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The Proposed Scheme of Arrangement Between the Royal London Mutual

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The Proposed Scheme of Arrangement Between the Royal London Mutual MILLIMAN REPORT The proposed scheme of arrangement between The Royal London Mutual Insurance Society Limited and the holders of United Friendly Industrial Branch with-profits policies The report of the Independent Expert 1 July 2021 Oliver Gillespie, FIA Table of Contents 1. EXECUTIVE SUMMARY ...................................................................................................................................... 2 2. BACKGROUND TO RLMIS AND THE IN-SCOPE WITH-PROFITS FUNDS .................................................... 10 3. A SUMMARY OF THE PROPOSED OFFER AND THE PROPOSED SCHEME ............................................... 24 4. THE PROCESS AND TIMETABLE FOR THE PROPOSED SCHEME .............................................................. 38 5. THE COMMUNICATIONS STRATEGY FOR THE PROPOSED SCHEME ....................................................... 43 6. THE CONSIDERATIONS OF THE INDEPENDENT EXPERT ........................................................................... 50 7. THE SECURITY OF POLICYHOLDER BENEFITS TEST ................................................................................. 58 8. THE POLICYHOLDER OUTCOMES TEST – OVERVIEW ................................................................................ 66 9. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE INCLUDED POLICYHOLDERS .......................................................................................................................... 67 10. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE EXISTING POLICYHOLDERS OF THE RL OPEN FUND ................................................................................. 90 11. THE POLICYHOLDER OUTCOMES TEST – THE REASONABLE BENEFIT EXPECTATIONS OF THE REMAINING POLICYHOLDERS OF RLMIS ...................................................................................................... 94 12. THE POLICYHOLDER OUTCOMES TEST – THE STANDARDS OF ADMINISTRATION, SERVICING AND GOVERNANCE APPLYING TO RLMIS’S POLICYHOLDERS .......................................................................... 95 13. THE POLICYHOLDER OUTCOMES TEST – SHOULD THE PROPOSED SCHEME BE CONSIDERED TO BE A REATTRIBUTION OF THE UFIB SUB-FUND INHERITED ESTATE ............................................................ 96 14. THE POLICYHOLDER OUTCOMES TEST – CONCLUSION ........................................................................... 98 15. THE ADVERSE SCENARIO TEST ..................................................................................................................... 99 16. THE POLICYHOLDER COMMUNICATIONS TEST ......................................................................................... 104 17. THE POLICYHOLDER VOTE TEST ................................................................................................................. 107 18. THE FAIR CONDUCT TEST ............................................................................................................................. 110 19. OTHER CONSIDERATIONS ARISING FROM THE SCHEME ........................................................................ 113 20. MY CONCLUSIONS.......................................................................................................................................... 123 21. RELIANCES AND LIMITATIONS OF THIS REPORT ...................................................................................... 124 APPENDIX A: FINANCIAL INFORMATION ON A SOLVENCY II PILLAR 1 BASIS ................................................................... 126 APPENDIX B: THE UK LIFE INSURANCE MARKET AND REGULATORY ENVIRONMENT .................................................... 127 APPENDIX C: DATA RELIED UPON ............................................................................................................................................ 133 APPENDIX D: CERTIFICATE OF COMPLIANCE ........................................................................................................................ 134 APPENDIX E: GLOSSARY OF TERMS ........................................................................................................................................ 135 1 1. Executive summary BACKGROUND TO ROYAL LONDON AND THE UFIB SUB-FUND The Royal London Mutual Insurance Society Limited 1.1 The Royal London Mutual Insurance Society Limited (“RLMIS”) is a mutual insurance company that is the parent entity of the Royal London Group (“RLG”). 1.2 As at 31 December 2020, RLMIS had £148 billion of funds under administration, 8.8 million policies in force and £95.3 billion of Technical Provisions. 1.3 RLMIS currently consists of the Royal London Open Fund (the “RL Open Fund”) and six ring-fenced funds referred to collectively as the “RLMIS Closed Funds”. The RLMIS Closed Funds contain the assets and liabilities relating to business acquired through various acquisitions by RLMIS as described in Section 2. The most relevant sub- funds for this report are: The RL Open Fund; and The United Friendly Industrial Branch Sub-Fund (the “UFIB Sub-Fund”). 1.4 All financial information in this report is (unless otherwise stated) as at 31 March 2021. The RL Open Fund 1.5 The RL Open Fund is the largest fund within RLMIS, and all new policies issued by RLMIS, with the exception of increments or options on existing policies allocated to some other funds, are written in the RL Open Fund. 1.6 The inherited estate of the RL Open Fund (the “RL Open Fund Estate”) provides capital to support the business activities of RLMIS, including writing new business in the RL Open Fund. In return, the RL Open Fund Estate receives profits (or incurs losses) from these business activities. 1.7 As at 31 March 2021, the RL Open Fund1 had: Assets of £72.4 billion; Own Funds2 (on an internal Pillar 2 basis) of £5.0 billion; and A standalone Internal SCR Cover of 191%. 1.8 The Internal SCR Cover is a measure of the financial strength of the RL Open Fund and is calculated as the ratio of the RL Open Fund Own Funds to the RL Open Fund Solvency Capital Requirement where the Own Funds and Solvency Capital Requirement are internally calculated by RLMIS. The UFIB Sub-Fund 1.9 The UFIB Sub-Fund arose from the acquisition of United Assurance Group (“UAG”) by RLMIS in 2000 and the transfer, in 2001, of the business of the insurance companies within UAG into RLMIS pursuant to an insurance business transfer scheme (the “UAG Scheme”). 1.10 Under the UAG Scheme, various subsets of the assets and liabilities of the insurance companies within UAG were transferred into the RL Open Fund, subject to separate ‘additional accounts’ being maintained for each subset. The presence of the additional accounts, in conjunction with the provisions in Chapter 20 of the Financial Conduct Authority’s (“FCA”) Conduct of Business Sourcebook ("COBS 20") in relation to the segregation of assets, means 1 The financial position of the RL Open Fund is set out here assuming the RAIB Sub-Fund Consolidation (described in more detail in Section 2) had already been implemented as at 31 March 2021. 2 Under the Solvency II regime, the excess of assets over liabilities, plus any subordinated liabilities, is known as Own Funds. Own Funds can be thought of as the capital resources available in the company to cover capital requirements. 2 that RLMIS has been treating these subsets as separate sub-funds of the RL Open Fund for reporting and communication purposes since 2004. 1.11 The UFIB Sub-Fund is one of these sub-funds, comprising the Industrial Branch (“IB”) business originally sold by United Friendly Insurance plc and consists principally of IB conventional with-profits (“CWP”) whole of life contracts, along with a small number of CWP endowment contracts. 1.12 As at 31 March 2021, the UFIB Sub-Fund had: Approximately 740,000 policies, of which approximately 600 are endowments, with the remainder being whole of life contracts3; Assets of £1.1 billion; Own Funds (on an internal Pillar 2 basis) of £103 million; An inherited estate (also referred to as an additional account) of £108 million; and A standalone Internal SCR Cover of 407%. 1.13 Since 2006, RLMIS has been distributing the additional account of the UFIB Sub-Fund (the “UFIB Additional Account”), which forms part of the UFIB Sub-Fund, to its policyholders using a combination of enhancements to asset shares and uplifts to claim values. 1.14 Under the terms of the UAG Scheme, RLMIS is required to allocate the UFIB Additional Account in full (less the provision for outstanding tax liabilities at that time) to the asset shares of the with-profits policies in the UFIB Sub- Fund when the total asset share falls below £100 million (the “Sunset Clause Threshold”), which is expected to be reached in 2043. At this point, the requirement to maintain any separation from the RL Open Fund would fall away and the UFIB Sub-Fund would be consolidated into the RL Open Fund. THE PROPOSED SCHEME OF ARRANGEMENT What is a scheme of arrangement? 1.15 A scheme of arrangement is a statutory procedure under Part 26 of the Companies Act 2006 whereby a company may make a compromise or arrangement with its members or creditors (or any class of them). 1.16 A scheme of arrangement must be approved at a creditor (i.e. the policyholder) meeting (convened by the court – for this Scheme it is the High Court of England and Wales – the “High Court") by a particular majority of creditors, namely a majority (i.e. more than half) in number representing at least three quarters
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