Assurance Society Ltd

Solvency coverage reduced slightly in 2011, with reduced free assets (although less reliance on financial engineering), and CRR coverage also fell back slightly. The company had earlier reported that conditions during 2008 led to it failing to cover its Pillar 2 ICA position as at 31 December 2008. However, following a period of extensive de-risking, including a reduction in equities, a data cleanse of its annuity business, a loan restructuring and the annuity reinsurance introduced in 2010, the position was restored by June 2009 and has been maintained thereafter. The year saw a transfer of £17.2m [2010: £16.5m] from the Long Term Fund to the Shareholder Fund.

The company reported an after-tax profit in 2011 of £22m [2010: £22m]. An interim dividend of £30m was paid [2010: £30m], with a further interim dividend of £30m declared in March 2011. Total assets increased by 1.2% despite the company continuing to experience a net outflow of business of £587m [2010: £518m]. Gross premiums fell 8%, to £316m. Some or all of the business in FLAS is expected to transfer to either Friends Life Ltd or Friends Life and Pensions Ltd in 2012 and AKG regards this business as secure.

Reinsurance Company Background - Friends Life Company Ltd

The company started trading as AXA Sun Life plc (ASL) in 1997, following the merger of the AXA and UAP insurance groups, as the main vehicle for AXA’s new life business in the UK. In its early days, the company was inextricably linked with AXA Equity & Law Life Assurance Society (AEL), whose origins dated back to 1844.

In 1987, Equity & Law Life had been acquired by Compagnie du Midi (which then merged with AXA in 1988). Initially, all ASL new with profits business was reinsured into AEL but in April 2001 all of AEL’s assets and liabilities were transferred into ASL, following a high profile court case concerning the attribution of the inherited estate. ASL wrote virtually all of AXA’s UK new long-term business and in January 2007 AXA transferred the business of Sun Life Unit Assurance, Sun Life Pensions Management and PPP lifetime care into ASL.

September 2008 saw ASL take ownership of AXA Annuity Company Ltd (AAC - which converted to an ISPV in October 2008), a vehicle into which it reinsures £3.6bn of its annuity liabilities. Legacy business was outsourced to Capita in 2008.

In September 2010, the company was acquired by Resolution and in March 2011 it was renamed Friends Life Company Ltd, becoming a wholly owned subsidiary of Friends Provident Life and Pensions Ltd. (At the same time, AAC was renamed Friends Annuities Ltd).

Two blocks of business (involving assets of £1.1bn) within the company were transferred back to the AXA Group during 2011.

Reinsurance Company Financial Strength – Friends Life Company Ltd

2011 saw pre-tax profit in the company increase from £37m in 2010 to £336m, largely driven by the gain on the transfer of business back to AXA Wealth together with a change in methodology to recognise negative reserves on protection business. Following the acquisition by Resolution the group rationalised its funding structures and the company paid dividends of £985m in 2011 [2010: £598m]. The company also repaid £77m against its outstanding contingent loan. Free assets improved, albeit CRR coverage fell slightly following a reduced reliance on financial engineering. The year also saw the transfer of £500m [2010: £1bn] from the Long Term Fund to the Shareholder Fund as a result of a five year test required under the 2001 Re-attribution Scheme.

AKG would expect the company to receive any necessary support from its new parent, albeit some or all of the business in FLC is expected to transfer to either Friends Life Ltd or Friends Life and Pensions Ltd in 2012 in 2012.

International With Profits Bond (Series 1 or 2) Product Outline

The International With Profits Bond Series 1 or 2 is a single premium unitised with profits 99 year capital redemption investment bond, issued in Sterling.

A percentage of the single premium received is invested in a unitised with profits fund. The percentage invested varies with the size of the single premium.

The unit offer price is increased by any regular bonuses added by the company.

On death or on surrender a terminal bonus may be added to the bid value of units to reflect the smoothed actual investment return achieved on the assets backing the plan. An MVR reduction may be made on surrenders.

On maturity after 99 years, the value payable is the bid value of units, with a guaranteed minimum of twice the original premium reduced by any withdrawals.

The main features of the Sterling version include:  Each plan comprises up to 100 policies.  For earlier versions, from the 6th year and annually thereafter, a loyalty bonus is added to the bond in the form of additional units.  Guarantees – On maturity after 99 years, the value payable is guaranteed to be at least twice the original premium reduced by any withdrawals. The surrender value basis is not guaranteed.  The benefit payable on surrender is the bid value of units allocated at the time, less, during the first 5 years, a discontinuance charge.  Regular withdrawals of up to 7.5% of the original investment, free of any early cash-in charges (except in year 1).  Death benefit 101% of the bid value of units  Minimum initial investment - £15,000  Additional single premium top-ups allowed.

International With Profits Bond (Series 3) Product Outline

The International With Profits Bond Series 3 is a single premium unitised with profits life assurance investment bond, issued in three different currencies - Sterling, Euro and US Dollar.

A percentage of the single premium received is invested in a unitised with profits fund. The percentage invested varies with the size of the single premium.

The unit offer price is increased by any regular bonuses added by the company.

The main features of the Sterling version include:  Each plan comprises up to 100 policies.  For earlier versions, from the 6th year and annually thereafter, a loyalty bonus is added to the bond in the form of additional units.  Guarantees – on later versions, the MVR may be restricted on the 5th and 10th anniversaries to guarantee policyholders their original investment. Otherwise, the surrender value basis is not guaranteed.  The benefit payable on surrender is the bid value of units allocated at the time, less, during the first 5 years, a discontinuance charge.  Regular withdrawals of up to 7.5% of the original investment, free of any early cash-in charges (except in year 1).  Death benefit 100% of surrender value + £1 per segment  Minimum initial investment - £25,000  Additional single premium top-ups allowed.

Current Bonus Scales - International With Profits Bond

Annual Bonus Rates 2012 2011 Series 1 2.00% 2.00% Series 2 2.75% 2.75% Series 3 3.00% 3.00%

Terminal Bonus Rates – Series 1 Bonds effected Current TB rate 1998 40% 1999 35% 2000 25%

Terminal Bonus Rates – Series 2 Bonds effected Current TB rate Q1 2001 20% Q2 2001 25% Q3 2001 25% Q4 2001 30% Q1 2002 30% Q2 2002 30% Q3 2002 40% Q4 2002 40% 2003 40% 2004 30%

Terminal Bonus Rates – Series 3 Bonds effected Current TB rate Bonds effected Current TB rate Q1 2005 15% Q2 2001 15% Q2 2005 15% Q3 2001 15% Q3 2005 10% Q4 2001 25% Q4 2005 10% Q1 2002 25% Q1 2006 5% Q2 2002 25% Q2 2006 5% Q3 2002 35% Q3 2006 5% Q4 2002 40% Q4 2006 5% Q1 2003 45% Q1 2007 0% Q2 2003 45% Q2 2007 0% Q3 2003 40% Q3 2007 0% Q4 2003 35% Q4 2007 0% Q1 2004 30% Q1 2008 5% Q2 2004 25% Q2 2008 5% Q3 2004 25% Q3 2008 10% Q4 2004 20% Q4 2008 10%

MVRs

International With Profits Bond Series 1 and 2

An MVR is permitted if investment performance is lower than that reflected in the regular bonus already added. MVRs are applied on surrender and switches, but not on deaths or on regular withdrawals up to 7.5%. MVRs are worked on a case by case basis and depend on the difference between the surrender value and the asset share.

MVRs are not applied where either the value of the policy (before applying the MVR) is below a certain limit, or where the amount of the MVR is less than a certain limit.

MVR scales are not normally changed unless the amounts payable on surrender for a group of policies differs from the total asset share for that group by more than 2%. Large adjustments may be reflected in a series of small adjustments consistent with the smoothing policy.

In 2011, no MVRs were applied on Sterling International With Profits Bonds.

International With Profits Bond Series 3

An MVR is permitted if investment performance is lower than that reflected in the regular bonus already added. MVRs are applied on surrender and switches, but not on deaths or regular withdrawals up to 7.5%. MVRs are calculated on a case by case basis and depend on the difference between the surrender value and the asset share.

MVRs are not applied where either the value of the policy (before applying the MVR) is below a certain limit, or where the amount of the MVR is less than a certain limit.

For later versions, the MVR may be restricted on the 5th and 10th anniversaries to guarantee policyholders their original investment.

In 2011, no MVRs were applied on Sterling International With Profits Bonds.

Guarantees

International With Profits Bond Series 1 and 2

On maturity after 99 years, the value payable is guaranteed to be at least twice the original premium reduced by any withdrawals. The surrender value basis is not guaranteed.

Friends Life Assurance Society Ltd aims to control the risks relating to guarantees by ensuring that a substantial proportion of the assets backing with profits are invested in fixed interest securities. Guarantees are not currently explicitly charged for, effectively being charged to the estate, with any profits being distributed via uplifts.

International With Profits Bond Series 3

On later versions, the MVR may be restricted on the 5th and 10th anniversaries to guarantee policyholders their original investment, the cost of which is charged to asset shares for such policies. Otherwise, the surrender value basis is not guaranteed.

Investment

International With Profits Bond Series 1 and 2

For most types of policy within Friends Life Assurance Society Ltd, a common asset mix is assumed applicable in respect of asset shares, but policies with higher levels of guarantees have a lower (or zero in some cases) EBR.

The table below shows the average mix for assets backing asset shares for the whole FLAS With Profit Fund.

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 28.9% 35.2% 38.7% 37.4% Overseas Equities 9.2% 7.5% 7.5% 7.2% Property 8.6% 9.2% 7.4% 7.4% Fixed Interest 47.0% 33.6% 41.5% 46.8% Cash 6.3% 12.8% 4.9% 1.2% Other 0.0% 1.7% 0.0% 0.0%

International With Profits Bond Series 3

Friends Life Company Ltd adopts different asset mixes for different types of with profits business.

The table below shows the asset mix applicable to unitised with profits policies with no maturity date, including the Series 3 bonds.

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 47.0% 53.7% 50.7% 49.3% Overseas Equities 15.0% 14.0% 19.4% 18.2% Property 16.0% 15.6% 15.5% 16.5% Fixed Interest 19.6% 12.9% 14.2% 15.6% Cash 2.4% 3.3% 0.1% 0.4% Other 0.0% 0.5% 0.1% 0.0%

Past Performance - International With Profits Bond

Payouts on Surrender Values at 1 April 2012 Bond Type Term (yrs) Freq Premium Payout Series 3 10 Single £10,000 £17,352 Series 2 13.75 Single £10,000 £21,693 Series 1 13.75 Single £10,000 £21,667

Investment Returns

Fund 2007 2008 2009 2010 2011 Series 1 and 2 3.1% -12.6% 10.8% 10.9% 0.9% Series 3 4.8% -20.3% 15.3% 14.5% -1.5% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

AXA Isle of Man does not routinely publish much information about with profits business on its website, but the company co-operated fully with AKG in the preparation of this report.

However, much of the information about the management of this business derives from the reinsurance companies involved, and hence we comment below on the transparency of their with profits funds.

International With Profits Bond Series 1 Fund 3 International With Profits Bond Series 2 Fund 3

Since announcing the fund's closure to new business, Friends Life Assurance Society Ltd has not disclosed details of its formal run-off plan.

The annual report to policyholders does not contain a great deal of useful information at a detailed level, and the company somewhat glosses over the differential asset mixes applied to different types of business within the fund. The company does however publish asset mix information for the fund on a quarterly basis.

There is now some common ground in the make-up of the With Profits Committee with that of the other Resolution subsidiaries, and the extent of independent representation has increased. AKG would hope to see the standards of disclosure rise in due course to mirror the approach in those other companies.

International With Profits Bond Series 3 Fund 3

Compared with best practice, Friends Life Company Ltd does not publish a great deal of supplementary details in respect of its with profits business in the public domain. The annual report to policyholders is somewhat lacking in useful detail, and is symptomatic of most of the company’s documentation by making little distinction between the Old and New Funds, or between unitised and conventional business.

AKG believes that there is scope for improving the overall transparency of the company’s with profits business. There is now some common ground in the make-up of the With Profits Committee with that of the other Resolution subsidiaries, and the extent of independent representation has improved. AKG would hope to see the standards of disclosure rise in due course to mirror the approach in those other companies. The activities of the fund continue to be reviewed by the Monitoring Board and the Monitoring Actuary in accordance with the 2001 Reorganisation Scheme.

Future Performance

International With Profits Bond Series 1 Fund 3 International With Profits Bond Series 2 Fund 3

Recent payouts on Friends Life Assurance Society Ltd’s onshore UK with profits policies seem to have improved slightly relative to others in the market, but they are far from market leading, and the fund does not have a particularly high EBR. The company has indicated that uplifts from surplus funds and from miscellaneous profits in the future are likely to be modest. Policies with high guarantees (which are backed by higher than average fixed interest investments) have commensurately lower future performance prospects.

International With Profits Bond Series 3 Fund 4

The unitised business is substantially the larger part of the overall Friends Life Company Ltd fund and it has retained a very high EBR for the with profits bond business (84% at the end of 2011). Its performance for maturity values in recent years, particularly for policies written under the AXA Sun Life brand, has been improving, although rankings of specimen surrender values for onshore UK business are mixed.

If the company’s commitment to maintaining a high EBR is maintained, it is hoped that future prospects for policyholders will be quite rosy, particularly since the company states 'that it is likely in the long term we will be able to continue to pay significant uplifts on maturing policies' in respect of surplus assets and miscellaneous profits.

Policyholders in the Old With Profits Fund stand to benefit from Special Bonuses to a higher degree than those in the New With Profits Fund.

With Profits Financial Strength

4 Whilst with profits products are no longer offered by AXA Isle of Man, its in force with profits business enjoys the security of the company into which it is reinsured.

Ownership of the reinsurers has moved away from the AXA group, but their positioning within the Resolution stable provides a degree of comfort, although a degree of future restructuring seems likely.

International With Profits Bond Series 1 & 2 Funds Given the decline in new with profits business, Friends Life Assurance Society Ltd closed the fund to new business at the end of July 2009. Previously primarily a with profits office, non profit business now outweighs with profits business within the overall portfolio.

Since closing to new business, the fund has showed no realistic excess available capital and no RCM, since it is assumed that planned enhancements could be sufficiently reduced so that no RCM is required.

Some or all of the business in the fund may transfer to either Friends Life Ltd or Friends Life and Pensions Ltd in 2012, and AKG has no concerns as to the security of the company’s with profits business.

International With Profits Bond Series 3 Fund Under the terms of the 2001 Reorganisation Scheme Friends Life Company Ltd’s New With Profits Fund is prevented from building up an inherited estate, and much of the working capital of the fund comes from support assets held outside the fund. At the end of 2010, following the second five yearly test in accordance with the Reorganisation Scheme, £1.01bn of these support assets were transferred to the shareholders’ fund. At the same time, it was also announced that further amounts may be transferred to shareholders in future years up to the end of 2015 if certain other tests are passed. A further £0.5bn was duly earmarked for transfer at the end of 2011.

As a result of the 2010 and 2011 transfers, the New With Profits Fund’s working capital has reduced from £1.5bn to £76m and the working capital ratio reduced from 28% (one of the highest in the market) to 1.4%. Realistic Excess Capital reduced to -£0.15bn from just over £0.1bn, and the ratio of realistic excess available capital to assets fell to -1.5% from 25% (also one of the

highest in the market). The RCM, as a percentage of liabilities, reduced to 2.9% from 3.5%.

Whilst the Old With Profits Fund does not directly write any new business, it accepts reinsurance of a proportion of the new business written by the New With Profits Fund. The company states that both funds are fully aligned in terms of asset allocation and that bonus rates should be the same. Unlike the New Fund, the Old Fund does not rely on support assets outside the fund.

Following the second five yearly test under the Reorganisation Scheme, Special Bonuses totalling £157m were distributed from the Old With Profits Fund at the end of 2010. The fund's working capital has reduced from £269m at the end of 2009 to £17m at the end of 2011 and the working capital ratio reduced from 20% (one of the highest in the market) to 1.2%. Realistic Excess Capital fell significantly from £223m to -£15m, and the ratio of realistic excess available capital to assets fell to -1.1% from 16.6%. The RCM, as a percentage of liabilities, reduced from 4.3% to 2.4%.

Friends Life Company Ltd made various undertakings as part of its 2001 Reorganisation Scheme. Given the current strength of the company in its own right, the court-approved schemes relating to both the April 2001 reorganisation and the January 2007 bulk transfers (which protect the with profits funds), and the degree of parental support potentially available, AKG has no significant concerns as to the security of the company’s with profits business. In the past, the company was the main vehicle for with profits funds within AXA UK, although its future position within the Resolution group is less clear until the dust settles after the acquisition. The volume of with profits business in force is declining insofar as exits far outweigh new business nowadays.

Company

CMI Insurance Company Ltd [Registered in the Isle of Man]

Ownership

Lloyds Banking Group plc [Registered in England and Wales]

Group Background

Lloyds TSB Group plc was renamed Lloyds Banking Group plc (LBG) in January 2009. This followed the acquisition of HBOS plc, which created the largest retail bank in the UK, part owned (43%) by HM Treasury. Within this, the Insurance Division encompasses all the insurance companies that previously operated within the two banks. Scottish Widows, acquired by Lloyds TSB plc in March 2000, distributed through the Lloyds branch network, IFAs and directly via the telephone and the internet, with four UK life subsidiaries - the main company Scottish Widows plc, together with the specialist subsidiaries Scottish Widows Unit Funds Ltd (linked pensions business), Scottish Widows Annuities Ltd (non-profit pension annuities), and Pensions Management (SWF) Ltd (managed pension fund business).

HBOS operated a multi-brand, multi-channel approach, with Clerical Medical Investment Group (CMIG), Halifax Life, St. James’s Place and St Andrew's Life. CMIG was the primary HBOS intermediary product provider, together with Clerical Medical Managed Funds Ltd, CMI Insurance Company Ltd (CMIIC - an Isle of Man based company now closed to new business) and HBOS Investment Fund Managers Ltd. CMIG remains the main product provider to the Clerical Medical Europe business, which writes business, including with profits, in several mainland European countries.

With effect from December 2010, the LBG Insurance Division has distributed all its intermediary life, pensions and investment business, through a combined salesforce operating under the Scottish Widows brand.

In November 2009 LBG sold Insight Investment Management Ltd to BNY Mellon for £235m. The management of Clerical Medical funds, previously managed by Insight, switched to Scottish Widows Investment Partnership.

In July 2011, a corporate restructuring led to the formation, with the exception of St James's Place, of one insurance group, under the ownership of Scottish Widows Group Ltd. Further integration of component companies may follow.

Company Background

The company, based on the Isle of Man, was established in 1987 by Clerical Medical & General Life Assurance Society to operate in the offshore market. At the end of 1996, the Society converted to limited company status and joined the Halifax, with the Society’s business being transferred to the newly formed Clerical Medical Investment Group Ltd.

Historically, the company operated primarily as a with profits company, reinsuring the business to CMIG and retaining little in the way of liabilities. This changed in 2002 (a move reflecting what was happening in CMIG), when a change in marketing emphasis followed the withdrawal of its pooled bond, replacing it with an open architecture portfolio bond.

The company, whilst retaining its name following the acquisition of HBOS plc by Lloyds Banking Group plc in January 2009, now operates (since 22 November 2010) under the Scottish Widows brand. The company announced its closure to new business in February 2012, following a review.

With profits business has historically represented the majority of business written by the company. Whilst this position had changed in recent years (effectively closed to new with profits business from the UK in 2002, although additional investment to existing products continues to be allowed) it remains significant.

With profits business has been written in CMIIC in three currencies, namely Sterling, US Dollar and Euro.

Company Financial Strength

CMIIC was one of the first international operations to be established by a UK life company. It is well capitalised (solvency levels increased a little in 2010) for a primarily unit linked operation.

Following activity which appeared to bolster the security of the company's position within LBG, the decision to cease new business activity now brings this into question.

With Profits Bond Products Marketed

Product Available from/to Open to New Business? CMI Premier Bond II Jan 1998-31 Jul 01 No* CMI Premier Bond III 2001 – Feb 2012 No* CMI Capital Investor 2001 – Feb 2012 No* CMI Global Investor 2002 – Feb 2012 No* CMI UK Premier Bond ? – 2005 No* CMI Passport Series – Wealthmaster Choice ? – Feb 2003 No* CMI Passport Series – Lifetime Choice ? – 2003? No* CMI Passport Series – Retirement Choice ? – 2003? No* * Ignoring sales to/top ups by existing customers

With Profits Fund Links Available (Sterling denominated)

Fund Available from/to Offshore With Profits (OWP) Series 1 Jan 1998- Feb 1999 Offshore With Profits (OWP) Series 2 Mar 1999 – Aug 1999 Offshore With Profits (OWP) Series 3 Sep 1999 – Feb 2000 Offshore With Profits (OWP) Series 4 Mar 2000 – May 2001 Offshore With Profits (OWP) Series 5 May 2001 - ? Offshore With Profits (OWP) Series 6 ? – Feb 2012 Guaranteed Growth Fund (GGF) Series 1 Jan 1998 – Dec 1998 Guaranteed Growth Fund (GGF) Series 2 Dec 1998 – Mar 1999 Guaranteed Growth Fund (GGF) Series 3 May 1999 - Mar 2000 Guaranteed Growth Fund (GGF) Series 4 May 1999 – Feb 2001 Guaranteed Growth Fund (GGF) Series 5 May 1999 – Feb 2001 Guaranteed Growth Fund (GGF) Series 6 Mar 2000 – Feb 2001 Guaranteed Growth Fund (GGF) Series 7 Aug 2003 – present

Reinsurance of With Profits Business

All of CMIIC’s with profits policies are 100% reinsured into the with profits fund of the sister company, Clerical Medical Investment Group Ltd. The funds reinsured at the end of 2011 amounted to £327m in total.

Reinsurance Company

Clerical Medical Investment Group Ltd [Registered in England and Wales]

Reinsurance Company Background

The Clerical, Medical & General Life Assurance Society was established in 1824 to cater for the insurance needs of the professionals of the day - the clergy and medics, subsequently broadening its target market to all types of professions and beyond this to a wider target market. At the end of 1996, the Society demutualised, becoming part of the Halifax, and its business was transferred into the newly formed Clerical Medical Investment Group Ltd (CMIG). In May 2006, much of Halifax Life's (HLL) with profits business (previously reinsured with CMIG) transferred to CMIG.

Historically a with profits company, most new business is now written on a unit linked basis. Unit linked pensions business (reserves of £8bn as at 31 December 2011) is reinsured to its subsidiary CMMF. On 31 December 2009, CMIG recaptured the annuity business previously reinsured to CMMF. This involved assets of £2bn and a loss of £112.2m. In January 2009, the company began accepting reinsured protection business from Scottish Widows plc, accounting for premiums of £153m and reserves of £173.5m in 2011. In July 2009, CMIG ceased writing new pensions business.

The 2011 insurance business restructuring saw CMIG become a direct subsidiary of Scottish Widows plc.

Reinsurance Company Financial Strength

Notwithstanding a fall in CMIG’s capital resources, back to 2009 levels, solvency levels remain reasonable, albeit both solvency ratios fell back slightly in 2011.

The company reported a pre-tax profit of £7m [2010: £136m loss, reflecting a net transfer of £110m to the With Profits Fund, primarily in respect of the reassessment of historical management charges]. The 2011 result was impacted by the setting of a provision of £175m in respect of ongoing litigation concerning policies issued in Germany. The company also received dividends from its subsidiaries: £184m from CMMF and £150m from Halifax Life Ltd, offset by a £194m impairment in the value of CMMF following receipt of the dividend. No dividend was paid [2010: nil]. CMIG's GAO reserve amounted to £490m [2010: £400m]. Net premium income fell almost 15% despite single premiums being unchanged from 2010. The company again saw net outflows: at £1.5bn a marked increase on £1bn in 2010. Total long term assets also fell, down from £17.8bn to £16.7bn.

As an integral part of the Insurance Division of LBG, AKG believes that CMIG would receive any further necessary financial support from its parent.

With Profits Bond Product Outline – CMI Premier Bond II

The Premier Bond II is a single premium unit-linked whole life assurance policy, with a unitised with profits fund choice via the Offshore With Profits Funds Series 1-4 (denominated in Sterling, Euros or US Dollars).

100% of the single premium received is invested in a unitised with profits fund at bid price.

An annual dividend (bonus) rate is declared annually in advance and added to the unit price on a daily basis. The rates reflect the company’s conservative expectations of medium term returns, and may vary by currency and by series.

A final bonus (terminal bonus) may be added at the time of a death claim, depending upon duration, currency and series.

The surrender value is the bid value of OWP Fund units, possibly plus a final bonus (terminal bonus) or reduced by an MVR (except at an MVR-free date), reduced by a discontinuance charge during the first 5 years.

The main features of the Sterling version of the bond include:  Minimum premium: £10,000.  Bonus units at the end of Year 1: Between 1% and 2.5% (depending on premium size) extra

units added to all investments, except for Offshore With Profits Funds qualifying for a first year guaranteed growth rate.  Loyalty bonus: 1% of the value of the fund is paid at the end of 10 years.  Annual management charge of 1% (OWP Series 1-3), 0.5% (OWP Series 4).  Establishment Charge: 1.44% per annum of the fund deducted monthly for the first five years.  Death benefit: 101% of the bid value of units.  On surrender during the first 5 years, a discontinuance charge applies: 9% in Year 1, reducing by 1.8% p.a. to nil in the sixth year.  Regular or one-off withdrawals up to 10% of the total invested allowed free of penalty subject to a minimum of £1,000 remaining in each fund.  Switches into any of the other available funds normally allowed at any time.  Additional single premium top-ups allowed.

With Profits Bond Product Outline – CMI Premier Bond III

The Premier Bond III is a single premium unit-linked whole life assurance policy, with a unitised with profits fund choice via the Offshore With Profits Funds Series 1-6 (denominated in Sterling, Euros or US Dollars).

A percentage of the single premium received is invested in a unitised with profits fund at bid price (98% - 102.5% depending upon premium size).

A final bonus (terminal bonus) may be added at the time of a death claim, depending upon duration, currency and series.

The main features of the Sterling version of the bond include:  Minimum premium: £10,000.  Loyalty bonus: 1% of the value of the fund is paid at the end of 10 years.  Annual management charge of 1% (OWP Series 1-3), 0.5% (OWP Series 4), 1.3% (OWP Series 5-6).  Establishment Charge: 1.44% per annum of the fund deducted monthly for the first five years.  Death benefit: 101% of the bid value of units.  On surrender during the first 5 years, a discontinuance charge applies: 9% in Year 1, reducing by 1.8% p.a. to nil in the sixth year.  Regular or one-off withdrawals up to 10% of the total invested allowed free of penalty subject to a minimum of £1,000 remaining in each fund.  Switches into any of the other available funds normally allowed at any time.  Additional single premium top-ups allowed.

With Profits Bond Product Outline – CMI Capital Investor

The Capital Investor is a single premium unit-linked corporate 99 year term capital redemption policy, with a unitised with profits fund choice via the Offshore With Profits Funds Series 1-6 (denominated in Sterling, Euros or US Dollars).

A percentage of the single premium received is invested in a unitised with profits fund at bid price

(98% - 102.5% depending upon premium size).

A final bonus (terminal bonus) may be added at the time of a death or maturity claim, depending upon duration, currency and series.

The main features of the Sterling version of the bond include:  Minimum premium: £10,000.  Loyalty bonus: 1% of the value of the fund is paid at the end of 10 years.  Annual management charge of 1% (OWP Series 1-3), 0.5% (OWP Series 4), 1.3% (OWP Series 5-6).  Establishment Charge: Five-year Option: 1.44% per annum of the fund deducted monthly for the first five years; Initial Option: 7% of the initial fund value.  Guaranteed Minimum Maturity benefit: 101% of the initial premium (subject to withdrawals).  On surrender during the first 5 years, a discontinuance charge applies: Five-year Option: 9% in Year 1, reducing by 1.8% p.a. to nil in the sixth year; Initial Option: Flat 2% charge.  Regular or one-off withdrawals up to 10% of the total invested allowed free of penalty subject to a minimum of £1,000 remaining in the fund and at least £5,000 remaining in the bond.  Switches into any of the other available funds normally allowed at any time.  Additional single premium top-ups allowed.

With Profits Bond Product Outline – CMI Global Investor

The Global Investor is a single premium unit-linked whole life policy, with a unitised with profits fund choice via the Offshore With Profits Funds (denominated in Sterling, Euros or US Dollars).

A percentage of the single premium received is invested in a unitised with profits fund at bid price (100% except for Charging Basis G, where the allocation rate is 107% for a nil commission policy. The allocation rate reduces by 1% for each percent of initial commission taken).

A final bonus (terminal bonus) may be added at the time of a death or maturity claim, depending upon duration, currency and series.

The surrender value is the bid value of OWP Fund units, possibly plus a final bonus (terminal bonus) or reduced by an MVR (except at an MVR-free date), possibly reduced by a surrender charge.

The main features of the Sterling version of the bond include:  Minimum premium: £100,000.  Annual management charge of 1% (OWP Series 1-3), 0.5% (OWP Series 4), 1.3% (OWP Series 5-6).  Death benefit: 100% of the bid value of units.  Initial Charge: Depends upon Charging Basis selected at outset. o Basis E: 8%. o Basis F – initial charge: 3%. o Other Bases: Nil charge.

 Establishment charge: Depends upon Charging Basis selected at outset. o Basis F – establishment charge: 0.286% per quarter during first 3 years. o Other Bases: Nil charge.  Surrender charge: Depends upon Charging Basis selected at outset. Specimens for a premium of £100,000 where maximum commission taken are: o Basis A: 9.536% in Quarter 1, reducing by 0.298% p.q. to nil in the ninth year. o Basis B: 6% in Quarter 1, reducing by 0.3% p.q. to nil in the sixth year. o Basis C: 9.82% in Quarter 1, reducing by 0.491% p.q. to nil in the sixth year. o Basis E: No charge. o Basis F – initial charge: No charge. o Basis F – establishment charge: A charge during the first 3 years equal to the remaining establishment charges. o Basis G: 9% (of the greater of the underlying value and the enhanced investment into the contract) in Quarter 1, reducing by 0.45% p.q. to nil in the ninth year.  Up to 20 free switches per year allowed into any of the other available investment choices.

With Profits Bond Product Outline – CMI UK Premier Bond

The UK Premier Bond is a single premium unit-linked whole life assurance policy, with a unitised with profits fund choice via a Guaranteed Growth Fund with a specified term (denominated in Sterling, Euros, US Dollars or [in the case of Guaranteed Growth Fund 1 only] International Currency Units, or ICUs). At the end of the GGF term, policies can be surrendered, switched or they can remain invested in a GGF (currently via GGF7).

A percentage of the single premium received is invested in a unitised with profits fund at bid price (100.5% - 101% depending upon premium size).

A claim bonus dividend (terminal bonus) may be added on death or on surrender at an MVR-free date at the time of a claim, depending upon duration, currency and series. There is a guaranteed minimum claim value. For GGF 1, the guarantee is that the value of units will not be less than if the declared annual dividend each year had been 4%. For the other GGF series, the guarantee is that the unit price, taking account of annual dividends and before any claim bonus dividend or MVR, will not fall.

When not at an MVR-free date, the surrender value is the bid value of Guaranteed Growth Fund units, possibly plus a surrender bonus dividend (terminal bonus) or reduced by an MVR, reduced by a discontinuance charge during the first 5 years.

The main features of the Sterling version of the bond include:  Minimum premium: £15,000.  Annual management charge of 1% (1.3% for GGF 7; 1.5% for GGF 2.003 and 2.004).  Establishment Charge: 1.5% per annum of the fund deducted monthly for the first five years.  Death benefit: 101% of the bid value of units, reduced to 100% if age next birthday at outset is greater than 65.  On surrender during the first 5 years, a discontinuance charge applies: 7.5% in Year 1, reducing by 1.5% p.a. to nil in the sixth year.  Regular or one-off withdrawals up to 10% of the total invested allowed free of penalty subject to a minimum of £200 and a minimum of £7,500 (or 10% of the initial investment if lower) remaining in the fund.  Switches into any of the other available funds normally allowed at any time. Up to 12 free switches allowed per year.

With Profits Bond Product Outline – CMI Passport Series (Single Premium variant)

The Passport Series is a unit-linked life assurance policy, with a unitised with profits fund choice via a Guaranteed Growth Fund with a specified term (denominated in Sterling, Euros, US Dollars or [in the case of Guaranteed Growth Fund 1 only] ICUs). At the end of the GGF term, policies can be surrendered, switched or they can remain invested in a GGF (currently via GGF7).

The Wealthmaster Choice and Retirement Choice are single premium endowment variants and the Lifetime Choice is a single premium whole of life variant. There are also 3 equivalent regular premium variants.

100% of the single premium received is invested in a unitised with profits fund at offer price.

A claim bonus dividend (terminal bonus) may be added on death, surrender at an MVR-free date, or maturity (for the endowment versions) at the time of a claim, depending upon duration, currency and series. There is a guaranteed minimum claim value. For GGF 1, the guarantee is that the value of units will not be less than if the declared annual dividend each year had been 4%. For the other GGF series, the guarantee is that the unit price, taking account of annual dividends and before any claim bonus dividend or MVR, will not fall.

The main features of the Sterling version of the bond include:  Initial charge: 7% of the allocated premium, plus rounding of no more than 1%.  Annual management charge of 1% (1.3% for GGF 7; 1.5% for GGF 2.003 and 2.004).  Optional Protection Benefits: A range of benefits such as additional life cover, critical illness and disability benefits can be added, paid for by unit encashment.  Death benefit: is a minimum of 101% of the bid value of units, unless a Life Cover benefit has been selected, in which case a minimum of 100% of the bid value is payable.  Regular withdrawals typically up to 7.5% of the original premium allowed free of MVR on GGF1/2/5 & 7 bonds. There were quite a number of variations around this theme, however, for different tranches.  Switches into any of the other available funds normally allowed at any time.

Current Bonus Scales – Sterling Funds

Annual Bonus Rates Feb 2012 Feb 2011 OWP Series 1-4 0.5% 0.5% OWP Series 5-6 0.7% 0.7% OWP Global Investor Fund 1.0% 1.0% GGF Series 1-6 1.0% 1.0% GGF Series 7 0.7% 0.7%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond II Bonds effected Current TB rate 1998 16% to 20% 1999 11% to 14% 2000 9% to 11% 2001 12% to 22%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond II (additional investments up to 10 November 2003) Bonds effected Current TB rate 1998 17% to 22% 1999 12% to 16% 2000 10% to 12% 2001 13% to 23% 2002 28% to 39% 2003 42% to 44% 2004 35% to 42% 2005 23% to 32% 2006 13% to 21% 2007 12% to 14% 2008 16% to 24% 2009 25% to 27% 2010 14% to 25% 2011 2% to 10% 2012 0%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond II (additional investments after 10 November 2003) Bonds effected Current TB rate 2003 34% 2004 26% to 32% 2005 16% to 23% 2006 8% to 14% 2007 6% to 9% 2008 11% to 20% 2009 22% to 25% 2010 13% to 24% 2011 2% to 9% 2012 0%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond III and CMI Capital Investor (Initial investments up to 1 August 2003 and additional investments up to 10 November 2003) Bonds effected Current TB rate 2001 13% to 23% 2002 28% to 39% 2003 42% to 44% 2004 35% to 42% 2005 23% to 32% 2006 13% to 21% 2007 12% to 14% 2008 16% to 24% 2009 25% to 27% 2010 14% to 25% 2011 2% to 10% 2012 0%

Terminal Bonus Rates at 1 February 2012 – CMI Premier Bond III and CMI Capital Investor (Initial investments after 1 August 2003 and additional investments after 10 November 2003) Bonds effected Current TB rate 2003 34% 2004 26% to 32% 2005 16% to 23% 2006 8% to 14% 2007 6% to 9% 2008 11% to 20% 2009 22% to 25% 2010 13% to 24% 2011 2% to 9% 2012 0%

Terminal Bonus Rates at 1 February 2012 – CMI Global Investor Bonds effected Current TB rate 2002 28% to 39% 2003 42% to 44% 2004 35% to 42% 2005 23% to 32% 2006 13% to 21% 2007 12% to 14% 2008 16% to 24% 2009 25% to 27% 2010 14% to 25% 2011 2% to 10% 2012 0%

Terminal Bonus Rates at 1 February 2012 – Guaranteed Growth Funds

Not disclosed.

MVRs

MVRs may be employed to protect the interests of continuing investors. The aim is to continue to pay out a fair share of investment performance to each investor, and MVR levels are kept under regular review.

CMIG MVR rates are currently capped at 35% (increased from 25% in September 2009), but this may change.

Sterling OWP Funds

Bonds were issued with an MVR-free date, which varied according to issue date – before 21/8/98: 5 years+; from 21/8/98: 7 years+; from 23/4/99: 12 years+.

During 2011, MVRs were applied to all funds for bonds effected between January and June 2000, and for bonds linked to funds 5 & 6 effected between July 2006 and December 2007.

Sterling Guaranteed Growth Funds

GGF bonds can be surrendered free of any MVR or surrender charge at the end of the specified term of the GGF concerned.

GGF3 bonds were issued with an MVR-free date on the 7th anniversary.

GGF4 bonds were issued with an MVR-free date on the 10th anniversary.

GGF6 bonds were issued with an MVR-free date on the 8th anniversary.

GGF1/2/5 & 7 bonds were issued with MVR-free withdrawal options, whereby typically up to 7.5% of the original premium could be withdrawn each year free of MVR. There were quite a number of variations around this theme, however, for different tranches.

MVRs were applied to all GGF funds during 2011, except for GGF funds 3.10, 4.01, 4.02, 5.01 and 6.01.

Guarantees

The costs of any investment guarantees on the with profits policies in CMIG’s With-Profits Fund are borne within the fund. Currently, deductions from asset shares are made for the cost of guarantees on with profits policies as the costs arise.

Guarantee costs are spread equally across all with profits policies, except for bonus classes where deductions for guarantee costs have already been made (e.g. CWP policies). Whilst CMIG states that the level of future deductions is uncertain, it does not expect the average cost to exceed 1% p.a. over the next ten years or 2% in any one year, although in very adverse conditions, it may need to deduct more.

For CWP life policies started before 1997, 2% was deducted from premiums paid before 1997 to pay for guarantees. No further charges are being made for guarantees from the asset shares in respect of these policies.

The total charges deducted from with profits reserves by CMIG in 2011 in respect of guarantees was £86m [2010: £72m].

Sterling OWP Funds

There are no investment guarantees applicable, but bonds were issued with specified MVR-free dates (see MVR section above).

Sterling Guaranteed Growth Funds

Bonds contain a range of different MVR-free guarantees, according to tranche (see MVR section above).

On death, surrender at an MVR-free date, or on maturity for endowment/capital redemption bonds, there is a guaranteed minimum claim value. For GGF 1, the guarantee is that the value of units will not be less than if the declared annual dividend each year had been 4%. For the other GGF series, the guarantee is that the unit price, taking account of annual dividends and before any claim bonus dividend or MVR, will not fall.

On certain products GGF1 policyholders have the option of a 5 year continuation at the end of their original term.

Investment

Subject to helping to ensure the solvency of the company and its ability to meet the guarantees it provides on with profits policies, CMIG’s aim is to achieve growth on the assets backing asset shares over the longer term, and the policy for those assets is to have a significant proportion in higher-risk assets, such as company shares and property. The investment strategy takes account of assets outside the CMIG With-Profits Fund, to allow the fund to invest a significant proportion in higher-risk assets.

CMIG’s investment strategy for assets backing asset shares depends upon the company’s view of investment markets, the surplus in the fund and guarantees in force. The company manages separate pools of assets for various different groups of policies within the fund.

CMIG’s investment strategy for the estate provides protection to help safeguard the future growth potential of the assets backing asset shares, reducing the likelihood that the EBR would need to be significantly reduced in the event of a significant stock market fall.

The CMIG fund sometimes uses derivatives, for example to effect a change in asset allocation quickly. The performance of the derivatives may differ from the corresponding assets and the effective exposure to different assets whilst the derivatives are held may differ from the published exposures.

At the end of 2011 CMIG introduced a revised strategic asset mix designed to increase expected return without increasing risk. This includes a reallocation between different regional share markets, and a reallocation between sovereign and corporate bonds.

Sterling OWP Funds

The asset mix for the Sterling OWP Funds is the same as for the remainder of CMIG’s Sterling with profits business.

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 26.2% 31.3% 34.9% 30.7% Overseas Equities 7.1% 8.5% 8.3% 9.2% Property 14.2% 12.0% 13.4% 12.3% Fixed Interest 36.6% 37.4% 37.7% 33.2% Cash 10.1% 3.9% 2.0% 5.7% Other 5.8% 6.9% 3.7% 8.9%

Sterling Guaranteed Growth Funds

CMIIC states that the asset mix for the Guaranteed Growth Funds differs from that of the OWP funds, and that ‘further information is available on request’. However, AKG was unable to obtain any further information from the company in time for the publication of this report.

Past Performance

The company declined to disclose any specimen past performance values as at 1st April 2012 to AKG. However the following specimen value can be deduced from CMIIC’s fund performance leaflet

Payouts on Surrender Values at 1 February 2012 Bond Type Term (yrs) Freq Premium Payout (£) CMI Premier Bond 5 Single £10,000 10,836

Investment Returns

Fund 2007 2008 2009 2010 2011 Sterling OWP Funds 1.9% -12.4% 8.6% 10.2% 3.1% Sterling Guaranteed Growth Funds 1.5% -7.8% 3.7% 9.8% 3.9% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

2 Whilst the LBG insurance companies are generally very co-operative in providing AKG with information on their businesses, AKG was unable to obtain any of the information it requested in respect of CMIIC for the publication of this report.

CMIIC’s website does, however, contain a reasonable amount of regularly updated information about the company’s with profits business.

Whilst no longer offering new with profits products in the UK, CMIG generally produces well written literature, although the design of its PPFM is a little confusing, and rather different than those of other companies. The regular updating of a graph illustrating the operation of smoothing for a with profits bond within the PPFM and CFPPFM is a good feature, however.

Information published on CMIG's and CMIIC’s websites has somewhat fallen behind that of other leading companies, with no historical versions of documents available, and no clear trail of PPFM changes. The annual report to with profits policyholders incorporates a series of Frequently Asked Questions (FAQs), but lacks detail in some areas. The company retains a high level of discretion in respect of most of its business.

CMIG's With Profits Committee has in the past comprised only non-executive directors, although two independent members joined it in February 2012 in response to the FSA’s evolving requirements. Its findings have not been published in the past.

Future Performance

CMIG's stated intention is to maintain a 'significant' EBR for the main blocks of Sterling business. However, this needs to be set against the fact that the fund is now effectively closed in the UK. Payouts on domestic UK policies recently have not been spectacular and some appear to have been deteriorating in relative terms.

CMIG started estate distribution from the With-Profits Fund from February 2010, which should enhance payouts for policies started before 2011, but the quantum of such distributions has not been published.

The future performance prospects of the various CMIIC with profits bond versions differ slightly on account of the variations in underlying guarantees and charging structures. Whether or not a particular bond has any MVR-free dates remaining will also be an important aspect.

Sterling OWP Funds 1-4 3

Bonds are subject to a management charge of 1% p.a. (OWP Series 1-3), 0.5% (OWP Series 4).

Sterling OWP Funds 5-6 3

Bonds are subject to an annual management charge of 1.3%, but recent regular bonus rates have been higher than for Funds 1-4.

Sterling Guaranteed Growth Fund 1 3

GGF1 is subject to a 4% underlying bonus rate guarantee. Bonds are subject to an annual management charge of 1%. It is unclear to AKG what the underlying asset mix for this fund is.

Sterling Guaranteed Growth Funds 2-6 3

Bonds are subject to an annual management charge of 1% (1.5% for GGF 2.003 and 2.004). It is unclear to AKG what the underlying asset mixes for these funds are.

Sterling Guaranteed Growth Fund 7 2

GGF7 is the only GGF fund currently open to switches and new investments, and it is subject to a 1.3% p.a. annual management charge. It is unclear to AKG what the underlying asset mix for this fund is.

With Profits Financial Strength

3 New with profits products are not offered by CMIIC, and the strength of its significant block of in force with profits business depends very largely upon the security of the company into which it is reinsured - CMIG.

Working capital in the CMIG fund (before zeroisation) fell substantially from £307m to £56m in 2011, mainly due to unexplained 'other' movements of £317m [2010: £648m]. The working capital ratio decreased from 2.7% to 0.6% (before zeroisation).

The CMIG fund is now effectively closed to UK new business and overseas new business has declined. Whilst the fund is judged secure it remains unclear as to the future of the fund given the ongoing consolidation within LBG and the possibility that parts of the group may be disposed of.

Company

Friends Provident International Ltd [Registered in the Isle of Man]

Ownership

Resolution Ltd [Registered in Guernsey]

Group Background

Resolution Ltd, incorporated in Guernsey, and formed to acquire businesses in the life assurance, asset management, general insurance, banking and general financial sectors in the UK and Western Europe, acquired the Friends Provident Group plc in November 2009.

Friends Provident, originally a mutual tracing its roots back to its Quaker origins in 1832, floated on the stockmarket in 2001. In the UK it operated via three main life companies, Friends Provident Life and Pensions Ltd (renamed Friends Life Ltd - FLL), Friends Provident Pensions Ltd (renamed Friends Life and Pensions Ltd) and Friends Provident Life Assurance Ltd (FPLAL), whilst operating internationally through Friends Provident International Ltd and Lombard International Assurance S.A. It also owns a number of intermediary companies, having acquired Sesame in 2007 and Bankhall in 2009.

On 16 September 2010, Resolution acquired AXA Sun Life Holdings Ltd (renamed Friends ASLH Ltd), including AXA Sun Life plc (renamed Friends Life Company Ltd (FLC)), Sun Life Assurance Society (Friends Life Assurance Society Ltd (FLAS)) and AXA Annuity Company Ltd (Friends Annuities Ltd (FAL)) - an Insurance Special Purpose Vehicle (ISPV). An additional company, Winterthur Life UK Ltd (WLUK), also moved to Resolution in November 2011 when a number of Part VII transfers of various blocks of business also took place. The businesses of Sun Life Unit Assurance, Sun Life Pensions Management and PPP Lifetime were transferred into AXA Sun Life plc in January 2007. January 2011 saw Resolution also acquire Bupa Health Assurance Ltd (BHA).

The enlarged Friends Life Group, with an estimated IGCA surplus of £1.9bn as at March 2012, was rebranded Friends Life in March 2011. FPLAL and BHA were transferred into FLL in 2011. In August 2011 the Group announced the establishment of a new business unit, UK Heritage Business, administering products no longer open to new business.

Friends Provident’s International operations comprise three elements: Lombard, which has maintained its brand, AmLife (having taken a 30% stake in November 2008 in a joint venture with AmBank of Malaysia) and Friends Provident International (FPI). Most of FPI’s business is written by Friends Provident International Ltd (FPIL) in the Isle of Man. FPIL also has offices in Hong Kong, Singapore and Dubai. The remainder - mainly into the EU - is now written from the UK by Friends Life Ltd.

Company Background

Friends Provident International Limited (FPIL), based on the Isle of Man, was previously known as Royal & SunAlliance International Financial Services Ltd and has been trading since 1978.

Friends Life purchased the company in 2002 from Royal & SunAlliance. The company is part of the Friends Provident International division and writes the majority of FPI's business. In addition to the Isle of Man, the company also has offices in Hong Kong, Dubai and Singapore.

Friends Provident International also writes business in Europe from the UK - now through Friends Life Ltd (OLAB business).

International business was confirmed as a core element of Friends Life's strategy following a strategic review in 2008. This remains the case following the acquisition by Resolution.

Company Financial Strength

The company is well established and reasonably large for an offshore company. Solvency levels remained adequate for what is primarily a unit linked operation. Parental support, which remains key to the operation, was emphasised in, and indeed confirmed by, the group's strategic review of 2008 and the subsequent acquisition by Resolution.

The deal with Resolution has positioned Friends Life at the centre of an ambitious 2 to 4 year life assurance and asset management consolidation strategy, one which has been substantially bolstered by the acquisition of the business from AXA. Whilst this did not directly involve the offshore operation, the success of FPI, together with its potential, recognised both internally and externally, remain encouraging factors.

With Profits Bond Products Marketed

Product Available only on Open to New Business? With Profits Bond Series 1 31 Dec 92 No* With Profits Bond Series 2 30 Apr 93 No* With Profits Bond Series 3 31 Aug 93 No* With Profits Bond Series 4 30 Nov 93 No With Profits Bond Series 5 30 Sep 96 No* With Profits Bond Series 6 18 Dec 98 No* * Ignoring sales to/top ups by existing customers

With Profits Fund Links Available (Sterling denominated)

Series 1-6: Reinsured to the Phoenix With-Profits Fund of Phoenix Life Ltd

Reinsurance of With Profits Business

All of FPIL’s with profits policies are reinsured into the Phoenix With Profit Fund of Phoenix Life Ltd. The total liabilities reinsured at the end of 2010 amounted to £4.6m.

Reinsurance Company

Phoenix Life Ltd [Registered in England and Wales]

Reinsurance Company Background

Founded in 1971 as Lloyd's Life Assurance Ltd, the company was renamed Royal Heritage Life Assurance Ltd in 1986 following its acquisition by Royal Insurance. It was renamed Royal & Sun Alliance Linked Insurances Ltd in 1998 following the merger of Royal with Sun Alliance and business from various companies in the enlarged group was transferred in.

The company closed to new business in September 2002 and was acquired by Resolution Life in September 2004. In December 2005, the company, now called Phoenix Life Ltd, received business transfers in from Phoenix Assurance Ltd, Swiss Life (UK) plc and Bradford Insurance Company Ltd, followed in December 2006 by the long-term business of Alba Life Ltd, Britannic Assurance plc, Britannic Retirement Solutions Ltd, Britannic Unit Linked Assurance Ltd, Century Life plc and Phoenix Life & Pensions Ltd.

In May 2008, Impala Holdings Ltd, a 75% subsidiary of Pearl Group, acquired Resolution plc.

The long term business and some of the shareholders' funds of Scottish Mutual Assurance Ltd and Scottish Provident Ltd were transferred into the company in January 2009 for a nil consideration. The transfer to PLL of the long term business and the majority of the shareholders' funds of PALAL was effective on 1 January 2011, and the long-term business of NPI Ltd (& some of the business of National Provident Life Ltd) was transferred to the company effective from January 2012.

Phoenix With Profit Fund

The Phoenix With Profit Fund was established on 31 December 2006 to receive all the business transferred from Phoenix Life & Pensions Ltd ('PLP'), both with profits and non profit.

PLP traces its history back to Royal Life Insurance Ltd ('RLI'), which was created in 1981 to receive the UK life insurance businesses of Royal Insurance Company Ltd. This included business from Law Union and Rock Insurance Company Ltd, and Liverpool and London and Globe Insurance Company Ltd which was transferred into Royal Insurance Company Limited in 1964.

RLI was a company within the Royal Insurance Group, which merged with the Sun Alliance and London Insurance Group in 1996. In 1998, RLI was renamed Royal & Sun Alliance Life and Pensions ('RSALP'). RSALP was bought by the (former) Resolution Life Group (which is not directly connected with the current Resolution Group) in 2004. RSALP changed its name to PLP in 2005.

PLP closed to new business in 2002, although the fund continues to write incremental new business.

The with profits contracts in the fund mainly fall into the following categories: • traditional endowments and whole life policies • traditional pension policies funding for cash, most of which have GAOs • single premium unitised with profits whole life bonds • unitised with profits pension policies

In September 2005, PLP sold, subject to court approval, a substantial part of the non profit pension annuity business that was in force at 1 January 2005 to Prudential. Initially this involved payment of a reinsurance premium of £1.5bn, but the business was finally transferred to Prudential Retirement Income Ltd in June 2006. This transaction substantially reduced the volume of non profit business in the fund. It led to a one-off reduction in asset shares of up to 1.4%, offset subsequently by an estimated 0.4% reduction the company would have made if the polices had not been reinsured.

Reinsurance Company Financial Strength

The Phoenix Group has stabilised since the rather public difficulties of the parent group in 2008 and early 2009.

Phoenix Life Ltd is a key part of the Phoenix Group's consolidation strategy, with business being transferred directly into it or its annuity subsidiary (PPL). Long term assets grew to £48bn by the end of 2011 [2010: £33bn], boosted by the transfer of business from PALAL.

The company’s free asset ratio reduced slightly in 2011, however, although there was an improvement in the company's CRR coverage.

With Profits Bond Product Outline

The With Profits Bond is a single premium unitised with profits life assurance investment bond, denominated in Sterling.

A percentage of the single premium received is invested in a unitised with profits fund (100% for Series 1-4, 103.5% for Series 5 and 103% for Series 6).

The bonds are not eligible for terminal bonuses.

Annual bonuses are set at a level which, using realistic assumptions, will bring the projected asset share and the value of projected policy benefits broadly in line over a five year period. If at any time the fund is targeting payouts at a higher proportion of asset share than 100% on account of distributable estate, then this will be allowed for in the projected asset share used for the purpose of calculating annual bonus rates, and such distributable estate will therefore be gradually reflected in payouts over a five year period.

A minimum annual bonus rate is set each year and the actual bonus rate set at the policy anniversary in 12 months time cannot be less than this. Other than at times when the value of the allocated assets are changing rapidly, bonus rates do not change by more than 2% (such as from 3% to less than 1% or more than 5%) in any 12 month period.

Surrender values are not guaranteed (except at the tenth anniversary for Series 5 and 6 bonds). The surrender value is 100% of the original amount allocated together with all bonuses previously declared, less the following:

(a) A sum equal to all annual withdrawals previously taken. (b) A surrender reduction during the first 5 years (7.5% in Year 1, reducing by 1.5% p.a.) (c) Any MVR applicable.

The main features of the bond include:  Establishment Charge: Series 1-4: 0.5% of premium per quarter for first six quarters. Series 5-6: Nil.  Death benefit: 101% of the premium together with all previously declared bonuses less all sums taken previously by way of annual withdrawals and less a fixed percentage of this total amount depending on the policy year in which death occurs as follows: 7.5%% in Year 1, reducing by 1.5% p.a. to nil in the sixth year.  On surrender during the first 5 years, a discontinuance charge applies (7.5%% in Year 1, reducing by 1.5% p.a. to nil in the sixth year).  Regular or one-off withdrawals allowed.  Switches not allowed.  Additional single premium top-ups allowed.

Current Bonus Scales - With Profits Bond

Annual Bonus Rates – Series 1 Anniversary date each year: 31 December Year Minimum bonus Declared bonus is: Next year’s minimum was: bonus is: 2011 2.75% 4.00% 2.75% 2012 2.75%

Annual Bonus Rates – Series 2 Anniversary date each year: 30 April Year Minimum bonus Declared bonus is: Next year’s minimum was: bonus is: 2011 2.75% 4.75% 2.75% 2012 2.75% 5.75% 2.75% 2013 2.75%

Annual Bonus Rates – Series 3 Anniversary date each year: 31 August Year Minimum bonus Declared bonus is: Next year’s minimum was: bonus is: 2011 2.75% 3.75% 2.75% 2012 2.75%

Annual Bonus Rates – Series 4 – Closed in April 2004

Annual Bonus Rates – Series 5 Anniversary date each year: 30 September Year Minimum bonus Declared bonus is: Next year’s minimum was: bonus is: 2011 2.75% 3.50% 2.75% 2012 2.75%

Annual Bonus Rates – Series 6 Anniversary date each year: 18 December Year Minimum bonus Declared bonus is: Next year’s minimum was: bonus is: 2011 1.25% 1.75% 1.75% 2012 1.75%

Terminal Bonus Rates: There are no terminal bonuses on the bond.

MVRs

The company’s policy is to apply an MVR if circumstances warrant (where no guarantees apply). The purpose of such an adjustment is to ensure continuing policyholders are protected when individual policyholders choose to surrender their policies.

During 2011, MVRs were applied throughout the year in respect of bonds sold in December 1998, and at various points in the year for top-ups sold between April 2007 and November 2010.

In May 2012, no MVRs were applicable, apart from an MVR of 1% on Series 6 bonds.

Guarantees

Series 1 – 3

There is a guarantee that no MVR applies on the 10th anniversary.

Series 5 – 6

On surrender on the 10th anniversary, there is a guaranteed return of the original premium less any withdrawals.

Investment

Since January 2004 the asset mix backing a with profits policy depends on the year of commencement and outstanding term as well as underlying guarantees. Some types of policy do not have any equities or property backing them. The company publishes extensive tables to policyholders each year, setting out in some detail the various asset proportions applying to their policy type.

The target EBR for with-profits policies is currently approximately 70%, subject to following variations:  If there are less than 9 years of term remaining, then the mixes are changed proportionately as the term remaining reduces until the EBR is 35% with one year or less of term remaining.  If the rate of return required from equity shares and commercial property for the asset share

to grow over the term remaining, after the deduction of retentions and charges, to equal the projected guaranteed benefits at the maturity date is more than 5% p.a. gross, then the EBR is reduced as follows: Rate of return required 5% to 7.5%, reduction applied 33%; 7.5% to 10%, 67%; 10% or more, 100%.

For the purpose of determining the exposure to growth investments, the term remaining for a with profits bond is taken as:  for bonds with a future guarantee date upon which no MVR will apply on surrender, the time to that guarantee date; or  for bonds with no such guarantee, or which have passed the date upon which such a guarantee applied, 10 years.

The table below shows the average asset mix within the fund for all business.

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 UK Equities 11.0% 17.6% 9.0% 7.3% Overseas Equities 6.1% 6.5% 7.8% 6.5% Property 9.0% 9.1% 8.4% 7.3% Fixed Interest 67.1% 60.4% 43.9% 35.9% Cash 6.9% 6.4% % % Other 0.0% 0.0% 30.9% 43.0%

Past Performance – With Profits Bond

Note: The payouts shown in the tables below are not directly comparable with those shown for other companies within this series of reports, since they are based on specific start dates, rather than being values for surrenders on 1st April 2012, which was AKG’s general target date to publish.

Payouts on Surrender Values for a bond commencing on 31 Dec 1992 Bond Type Term (yrs) Freq Premium Payout With Profits Bond - Series 1 2 Single £10,000 £11,091 With Profits Bond - Series 1 3 Single £10,000 £12,053 With Profits Bond - Series 1 5 Single £10,000 £14,460 With Profits Bond - Series 1 10 Single £10,000 £20,654 With Profits Bond - Series 1 15 Single £10,000 £26,594

Payouts on Surrender Values for a bond commencing on 30 Apr 1993 Bond Type Term (yrs) Freq Premium Payout With Profits Bond - Series 2 2 Single £10,000 £10,688 With Profits Bond - Series 2 3 Single £10,000 £11,669 With Profits Bond - Series 2 5 Single £10,000 £14,064 With Profits Bond - Series 2 10 Single £10,000 £20,625 With Profits Bond - Series 2 15 Single £10,000 £25,939

Payouts on Surrender Values for a bond commencing on 31 Aug 1993 Bond Type Term (yrs) Freq Premium Payout With Profits Bond - Series 3 2 Single £10,000 £10,637 With Profits Bond - Series 3 3 Single £10,000 £11,641 With Profits Bond - Series 3 5 Single £10,000 £14,227 With Profits Bond - Series 3 10 Single £10,000 £19,778 With Profits Bond - Series 3 15 Single £10,000 £23,394

Payouts on Surrender Values for a bond commencing on 30 Nov 1993 Bond Type Term (yrs) Freq Premium Payout With Profits Bond - Series 4 2 Single £10,000 £10,687 With Profits Bond - Series 4 3 Single £10,000 £11,615 With Profits Bond - Series 4 5 Single £10,000 £13,870 With Profits Bond - Series 4 10 Single £10,000 £18,224 With Profits Bond - Series 4 15 Single £10,000 n/a

Payouts on Surrender Values for a bond commencing on 30 Sep 1996 Bond Type Term (yrs) Freq Premium Payout With Profits Bond - Series 5 2 Single £10,000 £11,556 With Profits Bond - Series 5 3 Single £10,000 £12,676 With Profits Bond - Series 5 5 Single £10,000 £14,749 With Profits Bond - Series 5 10 Single £10,000 £17,760 With Profits Bond - Series 5 15 Single £10,000 £20,835

Payouts on Surrender Values at 1 April 2012 for a bond commencing on 30 Sep 1996 Bond Type Term (yrs) Freq Premium Payout With Profits Bond - Series 5 15.5 Single £10,000 £20,835

Payouts on Surrender Values for a bond commencing on 18 Dec 1998 Bond Type Term (yrs) Freq Premium Payout With Profits Bond - Series 6 2 Single £10,000 £11,077 With Profits Bond - Series 6 3 Single £10,000 £11,784 With Profits Bond - Series 6 5 Single £10,000 £9,862 With Profits Bond - Series 6 10 Single £10,000 £10,619 With Profits Bond - Series 6 15 Single £10,000 n/a

Investment Returns

The rate of investment return attributed to the with profits benefit reserve of a policy in Phoenix Life Ltd’s Phoenix With Profit Fund depends on the asset mix for it, which depends upon the outstanding term and the level of guarantees under the policy.

The table below shows the average rates of investment return added for unitised with profits bonds within the fund. It is understood that there may be some quite significant variations from these averages for some bonds, though, because of the fund’s approach to determining asset mix.

Fund 2007 2008 2009 2010 2011 Series 1-6 Funds 1.7% -3.0% 11.9% 12.5% -1.9% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

FPIL does not publish any significant information about its small block of with profits business on its website, but the company co-operated fully with AKG in the preparation of this report.

Much of the information about the management of this business derives from the reinsurance company involved, and hence AKG comments below on the transparency of Phoenix Life Ltd’s Phoenix With Profit Fund:

Whilst this is essentially an old style fund, with all that this entails, Phoenix Life has shown a willingness to increase the volume of information available to policyholders, partly as a response to regulatory requirements but also as a result of its overall approach to policyholder communication. However, it is often very difficult to see the wood for the trees, because simple overall average statistics are often omitted. The group advises policyholders of approaching MVR-free dates.

Whilst the Phoenix Life PPFM is relatively detailed, the company retains significant discretion and this, coupled with the complexity of the asset allocation methodology, makes the overall position less than clear. The report to policyholders is reasonably detailed.

There is now a majority of independent representation on the Phoenix Life With Profits Committee.

Future Performance

Notwithstanding the relatively high headline EBR quoted for Phoenix Life Ltd’s Phoenix With Profit Fund, in aggregate the fund had only some 25% of its assets in equities and property at the end of 2010 (although over 30% were also classified as 'other'). This reflects the impact of the staggered investment policy.

The fund retains a significant exposure to guarantees, and the imposition of an explicit charge for guarantees can only depress longer term returns.

Current maturity and surrender payouts on the UK business in the fund are generally disappointing relative to others in the market, despite the current asset share enhancement from the estate.

The rates of bonus declared on the FPIL bonds has varied quite a lot from one series to another, with the Series 6 rates being noticeably lower than the others.

Series 1 Fund 3 Series 2 Fund 3 Series 3 Fund 3 Series 5 Fund 2 Series 6 Fund 1

With Profits Financial Strength

3 New with profits products are not offered by FPIL, and the strength of its small block of in force with profits business depends very largely upon the security of the company into which it is reinsured.

The Phoenix With Profit Fund within Phoenix Life Ltd remains quite sizeable, being one of the largest of the company's nine with profits funds, but it cannot be considered as exceptionally strong. The PLP shareholder provided financial support to the fund in 2006 by way of loans, but this loan support was repaid by the end of 2006, and the fund does not currently need to rely on any capital support from the Non-Profit Fund or Shareholder Fund.

The notes to the realistic balance sheet of Phoenix Life Ltd show that, before zeroisation, the fund had working capital of £373.4m at the end of 2011 (a working capital ratio of 6.8%), substantially increased from the 2010 level of £250.5m.

Company

LCL International Life Assurance Company Ltd [Registered in the Isle of Man]

Ownership

Charles Taylor plc [Registered in England and Wales]

Group Background

Charles Taylor & Co was founded around 1840 in the north-east of England, and its early activity was as a coal merchant. In 1885, the Standard Steamship Owners' Protection and Indemnity Association Ltd was founded and engaged Charles Taylor as its managers.

Management of the Standard Club continued as Charles Taylor's principal activity until the 1960s, when Charles Taylor began to develop other mutuals. Over the next few decades, new mutuals included SMISBA for Italian shipowners, SCALA for Canadian shipowners and SIGNAL for US stevedore employers.

In 1996, the company was listed on the London Stock Exchange under Charles Taylor Group plc and has more recently traded as Charles Taylor plc.

The group’s core focus is on offering services to the insurance market, principally on a fee-based model and it operates through three Professional Services businesses – Management, Adjusting and Insurance Support Services. It also has a Run-off business that owns insurance companies which are closed to new business, including LCL. It has 900 staff in 47 offices spread across 23 counties in the UK, the Americas, Asia Pacific, Europe and the Middle East.

The group’s vision is to become the professional services provider of choice to the global insurance market. However it also continues to seek opportunities to acquire further closed offshore life companies.

Company Background

The company became a subsidiary of the Charles Taylor group in November 2005.

Originally launched in 1985 as Equity & Law International Life Assurance Co Ltd, the company became successively AXA Equity & Law International Life Assurance Co Ltd (1993), Old Mutual International (Isle of Man) Ltd (1997) and Aberdeen International (IoM) Life Assurance Ltd (2002) before becoming LCL International Life Assurance Company Ltd (LCL) in 2005.

Transfers into the company include:  March 2006 - Aberdeen International Ltd (formerly Abtrust International Ltd, Century Life International Ltd, N.E.L. Britannia International Ltd and N.E.L. International Ltd) - including business formerly written by Cornhill Insurance (Guernsey) Ltd, M&G Trust Assurance (Channel Islands) Ltd and M&G Insurance (Cayman) Ltd.  March 2006 Aberdeen International Assurance (Isle of Man) Ltd (formerly Abtrust International Insurance (Isle of Man) Ltd, Century International Insurance (Isle of Man) Ltd, Aetna International Insurance (Isle of Man) Ltd and Tyndall Assurance (Isle of Man) Ltd).  December 2006 - Premium Life International Ltd.  December 2010 - Finistere Life Assurance Ltd (formerly NM Life Assurance International Ltd, NM Schroder Life Assurance International Ltd and Schroder Life Assurance International Ltd).

In November 2011 the group acquired Alico Isle of Man Ltd, with transfer to the company expected to complete in 2012.

The bulk of the company’s business is unit-linked in nature, but there is a small amount (£13m of mathematical reserves) of Amulet With Profits Bond business in force, written by Aberdeen International Assurance (Isle of Man) Ltd / Abtrust International Insurance (Isle of Man) Ltd.

Company Financial Strength

Whilst quite small and not core to its parent's primary business focus, the company is part of a multi-national insurance sector service provider. There are signs of turbulence at the group's non-life subsidiaries, but LCL appears to be continuing to trade profitably, albeit AKG does not have access to the detailed position. It continues to acquire closed books of life assurance business, the latest being in November 2011.

With Profits Bond Products Marketed

Product Available from/to Open to New Business? Amulet With Profits Bond 7 Sep 1995 – Mar 1997 No

With Profits Fund Links Available (Sterling denominated)

LCL International Life Assurance Company Ltd’s With-Profits Fund

Reinsurance of With Profits Business

All of LCL’s with profits business is reinsured 100% into Friends Life Company Ltd’s Old and New With Profits Funds*.

Following both election opportunities, with profits policies that were in force on 1 April 2001 and were not elected policies were allocated to the Old With Profits Fund.

New with profits business written since April 2001 has been allocated to the New With Profits Fund, with around 13% being reinsured to the Old With Profits Fund.

Reinsurance Company

Friends Life Company Ltd [Registered in England and Wales]

Reinsurance Company Background

Friends Life Company Ltd started trading as AXA Sun Life plc (ASL) in 1997, following the merger of the AXA and UAP insurance groups, as the main vehicle for AXA’s new life business in the UK. In its early days, the company was inextricably linked with AXA Equity & Law Life Assurance Society (AEL), whose origins dated back to 1844.

Assurance, Sun Life Pensions Management and PPP lifetime care into ASL.

In September 2010, the company was acquired by Resolution and in March 2011 it was renamed Friends Life Company Ltd, becoming a wholly owned subsidiary of Friends Life Ltd. (At the same time, AAC was renamed Friends Annuities Ltd).

Two blocks of business (involving assets of £1.1bn) within the company were transferred back to the AXA Group during 2011.

Reinsurance Company Financial Strength

Amulet With Profits Bond Product Outline

The Amulet With Profits Bond is a single premium unitised with profits life assurance investment bond, issued in two different currencies - Sterling and US Dollars.

A percentage of the single premium received is invested at offer price in a unitised with profits fund (100% for premiums under £50,000, 101% for higher premiums).

The unit price is increased daily by addition of Regular Bonuses, net of the annual management charge. A smoothed approach is adopted whereby the unit price is gradually increased by the Regular Bonus rate which is altered infrequently, typically once a year. Regular Bonus rates are set to reflect actual and expected future investment returns. In particularly volatile markets the Regular Bonus rate may be adjusted more often.

As the Regular Bonus rate cannot be negative, the unit price grows over time increasing the current value of the fund. This smoothed approach means that in times of high investment return the unit price may not fully reflect the underlying value of the assets but, conversely, the smoothing effect does provide a degree of buffering from the worst effects of market declines.

When a claim is made the company calculates for that policy the return after charges on the underlying assets over the period – the calculated value. It then compares this with the current bid value. If the calculated value is significantly above or below the current value then the claim amount may be adjusted. In normal conditions smoothing again applies. If the calculated value is within a band 5% either side of the current value no adjustment is made.

 If the amount that should be payable is more than the current value of the units the amount payable is the current value plus a Terminal Bonus.

 If the amount that should be payable is less than the current value the amount payable is the current value less an MVR. The company guarantees that an MVR will not apply on a death claim.

The main features of the bond include:  Minimum initial investment - £15,000 or $22,500

 Each bond comprises up to 20 policies.  Management charge: 1.6% of the initial investment per annum taken by way of unit deduction.  Optional life cover benefit.  Death benefit: The greater of the sum assured, if any, or any additional life cover, or the bid price value of the units held.  On surrender during the first 5 years, a discontinuance charge applies.  Regular or one-off withdrawals not allowed.  Switches not allowed.  Additional single premium top-ups not allowed.

Current Bonus Scales - Amulet With Profits Bond

Annual Bonus Rate (since 23 February 2009) 3.50%

Terminal Bonus Rates No information has been supplied by the company regarding current terminal bonus scales.

MVRs

An MVR is permitted if investment performance is lower than that reflected in the regular bonus already added. MVRs are applied on surrender, but not on deaths. MVRs are calculated on a case by case basis and depend on the difference between the surrender value and the asset share.

MVRs are not applied where either the value of the policy (before applying the MVR) is below a certain limit, or where the amount of the MVR is less than a certain limit.

MVR have been applied in the past during periods of significantly reduced market values. However, as at the end of February 2012 there were no cases where an MVR would apply (and a Terminal Bonus would be paid in many cases).

Guarantees

There are no guarantees apart from any optional life cover element included and the guarantee that no MVR will be applied on death claims.

Investment

Friends Life Company Ltd adopts different asset mixes for different types of with profits business.

The table below shows the asset mix applicable to unitised with profits policies with no maturity date, including the Amulet bonds.

Past Performance - Amulet With Profits Bond

The company declined to disclose any specimen past performance values to AKG.

Investment Returns

Fund 2007 2008 2009 2010 2011 With Profits Fund 4.8% -20.3% 15.3% 14.5% -1.5% Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

LCL declined to co-operate with AKG in the preparation of this report, but it does routinely publish selected information about its with profits business on its website.

Much of the information about the management of this business derives from the reinsurance company involved, and hence AKG comments below on the transparency of FLC’s with profits funds.

AKG believes that there is scope for improving the overall transparency of FLC’s with profits business. There is now some common ground in the make-up of the With Profits Committee with that of the other Resolution subsidiaries, and the extent of independent representation has improved. AKG would hope to see the standards of disclosure rise in due course to mirror the approach in those other companies. The activities of the fund continue to be reviewed by the Monitoring Board and the Monitoring Actuary in accordance with the 2001 Reorganisation Scheme.

Future Performance

Unitised with profits business is substantially the larger part of the overall Friends Life Company Ltd fund and it has retained a very high EBR for the with profits bond business (84% at the end of 2011). Its performance for onshore maturity values in recent years, particularly under the AXA Sun Life brand, has been improving, although rankings of specimen surrender values for onshore UK business are mixed.

Given the continued commitment to maintaining a high EBR, it is to be hoped that future prospects for policyholders will be quite rosy, particularly since the company states 'that it is likely in the long term we will be able to continue to pay significant uplifts on maturing policies' in respect of surplus assets and miscellaneous profits. Policyholders in the Old With Profits Fund stand to benefit from Special Bonuses to a higher degree than those in the New With Profits Fund.

With Profits Financial Strength

3 Whilst new with profits products are not offered by LCL, its small block of in force with profits business enjoys the security of the company into which it is reinsured. Whilst ownership of the reinsurer has moved away from the AXA group, its positioning within the Resolution stable provides a degree of comfort, although a degree of future restructuring seems likely.

Friends Life Company Ltd Under the terms of the 2001 Reorganisation Scheme Friends Life Company Ltd’s New With Profits Fund is prevented from building up an inherited estate, and much of the working capital of the fund comes from support assets held outside the fund. At the end of 2010, following the second five yearly test in accordance with the Reorganisation Scheme, £1.01bn of these support assets were transferred to the shareholders’ fund. At the same time, it was also announced that further amounts may be transferred to shareholders in future years up to the end of 2015 if certain other tests are passed. A further £0.5bn was duly earmarked for transfer at the end of 2011.

Company

Prudential International Assurance plc [Registered in Ireland]

Ownership

Prudential plc [Registered in England and Wales]

Group Background

Prudential is an international financial services group with operations in the UK and Europe, Asia and the United States. Its strategy is to build sustainable, profitable businesses in each of these three markets. The main operations are Prudential UK & Europe (life and pensions), M&G Investments (the group’s UK and European fund manager, acquired in 1999), Jackson National Life Insurance Co (a leading US life company, acquired in 1986) and Prudential Corporation Asia (which now has life insurance and fund management operations in 13 markets in Asia). The group has a 25% (previously 50%) share in PruHealth, a joint venture with Discovery Holdings of South Africa, launched in 2004. Offshore business is marketed through the Dublin subsidiary Prudential International Assurance plc.

Prudential began its Asian operations in India in 1923, and it has focussed significant attention on expansion in Asia in recent years, most recently via a 2003 joint venture operation in Beijing. In 1999, Prudential Europe was formed as the group expanded into France and Germany. However, in 2003, the group sold its German operation to Canada Life and ceased writing business in France. The group sold its holdings in Mercantile and General Re-insurance to Swiss Re in 1996 and Egg, the internet bank, in 2007.

The group now has over 26,000 staff worldwide, plus over 365,000 agents in Asia. Whilst the group has come under regular speculative pressure in the UK to consider a break-up, particularly given that the bulk of its new business (76%) is written overseas, the group has reiterated its commitment to the UK market - it produces 18% of new business profit, 29% of group IFRS profit and substantially supports the overall credit rating of the group.

In 2007 the group acquired Equitable Life's with profits annuity book, containing approximately 50,000 annuitants and assets of £1.74bn. In 2008, Prudential UK outsourced a large proportion of its in-force and new business policy administration to Capita Group plc (Capita). In June 2010 the group abandoned its plans to acquire AIA from AIG after being unable to negotiate a lower price for the deal.

As at 31 March 2012, the group had an IGD surplus of £3.8 bn after deducting the 2011 final dividend (31 December 2011: £4.0 billion, before deducting the 2011 final dividend of £0.4 bn].

Company Background

Prudential International Assurance plc (PIA) is owned by the Shareholders Fund of Prudential Assurance Company Ltd (PAC).

The company was established in Dublin by J Rothschild in 1992 and renamed Scottish Amicable Life International plc (SALI) when Scottish Amicable acquired the management services company in 1994. SALI commenced writing business in the UK in 1994 and in Germany in 1995, becoming part of the Prudential group following the acquisition of Scottish Amicable in 1997.

In 1999, Prudential rebranded its European operations as Prudential Europe but continued to market its products as Scottish Amicable European in the UK and SALI in Germany. The first French product, Prudential Europe Vie (a with profits product), was launched in 2001 via a

branch of PAC (closed January 2004). In 2002, SALI was renamed PIA and the International Prudence Bond was launched in the UK. The company recently launched in to France and Spain.

In November 2003, the company outsourced its administration, for both new and existing business, to Capita.

Company Financial Strength

The company sits within the wider, and very strong, Prudential proposition. It follows a clear, focused strategy, one that has seen steady UK new business levels, with a bias towards with profits. Solvency is good and parental support is strong in terms of capital, if required, operational support and brand strength.

With Profits Bond Products Marketed

Product Available from/to Open to New Business? International Prudence Bond 1 Apr 2002 - present Yes

With Profits Fund Links Available (Sterling denominated)

Fund Available from/to Open to New Business? PAC Sterling With-Profits Fund 1 Apr 2002 - present Yes PruFund Growth (Sterling) Fund 25 Nov 2008 - present Yes PruFund Protected Growth (Sterling) Fund 25 Nov 2008 - 9 Oct 2009, Yes 11 Apr 2011 - present PruFund Cautious (Sterling) Fund 25 Nov 2009 - present Yes PruFund Protected Cautious (Sterling) Fund 25 Nov 2009 - present Yes

Reinsurance of With Profits Business

All of PIA’s with profits policies are reinsured into the immediate parent company, Prudential Assurance Company Ltd. The volume of business reinsured as at the end of 2011 amounted to £1.5bn.

The investment content of the reinsured business is invested in PAC’s Defined Contribution Participating Sub Fund (DCPSF).

PIA pays an annual charge to the PAC inherited estate within PAC’s With Profits Sub Fund for the use of the economic capital.

Reinsurance Company

Prudential Assurance Company Ltd [Registered in England and Wales]

Reinsurance Company Background

Prudential began life in 1848 as the Prudential Mutual Assurance Investment and Loan Association. It became the Prudential Assurance Company ('PAC') in 1867, and for many years it was the UK’s largest life company. Originally a composite office with a large home service operation, the company stopped writing IB business in 1995, and in 2001 the company closed its direct sales force and exited from general business in the UK by selling its book to Churchill (although a small run-off liability still exists). At the same time, it dropped the Scottish

Amicable brand (it had acquired Scottish Amicable in 1997) and all remaining Scottish Amicable business was transferred into Prudential at the end of 2002.

In December 2007 the company accepted a transfer of £1.8bn of with profits annuities liabilities (60,000 policies) from Equitable Life Assurance Society.

In 2008, the company decided not to proceed with a reattribution of its Inherited Estate.

At the end of October 2010 the businesses of Prudential (AN) Ltd and Prudential Holborn Life Ltd were transferred into the company, to simplify the group structure. Prudential (AN) Ltd contained a closed block of with profits bonds written in 2003 and 2004 via the sales force of Abbey National plc. That block of business, with reserves of £43m as at December 2009, had been wholly reinsured to Prudential Assurance prior to the transfer.

Prudential distributes life products through 4 channels within the UK: Intermediaries (distribution via financial advisers), Business to Business (corporate pensions business primarily with consulting actuaries and benefit consultants), Partnerships (arrangements with banks, insurers and other distributors), Direct to Customer (the sale of annuities to individual pension customers). Intermediaries are seen as a key component in the distribution strategy.

Sales of with profits products in the intermediary market are now limited mainly to pensions and with profits bonds. However, the company remains by far the biggest writer of new with profits business in the UK market, being almost alone in achieving significant growth in new business volumes compared to 2006 levels, reflecting a renewed focus on the with profits market.

Reinsurance Company Financial Strength

As one of the UK's largest and strongest life companies, PAC continues to show significant resilience in the wake of very challenging economic conditions. It has retained focus and increased its market share, whilst continuing to demonstrate its commitment to the UK market, specifically the Pre- and Post-Retirement space. Statutory solvency in PAC has proved resilient, as has cash generation and group IGD surplus remains significant.

Despite the failed attempt to acquire AIA in 2010, AKG believes that the group remains financially strong and that its strategy towards the UK, which is an important generator of cash, based on its brand and financial strength, is a sensible one.

International Prudence Bond Product Outline

The International Prudence Bond was launched on 1st April 2002.

The International Prudence Bond is a medium to long term single premium unitised with profits investment bond which offers the tax advantages of a Dublin-based bond combined with a range of selected funds, including a choice of guarantee options.

Due to PIA's location in Dublin, the underlying funds are subject only to withholding tax. As a result, investments have the potential to grow faster than in an onshore bond.

International Prudence Bond offers a choice of fund links:  Equity and managed multi-asset funds from the Prudential Group  Specialist equity and international funds from other leading fund managers  PruFund Range of Funds including guarantee options - Sterling, Euro and US Dollar  Three PAC With-Profits funds - Sterling, Euro and US Dollar  Dynamic Portfolios range - five 'fund of funds' portfolios combining the expertise of Prudential's Portfolio Management Group and Old Broad Street Research

The main features include:  Whole life or 99 year capital redemption options available.  Tax-efficient and flexible withdrawals - so clients can take out money when they need it, without necessarily adding to their immediate tax bill  Loyalty bonus: an extra 0.1% of the bond value is added from the end of year one, where no regular or partial withdrawals are made

 Annual Management Charge 1.2% p.a.  Establishment Charge: 1.2% per annum of the fund deducted quarterly for the first five years. (Alternatively an initial charge version is available).  Death benefit: o 101% of the full value of the units relating to the investment, if the relevant life assured (i.e. the oldest life for a joint life first death bond, the youngest life for a joint life second death bond) was 75 or under at entry; or o 100.1% of the cash-in value of the bond, if the relevant life assured was 76 or over at entry.  Guaranteed minimum maturity benefit (capital redemption version): 101% of the initial investment less any withdrawals.  On surrender during the first 5 years, a discontinuance charge applies: 10% in Year 1, reducing by 2% p.a. to nil in the sixth year.  Minimum initial investment - £20,000, Euro €25,000 or US$35,000  Top-up facility from £15,000, Euro €20,000 or US$25,000  Minimum allocation rate of 100%  Regular withdrawals allowed (up to a maximum in any 12 month period of 5% of the greater of the total invested and the value of the bond when withdrawals start).

Bonds linked to the PruFund funds have a number of special features:  Investment into the funds takes place only at quarter dates (25th of February, May, August and November). In the interim, monies are invested in an interest bearing PruFund Account.  Guarantee options - 7, 8, 9 and 10 year spot guarantees on the PruFund Protected Cautious Funds and a 10 year spot guarantee on the PruFund Protected Growth Funds

The International Prudence Bond is available in the UK, Jersey, Guernsey, Isle of Man, Cyprus, Malta, Gibraltar and France, and a specially designed variant is available in Spain.

Current Bonus Scales - PAC Sterling With-Profits Fund

Annual Bonus Rates Mar 2012 Mar 2011 International Prudence Bond 3.00% 3.50%

Terminal Bonus Rates For surrendering bonds, the company publishes a table of compounded annual yields applicable over the term invested. This represents the combined effect of annual and terminal bonuses (ignoring charges) and hence drives the amount of terminal bonus added in each case. The effective terminal bonus rates for the four specimen past performance figures supplied as at 1st April 2012 varied between 2.7% and 23.8%. The table of yields applicable from 1st March 2012 is as follows:

Date of investment Compound Yield p.a.

From 01/03/2012 6.50% 01/03/2011 – 29/02/2012 5.50% 01/03/2010 – 28/02/2011 5.50% 01/03/2009 – 28/02/2010 6.75% 01/03/2008 – 28/02/2009 4.50% 01/03/2007 – 29/02/2008 4.20% 01/03/2006 – 28/02/2007 4.30% 01/03/2005 – 28/02/2006 4.75% 01/03/2004 – 28/02/2005 6.00% 01/03/2003 – 29/02/2004 6.50% 01/03/2002 – 28/02/2003 6.00%

Current Bonus Scales - PruFund Funds

There is no concept of bonuses under the PruFund funds, and bonds participate in profits by means of an increase in the unit price of the fund. The unit price increases at the Expected Growth Rate which is published on each quarter date (the current rates being 7.9% p.a. for the Growth Funds - having been 8% p.a. from launch until 25 November 2009 - and 7.5% p.a. for the Cautious Funds) unless the unit price moves outside specified limits:

 On a quarter date, if the net asset value per unit is more than 5% above/below the unit price, the unit price is adjusted by half the difference between the unit price and the net asset value per unit. [NB No such adjustments have yet been made in either of the Sterling International Prudence Bond PruFund Cautious Funds. Adjustments have been made on five quarter dates for the corresponding Growth Funds – 25 February 2009: minus 2.55%; 25 August 2009: plus 8.15%; 25 November 2009: plus 3.55%; 25 November 2010: plus 3.54%; 25 February 2011: plus 2.57% ].

 Between quarter dates, the net asset value per unit is averaged over the previous 5 working days to give the average net asset value per unit. If the net asset value per unit and the average net asset value per unit are both 10% (or more) above/below the unit price, the unit price will be increased/decreased so that it is 2.5% below/above the net asset value per unit.[NB No such adjustments have yet been made in any of the four Sterling International Prudence Bond PruFund Funds].

If aggregate net flows of business into or out of an investment fund exceed limits specified within the policy provisions, the company may suspend the smoothing of the unit price, in which case the unit price will be the net asset value per unit.

MVRs

PAC Sterling With-Profits Fund

MVRs may be imposed where the value of the underlying assets is less than the value of the policy including bonuses.

MVRs are guaranteed not to apply on death claims, and the company’s current practice is to not apply MVRs on regular withdrawals of up to 5% of the value of the bond per annum (up to a maximum in any 12 month period of 5% of the greater of the total invested and the value of the with-profits portion of the bond when withdrawals start).

MVRs were applied throughout 2011 on some bonds within all years of entry.

PruFund Funds

PruFund funds are not subject to MVRs as such. The mechanism for determining policy payouts when markets are volatile, or depressed, is pre-defined as part of a systematic smoothing process. The only discretion the company has is whether to suspend smoothing or not. The fund's performance is not a deciding factor in whether the smoothing process is applied, or not. Large values of investments coming into or out of the fund could mean that investments would not be smoothed by the pre-defined process.

Guarantees

PAC Sterling With-Profits Fund

The long-term expected cost of smoothing and guarantees for each type of product is deducted in calculating asset shares and credited to the WPSF inherited estate, which bears the costs of smoothing and guarantees as they emerge.

On policies other than those invested in the PruFund range of funds, the total deduction over the lifetime of each policy is currently not more than 2% of any payment made from the fund, with

the deduction building up to this level over the first few years of the policy.

PruFund Growth (Sterling) Fund

There are no guarantees relating to returns under this fund.

PruFund Protected Growth (Sterling) Fund

Policies in this fund contain a guarantee at the tenth anniversary. The company guarantees to restore the value of the fund at the guarantee date to the amount of the original investment (reduced for any withdrawals), if necessary.

The charge for this option is fixed at the point of issue, the charge on current new policies being 0.5% pa [increased from 0.35% pa on 8 November 2011].

Immediately after the guarantee date, all units are switched to the PruFund Growth (Sterling) Fund, and the charge for the guarantee ceases.

PruFund Cautious (Sterling) Fund

There are no guarantees relating to returns under this fund.

PruFund Protected Cautious (Sterling) Fund

Policies in this fund contain a guarantee at the seventh, eighth, ninth or tenth anniversary (as selected by the bondholder at outset). The company guarantees to restore the value of the fund at the guarantee date to the amount of the original investment (reduced for any withdrawals), if necessary.

The charge for this option is fixed at the point of issue, the charge on current new policies being 1.25% pa (7 year guarantee), 0.75% pa (8 year guarantee), 0.5% pa (9 year guarantee), or 0.3% pa (10 year guarantee) [increased from 0.55% pa, 0.35% pa, 0.25% pa and 0.15% pa respectively on 8 November 2011].

Immediately after the guarantee date, all units are switched to the PruFund Cautious (Sterling) Fund, and the charge for the guarantee ceases.

Investment

PAC Sterling With-Profits Fund

In 2009 the EBR fell quite noticeably as a result of the decision to reduce the fund's equity content. At the end of March 2012, the EBR was 51.6% (including alternative assets held).

Asset type Actual Actual Actual Actual 31 Dec 2009 31 Dec 2010 31 Dec 2011 31 Mar 2012 UK Equities 25.0% 25.6% 23.8% 17.1% Overseas Equities 12.4% 12.6% 10.5% 16.8% Property 11.7% 12.0% 12.8% 12.2% Fixed Interest 39.5% 42.1% 44.1% 42.9% Cash 6.6% 2.3% 3.0% 5.5% Other 4.8% 5.4% 5.8% 5.5%

PruFund Growth (Sterling) Fund / Protected Growth (Sterling) Fund

The investment mix currently follows that of the main part of PAC’s With-Profits Sub-Fund. In

2009 the EBR fell quite noticeably as a result of the decision to reduce the fund's equity content. At the end of March 2012, the EBR was 51.6% (including alternative assets held).

PruFund Cautious (Sterling) Fund / Protected Cautious (Sterling) Fund

The fund has been marketed with a much more cautious approach than from the main part of the WPSF, with a current target of a 30% EBR.

Asset type Actual Actual Actual Actual 31 Dec 2009 31 Dec 2010 31 Dec 2011 31 Mar 2012 UK Equities 13.9% 13.8% 12.8% 9.1% Overseas Equities 7.0% 6.8% 5.8% 8.9% Property 6.5% 6.5% 7.1% 7.4% Fixed Interest 60.1% 66.3% 64.9% 63.5% Cash 9.9% 3.7% 6.9% 8.6% Other 2.6% 2.9% 2.5% 2.5%

Past Performance - International Prudence Bond

Payouts on Surrender Values at 1 April 2012 Fund Term (yrs) Freq Premium Payout PAC Sterling With-Profits Fund 2 Single £10,000 £10,213 PAC Sterling With-Profits Fund 3 Single £10,000 £11,263 PAC Sterling With-Profits Fund 5 Single £10,000 £11,564 PAC Sterling With-Profits Fund 10 Single £10,000 £17,029

Payouts on Surrender Values at 1 April 2012 Fund Term (yrs) Freq Premium Payout PruFund Growth (Sterling) Fund 2 Single £10,000 £11,071 PruFund Growth (Sterling) Fund 3 Single £10,000 £13,338

Payouts on Surrender Values at 1 April 2012 Fund Term (yrs) Freq Premium Payout PruFund Protected Growth (Sterling) 2 Single £10,000 £10,785 Fund PruFund Protected Growth (Sterling) 3 Single £10,000 £12,961 Fund

Payouts on Surrender Values at 1 April 2012 Fund Term (yrs) Freq Premium Payout PruFund Cautious (Sterling) Fund 2 Single £10,000 £10,352

Payouts on Surrender Values at 1 April 2012 Fund Term (yrs) Freq Premium Payout PruFund Protected Cautious (Sterling) 2 Single £10,000 £10,094 Fund

Investment Returns

Fund 2007 2008 2009 2010 2011 PAC Sterling With-Profits Fund 7.2% -19.7% 18.7% 12.7% 2.1% PruFund Growth (Sterling) Fund n/a n/a 18.7% 12.7% 2.1% PruFund Protected Growth (Sterling) n/a n/a 18.7% 12.7% 2.1% Fund PruFund Cautious (Sterling) Fund n/a n/a n/a 11.0% 5.5% PruFund Protected Cautious (Sterling) n/a n/a n/a 11.0% 5.5% Fund Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

In a number of ways the Prudential has set the standard for others to follow in terms of improving transparency. For example, it was the first company to establish a fully independent with profits committee (whose remit includes PIA’s with profits business), and it allows it to have a significant involvement in the management of the company’s with profits business. It also tends to define intended maximum charges for smoothing and guarantees at the start of a policy.

The general quality of Prudential’s literature is high, although the PPFM is slightly difficult to follow because of the wide range of different types of business in force, which entails a large number of departures in practice from the norm. A wide range of different publications on with profits issues are available, but occasionally some are difficult to track down online. The annual report to policyholders on compliance with the PPFM covers a lot of ground.

The ‘new-style’ PruFund funds are inherently more transparent than the Prudential’s older with profits funds, but their mechanics are fairly complex to understand. Policyholders receive a six-monthly statement along the lines of a bank statement.

PAC Sterling With-Profits Fund 5 PruFund Growth (Sterling) Fund 5 PruFund Protected Growth (Sterling) Fund 5 PruFund Cautious (Sterling) Fund 5 PruFund Protected Cautious (Sterling) Fund 5

Future Performance

Prudential remains highly committed to with profits and the philosophy that equities offer the best prospect of longer term returns. The strength and scale of Prudential also contribute to boost future performance prospects.

PAC Sterling With-Profits Fund 4

The equity backing ratio has fallen from its level of a few years ago, but there must be a reasonable expectation that it may revert to a higher level in the future. It is difficult to compare payouts in the offshore market, due to the lack of published data. Recent payouts on onshore UK business with the same asset mix have been fairly respectable, but have perhaps slipped relative to others in the market, and there are charges for smoothing and guarantees.

PruFund Growth (Sterling) Fund 4

This fund benefits from the same asset mix, and hence investment performance, as the PAC Sterling With-Profits Fund. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge.

PruFund Protected Growth (Sterling) Fund 3

The additional charge for guarantees on the PruFund Protected funds reduces the Future Performance Rating, relative to the PruFund Growth Fund.

PruFund Cautious (Sterling) Fund 3

Long-term growth prospects are lower than those in the company's more traditional equity based with profits funds, because of the intentionally cautious target EBR. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge.

PruFund Protected Cautious (Sterling) Fund 2

Long-term growth prospects are lower than those in the company's more traditional equity based with profits funds, because of the intentionally cautious target EBR. Also, the additional charge for guarantees on the PruFund Protected funds reduces the Future Performance Rating, relative to the PruFund Cautious Fund. Charges are pre-defined, and those for smoothing and guarantees are contained within the annual management charge.

With Profits Financial Strength

5 PIA (like its parent, Prudential Assurance Company Ltd, in the UK) continues to buck the general trend and write significant volumes of with profits new business (in 2010, €168.4m worth of new business was with profits, over 58% of the total). Thus with profits clearly remains strategically important to the company.

At the parental level, and particularly in the UK, an excellent level of financial strength is maintained and Prudential retains its acknowledged position as one of the leaders in the with profits arena.

The investment element of with profits business written by PIA is reinsured 100% to PAC. More specifically it is reinsured into the Defined Charge Participating Sub-Fund (DCPSF), one of three with profits sub funds within PAC. At 31 December 2011 the DCPSF had total assets of £3.0bn, whilst with profits assets in PAC totalled some £94.4bn (2010: £87.1bn).

On a standalone basis, the DCPSF maintains no free assets on a realistic basis. However, support is provided to the DCPSF by the very strong With-Profits Sub-Fund in return for a yearly charge (for PIA’s PAC Sterling With-Profits Fund business the charge was at the rate of 0.2% p.a. in 2009, 2010 and 2011).

Company

Scottish Mutual International plc [Registered in Ireland]

Ownership

Phoenix Group Holdings [Registered in Cayman Islands]

Group Background

Phoenix Group is the largest closed consolidator of life companies in the UK with around £70bn of funds under management. It was formed by the merger, in 2008, of Pearl Group and Resolution. Pearl Group, companies that traded under the Pearl, NPI and London Life brands, was acquired in 2005 by Life Company Investor Group Ltd (subsequently renamed Pearl Group Ltd (PGL)) from Henderson Group plc (previously HHG plc and formed following the withdrawal from the UK of AMP Ltd).

The group was simplified in 2006 with the transfer of business from Pearl Assurance (Unit Linked Pensions) Ltd, Pearl Assurance (Unit Funds) Ltd and London Life Linked Assurances Ltd into NPI Ltd.

Resolution plc was formed in September 2005 from the merger of Resolution Life Group Ltd and Britannic Group plc, including the life business of Alba Life (previously Britannia Life), the life operations of Allianz Cornhill and the Century group (itself the result of numerous previous consolidations).

In December 2005, the funds of Swiss Life (UK) plc, Phoenix Assurance Ltd and Bradford Insurance Company Ltd were transferred into Royal & SunAlliance Linked Insurances Ltd (renamed Phoenix Life Ltd (PLL)).

In August 2006, Resolution plc acquired the life businesses of Abbey National plc: Scottish Mutual Assurance Ltd (SMAL), Scottish Mutual International Ltd (SMI), Scottish Provident Ltd (SPL) and Abbey National Life plc (re-named Phoenix Life Assurance Ltd (PLAL)).

In May 2008, Impala Holdings Ltd, a 75% subsidiary of PGL, acquired Resolution plc. Royal London acquired Scottish Provident International Life Assurance Ltd in June 2008 and PLAL and the new business capability of SMAL and SPL in August 2008.

In September 2009, PGL was acquired by Liberty Acquisitions Holdings (International) of the Cayman Islands, which then renamed itself PGL. Following extensive capital restructuring, the group changed its name to Phoenix Group in March 2010.

In January 2011, the business of Phoenix & London Assurance Ltd (PALAL) was transferred into PLL. The business of NPI Ltd (and some of the business of National Provident Life Ltd) was transferred into PLL effective from January 2012.

Company background

The company was established in 1996 as the offshore life assurance arm of Abbey National plc. Throughout 1996 to 1998 SMI concentrated on the UK market, but it has also written business in Ireland and Hong Kong (via a branch operation).

Initially, SMI wrote with profits business under which the policy benefits were reinsured to the Overseas Life Assurance Business Fund of the With Profit Sub-Fund of its then sister company Scottish Mutual Assurance Ltd. In 2009, this business along with the rest of SMAL’s business was transferred to Phoenix Life Limited and the reinsurance is now to the Scottish Mutual

With-Profits fund of PLL.

From April 2000, with profits business was written and retained in the long-term fund of SMI.

In March 2003, the Abbey National Group announced that its international businesses were no longer considered key, and SMI was closed to new business in April 2003, although it still accepts increments on certain existing policies.

The company’s business comprises predominantly single premium investment products, incorporating single premium unit-linked bonds, portfolio bond type investments and unitised with profits bonds.

With regard to its Irish domestic business, the company now sits alongside Phoenix Life Ltd’s Irish branch business (including that in the SPI With Profits Fund), together branded as Phoenix Ireland. From the end of 2009, the company entered into an outsourcing agreement with Percana Ltd, to give certainty of future costs.

Company Financial Strength

The company’s business is running off quite quickly now, with long term assets reducing from £1.9bn at the end of 2006 to £358m at the end of 2010. However, capital resources in excess of capital requirements increased from £42.1m to £46.3m in 2010, when a pre-tax profit of £623,000 was achieved, following a loss of £6.5m in 2009.

The parent group is the UK’s largest closed life and pension fund consolidator, with £72bn of assets under management at the end of 2011. The Group's estimated IGD surplus was £1.3bn as at 31 March 2012.

With Profits Bond Products Marketed

Product Available from/to Open to New Business? With Profit Investment Bond Jan 1999-May 2001 No* Guaranteed Investment Bond May 2001-April 2003 No* * Ignoring sales to/top ups by existing customers

With Profits Fund Links Available (Sterling denominated)

Fund Product Available from/to With Profit Series 1 Fund With Profit Investment Jan 1999-Apr 2000 Bond SMI With Profits Sterling Fund (Series 1) With Profit Investment Apr 2000-May 2001 Bond SMI With Profits Sterling Fund (Series 2) Guaranteed Investment May 2001-Jun 2002 Bond SMI With Profits Sterling Fund (Series 3) Guaranteed Investment Jun 2002-Apr 2003 Bond

Reinsurance of With Profits Business

The With Profit Series 1 Fund is fully reinsured into the Scottish Mutual With-Profits Fund of the sister company, Phoenix Life Ltd. Reserves for this business amounted to less than £18m at the end of 2011, including only £1.6m denominated in Sterling.

The SMI With Profits Sterling Funds, also known as the ‘Dublin Funds’, are retained within SMI.

Reinsurance Company

Phoenix Life Ltd [Registered in England and Wales]

Reinsurance Company Background

In May 2008, Impala Holdings Ltd, a 75% subsidiary of Pearl Group, acquired Resolution plc.

The long term business and some of the shareholders' funds of Scottish Mutual Assurance Ltd and Scottish Provident Ltd were transferred into the company in January 2009 for a nil consideration.

The transfer to PLL of the long term business and the majority of the shareholders' funds of PALAL was effective on 1 January 2011, and the long-term business of NPI Ltd (& some of the business of National Provident Life Ltd) was transferred to the company effective from January 2012.

Scottish Mutual With-Profits Fund

The Scottish Mutual With-Profits Fund (SMWPF) contains the with profits business transferred to Phoenix Life Ltd in January 2009 from the With Profits Sub-Fund (WPSF) of Scottish Mutual Assurance Ltd 'SMAL). It also includes the new-style with profits Smoothed Investment Fund business transferred to the Phoenix Life Ltd Non-Profit Fund at the same time from SMAL’s Other Business Sub-Fund (OBSF), and then subsequently reinsured to the SMWPF.

Scottish Mutual's origins date back to 1883, when The Scottish Temperance Life Assurance Company Ltd was founded. It became a mutual in 1952 on the formation of The Scottish Mutual Assurance Society. The Scottish Mutual Assurance Society demutualised on 1 January 1992 and its business was transferred to Scottish Mutual Assurance plc, which was subsequently renamed Scottish Mutual Assurance Ltd. From 1991 to 2006, SMAL was owned by Abbey National plc, but in September 2006, it was acquired by Resolution plc.

When Scottish Mutual demutualised, the WPSF received all the CWP business, and the with profits investment element of UWP business. From 1992 until 2002, all further new Scottish Mutual with profits business was written in the WPSF, with the exception of the Triple Bonus Bond. In December 2002, Scottish Mutual withdrew the then current with profits option for all new life and pensions business.

SMAL launched two new-style with profits funds in April 2003, the Smoothed Income and Smoothed Growth Funds, which were ring-fenced funds within the OBSF. Both funds were closed in 2008 and they are quite small, so they are not generally considered in more detail in this report.

In June 2004, following extensive discussion with the FSA, the company announced a 'stabilisation' exercise designed to ensure the future solvency of the fund post the introduction of realistic reporting. This involved five steps:

(i) Asset shares were reduced by £351m (ii) The injection of £460m of capital into the WPSF from the OBSF (iii) The repayment of the outstanding contingent loan (totalling £591m) (iv) The establishment of a Risk Based Capital (RBC) capital support facility external to the fund (v) The implementation of a hedging strategy, referred to as project OPAL.

Whilst SMAL latterly focussed on its protection speciality (much of which was sold to Royal London), a large proportion of its liabilities related to the older legacy portfolio of other business, and the majority of its reserves were with-profits in nature, including within the WPSF approximately £1bn of with profits bonds reinsured in from Phoenix Life Assurance Ltd (which was recaptured in August 2008).

The fund is generally no longer actively seeking new business, but it continues to write a small amount of incremental new business.

Where appropriate, historic data is shown in this report in respect of the business transferred into the fund, using the data from SMAL’s WPSF fund.

Reinsurance Company Financial Strength

The Phoenix Group has stabilised since the rather public difficulties of the parent group in 2008 and early 2009.

The company’s free asset ratio reduced slightly in 2011, however, although there was an improvement in the company's CRR coverage.

With Profit Investment Bond Product Outline

The With Profit Investment Bond is a single premium unitised with profits whole life assurance investment bond, denominated in Sterling, Euros or US Dollars.

A percentage of the single premium received is invested in a unitised with profits fund (100% for ages under 80 at entry, 98% for ages over 80 or over).

Policies purchase notional units in a unitised with profits fund. Benefit payments are dependent on unit prices at the time of a claim, although charges may be applied. The unit price is typically guaranteed not to fall and increases in line with any discretionary bonus payments.

The bonuses are designed to distribute to policyholders a fair share of the return on assets in the with profits funds together with other elements of the experience of the fund. The owners of the company are entitled to receive 15% of the cost of the bonuses declared.

With Profits Series 1 policyholders share only in the investment experience of the fund, with other sources of profit and loss falling to the shareholders. For this series, no annual bonuses have been added since the end of 2002.

SMI With Profits Sterling Fund policyholders are entitled to 100% of the profits remaining after the annual management charges have been deducted. To date, the company has maintained a positive bonus rate each year, although the rate fell to 1% at the end of 2008.

Surrender values are not guaranteed (except at the special Guaranteed Dates). The surrender value is the value of units increased by any terminal bonus, reduced by any MVR and reduced by a discontinuance charge during the first 5 years.

The main features of the Sterling version of the bond include:  Minimum premium: £15,000.  For premiums of £25,000 or over, additional units were added to the plan at the end of the first year (1% - 2% depending on premium size).  Establishment Charge: 1% per annum of the fund deducted quarterly in arrears for the first five years.  Annual management charge of 1.1% to cover fund management and administration fees.  Additional charge on With Profits Series 1 Fund units: 0.5% per annum payable to the

Scottish Mutual With-Profits Fund of PLL.  Death benefit: 101% (100.1% at age 75 or over) of the value of units, adjusted for any terminal bonus and early surrender charge.  On surrender during the first 5 years, a discontinuance charge applies (9% in Year 1, reducing by 2% p.a. to nil in the sixth year).  Regular or one-off withdrawals allowed subject to a minimum of £500 and at least £10,000 remaining in the bond.  Switches not allowed.  Additional single premium top-ups allowed.  Tax – SMI Sterling With Profits Fund: no tax is allocated to units, except tax deducted at source on investment proceeds.

Guaranteed With Profit Bond Product Outline

The Guaranteed With Profit Bond is a single premium unitised with profits investment bond, denominated in Sterling, Euros or US Dollars (originally there was a Hong Kong Dollar version as well, but that fund is now closed). The bond was available on two different bases: whole life assurance or capital redemption (with an 80 year term).

A percentage of the single premium received is invested in a unitised with profits fund (capital redemption: 100%; whole life: 100% for ages under 80 at entry, 98% for ages over 80 or over).

The bonuses are designed to distribute to policyholders a fair share of the return on assets in the with profits funds together with other elements of the experience of the fund. Policyholders are entitled to 100% of the profits remaining after the annual management charges have been deducted. The owners of the company are entitled to receive 15% of the cost of the bonuses declared.

Surrender values are not guaranteed (except at the two special Guaranteed Dates). The surrender value is the value of units increased by any terminal bonus, reduced by any MVR and reduced by a discontinuance charge during the first 5 years.

The main features of the Sterling version of the bond include:  Minimum premium: £15,000.  For premiums of £50,000 or over, additional units were added to the plan at the outset (0.5% - 2% depending on premium size).  Establishment Charge: 1.3% per annum of the fund deducted quarterly in arrears for the first five years.  An annual distribution charge is taken daily, equivalent to (15/85)% of the current annual bonus rate, and a charge of (15/85)% of the amount of any terminal bonus. When an MVR is applied to an encashment of units, an amount equal to 15/85ths of the MVR is added to the With Profits Fund. For policies invested in Series 5 units, the amount added back is restricted to a maximum of the annual charges deducted to that date.  Death benefit at ages under 75 – life assurance version: the greater of 101% of the surrender value and the original premium increased at the rate of 2% per annum from the start date.  Death benefit at age 75 or over – life assurance version: 100.1% of the surrender value.  Maturity benefit – capital redemption version: The greater of the surrender value of the bond and the Guaranteed Maturity Value (twice the original premium, if no withdrawals).  On surrender during the first 5 years, a discontinuance charge applies (a percentage of the units, based on the number of outstanding establishment charges and the size of the plan)  Regular or one-off withdrawals allowed subject to a minimum of £200 and a maximum of 7.%% of the bond value at the start of the policy year.  Switches not allowed (except to one of the other currency funds).

 Additional single premium top-ups allowed.  Tax: no tax is allocated to units, except tax deducted at source on investment proceeds.

Current Bonus Scales

Annual Bonus Rates In 2011 In 2010 With Profit Series 1 Fund 0% 0% SMI With Profit Sterling Fund (Series 1,2 and 5) 1% 1%

Terminal Bonus Rates at 1 June 2012 – With Profit Series 1 Fund Bonds effected Current TB rate 1999 19.7% 2000 20.3% 2001 34.7% 2002 52.0% 2003 60.0%

MVR/Terminal Bonus Rates at 1 June 2012 – SMI With Profit Sterling Fund (Series 1) Bonds effected Current TB rate 2000 -23% to -15% 2001 -15% to +6% 2002 0% to +19% 2003 +15% to +20%

MVR/Terminal Bonus Rates at 1 June 2012 – SMI With Profit Sterling Fund (Series 2) Bonds effected Current TB rate 2001 -2% to +13% 2002 0% to +22%

MVR/Terminal Bonus Rates at 1 June 2012 – SMI With Profit Sterling Fund (Series 5) Bonds effected Current TB rate 2002 0% to +26% 2003 0% to +27%

MVRs

With Profit Investment Bond

MVRs may be applied on surrenders, except that an amount up to the Charge Free Withdrawal Allowance may be withdrawn from the bond each year free from any MVR or surrender penalty. The Charge Free Withdrawal Allowance is the current annual bonus rate applied to the value of units.

As at 1st June 2012, MVRs (of up to 23%) were only being applied for SMI With Profits Sterling Fund (Series 1) bonds effected between April 2000 and August 2001.

Guaranteed With Profit Bond

MVRs may be applied on surrenders, subject to the guarantees applicable at the two special Guaranteed Dates (see section on Guarantees below).

As at 1st June 2012, MVRs (of 2%) were only being applied for Sterling Series 2 bonds effected in May 2001.

Guarantees

A substantial proportion of the company’s original guarantees expired between 2009 and 2011.

With Profit Investment Bond

There are special Guaranteed Dates which fall on the 8th anniversary (or any later anniversary chosen at outset) and every five years thereafter. This guarantee allows the plan to be surrendered in full, or in part, free from any MVR.

The With Profit Series 1 bonds are subject to a reduction in the investment return credited to asset shares in respect of the cost of rebalancing the hedge assets held within the Scottish Mutual With-Profits Fund in respect of the fund’s extensive guarantees. In 2010, this cost was more than offset by the effect of estate distributions from the fund and there was a net increase in asset shares of 3.21%. In 2001, however, there was no net charge or enhancement.

Guaranteed With Profit Bond

There are two special Guaranteed Dates which fall on an anniversary selected at outset (between the 8th and the 13th) and the 15th anniversary.

This guarantee allows the plan to be surrendered in full, or in part, for a minimum value equal to the premium multiplied by the appropriate Guarantee %. The guarantee reduces in line with any withdrawals. The Guarantee % is 117.5% on the 8th anniversary, 120% on the 9th anniversary, 122% on the 10th anniversary, 125% on the 11th anniversary, 127% on the 12th anniversary, 130% on the 13th anniversary, and 140% on the 15th anniversary.

The company operates a hedging strategy to protect against guarantee costs.

Investment

With Profit Series 1 Fund

There has been a marked shift away from equities in the Scottish Mutual With-Profits Fund since 1999, with the EBR reducing from around 77%. The investment strategy now includes an explicit and regularly rebalanced hedging strategy using a series of structured derivatives comprising equity put options, equity futures, interest rate swaps and interest rate swaptions. At December 2011 the value of the derivatives held was £333m. Hedging is limited to 5% of the fund.

PLL changed the investment strategy for with profits asset shares in 2010, announcing an intention to: reduce the UK equity content; increase the overseas equity content; introduce a property element and a small proportion of alternative assets, such as hedge funds; reduce the proportion in cash and increase the proportion in gilts.

Until 2010, there had been a single asset mix for the asset shares of all sterling denominated business (excluding the Smoothed Funds), with a maximum guideline holding of 45% in equities (increased from 40% in September 2006). Similarly there had been a single mix of asset held for euro denominated business and a single mix of asset held for US dollar denominated business. Now, the asset mix varies by policy type. Compared with the previous status quo, policies with low guarantees have a higher EBR, whilst those with high guarantees have a lower EBR.

The tables below shows the asset mix for UWP business without guaranteed minimum bonuses. The current guideline range for equities and property for this block of business (excluding assets backing guarantee costs) is 55%-65%.

Asset type Actual Actual Actual Actual 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 Equities 36.0% 39.0% 52.0% 49.0% Property 0.0% 0.0% 5.0% 6.0% Fixed Interest 64.0% 50.0% 40.0% 41.0% Cash 10.0% 11.0% 0.0% 1.0% Other 0.0% 0.0% 3.0% 3.0%

SMI With Profits Sterling Fund (Series 1, 2 and 5)

The investment strategy and risk profile of SMI’s Dublin With Profits Fund for each of the notional currency sub-funds is assessed at a total fund level rather than at sub-fund level, although there may be future circumstances when such consideration is desirable at sub-fund level (for example if assets to hedge the guarantees were to be held within the fund).

The table below shows the target asset allocations within the fund. Actual asset mix may vary by a few (typically less than 5) percentage points.

Asset type Target Target Target Target 1 Sep 2006 1 May 2008 1 May 2011 30 Apr 2012 UK Equities 32.0% 50.0% 50.0% 50.0% Overseas Equities 8.0% (inc above) (inc above) (inc above) Property 0.0% 0.0% 0.0% 0.0% Fixed Interest 45.0% 38.0% 37.5% 37.5% Cash 15.0% 12.0% 12.5% 12.5% Other 0.0% 0.0% 0.0% 0.0%

Past Performance

The company declined to disclose any specimen past performance values to AKG.

Investment Returns

SMI does not currently make any distinctions between different classes of policy, in recognising the gross investment return to use in its calculation of asset share models other than by reference to the currency sub-funds. In particular there are units denominated in three different currencies (£, $ and €) with premiums in each currency being applied to four distinct currency sub-funds. Each currency sub-fund is separately maintained and has its own notionally allocated assets, with the performance of those notionally allocated assets driving the calculation of the specific investment return of each sub-fund. The actual calculations use gross of tax investment returns as no policyholder tax is currently applicable.

Fund 2007 2008 2009 2010 2011 With Profit Series 1 5.3% -8.8% 12.2% 13.0% 0.0% SMI With Profits Sterling Fund (Series 5.1% -8.6% Not disclosed to AKG 1, 2 and 5) Note: Returns shown above are investment returns gross of tax (where applicable) and charges.

Transparency

SMI declined to co-operate with AKG in the preparation of this report.

SMI does routinely publish some current and historic information about its with profits business on its website, including illustrative scales of terminal bonus and MVRs which are published each month. However, there are clear indications that the breadth of the material published has diminished.

With Profit Series 1 Fund 2

Phoenix Life Ltd’s Scottish Mutual With-Profits Fund is essentially an old style fund, with all that this entails. Phoenix Life's annual reports to with profits policyholders are fairly detailed, although this partly reflects the increased complexity of the company's funds. There is now a majority of independent representation on PLL’s WPC.

SMI With Profits Sterling Fund (Series 1, 2 and 5) 1

AKG has been unable to locate any information about many key aspects of the fund’s operation in recent years, for example: costs of rebalancing hedge assets, actual asset mix, and investment returns.

SMI does not operate a With Profits Committee and does not appear to provide policyholders with much feedback about compliance with the terms of the PPFM.

Future Performance

Actual payout levels for all of the company’s with profits bonds are very much an unknown quantity, so it is impossible to judge how competitive the company has been.

With Profit Series 1 Fund 2

For this reinsured bonus series, no annual bonuses have been added since the end of 2002, although the company is currently adding terminal bonuses for all dates of entry.

Distributions from the estate of the Scottish Mutual With-Profits Fund have now commenced, albeit potentially offset by charges for rebalancing the hedge assets. Future prospects for this block of business are improved as a result of the differential asset mix strategy introduced in 2010. This has led to an increased EBR and hence the possibility of improved returns.

SMI With Profits Sterling Fund (Series 1) 2 SMI With Profits Sterling Fund (Series 2) 2 SMI With Profits Sterling Fund (Series 5) 2

For these non-reinsured bonus series, annual bonuses have continued to be added each year, albeit at a much reduced rate, and MVRs are applied in some instances. Terminal bonus rates vary quite a lot between these three series, for any given month of entry.

With Profits Financial Strength

With Profit Series 1 Fund 2 New with profits products are not offered by SMI, and the strength of its small block of in force with profits business reinsured to PLL depends very largely upon that company’s security.

SMAL carried out a number of actions to stabilise the Scottish Mutual With-Profits Fund, the most apparent being a capital injection in 2004 and the explicit hedging strategy. The fund is subject to PLL's company-wide support mechanism, which is reassuring, but policyholders in this fund are likely to suffer through, in particular, lower EBRs and other penalties before it would come into play.

The fund has not currently drawn down a loan from the Non-Profit Fund or the Shareholder Fund, but it does rely on surplus assets in the Non-Profit Fund to cover its ICA. The company does expect the solvency position to improve as the fund runs down. The working capital in the fund (before zeroisation) increased from £243m to £253m in 2011, a working capital ratio of 6.6%.

SMI With Profits Sterling Fund (Series 1, 2 and 5) 2 New with profits products are not offered by SMI, and the volume of business in force is diminishing rapidly. The company’s profits for shareholders have fluctuated widely in recent years.

The company operates a hedging strategy to protect against guarantee costs. A substantial proportion of the company’s original guarantees expired between 2009 and 2011.

Tel No: +44 (0) 1306 876439 Fax No: +44 (0) 1306 885325 e-mail: [email protected] www.akg.co.uk

AKG is an actuarially based consultancy specialising in the provision of information and market assistance to the financial services industry