Milliman Client Report k The Part VII transfer of non-profit annuity business from The Prudential Assurance Company Limited to Rothesay Life Plc The report of the Independent Expert Prepared by: Nick Dumbreck FIA, CERA January 21, 2019 Milliman Client Report Table of Contents TABLE OF CONTENTS ...................................................................................................................................... 2 1. INTRODUCTION........................................................................................................................................ 5 The Independent Expert .................................................................................................................................. 5 The purpose and scope of my report ............................................................................................................... 5 Qualifications and Disclosures ........................................................................................................................ 6 The parties for whom the report has been prepared ....................................................................................... 6 Limitations ........................................................................................................................................................ 7 Technical Actuarial Standards (“TAS”) ............................................................................................................ 7 The Actuarial Profession Standards (“APS”) ................................................................................................... 7 The structure of my report ............................................................................................................................... 7 My Supplementary Report ............................................................................................................................... 8 2. EXECUTIVE SUMMARY ........................................................................................................................... 9 Summary of proposed Scheme ....................................................................................................................... 9 Impact of the proposed transfer on transferring policies ................................................................................. 9 Impact of the proposed transfer on non-transferring policies of PAC............................................................ 11 Impact of the proposed transfer on existing policies of Rothesay ................................................................. 12 Consideration of the reinsurance agreement ................................................................................................ 13 Other considerations arising from the Scheme ............................................................................................. 14 Overall conclusions ........................................................................................................................................ 14 3. GENERAL CONSIDERATIONS OF THE INDEPENDENT EXPERT ..................................................... 15 The role of the Independent Expert ............................................................................................................... 15 The definition of ‘policyholder’ ....................................................................................................................... 15 Security of policyholder benefits .................................................................................................................... 16 Policyholders’ reasonable expectations ........................................................................................................ 16 The conclusions of the Independent Expert .................................................................................................. 16 The supplementary report .............................................................................................................................. 16 Reliance on legal advice ................................................................................................................................ 17 4. THE UK LIFE INSURANCE MARKET AND REGULATORY ENVIRONMENT ..................................... 18 Introduction .................................................................................................................................................... 18 The UK regulators .......................................................................................................................................... 18 The Solvency II regulatory regime ................................................................................................................. 18 The governance of UK long-term insurers ..................................................................................................... 20 A firm’s risk appetite and internal capital policy ............................................................................................. 21 The products and long-term business relevant to this report ........................................................................ 21 The financial information in this report ........................................................................................................... 22 5. BACKGROUND TO PAC ........................................................................................................................ 24 Background .................................................................................................................................................... 24 PAC’S current fund structure ......................................................................................................................... 24 PAC NPSF products ...................................................................................................................................... 25 PAC with-profits fund products ...................................................................................................................... 26 Recent relevant events .................................................................................................................................. 26 PAC’s reinsurance arrangements .................................................................................................................. 28 Financial condition ......................................................................................................................................... 29 2 January 21, 2019 Milliman Client Report Risk and capital management ....................................................................................................................... 31 Shareholder exposure to PAC’s with-profits fund .......................................................................................... 32 The PAC Pensions Mis-selling Costs Assurance .......................................................................................... 32 Capital support available to PAC ................................................................................................................... 32 Administration and outsourcing ..................................................................................................................... 33 Risks inherent in PAC .................................................................................................................................... 33 6. BACKGROUND TO ROTHESAY ............................................................................................................ 34 Background .................................................................................................................................................... 34 Products ......................................................................................................................................................... 35 Recent relevant events .................................................................................................................................. 35 Outwards reinsurance arrangements ............................................................................................................ 36 Financial condition ......................................................................................................................................... 36 Risk and capital management ....................................................................................................................... 37 Administration and outsourcing ..................................................................................................................... 38 Risks inherent in Rothesay ............................................................................................................................ 38 7. THE SCHEME .......................................................................................................................................... 40 The motivation for the Scheme ...................................................................................................................... 40 Summary of the Scheme ............................................................................................................................... 40 Transferring assets and liabilities .................................................................................................................