Report of the Independent Expert on the proposed Scheme to transfer the entire business of Abbey Life Assurance Company Limited to Phoenix Life Limited. Prepared by Tim Roff FIA 12 July 2018 Contents 1 Introduction 1 2 Executive Summary 6 3 Regulatory background 13 4 Background on Abbey Life Assurance Company Limited 18 5 Background on Phoenix Life Limited 25 6 Outline of the proposed Scheme 30 7 Conversion of With-profits Funds to Non-Profit 34 8 The impact of the Scheme on Abbey Life Policyholders 37 9 The impact of the Scheme on the Current Policyholders of Phoenix 44 10 The impact of the Scheme on external reinsurers 47 11 Other considerations relevant to the Scheme 48 Appendices A Summary CV for Tim Roff 50 B Extract from work order 51 C PRA's approach to insurance business transfers 53 D FCA’s approach to insurance business transfers 58 E Information/Documents reviewed/relied on 67 F Glossary 70 1 Introduction Purpose of this report 1.1 On 30 December 2016, Abbey Life Assurance Company Limited (“Abbey Life”) was acquired by the Phoenix Group and is currently one of the UK regulated life insurance companies within the Phoenix Group. It is now proposed to transfer all of Abbey Life’s business into another UK life insurance company within the Phoenix Group, Phoenix Life Limited (“Phoenix”). The transfer will enable the Phoenix Group to de-authorise Abbey Life and increase capital and operational efficiency by reducing the number of life assurance companies within the Group. For Abbey Life the motivation of entering into the Scheme is the transfer of its business into a well-capitalised and diversified insurance company. 1.2 As part of the transfer it is proposed to convert the with-profits policies within Abbey Life’s two with-profits funds– Hill Samuel Participating Business Fund (“Hill Samuel PB Fund”) and Abbey Life Participating Business Fund (“Abbey Life PB Fund”) to non-profit (“Conversion”). More details on the Conversion are discussed in later sections of this report. 1.3 It is a requirement that when a scheme of transfer of insurance business from one company to another is submitted to the High Court of Justice of England and Wales (the "English Court") for approval, it must be accompanied by a report from an Independent Expert (the "Report"). There are similar requirements for schemes of transfer relating to policies issued to or held by residents of Jersey and Guernsey. 1.4 The relevant requirements are set out in the following legislation: (1) Part VII of the Financial Services and Markets Act 2000 (as amended) ("FSMA") in relation to the transfer described above (the “English Scheme”) which is to be submitted to the English Court for approval; (2) Article 27 of and Schedule 2 to the Insurance Business (Jersey) Law 1996 (“IBJL”) in relation to the transfer of Jersey policies described above (the “Jersey Scheme”) which is to be submitted to the High Court in Jersey (the “Jersey Court”) for approval; and (3) Section 44 of the Insurance Business (Bailiwick of Guernsey) Law 2002 (“IBGL”) in relation to the transfer of Guernsey policies described above (the “Guernsey Scheme”) which is to be submitted to the High Court in Guernsey (the “Guernsey Court”) for approval. 1.5 The Jersey Scheme and the Guernsey Scheme, which provide for the transfer of policies on substantially the same terms as the English Scheme, are conditional on the sanction of the English Scheme by the English Court and are expected to become effective on the same date. 1.6 Unless otherwise indicated in this Report, the English Scheme, the Jersey Scheme and the Guernsey Scheme are referred to collectively as the "Scheme" and the English Court, the Jersey Court and the Guernsey Court are referred to collectively as the "Court". 1.7 The Independent Expert must be approved by the Prudential Regulation Authority ("PRA"), having consulted with the Financial Conduct Authority ("FCA") (the PRA and the FCA together, the "Regulators"). 1.8 Abbey Life and Phoenix have nominated me to act as Independent Expert and to provide the Report in respect of the Scheme, and the PRA has approved my appointment in consultation with the FCA. The shareholders of Phoenix are meeting the costs of my appointment. © 2018 Grant Thornton UK LLP. All rights reserved. 1 1.9 The Scheme will be submitted to the Court for sanction under Section 111 of Part VII of the FSMA. If approved, it is expected that the Scheme will become operative and take effect on 31 December 2018 (the "Transfer Date"). This Report and any Supplemental Report1 I may issue (together my "Reports") will be presented to the Court which will consider the contents of these Reports in deciding whether to sanction the Scheme. 1.10 In preparing my Report, I have considered the terms of the Scheme only and have not considered whether any other scheme might provide a more efficient or effective outcome. 1.11 To the best of my knowledge, all material facts have been considered when assessing the impact of the Scheme and preparing my Report. 1.12 The Report describes the impact on policyholders that transfer as a result of the Scheme ("Transferring Policyholders") and the likely effect on existing policyholders of Phoenix (“Current Policyholders”). I also consider the impact of the Scheme on the current reinsurers of Abbey Life. What happens if the Scheme is not implemented? 1.13 If the entire Scheme does not proceed for any reason, then the transferring policies will remain within Abbey Life and will not become policies of Phoenix. In this situation, the internal reinsurance agreement between Abbey Life and Phoenix will remain in place and Abbey Life will continue to meet the requirements under its capital policy. Layout of the Report 1.14 The report is structured as follows: this section sets out an introduction to the Scheme and the Report; Section 2 provides a summary of my conclusions; Section 3 provides some background information to the regulatory regime in UK; Section 4 and Section 5 describe the background to the entities involved; Section 6 describes the purpose and terms of the Scheme; Section 7 describes the proposed Conversion of With-Profits Funds to Non-Profit; Section 8 describes the impact of the Scheme and Conversion on the Transferring Policyholders; Section 9 describes the impact of the Scheme on the Current Policyholders of Phoenix; Section 10 describes the impact of the Scheme on the external reinsurers; and Section 11 outlines other considerations relevant to the Scheme. The Independent Expert 1.15 I am a Fellow of the Institute and Faculty of Actuaries and I have over 30 years' experience in the life insurance industry. I am a Partner at Grant Thornton UK LLP ("Grant Thornton"). I joined Grant Thornton as a partner in October 2014. Prior to this I held senior roles at a number of firms including partner roles at EY and KPMG. Appendix A sets out more details of my experience. Appendix B is an extract from the letter of engagement between Grant Thornton, Abbey Life and Phoenix, setting out the agreed scope of my work. 1 In order to reflect any updated financial information or circumstances nearer the date of the final Court hearing, I will provide a Supplemental Report to update my opinions in respect of the Scheme. © 2018 Grant Thornton UK LLP. All rights reserved. 2 Independence 1.16 I confirm that in my opinion I have no conflict of interest that would compromise my ability to assist with this assignment. In reaching this opinion, I have considered the following factors to the best of my knowledge and belief: I am not and never have been a director or employee of Abbey Life or Phoenix; I have not provided any material consulting services or acted in any advisory capacity to Abbey Life or Phoenix in the last 3 years that create a conflict with my acting as the Independent Expert; I have never been a shareholder in Abbey Life or Phoenix nor acted as a representative of a shareholder nor invested in either of them through commercial loans or as a policyholder; I have not been part of an external audit to either Abbey Life or Phoenix, in the last three years; I do not hold any directorships in common with any of the directors or advisors of Abbey Life or Phoenix; I do not have any family ties with the directors, senior employees or advisors of Abbey Life or Phoenix; I have considered the most recent guidance issued by the Actuarial profession regarding conflicts of interest and have identified no conflict of interest that might compromise my independence; and I am of independent character and judgement. 1.17 Grant Thornton is a large consulting firm and has advised the Phoenix Group on various assignments. Grant Thornton has also advised Abbey Life on a small number of assignments. I do not believe that any of the assignments carried out for the Phoenix Group or Abbey Life compromise my independence, create a conflict of interest, or compromise my ability to report on the proposed Scheme. These assignments were disclosed to the Regulators prior to their approval of me as the Independent Expert Regulatory and professional guidance 1.18 My Report has been prepared in accordance with guidance contained in Chapter 18 of the Supervision Manual of the FCA's Handbook of Rules and Guidance ("SUP 18") and the Statement of Policy: The PRA's approach to insurance business transfers, dated April 2015. See Appendix C for details of how these requirements have been met.