INDEPENDENT EXPERT REPORT OF PHILIP TIPPIN … Classification - KPMG Public Stress test analysis 44 ... after the Swiss business has been transferred out, unless otherwise stated

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Document Classification - KPMG Public

INDEPENDENT EXPERT REPORT

OF PHILIP TIPPIN FIA

In the matters of

ACE EUROPEAN GROUP LIMITED

AND

CHUBB INSURANCE COMPANY OF EUROPE SE

AND

CHUBB BERMUDA INTERNATIONAL INSURANCE IRELAND DESIGNATED ACTIVITY COMPANY

AND IN THE MATTER OF PART VII OF THE FINANCIAL

SERVICES AND MARKETS

ACT 2000

IN THE HIGH COURT OF JUSTICE

DATED 11 NOVEMBER 2016

http://www.kpmg.com/uk

Independent Expert's Report on Proposed Insurance Business Transfers of Chubb Insurance Company of Europe SE and Chubb Bermuda International Insurance Ireland Designated Activity Company to ACE European Group Limited

© KPMG LLP. All rights reserved Page 2 of 61 11/11/2016


Contents

1. INTRODUCTION 4

Purpose of the report 4 Independent Expert 5 Proposed Transfers 5 Scope 6 Reliances 6 Use and limitations 7 Professional guidance 8 Terminology 8

2. EXECUTIVE SUMMARY & CONCLUSIONS 9

Overview of the Transfers 9 Purpose of the Transfers 10 Key Assumptions 11 Findings 12 Expert’s declaration 14

3. BACKGROUND 15

Chubb Limited (“Chubb”) 15 ACE European Group Limited (“AEGL”) 16 Chubb Insurance Company of Europe SE (“CICE”) 17 Chubb Bermuda International Insurance Ireland Designated Activity Company (“CBII”)18 Insurance business of the Transfer Companies 19 Outwards reinsurance programmes 21 Prudential capital requirements 21 Capital management policy 22 Guarantees / risk sharing arrangements 23

4. EFFECTS OF THE TRANSFERS 24

Effect of the Transfers on group structure 24 Effect of the Transfers on Transfer Company balance sheets 26 Non-financial effect of the Transfers 28

5. POTENTIAL IMPACT OF TRANSFERS ON STAKEHOLDERS 31

Overview of analysis performed 31 Identification of policyholder groups 31 Future intentions of AEGL 33 Governance and management framework 33 Cyber-security 34 Claims and policy administration 34 Conduct risk 34 Impact of changes in regulatory regime and jurisdiction 34 Financial and economic information considered 35 Consideration of capital and risk 36 Impact of Transfers on capital available to policyholders 38 Impact on existing reinsurers 39 Pension scheme obligations 40

6. METHODOLOGY, STRESS AND SCENARIO ANALYSIS 42

Overview 42 Loss modelling approach 42




Stress test analysis 44

7. SUMMARY OF FINDINGS 47

Summary of changes in circumstances of transferring CICE policyholders 47 Summary of changes in circumstances of transferring CBII policyholders 47 Summary of changes in circumstances of existing AEGL policyholders 48

APPENDIX 1 CURRICULUM VITAE OF THE INDEPENDENT EXPERT 49

APPENDIX 2 EXTRACT FROM LETTER OF ENGAGEMENT 50

APPENDIX 3 LETTER OF REPRESENTATION 51

APPENDIX 4 LIST OF INFORMATION PROVIDED 53

APPENDIX 5 GLOSSARY OF TERMS AND DEFINITIONS 54

APPENDIX 6 LIST OF INTERVIEWS CARRIED OUT 58

APPENDIX 7 DETAILS OF PROPOSED POLICYHOLDER COMMUNICATION (SUMMARISED FROM WITNESS STATEMENTS) 59




1. Introduction

Purpose of the report

1.1 ACE Limited acquired The Chubb Corporation in January 2016 and the group is now trading as Chubb Limited (“Chubb”) and based in Switzerland. Following the acquisition it has been proposed to re-organise the European group structure. All companies involved in the transfers described in this report write solely non-life business.

The largest entity of the three companies involved is ACE European Group Limited (“AEGL”) which will be the “Transferee”. AEGL is a subsidiary of Chubb Insurance S.A/N.V and ACE European Holdings Limited as of 2 November 2016 and has branches in 20 different countries including a head office in the United Kingdom. The insurance and reinsurance business of Chubb Insurance Company of Europe SE (“CICE”) will be transferred to AEGL under the provision of Part VII of the Financial Services and Markets Act 2000 (“FSMA”) under a transfer to be approved by the High Court of Justice, England (“the UK Court”).

Chubb Bermuda International Insurance Ireland Designated Activity Company (“CBII”) will also be transferred to AEGL through a similar process to a Part VII, under a transfer to be approved by the High Court in Ireland (“the Irish Court”). This will be under the provisions of section 13 of the Assurance Companies Act 1909 of the Irish Statute Book, section 36 of the Insurance Act 1989 and the European Union (Insurance and Reinsurance) Regulations 2015.

Where I refer henceforth to CICE in this report, it will be assumed that it is the business of CICE after the Swiss business has been transferred out, unless otherwise stated. All numerical information presented with respect to CICE is also shown after the Swiss business has been transferred out, unless otherwise stated.

In addition to the UK and Irish transfers a parallel transfer to AEGL is proposed in Jersey in respect of business written by CICE in Jersey. The transfer of businesses carried on in or from within Jersey must be approved by the Royal Court of Jersey. For the avoidance of doubt, I have specifically considered the position of Jersey policyholders and my conclusions equally apply to those policyholders affected by the Jersey transfer.

The proposed transfers move the insurance and reinsurance policies and certain related contracts from CICE and CBII into AEGL. The proposed date for all the transfers to be finalised is 1 May 2017. Immediately after this it is proposed that CICE and CBII are legally merged into AEGL through a European Cross-Border Merger (“CBM”) process.

I refer to the transfers of insurance business of CICE and CBII as the “Transfers”. I refer to CICE, CBII and AEGL as the “Transfer Companies”. I refer to CICE and CBII as the “Transferring Companies”. I refer to the UK and Irish Courts as “the Courts”.

1.2 Under FSMA, a proposed transfer of (re)insurance business from one entity to another can only take place if it has been approved by the Courts for the appropriate jurisdictions. As part of the approval process a report is required from an expert (the “Independent Expert”) to aid the relevant Courts in their deliberations.

1.3 This report describes the proposed transfers and discusses their possible effects on the relevant policyholder groups, including effects on security and levels of service.

This report is organised into seven sections as follows:

Section 1 – The purpose of this report and the role of the Independent Expert

Section 2 – Executive summary and conclusions

Section 3 – Relevant background information on Chubb and each of the Transfer Companies

Section 4 – Setting out the effect of the Transfers on the Transfer Companies

Section 5 – Discussion of the potential impact of the Transfers on stakeholders

Section 6 – Consideration of the appropriateness of the information provided to me which informs my opinion, including consideration of methodologies for calculations




used in provision of data and scenarios following the Transfers taking effect that may affect policyholder security.

Section 7 - Summary of findings

Independent Expert

1.4 I, Philip Tippin, am a partner in the actuarial practice of KPMG LLP (“KPMG”). I have been a Fellow of the Institute and Faculty of Actuaries for 18 years. My detailed curriculum vitae is included in Appendix 1.

1.5 I have been appointed by AEGL to act as the Independent Expert in connection with the Transfers. My appointment has subsequently been approved by the Prudential Regulation Authority (“PRA”) on 23 March 2016. Central Bank of Ireland approval is not required; Irish regulations do not stipulate the appointment of an Independent Expert, however it is seen as best practice.

1.6 To the best of my knowledge, information and belief, I have no conflicts of interest in connection with the parties involved in the proposed Transfers and I therefore consider myself able to act as an Independent Expert on this transaction.

1.7 I can confirm that I have no financial interest in the Transfer Companies, nor do I work for any entity belonging to Chubb. Neither I, nor any of my immediate team assisting me in producing this report, have carried out any work with the Transfer Companies or any of the wider Chubb group companies over the last three years.

1.8 I can confirm that the contribution of Chubb and its subsidiaries to KPMG’s global fee income has not exceeded 0.01% over the last 3 years.

1.9 The costs and expenses associated with my appointment as Independent Expert and the production of this report will be charged to AEGL.

1.10 In reporting to the Courts on the proposed Transfers my overriding duty is to the Courts. This duty applies irrespective of any person or firm from whom I have been instructed or paid.

Proposed Transfers

1.11 The Transfer Companies are owned indirectly by Chubb, and the Transfers represent an internal reorganisation of Chubb’s UK and Ireland general insurance business.

It is proposed that the insurance and reinsurance policies of the Transferring Companies and certain related contracts will be transferred to AEGL. This is intended to take effect on 1 May 2017 (the “Effective Date”). The transferring policies cover a broad range of insurance types, mostly written through brokers.

1.12 On 23 June 2016, the UK Government held a referendum which resulted in the electorate voting to leave the European Union (“EU”). I assume in my Report that should this happen before the Effective Date, the UK will still follow the EU-wide prudential regulatory regime known as Solvency II, or an equivalent, going forward. I note though that the negotiations to lead to any exit of the EU can last up to two years from the point at which the UK Government formally gives notice to leave, which most likely extends long beyond the proposed Effective Date of these Transfers.

1.13 Under the proposed terms of the Transfers, all assets and liabilities relating to the policies and certain related contracts will transfer to AEGL, and the remaining assets and liabilities of the Transferring Companies will transfer to AEGL under the CBM which is explained further below. The ultimate goal is to bring CICE, AEGL and CBII into one entity through the mechanism of a CBM so that they can be managed collectively and centrally in an efficient manner. It is intended that the CBM completes on the same day as the Transfers.

A CBM is a particular type of merger that involves at least one company formed and registered in the UK and at least one company formed and registered in a European Economic Area (“EEA”) state other than the UK. It is subject to the legislation detailed in the EU Cross Border Mergers Directive (2005/56/EC) and the Companies (Cross-Border Mergers) Regulations 2007/2974. In undertaking a CBM, Chubb will carry forward tax losses from the Transferring Companies into AEGL.




I note that a conditional order is being requested from the Courts as part of the Transfers, whereby if the Transfers are sanctioned but the CBM is not or the Jersey transfer is not (see below), the Transfers will not occur on a standalone basis. For the purposes of this Report, I assume that the CBM and the Jersey transfer will also be sanctioned, as if this does not happen then the conditional order would apply and there would be no change to policyholders of any of the Transfer Companies.

Jersey policies issued by CICE will not transfer unless the Jersey transfer is approved by the Royal Court of Jersey. The Jersey transfer, which provides for the transfer of policies on the same terms as the UK Transfers, is conditional on the sanction of the UK transfers by the High Court of Justice, England. The Jersey transfer will have the same effective date as the Transfers’ Effective Date.

1.14 The Transfers theoretically provide for the possibility of there being a limited number of policies which may not be capable of being transferred by law under the Transfers ("residual policies"). To the extent there are any such residual policies, they would be in the minority and those policies would remain with CICE or CBII (as applicable). However, given that the Transfers and the CBM are intended to occur simultaneously and the scheme is conditional on the CBM, in practice, any residual policies and associated assets would then transfer to AEGL under the CBM as CICE would no longer exist following the CBM. For that reason, it is therefore currently expected that there will be no residual policies and I assume in my Report that this is the case.

If the Transfers were not to occur then the CBM would not either. Policyholders would remain with their existing insurers, but the changes in executive management and overall operating model described in this report would still occur.

1.15 Certain policies sold by the Transferring Companies cover policyholders in non-EEA countries. Such policies fall under the law of the location of the policyholder, under which it may not be clear if the Transfers are to be recognised. I have considered whether from the point of view of these policyholders, it is likely to be any more difficult to bring a claim against AEGL than it would be to do so against the relevant Transferring Company. In theory there would be an issue arising if a party claimed that the Transfers were not effective in the relevant jurisdictions. However this would only be an issue if AEGL were to decline otherwise valid claims as a result of this which, as this would be in breach of the terms of the Courts’ orders approving the Transfers, I do not consider to be a realistic scenario. I therefore consider that there is no real risk of the Transfers making it more difficult for a policyholder outside the EEA to bring a claim under a policy from a Transferring Company.

For the avoidance of doubt I have not taken legal advice on this as I do not believe it is necessary. I have considered the two types of situation that an overseas Court could refuse to acknowledge: the rights of a non-EEA policyholder to assert a claim, which I do not see as a risk especially given that there is no incentive for policyholders to seek such a judgement, and that a reinsurer could petition that they do not need to respect existing policies as they did not recognise the Transfers. For the latter, I am comfortable that the risk does not change my conclusion. I discuss this further in section 5.16.

Scope

1.16 As Independent Expert, it is my duty to the Courts to consider the impact of the Transfers on the policyholders of the Transfer Companies, along with any other policyholders affected by the Transfers. In particular, it is my duty to consider the impact on their security and service levels for their benefits as set out in Appendix 2. In this instance, I have not identified any policyholders other than those of the Transfer Companies to be potentially affected.

1.17 This report does not consider any possible alternative arrangements to those referred to in sections 1.11 to 1.14. I am not aware of any other significant transaction relating to the Transfer Companies other than those set out in sections 1.11 to 1.14.

Reliances

1.18 I understand that my role is to produce a report in a form approved by the PRA for submission to the Courts. Whilst I have been assisted by my team, the report is written in the first person singular and the opinions expressed are my own.




1.19 My work has been based on the data and other information made available to me by the Transfer Companies. A list of data and other information that I have considered is shown in Appendix 4.

I have not sought independent verification of data and information provided to me by the Transfer Companies, nor does my work constitute an audit of the financial and other information provided to me. Where indicated, I have reviewed the information provided for reasonableness and consistency and with the benefit of my experience this has not raised any concerns. I note that the information has been provided to me by members of the senior management of the Transfer Companies or by responsible senior professionals from the Transfer Companies’ advisors.

Where possible I have obtained audited financial information, and have received reports from independent third parties. In any case I have considered the sources of all data I have received before placing any reliance on it, and have sought representations where I consider it appropriate.

I have met in person or conducted conference calls with representatives of the Transfer Companies to discuss the information provided to me and specific matters arising out of the considerations and analysis conducted. This includes the legal advisers and the tax advisers to the Transfers, where appropriate.

Where significant pieces of information have been provided orally I have requested and received written confirmation.

Use and limitations

1.20 This report must be read in its entirety. Reading individual sections in isolation may be misleading.

1.21 Copies of this report will be sent to the relevant UK, Irish and Jersey financial regulators: the PRA and the FCA, the Central Bank of Ireland and the Jersey Financial Services Commission. This report will be used in evidence in the applications submitted to the UK and Irish Courts, and the Royal Court of Jersey. It will also be made available to policyholders and other members of the public as required by the relevant legislation and will be made available on www.chubb.com/CICE-transfer.

This report has been prepared under section 109 of FSMA in a form expected to be approved shortly by the PRA in consultation with the FCA.

This report is prepared solely in connection with, and for the purposes of, informing the UK and Irish Courts, the PRA, the FCA, the Central Bank of Ireland, and policyholders of the Transfer Companies of my findings in respect of the impact of the Transfers on the security and service levels of policyholders and may only be relied on for this purpose. This report is subject to the terms and limitations, including limitation of liability, set out in my firm’s engagement letter of 7 March 2016. An extract from this letter describing the scope of my work is contained in Appendix 2.

This report should not be regarded as suitable to be used or relied on by any party wishing to acquire any right to bring action against KPMG LLP in connection with any other use or reliance. To the fullest extent permitted by law, KPMG LLP will accept no responsibility or liability in respect of this report to any other party, other than as defined in my firm’s engagement letter referenced above.

1.22 In the normal course of conducting my role as Independent Expert, I have been provided with a significant and appropriate amount of information and data about the Transfer Companies’ activities and performance. In forming my view as set out in this report, this information has served a necessary and vital contribution. Due to a combination of legal, regulatory and commercial sensitivities some of the information I have relied upon to reach my conclusions cannot be disclosed in a public report such as this. However I can confirm that appropriate detailed information has been provided to me to enable me to form the opinions I express to the UK and Irish Courts in this report.

http://www.chubb.com/CICE-transfer




Professional guidance

1.23 This report has been prepared in accordance with the guidance set out in Part 35 of the Civil Procedure Rules and the accompanying practice direction, including the protocol/guidance for the instruction of experts to give evidence in civil claims (2014) issued by the Civil Justice Council.

This report also complies with the guidance for transfers reports set out in the Statement of Policy issued by the PRA in April 2015 entitled “The Prudential Regulation Authority’s Approach to Insurance Business Transfers” and in Chapter 18 of the FCA Supervision Handbook, in particular, sections 18.2.31 to 18.2.41 inclusive, regarding the content and considerations of the report.

In preparing this report I have taken into account the requirements of the Technical Actuarial Standards (“TASs”) issued by the Financial Reporting Council. The TAS Standards which apply to the work performed in preparing this report are Transformations, Modelling, Data, Insurance and Reporting Actuarial Information. In my opinion, there are no material departures from any of these TASs in my performance of this work and this report. I have also followed the guidance set out in APS X2: Review of Actuarial Work.

I understand that my duty in preparing my report is to help the UK and Irish Courts on all matters within my expertise and that this duty overrides any obligations I have to those instructing me and/or paying my fee. I confirm that I have complied with this.

Terminology

1.24 In my discussion of the effects of the proposed Transfers on the Transfer Companies concerned, I use various technical terms. The definitions of these terms as used in this report are contained in the Glossary in Appendix 5.




2. Executive Summary & Conclusions

Overview of the Transfers

2.1 This report considers the impact of the proposed transfers of the insurance business of CICE and CBII to AEGL. The transferring policyholders are both businesses and individual retail clients. Products offered to business clients include: property, casualty, accident and health, financial lines, excess liability and political risk insurance. Individual clients’ policies include: home and contents, jewellery, fine art and motor cover.

As a consequence of the Transfers the insurance and reinsurance obligations and certain other assets and liabilities of CICE and CBII will transfer to AEGL. The existing policyholders of AEGL are a mix of business and individual clients. Policies offered to business clients include: primary and excess casualty, financial lines, political risks, marine cargo, construction, aviation, energy, property and accident and health insurance. Personal lines include accident and health and travel insurance alongside speciality personal lines insurance mainly for mobile phone handsets. AEGL also provide reinsurance for property and casualty classes.

AEGL has the permissions to write all the classes being transferred into it.

2.2 The Transfers are primarily a legal and financial reorganisation of selected non-life businesses operating from the UK and Ireland, aiming to gather simplification and efficiency gains throughout the businesses and in particular more effective management of capital following the introduction of Solvency II.

2.3 CICE and CBII intend to communicate details of the Transfers to their policyholders. Policyholders of CBII are all to be individually notified, policyholders of AEGL are not to be individually notified, and policyholders of CICE are to be informed excepting the following groups:

underlying beneficiaries of group policies (though CICE will notify the group policyholder);

policyholders who are individuals, subsidiaries or affiliates under directors and officers insurance;

any individual whose name is not written in policy documents or with an incorrect or incomplete address;

policyholders whose policy has expired (with some exceptions, as discussed in Appendix 7);

policyholders who purchased their coverage through a corporate partner or scheme offered by a sponsoring broker and who are not individually notified by the partner or broker (as applicable) or the partner or broker has not provided CICE with data to enable it to individually notify such policyholders; and

policyholders of a particular corporate partner (instead it is anticipated that notice will be given through the inclusion of a message in policyholder banking statements).

Although it is not part of my scope as Independent Expert I have been asked to comment on the appropriateness of the communications waivers requested. I provide my reasoning in Appendix 7. I note and accept though that the Courts are the ultimate arbiter on the communication and any non-circularisation, and the regulators will also have their own opinions on these issues.

When considering the proposed approach to notifications, I have considered a number of factors, including the likelihood of a policyholder having a claim, whether the policyholder’s policy is transferring and the impact of the Transfers on the security of the policyholders. I have also considered the practicality of notifying policyholders.




I consider the proposed approach to communicating the Transfers to be appropriate, reasonable and proportionate. I consider that the non-circularisation to the specific groups of policyholders of CICE (as set out above in summary and in Appendix 7 in detail) is appropriate, reasonable and proportionate given the circumstances of those policyholders.

2.4 Background of the Transfer Companies

AEGL is a legal entity of Chubb which operates under four divisions: Chubb Europe, Chubb Global Markets, Chubb Tempest Re Europe, and Combined Insurance. Chubb Europe specialises in providing property, primary and excess casualty, financial lines, political risk, marine cargo and construction-related risks insurance for multinational and large commercial clients. In addition, they provide accident and health, travel and mobile phone handset insurance for individuals. Chubb Global Markets is a London Market speciality international business offering excess and surplus lines, marine, aviation, energy, political risks, property, financial lines and accident and health insurance. Chubb Tempest Re Europe provide casualty and property reinsurance. Combined Insurance provides accident and healthcare insurance. As of 2 November 2016, AEGL operates as a subsidiary of ACE European Holdings Limited and Chubb Insurance S.A/N.V.

As of 2 November 2016, CICE operates as a wholly owned subsidary of ACE European Holdings No. 2 Limited, with policyholders including small to multinational businesses and individuals. CICE offer commercial lines, accident and health and financial lines for business clients. They provide home and contents, jewellery, fine art and motor insurance for individuals.

CBII operates as a wholly owned subsidary of ACE European Holdings No. 2 Limited as of 2 November 2016, specialising in providing commercial insurance on an excess basis. Exposures are high in severity and low in frequency, with a global client base.

All of the Transfer Companies have credit ratings of A++ from AM Best. For the avoidance of doubt, I have placed no reliance on the Transfer Companies’ credit ratings in this report, but note this as it can be a reason that policyholders choose to do business with Chubb companies.

Purpose of the Transfers

2.5 The proposed Transfers constitute an internal reorganisation of selected non-life UK and Irish subsidiaries of Chubb, aiming to gather simplification and efficiency gains throughout the businesses and in particular more effective management of capital following the introduction of the new prudential regulatory regime known as Solvency II.

2.6 My approach to assessing the likely effects of the Transfers on policyholders is to:

Understand the businesses of the entities affected by the Transfers; and

Understand the effect of the Transfers on the assets and liabilities of the companies and businesses involved.

The above stages are contained in sections 3 and 4 of this report.

Having identified the effects of the Transfers on the various companies and businesses, I then do the following in section 5:

Identify the relevant groups of policyholders within each company;

Consider the impact of the Transfers on the security of each group of policyholders and other stakeholders; and

Consider other non-financial aspects of the impact of the Transfers (for example, policyholder service and the claims handling process).

I note that the Transfer Companies operate in markets which may require market participants to maintain higher standards of financial security than the regulatory minimum in order to




continue to access new business. All Transfer Companies are part of Chubb, a leading, publicly traded, global property and casualty insurer, and benefit from this association; for example referencing of their ownership in their marketing and group rating benefits.

Given the levels of capital cover (as a proportion of the regulatory minimum requirement) held by all Transfer Companies, I expect the chance that any one of them would not be able to meet its respective future obligations in full to be remote, and I therefore conclude that no existing, or transferring policyholder will suffer detriment to their security if the Transfers proceed.

2.7 Financial and economic information considered

In order to consider the effect of the proposed Transfers on each of the entities and groups of policyholders concerned, I have been provided with comparative information for each legal entity, including:

Balance sheet information based on the most recently audited balance sheet figures as at 31 December 2015 for all entities;

External actuarial reserve reviews for AEGL, CBII and CICE as at 31 December 2015;

Internal actuarial reserve reviews for AEGL, CBII and CICE as at 31 December 2015;

Estimates of the regulatory capital required for each entity as at 31 December 2015; and

Internal management information provided over the course of preparing this report.

I will issue a supplemental report containing the most up-to-date financial information prior to the final hearing.

In forming my opinion, I have conducted a number of interviews with key personnel responsible for core functions in the Transfer Companies (a complete list of interviewees is provided in Appendix 6), and I have placed reliance on, amongst other information, estimates of the capital required to be held by the Transfer Companies (such that the companies are able to fulfil their policyholder obligations in the event of an extreme event or scenario) provided by the Transfer Companies. I describe how I have used this information in performing my analysis in more detail in section 5.13. In order to satisfy myself that these estimates are an appropriate basis on which to form an opinion, I have considered:

The appropriateness of the methods used by the Transfer Companies to calculate the estimates of capital requirements; and

The impact of a set of specific severe adverse events on each of the Transfer Companies pre and post Transfers in order to gain comfort that, at a high level, the capital estimates are reasonable.

The above stages are contained in section 6 of this report.

Key Assumptions

2.8 In conducting my analysis I have assumed the following:

There will be no policyholders left in the Transferring Companies after the Transfers, as all existing policyholders of the Transferring Companies, will become policyholders of AEGL as a consequence of the Transfers. As discussed in 1.14, I assume there are no residual policies.

The Transfers are to be broadly tax neutral for all of the Transfer Companies. There may be a small tax liability that arises in CBII of less than £3m, which I do not consider material




in the context of the balance sheet of AEGL after the Transfer. This has been confirmed by the management of the Transfer Companies as discussed in section 4.6.

Post Transfer, AEGL will be adhering to the overarching capital management policy that is being implemented across the Transfer Companies following the acquisition. The minimum regulatory capital cover levels within the capital management policy are sufficiently in excess of the regulatory minimum such that the probability of default remains remote. The policy is discussed further in 3.25;

The same level of assets and liabilities will exist within AEGL as compared to the Transfer Companies in aggregate after the Transfers and the CBM as before the Transfers (when valued on the same accounting basis before and after); and

AEGL will continue to operate and has no current intentions to cease underwriting or carry out a further restructuring of their business as a consequence of the Transfers, other than that of the planned CBM.

In the unlikely event of the UK leaving the EU before the Effective Date, the UK will still follow the EU-wide prudential regulatory regime known as Solvency II, or an equivalent, going forward

The above assumptions underlie the analysis and conclusions in my report. If these assumptions were to change my opinion may also change. At the time of writing my report the above assumptions are the current intentions for the Transfers and the Transfer Companies and I have received written representations from the Transfer Companies substantially similar to Appendix 3 confirming my understanding.

Findings

2.9 The findings of my report are summarised below. The detailed explanation behind these conclusions follows in the body of this report:

I have identified three distinct policyholder groups. These are:

i) Existing AEGL policyholders;

ii) Transferring CICE policyholders; and

iii) Transferring CBII policyholders.

I have considered using other policyholder groupings within my report as summarised below, however I have not identified any material difference in impact on policyholders when split differently to that above. I considered the following alternative groupings but came to the conclusion that each subsets interests were aligned:

i) Insurance and Reinsurance policyholders;

ii) Policyholders of compulsory and non-compulsory insurance; and

iii) Policyholders related to latent risks and the remainder of the book.

With respect to the CICE policyholders transferring to AEGL under the Transfers, I do not expect any adverse impact on policyholder security as a consequence of the Transfers, as none of the metrics I have considered show deterioration as a result of the Transfers.

With respect to the CBII policyholders, I do not expect any material adverse impact as a result of the Transfers; the Transfers leave CBII policyholders with a much larger and better diversified capital base to support their risks, and the probability that policyholders will not be paid in full will remain remote. The absolute capital coverage ratio for regulatory capital




does decrease, but given the resulting broader capital base I do not find this to have a material impact on CBII policyholder security.

With respect to the existing policyholders of AEGL, I expect there to be a favourable impact on policyholders’ security as a consequence of the Transfers; CBII holds substantially more capital than required by regulation, and the transfer of this additional capital produces a policyholder security benefit to both AEGL and CICE policyholders. However, in taking on guarantees for CICE’s UK pension scheme, AEGL will be taking on responsibility for a scheme which is open to accrual, unlike AEGL’s current pension obligations. Further to this, CBII and AEGL policyholders will be protected by an entity that will guarantee pension schemes, whereas CBII and AEGL did not previously do so. However, considering the size of the existing pension deficit (which is recognised in the UK GAAP and Solvency II balance sheets) relative to the capital resources available to the enlarged AEGL post-Transfer, I do not believe this will cause a materially adverse change to the security available to AEGL or CBII policyholders. I consider that the increased capital available to AEGL policyholders after the Transfers outweighs the additional liability taken on through the pension scheme guarantee, and therefore that the Transfers have an overall favourable impact on AEGL policyholders. .

There is no change for CICE pension obligations as a result of the Transfers other than the change of guarantor to AEGL, which has a larger capital base.

In terms of regulatory supervision, and the protections available to policyholders in the event of the failure to pay claims of one of the Transfer Companies, there is no change for policyholders of CICE or AEGL. CBII will change from being supervised by the Central Bank of Ireland to being supervised by the PRA and Financial Conduct Authority (“FCA”). I do not identify any adverse effect on the policyholders by a change in prudential regulator due to the common prudential regulatory framework seen across the EU and the expectation that the UK will continue to adopt a Solvency II equivalent regime in the event of leaving the EU before the Transfers.

There will be no change in executive management, governance or risk committee structure, or capital management as a result of the Transfers. As a result of ACE Limited acquiring The Chubb Corporation, these services are, or have already been integrated, and would have been regardless of the Transfers.

There will be no substantial change in the standards of service which the policyholders will receive as a consequence of the Transfers. Following the acquisition, the administration and operational services used by the Transfer Companies are being organised to create a unified business model whether or not the Transfers go ahead, as would be expected. Claims administration and administration for the Transfer Companies share common, similar processes.

As part of the integration the AEGL complaints model is being extended to cover CICE customers. This represents an improvement in the complaints process for former CICE customers because of the additional governance involved in the AEGL model. Furthermore, there is no expectation that the protection of any of the Transfer Companies’ customers’ data will diminish as a result of the Transfers.

2.10 I have considered the Transfers and their likely effect on each of the policyholder groups, including Jersey policyholders. I have concluded that the risk of any policyholder being adversely affected by the proposed Transfers is sufficiently remote for it to be appropriate to proceed with the proposed Transfers as described in this report. For the avoidance of doubt, this conclusion equally applies to those policyholders affected by the Jersey transfer.




Expert’s declaration

2.11 I confirm that I have made clear which facts and matters referred to in this report are within my own knowledge and which are not. Those that are within my own knowledge I confirm to be true. The opinions I have expressed represent my true and complete professional opinions on the matters to which they refer.

Philip Tippin Fellow of the Institute of Actuaries Partner, KPMG LLP 11 November 2016




3. Background

Chubb Limited (“Chubb”)

3.1 ACE Limited acquired The Chubb Corporation in January 2016 and the group is now trading as Chubb. Chubb operates in over 54 countries and offers insurance to both business and individual clients. Core products offered to business clients include: accident and health, property, casualty and life insurance. Chubb provide reinsurance for property, casualty and life insurers. Chubb also provides mobile assurance through network operators to provide personal insurance cover. Chubb work with small and medium sized businesses to provide specialised packages to meet their insurance needs. For individual clients, Chubb provides a diverse range of personal insurance products both directly and through brokers. Products include: accidental death, motor, small electronic goods, identity theft protection, life insurance protection, savings products, prescription drug, recreational marine, personal accident, medical, travel and home insurance.

As at 31 December 2015 on a pro-forma basis, Chubb had gross written premiums of $37,379m and a net income of $4,578m.

The chart below shows the intended structure of relevant entities in Chubb as at the time of the Transfers. I note that this restructuring is currently taking place and as such the current structure is slightly different; however by the time of the Transfers, this will be the case.




ACE European Group Limited (“AEGL”)

3.2 AEGL is a legal entity of Chubb which operates under four divisions:

Chubb Europe, which specialises in providing property, primary and excess casualty, financial lines, political risk, marine cargo and construction-related risks insurance for multinational and large commercial clients. It also underwrites accident and health and travel insurance for individuals and employee and affinity groups across Europe, and Speciality Personal Lines business, which is primarily mobile phone handset insurance. Chubb Europe’s clients are throughout Europe, the Middle East and Africa.

Chubb Global Markets, which is a London Market speciality international business. Lines include excess and surplus lines business, marine, aviation, energy and political risk as well as property, financial lines and accident and health.

Chubb Tempest Re Europe, which writes a range of treaty reinsurance portfolio across both property and casualty classes.

Combined Insurance, which is a provider of accident and healthcare on both an individual and business basis. Products offered include short-term disability, critical condition and hospitalisation, which are offered across various European countries. AEGL provides the general insurance products whilst another of Chubb’s subsidiaries, ACE Europe Life Limited, provide the life assurance and permanent healthcare products.

AEGL sources its business primarily through broker channels.

3.3 AEGL is authorised by the PRA, regulated by the PRA and the FCA, and is a member of the Financial Services Compensation Scheme (“FSCS”), a statutory scheme funded by members of the UK financial services industry that provides protection to policyholders. Under current FSCS rules, claims made by UK private individuals and compulsory commercial policyholders are protected in the event of a default of a covered insurer. However, most non-compulsory commercial policyholders are not covered by the FSCS.

3.4 The table below provides an overview of the annual financial performance of AEGL from 31 December 2012 to 2015 on a UK GAAP basis.

AEGL (£m's) 2015 2014 2013 2012

Net Earned Premium 1,111 1,074 1,085 997

Profit / (Loss) after tax 33 187 38 127

Gross Insurance Liabilities (4,564) (4,606) (4,550) (4,521)

Total Liabilities (5,013) (5,151) (5,136) (5,200)

Reinsurance Assets 2,449 2,426 2,348 2,368

Other Assets 3,642 3,728 3,717 3,778

Total Assets 6,091 6,154 6,064 6,147

Net Assets 1,079 1,003 928 947

Source: Annual Report and Financial Statements, UK GAAP




AEGL’s net assets have been relatively stable over the last number of years. The combined ratio for the business has remained relatively stable too, with fluctuations in profitability driven by investment return and foreign exchange changes.

3.5 The table below provides an overview of the Solvency II balance sheet as at 31 December 2015.

As can be seen, AEGL is well capitalised as it has a material excess of assets over liabilities.

Chubb Insurance Company of Europe SE (“CICE”)

3.6 CICE operates as a subsidary of ACE European Holdings No. 2 Limited and Chubb Insurance Investment Holdings Limited.

CICE is a European Public Limited Liability Company, or “Societas Europaea” (“SE”) registered company. This denotes a public company which is registered in the UK under the corporate law of the EU.

CICE insure a diverse range of businesses ranging from small to multinational companies. CICE was historically broken into three strategic business units: Chubb Commercial Insurance, Chubb Speciality Insurance and Chubb Personal Insurance.

Following the acquisition of The Chubb Corporation by ACE Limited, the CICE business has been absorbed into the division structure of AEGL. The significant majority of the business is managed under the Chubb Europe division, with a small element being managed under the Chubb Tempest Re division.

CICE sources its business through a mix of brokers and affinity partners.

3.7 CICE is authorised by the PRA, currently regulated by the PRA and the FCA, and is also a member of the FSCS.

3.8 The table below provides an overview of the annual financial performance of CICE from 31 December 2012 to 2015.

CICE (£m's) 2015 2014 2013 2012

Net Earned Premium 578 587 590 584


Gross Insurance Liabilities (1,623) (1,698) (1,765) (1,761)

Total Liabilities (1,763) (1,880) (1,893) (1,920)

Reinsurance Assets 189 207 227 245

Other Assets 2,388 2,545 2,507 2,571

Total Assets 2,577 2,752 2,734 2,817

Net Assets 814 872 841 897

Source: Annual Report and Financial Statements, UK GAAP

AEGL (£m) 2015

Gross Solvency II Technical Provisions (3,292)

Risk Margin (172)

Total Liabilities (3,821)

Reinsurance Assets 1,946

Other Assets 3,094

Total Assets 5,040

Net Assets 1,219

S ource: S olvency II Balance S heet




CICE’s net assets have been relatively stable over the last several years, and profits have been stable, with less volatility than AEGL in investment returns and foreign exchange.


As can be seen, CICE is well capitalised as it has a material excess of assets over liabilities.

Chubb Bermuda International Insurance Ireland Designated Activity Company (“CBII”)

3.10 From 2 November 2016, CBII is a wholly owned subsidiary of ACE European Holdings No. 2 Limited, trading as Chubb Bermuda International with the Head Office in Dublin, Ireland and a branch operation in London, England. CBII specialises in providing commercial insurance products on an excess basis. Exposures tend to be high in severity and low in frequency, with a global client base. CBII offers excess liability, professional lines and excess property insurance products. Political risk insurance is also offered through a Management Agency Agreement with Sovereign Risk Insurance Limited. CBII have a significant reinsurance agreement which means that the net liabilities within the entity are relatively small compared to the gross liabilities.

CBII sources its business through broker channels.

3.11 CBII is a recent name change for the entity following the acquisition of The Chubb Corporation by ACE Limited, having previously been known as ACE Bermuda International Insurance Ireland Limited up to 1 July 2016.

3.12 CBII is authorised and regulated by the Central Bank of Ireland. Due to the policyholders of CBII being large corporations, they are not covered by the Insurance Compensation Fund (“ICF”).

3.13 The table below provides an overview of the annual financial performance of CBII from 31 December 2012 to 2015.

CBII (£m's) 2015 2014 2013 2012

Net Earned Premium 10 9 8 7


Gross Insurance Liabilities (161) (162) (189) (215)

Total Liabilities (174) (178) (204) (232)

Reinsurance Assets 132 131 157 179

Other Assets 143 142 138 159

Total Assets 276 274 295 339

Net Assets 101 95 91 106

Source: Annual Report and Financial Statements, Republic of Ireland GAAP

CICE (£m) 2015

Gross Solvency II Technical Provisions (1,457)

Risk Margin (88)

Total Liabilities (1,653)

Reinsurance Assets 125

Other Assets 2,326

Total Assets 2,451

Net Assets 798





CBII’s profits have remained within a steady range over the past several years. The net assets held have been increasing since 2013.


As can be seen, CBII is very well capitalised as it has a large (proportionately) excess of assets over liabilities.

Insurance business of the Transfer Companies

3.15 As a consequence of the Transfers the insurance and reinsurance obligations and certain other assets and liabilities of the Transferring Companies will transfer to AEGL.

The table below shows comparative metrics for the Transfer Companies. Open claims information is provided for the Transferring Companies in order to give an indication of the open claim volumes transferring to AEGL. Reserve and in-force policy information is provided for all Transfer Companies in order to give perspective on the size of the entities involved.

Using the data at the latest dates available (noted above) as an estimate, at the time of the Transfers it is forecast that there will be roughly 118,000 unexpired in-force policies transferring to AEGL.

3.16 Business written by AEGL

AEGL currently writes a range of insurance risks including commercial lines, accident and health and reinsurance for property and casualty classes, writing £2,200 million of premium gross of reinsurance in 2015.

The majority of AEGL’s risk exposure relates to commercial liability (23% of premiums in 2015), commercial property (22% of premiums in 2015), accident and health (20% of premiums in 2015) and mobile phone cover (15% of premiums in 2015), with the remainder comprising of miscellaneous products and reinsurance.

Outside of the UK, and taking account of AEGL’s services/branch operations, AEGL has written business in the following European countries: Republic of Ireland, Germany, Portugal, Austria, Belgium, Czech Republic, Denmark, Finland, France, Gibraltar, Italy, Netherlands, Norway, Poland, Spain, Sweden, Switzerland and Turkey. There is also a small amount of business written outside of Europe, which is mainly written in the USA and Asia.

3.17 Noteworthy liability types in AEGL

Periodic Payment Orders (“PPOs”) impact AEGL’s liability classes and the motor portfolio written by Chubb Tempest Re. A PPO is a court order to pay an accident victim’s compensation through an annual payment for life rather than as a lump sum. PPOs are awarded as

CBII (£m) 2015

Gross Solvency II Technical Provisions (126)

Risk Margin (3)

Total Liabilities (141)

Reinsurance Assets 110

Other Assets 139

Total Assets 249

Net Assets 108


Transfer Companies' Business Profile

AEGL CICE CBII

Gross Claims Reserves (£ms) 4,564 1,623 161

Net Claims Reserves (£ms) 2,115 1,431 29

Number of open claims (excluding AEGL) 29,313 209

In-force policies 12,981,053 110,647 682 S ource: M anagement

In- force policy estimates as at 23/02/16 for AE GL, 31/12/15 for CICE and 23/02/16 for CBII;

Reserve estimates as at 31/12/15




compensation following injury and affect Motor and General Liability Insurance in the UK. This creates the potential for very long term exposure (in excess of 20 years) and exposure to a range of risks including those arising from future investment returns and economic factors such as inflation and longevity risk.

AEGL has exposure to Asbestos, Pollution and Health Hazard (“APH”) losses from its run off book of business, which covers any losses due to health hazards. The nature of these health issues mean that previously unknown claims can develop from unexpired policies. Given the age of the liabilities it can be difficult for some companies to identify all of the potentially affected policyholders.

AEGL has exposure to financial large losses arising from the financial crisis during 2007 - 2008. Loss estimates arising from such claims have been relatively stable over recent years.

I discuss the PPO and APH liabilities further in 3.21.

3.18 Business written by CICE

The predominant policy types written by CICE are third-party liability, property, accident and health, and household, which account for 44%, 17%, 12% and 11% of the premium respectively in 2015. Within third-party liability the most predominant policies written were Directors & Officers (“D&O”), Errors & Omissions (“E&O”), Commercial General and Excess Liability Insurance, and Employers’ Liability Insurance.

Outside of the UK, and taking account of CICE’s services/branch operations, CICE has written business in the following European countries: Republic of Ireland, Spain, Germany, France, Italy, Holland, Denmark, Sweden and Austria. There is also a small amount of business written outside of Europe. There are also some policyholders in Jersey and Guernsey.

3.19 Noteworthy liability types in CICE

CICE has exposure to the Madoff Ponzi Scheme investment fraud and Sub-prime lending financial catastrophes arising from the financial crisis during 2007 – 2008. Loss estimates arising from such claims have been relatively stable over recent years.

There is some exposure in CICE to APH losses which relate to the 2000 and prior years.

CICE underwrites a significant portfolio of High Net Worth Individuals homeowners and motor business.

I discuss the PPO and APH liabilities further in 3.21.

3.20 Business written by CBII

CBII primarily write property and liability business, which make up 46% and 31% of the premium respectively in 2015.

CBII have a significant reinsurance agreement which means that the net liabilities within the entity are relatively small compared to the gross liabilities.

3.21 Business mix

The Transfers do not lead to any the Transfer Companies being exposed to any material key risks to which they have already not been exposed. As shown in the table below, AEGL and CICE both have APH and PPO liabilities though given the size of the respective Transfer Companies, and in particular AEGL, they are not material.

Transfer Companies' Risk Mix Business Profile

AEGL CICE AEGL CICE

Claims Reserves (£m) 4,564 1,623 2,115 1,431

PPO Reserves (£m) 47 7 10 7

APH Reserves (£m) 87 9 15 9

PPO Reserves (% of total) 1.0% 0.4% 0.2% 0.4%

APH Reserves (% of total) 1.9% 0.6% 0.3% 0.6%

Source: M anagement

A ll f igures based on Q4 2 0 15 ( A PH reserves as at Q2 2 0 15 t hough unchanged f o r Q4 2 0 15)

Gross Net




In CICE the PPO is in respect of an employer’s liability risk and therefore there is a limit on the original policy that cannot be exceeded. For AEGL the PPOs are emerging in the motor reinsurance book of Chubb Tempest Re. Since 2012 these policies have been written with limits under £5m (and mostly under £2m), and all of the PPOs in AEGL are protected by substantial outwards reinsurance. I have considered the extent to which these PPO liabilities could grow as a proportion of the existing reserves if economic conditions or mortality assumptions were to change for the worse, but the mitigating factors above mean that they do not grow so materially as to change my conclusions as set out in this report.

Outwards reinsurance programmes

3.22 The Transfer Companies have purchased reinsurance protections to mitigate their insurance risks. These protections are typical of those used by other insurance companies for the types of insurance business underwritten by the Transfer Companies. CICE have historically had a much larger net retention than AEGL and CBII. However, changes to the CICE reinsurance programmes commencing in April 2016 mean that the protections are largely aligned with the other Transfer Companies’ prior to the Transfers for unexpired risks. This change in purchasing has not changed the retentions on expired risks.

3.23 The key risk protections are:

Catastrophe Reinsurance is purchased by AEGL, CICE and CBII to mitigate the effect of large claim events. Such reinsurance is designed to mitigate the financial impact of the catastrophic events that may lead to material claims across a number of different types of insurance and a number of entities – for example, severe weather affecting large areas of the UK leading to multiple property damage claims from wind damage and flooding.

Excess of Loss Reinsurance is purchased by AEGL and CICE to mitigate the effect of individual large claims such as high value liability claims in the case of CICE and high value property claims in the case of AEGL.

AEGL, CICE and CBII all have proportional reinsurance arrangements in place whereby it shares a percentage of all premiums and claims with a reinsurer.

AEGL has material reinsurance recoveries expected to offset the gross liabilities, both intra-group and external to the group. To manage the credit risk in the event of a default of the largest single reinsurance counterparty, I understand that AEGL hold assets in trust arrangements. These arrangements will continue to apply to the new combined AEGL post Transfers. The incoming Transfers do not increase the exposure to this one particular counterparty, so these arrangements will provide the same level of support as they did before the Transfers.

Prudential capital requirements

3.24 The Transfer Companies are currently subject to a prudential capital regime which requires them to meet a solvency capital requirement calibrated to ensure that policyholders are secure at the 99.5% confidence level of potential future liability outcomes.

This is part of a new EU wide regulatory regime for insurance companies known as “Solvency II”, which was introduced with effect from 1st January 2016.

Other key requirements of this regime are as follows:

Insurance entities must calculate their Solvency II capital requirement either using a complex set of rules specified in EU legislation (the “Standard Formula”), or, subject to the approval of their regulator, using an internally developed economic capital model (an “Internal Model”). In either case, the determinants of the solvency capital requirement relate to the nature of the risks within the regulated entity, including market related investment risk, insurance risk arising from new business or existing liabilities, and other business risks including credit risk and operational risk.




To use the Internal Model method, entities must complete a lengthy approval process with the regulator.

The Transfer Companies currently use the Standard Formula, though AEGL was a substantial way through the approval process to use the internal model, pausing its application in order to perform this integration. Should the Transfers proceed, it is planned for the new combined AEGL entity to resume the path to their Internal Model approval.

Regulatory capital requirements are defined in terms of a Solvency Capital Requirement (“SCR”) and a Minimum Capital Requirement (“MCR”). The requirements are calculated based on a complex formula based on the technical provisions, written premiums, reinsurance, deferred tax and administrative expenses.

The method with which insurance entity balance sheets and the definition of capital are calculated for regulatory purposes is now based on largely economic measures of assets and liabilities, rather than accounting based measures.

A range of minimum standards relating to insurance entity governance and disclosure have been introduced (known as “Pillar II” and “Pillar III”), including a requirement to perform and document an “Own Risk and Solvency Assessment” or “ORSA”.

If an insurer's available resources fall below the SCR, then supervisors are required to take action with the aim of restoring the insurer’s finances back to the level of the SCR as soon as possible. If, however, the financial situation of the insurer continues to deteriorate, then the level of supervisory intervention will be progressively intensified. The aim of this 'supervisory ladder' of intervention is to identify any ailing insurers before a serious threat to policyholders' interests is realised. If, despite supervisory intervention, the available resources of the insurer fall below the MCR, then 'ultimate supervisory action' will be triggered. This means that the insurer's liabilities could be transferred to another insurer, the licence of the insurer withdrawn, the insurer closed to new business and its in-force business liquidated.

I note that:

I have looked at the Solvency II Standard Formula calculations of the Transfer Companies to compare the relative difference in policyholder positions before and after the Transfers of liabilities. The appropriateness of this approach and more detailed description of this analysis can be found in section 5.13 and 5.15 below.

I have considered the stress tests included within the ORSAs produced by each of the Transfer Companies in determining the stress-tests to apply when considering the policyholder security for each group in section 6 below.

Capital management policy

3.25 Although the Transfer Companies are capitalised individually, Chubb is implementing an overarching capital management policy to oversee AEGL and CICE. This is to ensure consistent interpretation of the capital requirements and a consistent risk appetite applied to each, meaning that each entity will be managed so policyholder security is maintained above a minimum level of regulatory capital cover. Beyond this minimum level of regulatory capital cover, Chubb may manage its capital as it sees appropriate. For example, it may consider alternative uses for the excess capital above the capital management policy minimum, whilst considering the level required to maintain particular credit rating agencies’ ratings (which may be an important criterion to policyholders when selecting a policy). This will be happening regardless of the Transfers. CBII has a similar capital management policy that was approved by its Board in December 2015, and similarly requires an excess amount of capital over the regulatory capital requirements to be maintained.




3.26 The minimum regulatory capital cover levels implied by the risk appetites within the intended capital management policy are sufficiently in excess of the regulatory minimum such that the probability of policyholder default remains a remote possibility.

Guarantees / risk sharing arrangements

3.27 ACE European Holdings Limited, which is a parent company of AEGL, has guarantees for four Defined Benefit pension schemes currently in place. AEGL itself currently provides no such guarantee.

CICE currently provide two guarantees over their UK pension scheme, of which the sponsor is ACE INA Services Limited. After the Transfer, AEGL will take over provision of the guarantees in the same forms.

There are no intragroup guarantees in place supporting any insurance liabilities for any of the Transfer Companies.




4. Effects of the Transfers

Effect of the Transfers on group structure

4.1 As a consequence of the Transfers the insurance and reinsurance obligations and certain other assets and liabilities of the Transferring Companies will transfer to AEGL.

The structure charts below identify the before and after Transfers group structure (with relevant entities to the Transfers) highlighting which entities will retain insurance liabilities after the transfers. I note that these structures are as at the date of the Transfers and the entities are currently undergoing restructuring to achieve this.




The diagram below shows how, immediately after the Transfers, the entities will be merged using the CBM mechanism in order to bring all European business together into AEGL.

The current CICE policyholders will be moving from an SE company (CICE) to a limited company (AEGL).

One of the main features of an SE company is that it can (subject to compliance with the required steps) transfer its registered office to any EU country (and therefore be regulated in any EU country), whereas a limited company will be regulated in the country where is it first registered. With AEGL as the destination company for the CBMs, the end-business will not




have the same portability that CICE enjoys currently. The portability is however over a prudential regulatory environment which, particularly with the introduction of Solvency II, is consistent across the EU.

Effect of the Transfers on Transfer Company balance sheets

4.2 I have carried out my analyses based on figures as at 31 December 2015 for the purposes of this Independent Expert Report, however I will update the analyses to the most up-to-date in a supplemental report.

4.3 There are no material differences between the accounting treatments of items in the statutory accounts of the Transfer Companies as presented in Section 3, with all figures reported on a UK or Republic of Ireland GAAP basis.

4.4 The table below illustrates the UK and Irish GAAP financial position of the Transfer Companies following the Transfers based on the financial position of the Transfer Companies at 31 December 2015, assuming that all assets and liabilities at that date were to transfer to AEGL:

As at 31 December 2015 (£m)AEGL (pre

transfer)CICE CBII

AEGL (post

transfer)

Assets

Investments and cash 2,714 2,128 125 4,967

Reinsurers share of provisions 2,449 189 132 2,770

Other assets 928 260 19 1,207

Total Assets 6,091 2,577 276 8,944

Liabilities

Insurance Liabilities 3,762 1,337 136 5,235

Unearned Premium Reserves 802 285 25 1,112

Other Liabilities 449 141 13 603

Total Liabilities 5,013 1,763 174 6,950

Net Asset Surplus 1,079 814 101 1,994

Source: 2015 Accounts, Management

The net asset position of AEGL is £1,079m.

Under the proposed Transfers, AEGL will receive the insurance and reinsurance policies of CICE and CBII. Assuming the Transfers had occurred at 31 December 2015 the resulting balance sheet would therefore show £8,944m of assets, £6,950m of gross liabilities and a net assets position of £1,994m.

4.5 The table below illustrates the Solvency II financial position of the Transfer Companies following the Transfers based on the Solvency II balance sheet of the Transfer Companies at 31 December 2015, assuming that all assets and liabilities at that date had transferred:

As at 31 December 2015 (£m)AEGL (pre

transfer)CICE CBII

AEGL (post

transfer)

Assets

Investments and cash 2,738 2,231 124 5,093

Reinsurers share of provisions 1,946 125 110 2,181

Other assets 356 95 15 466

Total Assets 5,040 2,451 249 7,740

Liabilities

Gross Solvency II Technical Provisions 3,292 1,457 126 4,875

Risk Margin 172 88 3 263

Other Liabilities 357 108 12 477

Total Liabilities 3,821 1,653 141 5,615

Net Asset Surplus 1,219 798 108 2,125

Source: Solvency II Balance Sheet




The net asset position of AEGL on a Solvency II valuation basis is £1,219m.

Under the proposed Transfers, AEGL will receive the insurance and reinsurance policies of CICE and CBII. Assuming the Transfers had occurred at 31 December 2015 the resulting Solvency II balance sheet would therefore show £7,740m of assets, £5,615m of gross liabilities and a net assets position of £2,125m.

4.6 Cost and tax impact of the Transfers

I have received confirmation from the management of the Transfer Companies that no significant tax liabilities will be realised as the result of the Transfers and CBMs, following advice from independent advisers, because the ultimate CBMs will preserve their aggregate tax position. There is a risk that a small tax charge may arise from any gains realised from the transfer of the UK branch of CBII into AEGL, but I am satisfied that any such charge would be immaterial in the context of the combined AEGL balance sheet post-Transfers. This potential tax impact is expected to be less than £3m. Whilst there are some potential additional tax liabilities that may emerge (such as VAT on professional fees), it is expected that there will be no material change of the tax position once the ultimate sequence of Transfers has been completed, and therefore I am satisfied that they would not be sufficient to change any of my conclusions within this report. The Transfer Companies have performed due diligence including commissioning analysis from specialist tax advisors on the tax implications of the Transfers, which I have seen, in order to make this statement.

I understand that most costs associated with the Transfers will be incurred whether or not the Transfers proceed, as the majority of these costs relate to activities occurring prior to the sanction hearing (for example, with respect to legal fees and policyholder communications). Therefore I identify no significant additional costs arising from the implementation of the Transfers. AEGL will meet these costs.

4.7 Outwards reinsurance

Following the Transfers, it is intended that the reinsurance arrangements of CICE and CBII will be transferred with the reinsured policies, such that AEGL and former CICE and CBII policyholders will still be protected by the same reinsurance contracts as was the case before the Transfers. Any reinsurance contracts that do not transfer with the Transfers are anticipated to transfer with the CBM.

There is a risk that non-EEA reinsurers of the Transfer Companies may not recognise the Transfers and decline payment of future reinsurance recoveries. For reinsurance policies originally purchased by AEGL the subject business will not be transferring, and so there is no such risk for these protections. For CBII and CICE the total expected reinsurance recoveries anticipated from reinsurance outside the Chubb group of companies are less than 3% of the total reinsurance asset of AEGL after the Transfer. The amounts at risk are therefore very small in the context of the Transfer Companies’ balance sheets. I also note that in section 6.10 I consider a stress test of a major reinsurer failure that is larger than the total amount at risk from the non-recognition of the Transfers by non-EEA reinsurers, and this stress test does not change my overall conclusions. As a result I do not believe that this risk has a material adverse impact on any groups of policyholders involved in the Transfers.

4.8 Guarantees

I understand that there will be no changes to the AEHL pension scheme guarantees as a result of the Transfers. CICE’s guarantees of the pension scheme sponsored by ACE INA Services Limited will transfer in the same form to AEGL. Each guarantee will therefore remain in place for the respective groups of pensions liabilities.

There are no parental guarantees in place that affect the liabilities of the Transfer companies, and no new ones are intended to support the Transfers.

4.9 Dividends and capital structure

Any surplus assets in the Transferring Companies, being assets in excess of the transfer of reserves (with the exception of any assets required to meet the Minimum Capital Requirement for the Transferring Companies immediately after the Transfers but before the CBMs), will be passed to AEGL as part of the CBM. As a consequence of the Transfer the capital of AEGL will increase to reflect the combined capital resources of the Transfer Companies. Management of




AEGL have confirmed to me that post Transfer, they will be adhering to the overarching capital management policy that is being implemented following the acquisition, regardless of the Transfers. This policy ensures policyholder security is maintained above a minimum level of regulatory capital cover. Beyond this minimum level of regulatory capital cover, Chubb may manage its capital as it sees appropriate. The policy is discussed further in 3.25.

Non-financial effect of the Transfers

4.10 I consider here the areas that a policyholder may have considered in their decision to buy a policy with the company and have reasonable expectations with regard to service levels on an ongoing basis. In particular I have considered the executive management (in that it sets the tone and culture for engagement), claims handling, the ease of access to the company for complaints or policy administration, cyber security insofar as it protects the customer’s data, and the regulatory protections that the policyholder benefits from. Note that I am not concerned about the impact of changes on business underwritten after the Transfers have completed, unless there is no wider market for these policies that could meet a policyholder’s requirements, as a policyholder that is unhappy with the product, service, or any other aspect of the newly combined business, has the opportunity to buy their next policy elsewhere.

4.11 Executive management

As a result of ACE Limited acquiring The Chubb Corporation, the executive management team has been integrated in order to create a unified management team for AEGL and CICE. This has already occurred and is not contingent on the Transfers in any way, hence there will be no impact on the executive management as a consequence of the Transfers.

4.12 Administration of the business

Claims administration for the Transfer Companies shares common, similar processes (and in the case of CICE, the same claims team as AEGL is used already for UK claims). CICE and AEGL have their own claims IT systems and work is in progress to identify a common future state IT platform. CBII follows the AEGL process though the handling is done through a Service Level Agreement with Chubb Bermuda Insurance Limited, (who were the parent company of CBII up to 2 November 2016). AEGL retains regulatory responsibility. As and when permitted by all applicable law and regulation and subject to completion of necessary employee consultation, claims handlers will serve both CICE and AEGL claims.

The majority by value is conducted in house. For selected, often mass market, products third-party administrators are used. This is particularly the case for the mobile phone insurance business underwritten by AEGL, and the accident and health business underwritten by CICE.

Following ACE Limited’s acquisition of The Chubb Corporation, the administration and operational services used by the Transfer Companies are being organised to create a unified business model whether or not the Transfers go ahead, as would be expected following an acquisition. I understand that Chubb has undertaken this in each case by refining the service models from each former entity appropriate to the distinct customer groups serviced. There is no change for any policyholders to the contact details needed to make a claim or amend a policy; or the cities in which they are dealt with as a direct result of the Transfers. As part of this integration, an exercise has been carried out to identify and appropriately manage potential conflicts of interest between claimants of the different businesses, and I have seen evidence that no material issues were identified.

4.13 Contractual arrangements

The Transfers are to have no impact on contractual terms to insurance policies, other than changing the party to the contract from the Transferring Company in question to AEGL. In addition, I understand that the Transfers are intended to have no impact on contractual terms and arrangements with third party contracts, other than changing the party to the contract from the Transferring Company in question to AEGL.

I understand that there could be a number of policies subject to the proposed Transfers that include auto-renewal terms. For these policies these terms will remain on the same basis after the Transfers as the contracts will hold as before; the only difference will be the change in insurer. There are no provisions in the Transfers which would alter the terms on which policies




would be renewed. The process used to derive a premium will not change from that currently followed by CICE and CBII in their current business models as a consequence of the Transfers, though I note that such processes are likely to align over time. This will not have any effect on existing policies though.

I understand that there will be no change to policy administration as a result of the Transfers. As part of the acquisition, a substantial integration exercise has taken place to align the various service models for each customer group. Part of this exercise has involved identifying and managing any potential conflicts of interest which may arise between the claimants of the different businesses. Additionally, there has been a review into the possibility of potentially bringing in-house some of the currently outsourced claims handling.

There will be no change to the way CICE’s High Net Worth book of business is run as a result of the Transfers. There will also be no change to any AEGL business underwritten through Chubb Tempest Re, which has its own claims handling operation. These changes would have been made regardless of the Transfers taking place.

4.14 Regulatory arrangements

AEGL and CICE’s primary regulators are currently the PRA and the FCA, so there will be no supervisory change for them as a result of the Transfers.

CBII’s primary regulator is the Central Bank of Ireland, so there will be a supervisory change to the UK regulators (the PRA and FCA) as the result of the Transfer. The impact of this change in terms of policyholder security will be immaterial due to a common prudential regulatory framework across the EU and the expectation that the UK will continue to adopt a Solvency II equivalent basis.

In terms of conduct regulation, the CBI has responsibility for this in Ireland in addition to acting as prudential regulator, whereas for insurance companies in the UK the FCA only acts as conduct regulator. Whilst both have similar overall aims with regard to conduct of insurance companies, there can be situations in the normal course of business where there is potential conflict between prudential and conduct regulatory objectives. As CBII policyholders are moving from the CBI to the FCA for conduct regulation any such potential conflicts in regulatory objective should cease to exist, so from a policyholder perspective there should be no detriment caused by the change in conduct regulator as a result of the Transfers.

The policyholders of CICE that are eligible for protection under the FSCS will retain this protection in the event that claims cannot be paid in full out of current reserves, capital and reinsurance. In practice there will be no change to any of CICE’s policyholders with regard to their protection under the FSCS. Similarly no policyholders’ right of access to the Financial Ombudsman Service will change as a result of the Transfers.

Although there is a similar scheme setup in Ireland, the ICF, CBII policyholders are not protected due to the nature of the classes of business written. CBII policyholders will not be covered under the FSCS for the same reason. Therefore, there will be no change for these policyholders as a result of the Transfers.

Customer complaints handling is handled slightly differently between the Transfer Companies. In CICE complaints are currently handled by a supervisor within the function from where the complaint originates, before escalation to the compliance function. Within AEGL, complaints are handled by a multi-lingual complaints team in a dedicated independent complaints department, which follows local regulatory standards in each country that business is underwritten, in addition to root-cause analysis with a close-loop process for ongoing improvement. The team use a complaints management tool called Respond 5, which is a recognised tool in the industry. The Board oversees the complaints handling procedure of issues arising. This process is currently being rolled out to cover third-party service providers, claim providers and assistance companies.

As part of the integration the AEGL complaints model is being extended to cover CICE customers. This represents an improvement in the complaints process for former CICE customers because of the additional governance involved in the AEGL model.




The CBII complaints model differs from the above process as they do not have consumer or small commercial policyholders, and as such their policies contain arbitration clauses to resolve any disputes.

4.15 Cyber security risk

Cyber security risk is a relatively new and increasing threat to businesses today. Cyber-attacks on companies are becoming more frequent. These attacks can take forms such as gaining access to and selling or publicising customers’ data, or preventing the business from operating as usual. Cyber-security is therefore becoming ever more paramount. It is a reasonable expectation of a customer that their insurer should take appropriate steps to protect their confidential data.

With the support of a cyber-security specialist from within my firm, I have discussed the cyber security arrangements currently in place with management of the Transfer Companies, and how these are expected to change as a result of the Transfers. This has involved analysis of cyber protections, procedures, governance and contingency plans. I have also held discussions of the relative scores coming from each of the Transfer Companies self-assessment from a questionnaire on cyber security sophistication. I am satisfied that there are no material differences between the current levels of security afforded to customers’ data, and that there is no expectation that this protection would diminish as a result of the Transfers.

4.16 Conduct risk

Ongoing management of conduct risk is a priority for the Transfer Companies. Both CICE and AEGL have documented Conduct Risk frameworks with similar structures and component parts. Both CICE and AEGL have a Product Oversight Committee / Group to review and challenge new proposals and monitor conduct risk via a set of metrics made available at product level. The AEGL framework is currently being implemented across the Transfer Companies replacing existing practices in consumer lines business areas.

4.17 Implications of “Brexit” referendum

On 23 June 2016, the UK held a nationwide referendum which asked the electorate whether they wanted the UK to remain part of or to leave the EU. The referendum resulted in a majority vote to leave the EU, a situation commonly referred to as “Brexit”, and the consequences of this vote are still uncertain. At the time of this Report there remains much political and economic uncertainty within the UK. Chubb continues to monitor the situation and has put in place contingency plans should the UK formally enact Article 50 of the Lisbon Treaty and exit the EU. Whilst there are many potential consequences (including the stock market and foreign exchange market instability witnessed during June and July of 2016), the one with the most potential to affect the business models of the Transfer Companies is the risk that UK insurance businesses would lose their “passporting rights” to do business across the European single market (and that European insurance businesses could lose their right to trade in the UK).

As invoking Article 50 triggers a negotiation period of up to two years, it is unlikely to be clear what the ultimate position on “passporting” will be before the effective date of these proposed Transfers. I note that in the event of the loss of “passporting rights” current in-force and expired policies would still be valid, so Brexit should not have any direct impact on the existing policies for any of the Transfer Companies.

I note that the Transfer Companies have undertaken significant planning for the possible outcomes of Brexit. In particular to the Transfers, there is the possibility that AEGL would apply for SE company status, where, as discussed in 4.1, subject to compliance with the required steps it can transfer its registered office to any EU country (and therefore be regulated in any EU country).

I will consider emerging developments in the consequences of Brexit in a supplemental report but have received confirmation that recent market volatility has not materially affected the solvency positions of any of the Transfer companies.




5. Potential impact of Transfers on stakeholders

Overview of analysis performed

5.1 In considering the impact of the proposed Transfers on the security of policyholders, I have considered both the impact of the Transfers of the financial resources available to support policyholders and also a number of non-financial impacts on how a customers’ experience may change as a result of the Transfers. In doing this I have followed a five step approach as outlined below:

(i) I have considered the specific circumstances of each policyholder group.

(ii) I have considered the management and governance framework in place and the future intentions and strategies adopted by Chubb with respect to the Transfer Companies.

(iii) I have compared the amount of financial resources available to meet policyholder claims in the event the Transfers proceed with the financial resources available if the Transfers do not proceed. I have made this comparison using three alternative measures of financial strength, and considered the change in both the absolute level of financial resources and the change in the ratio of financial resources available to existing liabilities and to insured exposure before and after the Transfers.

(iv) I have compared the position of policyholders before and after the Transfers under a variety of stressed scenarios to consider the ability of the Transfer Companies to deal with adverse scenarios.

(v) Having considered the change in capital available and the potential change in the risks to which the policyholder groups may be exposed, I have performed any further analysis I consider necessary to form an opinion.

My approach to considering the effect of the Transfers on service levels experienced by policyholders has been to determine if a change in service arrangements would occur if the Transfers were to proceed, and to compare any changes with the arrangements that would be in place were the Transfers not to take place.

Identification of policyholder groups

5.2 Consideration of Policyholder groupings

5.2.1 Policyholder characteristics

I have identified a number of policyholder characteristics that would influence the magnitude of the Transfers impact on policyholder security. The policyholder characteristics that I have considered include:

The original Transfer Company that the insurance policy was issued by.

The nature of the regulatory regime and other policyholder protections which apply before and after the Transfers to different groups of policyholders.

The nature of the type of business written and whether policyholders are:

i) Insurance or Reinsurance policyholders;

ii) Policyholders of compulsory or non-compulsory insurance; or

iii) Policyholders related to legacy risks or those with products that continue to be underwritten.




The length of time that policyholders are likely to continue to receive benefits under the terms of their policies.

The ability of policyholders to access the financial resources of each Transfer Company in the event of them entering administration, rehabilitation or insolvency and how this changes as a result of the Transfers.

The extent to which policyholders can call upon other mechanisms that protect their financial security, such as the FSCS.

5.2.2 Reasoning for policyholder groupings

In selecting appropriate groupings of policyholders for my analysis I have considered the following:

Under the EU Insurance Winding-Up Directive reinsurance policyholders rank behind insurance policyholders in the event of the insolvency of an insurance business. The distinction then between reinsurance and insurance policyholders becomes important if there is a significant risk that one or more of the Transfer Companies could become insolvent in the short term. Given the levels of regulatory capital coverage that all of the Transfer Companies enjoy, along with their external credit ratings, I consider such a possibility to be remote, and therefore do not distinguish between reinsurance and insurance policyholders in my analysis.

Both AEGL and CICE policyholders are within an environment regulated by the PRA and FCA. Retail policyholders (Personal Motor, Creditor and Household) and compulsory commercial insurance policyholders of both entities currently benefit from the protection of the FSCS which exists to pay out direct personal policyholders and compulsory commercial policyholders in the UK in the event of their insurer not being able to meet their claim payment in full. Non-compulsory commercial insurance policyholders of the companies are not covered by the FSCS. As mentioned above in 4.14, CBII policyholders are not protected by the ICF.

None of these situations change as a result of the proposed Transfer and all policyholders will have the same protections with AEGL and CICE subject to the same regulatory regime that they were going to have if the Transfer did not occur. Similarly, although the CBII policyholders move from the Irish environment regulated by the Central Bank of Ireland, they will not be subject to any compensation fund protection (FSCS or ICF) regardless of the Transfer occurring or not. I have therefore decided not to distinguish between compulsory and non-compulsory product policyholders, nor between retail and commercial policyholders, within different policyholder groups in this report.

Both AEGL and CICE have a small exposure (relative to their overall claims reserves) to legacy business (for the purpose of this report I consider legacy business to be any open claims dating back to underwriting periods prior to 1993). Claims settlement, though processed through a different route from the claims for the ongoing business lines, follows the same principles in each case as for ongoing business. In many businesses, significant legacy portfolios are often associated with increased volatility of reserving, which can be of concern to policyholders. CBII does not have any exposure to legacy business. In both AEGL and CICE the legacy exposure is immaterial in the context of the wider reserves and ongoing business. Given that there are substantial capital resources in total relative to the legacy exposure to provide for the claims to be paid in the event of a deterioration in ongoing business performance, I believe the legacy claims volatility will not trouble the ongoing policyholders. Additionally there is no change proposed in the management of either legacy portfolio as a result of the Transfer, so I have not distinguished between legacy and ongoing policyholders within different policyholder groups in this report. As a result I conclude that




the difference between the interests of these policyholder groups is not so different as to require their separate consideration.

5.2.3 Policyholder groupings chosen

Based on my analysis of policyholder characteristics and the fact that there is no practical change in administration or regulation as a result of the Transfers I have identified the following three major policyholder groups. These are:

Current AEGL policyholders;

Existing CICE policyholders that are transferring to AEGL; and

Existing CBII policyholders that are transferring to AEGL.

Future intentions of AEGL

5.3 The Transfers are intended to enable Chubb to manage capital more effectively, and to achieve financial savings through the elimination of costs associated with the operation of the Transferring Companies. Both regulatory capital requirements and costs have increased as a consequence of the introduction of the new European Solvency II regulatory regime, which was effective from 1st January 2016. The Transfers also represent a legal reorganisation of the Transfer Companies in preparation for bringing CICE, CBII and AEGL into one entity through the CBM.

I understand that AEGL will be adhering to the overarching capital management policy that is being implemented following the acquisition. This policy is discussed further in 3.25

There is no current intention to discontinue or deregister the operation of AEGL.

Given the above I identify no adverse impact on policyholders arising from the intentions or motives of Chubb in proposing the Transfers.

Governance and management framework

5.4 Management framework

Following the acquisition, the combined Chubb has restructured the executive management team of the Transfer Companies into a unified management team and a number of changes were made.

The restructuring has occurred as part of the integration of the businesses following acquisition, and there are no changes to management that would not have occurred regardless of the Transfers.

A consequence of the Transfers will be a reduction in the quantity of financial and regulatory reporting required due to the elimination of these requirements for the Transferring Companies, and consequent routine changes required to align financial and regulatory reporting of the transferred business in AEGL. I also note the Transfer Companies already operate within a wider Chubb Group financial reporting framework, and I do not identify a risk of any material adverse impact arising from this change.

5.5 Governance framework

As at the date of this report the Transfer Companies have a common governance and risk committee structure, and capital management in place. Therefore the Transfers will have no effect on the governance framework of the Transfer Companies. Governance frameworks have been aligned during the business integration process for the individual entities, such that there is little change to the board and risk compositions and structures as a result of the Transfer other than to reduce the amount of individual reports, meetings and processes and instead streamline them into a more efficient reporting and governance structure.




Cyber-security

5.6 Cyber-security

As noted in section 4.15, there is no expectation that the protection of customers’ data will diminish as a result of the Transfers, I conclude that there is no risk of any material adverse impact on policyholders resulting from the Transfers. Cyber-attacks are attempted on businesses all the time, so there is always the risk that one may be successful, but the Transfers do not appear to increase that risk in any way.

Claims and policy administration

5.7 Claims and policy administration

As noted in section 4.12, Chubb has undertaken significant integration activity as part of the acquisition including refining the service models from each former entity to ensure they are appropriate to the distinct customer groups serviced. There is substantially no change for any policyholders to the front end information they see. As part of this integration, an exercise has been carried out to identify and appropriately manage potential conflicts of interest between claimants of the different businesses; I have seen evidence of the assessment and believe this to be appropriate, and I have seen evidence that as a result of this assessment, no material issues were identified. I understand that existing claims-handling service standards for each group of policyholders will be maintained.

Similarly, the existing reinsurance business underwritten through Chubb Tempest Re that is on the AEGL balance sheet has its own claims handling operation and this will remain unchanged as a result of the Transfers.

The business that CICE has with High Net Worth individuals will experience no change to the way it is run. I understand that this type of policyholder is not currently served by any of the other Transfer Companies, and CICE offers a bespoke service. This bespoke service is expected to continue after the Transfers.

Therefore there will be no anticipated impact on policyholders with regard to claims administration.

Conduct risk

5.8 Conduct risk

As noted in section 4.16 CICE and AEGL have produced similar Conduct Risk frameworks and are continuing to improve their conduct risk management.

As changes to the framework are occurring as part of the acquisition, I do not believe there will be any adverse impact upon the policyholders as a result of the Transfer.

Further to this, I have considered the potential impact of a conduct risk scenario where the Transfer Companies are impacted financially by a conduct risk and do not believe it to have a material impact upon my analysis of policyholder security

Impact of changes in regulatory regime and jurisdiction

5.9 Change in regulatory regime and jurisdiction

As noted in section 4.14, there is no material change to any of the regulatory arrangements for AEGL and CICE as a result of the Transfers. The change of regulatory regime for CBII from the CBI to the PRA and FCA will not have any adverse impact due to all regimes being subject to Solvency II and policyholders not being currently entitled to protection from a central compensation fund (ICF or FSCS). Therefore I do not identify any adverse impact caused by changes in the regulatory regime on any group of policyholders as a consequence of the Transfers.




Financial and economic information considered

5.10 Consideration of the nature of assets available to meet policyholder obligations

In assessing the impact of the Transfers, I have considered the nature of assets within each Transfer Company before and after the Transfers occur. The assets of each Transfer Company can be classified into four broad categories.

Equities – AEGL and CICE hold a small amount of equities.

Investments and cash – Financial investments held by the Transfer Companies are predominantly held in cash and bonds.

Reinsurance share of provisions – Subject to the specific terms of the relevant reinsurance contracts, reinsurance assets have the capacity to absorb losses arising from the underlying reinsured insurance liabilities, thereby reducing financial risk. The nature and level of utilisation of such arrangements is in line with my expectations for all Transfer Companies.

Other assets – Other balance sheet assets include sundry assets arising in the normal course of business such as tax assets, accounts receivable from intermediaries and suppliers, and intercompany balances due from other members of Chubb largely arising as a consequence of recharges of expenses between group companies. These balances are in line with my expectations for a business of this nature.

I do not identify any matter arising from balance sheet assets held by the Transfer Companies that would cause me to perform specific further additional analysis. I note that no change in the overall asset mix of the Transfer Companies is planned as a direct consequence of the Transfers.

5.11 Valuation of insurance liabilities

I have considered the valuation of insurance liabilities included in each Transfer Company balance sheet. The process of estimating insurance liabilities is inherently uncertain due to unknown future events or circumstances and the effect these may have on the frequency and cost of claims. For example, future legal changes may increase the number of claims to which insurers are exposed, inflation may change the costs of remediation of insured events and new types of claim may emerge which are not currently anticipated. Recent examples of this uncertainty include the market-observed significant increases in the number of claims reported to Employers Liability policies for Noise-Induced Hearing Loss, or the increasing costs to the market of PPO claims.

In performing my analysis of the relative impact of the Transfers on different policyholder groups I have considered the appropriateness of the methods and assumptions used by the Transfer Companies to value their insurance liabilities.

The Transfer Companies have similar philosophies on reserving for statutory GAAP reporting. There is a prudent philosophy of reacting quickly to negative indications and waiting until positive news is confirmed to a credible level before acting upon it. For large claim events there is a regular communication channel in all Transfer Companies between the claims team and the actuarial team. Whilst the legacy businesses used the information from these meetings in different ways, the overall reserving strength for large losses has been reasonably consistent between Transfer Companies for similar liability profiles. The actuarial team looking at all of the Transfer Companies has been brought together as a single team already.

Management in each Transfer Company book a best estimate provision for claims that is allowed to differ from the actuarial estimates of required reserves. In each company this results in a higher reserve being established than the actuarial recommendation.




For Solvency II, each entity has to produce an economic balance sheet, for which the appropriate actuarial best estimate is used as the base point.

Reserves are independently reviewed at least annually for AEGL, CBII, and CICE. Internal reviews are done at a detailed level annually within CBII, three times each year within AEGL, and twice annually within CICE. Light reviews are undertaken at each other quarter in all the Transfer Companies.

As a result of the acquisition, the reserving approach for all companies is changing to mirror the historical AEGL approach. As the overall reserving philosophies of the Transfer Companies are similar, the change in approach to reserving will not have any material impact on the security of the transferring policyholders.

I have performed an analysis to satisfy myself that the insurance liabilities are consistent with my expectations for insurance business of this nature. This analysis involved:

A review of both internal and (where available) external reserve reports on the business prepared by qualified actuaries;

A review of the methods used to estimate reserves compared with industry best practice;

A number of interviews with key personnel responsible for estimating the value of insurance liabilities within the actuarial and claims management functions discussing the analyses performed and results of these analyses; and

Consideration of the actual run-off profit or loss on prior underwriting years exhibited by each of the Transfer Companies.

Conservative reserves contain some margin for risk of deterioration over and above the expected ultimate outcome which provides an additional level of policyholder security on top of the capital in the business. AEGL has had favourable claims experience in recent years with initial claims reserves set on a number of major lines of business seeing releases in subsequent calendar years.

CBII has had favourable claims experience over the year due to favourable developments on known claims and a lack of claims emergence on lines of business. In particular, the excess liability and professional indemnity classes have had favourable movements for prior years.

CICE has had favourable claims experience over 2014 and 2015, mainly due to the long tail D&O business line. There was slightly unfavourable experience in the third-party liability class in 2015 due to crime and business interruption claims, however this was offset by the favourable experience above. Lower claims management costs also added to the favourable experience seen in 2015.

5.12 Consistency of insurance liability valuation

Whilst I have not conducted an in depth analysis of reserve adequacy, I have investigated the policies, methods and assumptions used to set the reserves for the various types of insurance liabilities within the Transfer Companies. Specifically, I have considered the policies, methods and assumptions that are applied within each entity to result in a consistent reserve valuation for each Transfer Company and policyholder group. I am therefore comfortable that they are an appropriate basis on which to form my opinion of the position of each policyholder group before and after the Transfers.

Consideration of capital and risk

5.13 Measures of capital

I have considered the value of each Transfer Company’s net assets compared with the risk that each Transfer Company is exposed to by reference to the Standard Formula SCR for each company. This is the only measure which is available for all Transfer Companies and as such is a consistent comparison. I have reviewed the Standard Formula estimates as at 31 December for AEGL, CICE and CBII for comparison purposes.




These estimates compare in principle the value of each legal entity’s economic resources with the Transfer Companies’ estimates of the amount of capital required to ensure that policyholders are secure at the 99.5% confidence level under the Solvency II regime. The risks considered in these estimates include:

The ultimate potential insurance liabilities;

Potential losses from investments;

Potential losses arising from new underwriting exposure over the following year;

Potential losses arising from the failure of third parties to which each legal entity has exposure; and

Potential losses arising from operational risks.

None of the Transfer Companies have chosen to use an Internal Model for setting the SCR under Solvency II at present, due to the imminent proposed Transfers and subsequent CBMs. In addition to this, CBII cite that it is hard to justify the cost of developing and maintaining an approved Internal Model given the size and nature of the respective businesses, and this is in line with what I would expect for businesses of their size and nature. AEGL was a substantial way through the approval process to use their Internal Model, coming to a pause in their application in order to perform the integration following the acquisition. Should the Transfers proceed, it is planned for the new combined entity to move to an Internal Model.

With the Standard Formula being based on the insurance risks within the “average” insurance company, it will not reflect the risk profile of any company perfectly, in particular companies writing niche insurance like CBII. I note that CBII investigated the use of Undertaking Specific Parameters (“USPs”) in its Standard Formula calculation as permitted by the Solvency II rules, but concluded that they did not make a material enough difference to the calculated SCR to pursue this use further.

Notwithstanding the risk profiles of the Transfer Companies are not going to be perfectly captured through use of the Standard Formula, I believe that it appropriately demonstrates the relative change in policyholder security before and after the Transfers to support my opinion within this report, and furthermore does so consistently across the Transfer Companies. However, I have also considered how my analysis would change were the SCR for AEGL to have been based on the historic estimates produced by the AEGL internal model instead. This analysis does not change my conclusions in any way.

I note that these estimates:

Have been produced by suitably qualified individuals from within the Transfer Companies;

Have been reviewed and agreed by the Boards of the Transfer Companies; and

Are consistent with the estimates submitted to the PRA, where relevant

For the avoidance of doubt, the estimates have been calculated excluding the Swiss branch of CICE, as discussed in section 1.1.

I have not performed a detailed verification of the calculations performed by the Transfer Companies. However, in order to satisfy myself that the estimates are reasonable, I have performed stress tests on the areas I consider material to the Transfer Companies’ assessment of available and required capital, or where other market participants have to my knowledge experienced deteriorations recently and to which one or several of the Transfer Companies are exposed. These stresses are intended to describe real life scenarios that are conceptually easier to understand than, for example, a 1 in 200 year event.

In each case the available capital post Transfers more than meets the scenario tested. Whilst this does not constitute a formal re-estimation of the capital required for each of these




scenarios, the fact that each scenario is contained within the capital amounts estimated under the Standard Formula approach reassures me that these estimates are capturing and covering the appropriate risks. I discuss the results of this analysis in sections 6.4 to 6.11

Impact of Transfers on capital available to policyholders

5.14 Change in financial accounting ratios – UK and Irish GAAP

The table below summarises the UK and Irish GAAP assets, liabilities and publicly available financial ratios for the Transfer Companies before and after the transfers.

Please note that net assets refers to assets net of liabilities, and net insurance liabilities refers to insurance liabilities net of reinsurance. Reinsurance assets are included within total assets.

As at 31 December 2015 AEGL (pre transfer)

CICE CBII AEGL (post transfer)

(£m)

Net assets (as detailed in tables in 3.4, 3.8 and 3.13) 1,079 814 101 1,994

Total assets 3,642 2,388 276 6,306

Net Insurance Liabilities (2,115) (1,434) (29) (3,577)

Total liabilities (5,013) (1,763) (174) (6,950)

Net assets as a percentage of total assets 30% 34% 37% 32%

Net assets as a percentage of net insurance liabilities 51% 57% 352% 56%

Net assets as a percentage of total liabilities 22% 46% 58% 29%

Source: 2015 Accounts, Management

The ratios above constitute a simple measure of the change in capital position based on information readily available from the UK GAAP and Republic of Ireland GAAP balance sheets. On each of these metrics, AEGL and CICE policies that transfer to AEGL see no material change in their implied security on these metrics, whilst although seeing a decrease in level of net assets, the CBII policyholders now have access to a larger pool of net assets albeit at a lower proportion of the total assets/liabilities and net liabilities.

5.15 Change in Solvency II capital cover ratios

The table below summarises the Solvency II balance sheet assets, liabilities and financial ratios for the Transfer Companies before and after the transfers.

As above, please note that net assets refers to assets net of liabilities, and net SII Technical Provisions refers to Technical Provisions net of reinsurance. Reinsurance assets are included within total assets.

As at 31 December 2015 AEGL

(pre transfer)

CICE CBII AEGL (post transfer) (£m)

Net assets (as detailed in tables in 3.5, 3.9 and 3.14) 1,219 798 108 2,125

Total assets 3,094 2,326 139 5,559

Net SII Technical Provisions (1,346) (1,333) (16) (2,695)

Risk Margin (172) (88) (3) (263)

Total liabilities (3,821) (1,653) (141) (5,615)

Net assets as a percentage of total assets 39% 34% 78% 38%

Net assets as a percentage of net SII Technical Provisions plus Risk Margin

80% 56% 573% 72%

Net assets as a percentage of total liabilities 32% 48% 77% 38%

Source: Solvency II Balance Sheet

AEGL purchases less reinsurance currently than CICE which explains the large difference in net assets as a percentage of net technical provisions. The ongoing business will be reinsured more in line with the current AEGL strategy. CBII policies see a reduction in their relative




capitalisation however they will still have a comfortable level of assets above liabilities, and will benefit from the diversification and size of the larger entity. In each set of metrics, the level of net assets retained remains sufficiently high such that the policyholders remain in an entity with significant net assets. The most important measures to consider though are how the net assets compare to the regulatory capital requirements, and I discuss this in the paragraphs below.

When considering the impact of the Transfers in terms of the Solvency II capital cover ratio, I note that no Transfer Company currently uses an Internal Model to calculate their SCR under the Solvency II regime, using instead the Standard Formula. I note however, that AEGL plans to apply for internal model approval at some point after the Transfers and CBMs are completed.

I have considered the SCR for all companies, and the view of the Transfer Companies on how the combined SCR may have looked if the Transfers had taken place for 31 December 2015. I have also considered AEGL’s Internal Model documentation that was produced for the approval process before the hiatus. The results are not in the public domain so I do not show them here.

I observe the following:

Prior to the Transfers, the Standard Formula capital cover ratios for the policyholders of all the Transfer Companies are materially in excess of one, indicating the Transfer Companies comfortably meet the Standard Formula SCR;

After the Transfers, AEGL will have a Standard Formula capital cover ratio materially greater than one, indicating the probability that policyholder benefits may not be paid remains remote for existing policyholders;

As a result of the Transfers, policyholders of AEGL and CICE see a small increase in their Standard Formula capital cover ratio. Policyholders of CBII see a decrease in their Standard Formula capital cover ratio, although the ratio is still comfortably in excess of one. Furthermore, CBII is a much smaller entity than AEGL and CICE, with that reflected in their higher capital cover prior to the Transfers.

Although policyholders of CBII will see a decrease in their capital cover ratio, there are a number of reasons why I do not find this cause for concern. Both CICE and AEGL are well-diversified insurance businesses for which the Standard Formula provides an appropriate (if conservative) estimate of the capital required to support the risks in the business. CBII is less diversified and underwrites low-frequency, high-severity exposures. As a result the effective level of capital that is required to support the business is not that which comes from the Standard Formula (or any other economic modelling) but that expected and requested by their policyholders and brokers, which is considerably higher than the Standard Formula SCR. I have also considered this higher metric (the market expectation) as a reference point to the required capital pre-Transfers, which gives me comfort that the policyholders of CBII will not be adversely affected by the Transfers.

With the interests of these clients and brokers in mind, the transfer of CBII’s policies to AEGL’s substantially larger balance sheet and broader capital base should provide further comfort to those willing to do business with CBII.

Given the above, I identify no material adverse change in the economic position of, or capital protection available to, any of the main groups of policyholders.

Impact on existing reinsurers

5.16 Outwards reinsurance arrangements

Reinsurance assets along with the liabilities associated with them will transfer under the Transfers with the reinsured party’s name changing from the respective Transferring Company to AEGL. As discussed in section 4.7, the CBM process ensures that all outwards reinsurance




arrangements transfer. If a reinsurance contract does not transfer to AEGL under the Transfers, it is anticipated that it would transfer under the CBM. A number of reinsurance contracts are not governed by English law and whilst the Transfers and the CBM will operate to effectively transfer such contracts to AEGL as a matter of English law, counterparty consent is also being sought in the majority of cases to help mitigate any local law transferability concerns.

There are two types of situation that an overseas Court could refuse to acknowledge. The first is the rights of a non-EEA policyholder to assert a claim in a non-EEA jurisdiction. Under the Part VII process AEGL would meet valid claims on behalf of any of the Transfer Companies. It is almost inconceivable that a policyholder would petition an overseas Court in order to challenge their own right to make a claim; therefore I do not consider this to be a material risk.

The second would be that a reinsurer could petition that they did not need to respect existing policies because they did not recognise the Transfers. In regard to this risk, I observe the following:

each reinsurer with a New York law governed agreement is being notified so as to ask them to consent to the Transfers;

the market in which the entities participate is one that does trade in part on longer-term relationships, so there could be reputational damage to a reinsurer that pursued such an argument;

it is only the reinsurers of CBII and CICE that could make such a complaint. However, the reinsurance asset of the post Transfers business is heavily weighted to AEGL, which would not be affected. The proportion of the expected non EEA and non intra group reinsurance asset on the balance sheet is less than the bad debt stress test that I consider in section 6 of my report (which I conclude would not change my conclusion).

Therefore, I am comfortable that the risk of non-recognition is not one that changes my opinion.

The Transfers have no further effect on the coverage provided by current or historic reinsurers, creating neither an increase nor decrease in the exposure of reinsurers. This will mean existing reinsurers of the receiving entities will not be liable for the transferred liabilities, which will instead be reinsured by the current respective Transferring Company reinsurers that will transfer also.

Given the above, I identify no material adverse impact to any policyholders of the Transfer Companies from the Transfers due to reinsurance arrangements.

Pension scheme obligations

5.17 Pension Scheme Obligations

AEGL operates a number of defined benefit pension schemes in Continental Europe, which are closed to accrual and to new entrants. As at 31 December 2015, the liabilities relating to these scheme were £32.1m, with a deficit of £9.6m. This has reduced from a 2014 deficit of £11.2m.

CICE operates a number of defined benefit schemes which are largely closed to new entrants though open to accrual. The UK scheme is the largest of these. As at 31 December 2015, the liabilities relating to these schemes were £176.4m, with a deficit of £30.9m. This has reduced from a 2014 deficit of £47.2m. In May 2016, CICE paid a lump deficit contribution to the UK scheme of £20.6m.

CBII is not the sponsor of any defined benefit pension schemes.

The position of sponsor of CICE’s UK pension scheme was recently transferred from CICE to ACE INA Services UK Limited, a service company within the Chubb structure, and CICE currently provide two guarantees, one a Pension Protection Fund (“PPF”) compliant guarantee, over the pension scheme. The PPF is an organisation set up under the Pensions Act 2004, which oversees the payment of compensation to members of eligible insolvent pension schemes, charging a levy to eligible solvent schemes to help fund itself. After the Transfer, AEGL will take over provision of the guarantees in the same form as they were before.




Therefore, for CICE, there is no change as a result of the Transfers other than the change of pension guarantor, and this will be to AEGL, a company with a larger capital base.

AEGL will be taking on guarantees for CICE’s UK pension scheme, which is open to accrual. None of AEGL’s current pension schemes are open to accrual. However, the pension deficit is recognised on both the UK GAAP and Solvency II balance sheets that I reference in my report.

After the Transfers, CBII and AEGL policyholders will be protected by an entity that will sponsor and guarantee pension schemes, whereas CBII and AEGL did not previously do so. However, considering the size of the existing pension deficit (which is recognised in the UK GAAP and Solvency II balance sheets) relative to the capital resources available to the enlarged AEGL post-Transfer, I do not believe this to have a material impact upon my analysis of policyholder security.

Given the above, I identify no material adverse impact on any of the policyholders due to pension scheme obligations as a result of the Transfers.




6. Methodology, stress and scenario analysis

Overview

6.1 In performing my analysis of the impact of the proposed Transfers, I have considered estimates prepared by the Transfer Companies of the maximum losses each of the Transfer Companies would face at certain confidence levels. In order to satisfy myself that these estimates are an appropriate basis on which to form an opinion, I have performed further analysis in three main areas:

Modelling approach – I have considered the methods used by the Transfer Companies to calculate the estimate of insured losses at differing levels of confidence, allowing me to have confidence that the results of the model prepared by the Transfer Companies are based on appropriate assumptions and capture the relevant aspects of each Transfer Company’s risk.

Analysis of sensitivity of the model estimates to alternative assumptions – I have considered how sensitive my opinion is to variations in the underlying assumptions used by the Transfer Companies, and whether the reasoning behind my opinion would be different using alternative assumptions.

Stress test analysis – I have considered the impact of a set of specific severe adverse events on each of the Transfer Companies, allowing me to gain comfort at a high level that the economic loss estimates used in my analysis are meaningful when compared with real world loss assumptions.

Loss modelling approach

6.2 Modelling approach

In finding the most suitable metric for assessing and comparing the capital required for each entity, I had to consider the methods that each entity used as its estimate of capital required. AEGL has an economic capital model which is used internally to manage the business however since this has not been approved by the PRA having not gone through the required Internal Model Approval Process, they use the Standard Formula to calculate their SCR (the required capital amount). CICE and CBII do not use an internal model and rely upon Standard Formula estimates as allowed by Solvency II guidelines. Given each of the Transfer Companies have calculated their capital required using the Standard Formula guidelines, I have used as my first consideration of capital requirements the Standard Formula estimate for each entity, as this is a common metric.

The Standard Formula capital requirements are prepared by local business units within a common risk management framework. These estimates are prepared for inclusion within the regulatory submissions made by the respective entities and are subject to internal review by AEGL’s central risk management function to ensure consistency with group standards.

A broad spectrum of risks is considered within this Standard Formula estimate including:

Risk arising from insurance business, for example, the risk of losses from natural catastrophes, unexpected adverse losses on new business written or deterioration in the valuation of insurance liabilities.

Market risk, for example, the risk that investment returns are not as high as anticipated.

Counterparty default risk, for example, the risk that a bond or reinsurance counterparty becomes insolvent and cannot honour its obligations.

Operational risk, for example, the risk that there is a failure in underwriting controls.




The range of risks considered by each Transfer Company is prescribed by the Solvency II guidelines and is intended to reflect the inherent risk within the activities of each entity. In each case senior management is closely involved in the calculation of required capital. For each entity, the results require approval from the respective board.

I consider the processes which have been adopted in calculating this Standard Formula estimate to be consistent with industry practice for insurance businesses of the size and complexity of AEGL, CICE and CBII. I am therefore comfortable that these processes are appropriate in nature and scope.

6.3 Findings of review of the modelling approach

I have discussed the results of the Standard Formula approach with the Transfer Companies’ management and been provided with a range of related material including required capital estimates using alternative methods and descriptions of the methodology used.

The Transfer Companies have applied standard actuarial methods to generate their estimates of potential losses for each entity. The draft estimates of required capital that have been provided to me as at 31 December 2015 are broadly consistent with those previously prepared for alternative purposes (“Standard Formula Appropriateness” reviews for AEGL and CICE and “Forward Looking Own Assessment of Risk” for CBII) which have been subject to full internal review and governance processes. Differences that exist between these results appear reasonable when changes in the volume of business written and updates made to estimates of variability and risk are taken into account. There have been a number of re-calibrations and changes to the estimation methods used, however these incremental changes are consistent with normal “business as usual” process of improvements.

The most significant risks contributing to AEGL’s required capital relate to the underlying general insurance business and associated uncertainties relating to the value of existing insurance liabilities and potential for adverse outcomes to that expected in the risks underwritten in the forthcoming twelve months and reserves currently set, particularly in the liabilities that would be expected to settle over a longer time period (Casualty and Financial lines). In addition to general insurance risks similar to those faced by AEGL, CICE has historically had a higher exposure to risks arising from large loss and Catastrophe events both Natural and Non-Natural. These are typically very large in size with historical examples of natural being weather events incurring losses on the property and homeowners lines of business whilst non-natural losses have historically been seen in the financial lines as a result of Madoff and sub-prime financial event losses. While the reinsurance programmes are moving to become aligned in advance of the Transfers and subsequent CBM, the latest capital figures available from the Transfer Companies do not yet reflect this. I will therefore discuss these changes and any impact they may have in my Supplemental Report.

As AEGL holds a different asset mix from the other Transfer Companies owing to the relatively longer tailed business it writes, it also holds greater market risk related to investment risks, including the risk that the value of investments in bonds will fall due to market perceptions of credit risk or changes in interest rates.

CBII has a much smaller required capital than AEGL or CICE, in line with its smaller asset and liability base, and its largest insurance risk relates to the excess liability it writes. It also has a relatively large market risk due to the asset type it holds, similar to AEGL, being matched to the longer tailed nature of its liabilities.

The relative contribution of different risk types to the required capital estimates for AEGL, CICE and CBII are consistent with my understanding of the underlying business and in line with my expectations.

Whilst I have not performed a detailed validation of model results, the assumptions, methodology and outputs from the model are consistent with my expectations for business of this nature and I am satisfied that they are informative as to the change in risk which would occur following the Transfers compared with the position assuming no Transfers occur.




Stress test analysis

6.4 I have considered a variety of severe adverse scenarios that could have a material impact on the financial security of policyholders. I have performed this analysis in order to:

Quantify the impact of a stress event on the Transfer Companies and hence policyholder security; and

Satisfy myself that the estimates produced by the respective entities on the basis of their Solvency II Standard Formula calculations, together with the resulting capital cover ratios, are broadly reasonable when compared with the impact of a combination of specific adverse events.

The estimates of capital required from the Standard Formula calculation prepared by the Transfer Companies are intended to represent the full range of realistic economic risks that each Transfer Company could experience, and represents a more complete consideration of business risk than an analysis of specific stress events. However, such estimates are based on multiple modelling assumptions which rely on expert judgement. By contrast my consideration of specific adverse stresses provides qualitative information on the security of policyholders in a single defined scenario. Such specific severe adverse scenario testing does not rely on expert judgements regarding the frequency and range of uncertainty, and provides an alternative source of information from which I can gain insight into the levels of security of policyholders.

I note that the output from the Transfer Companies’ capital models (in their varying levels of sophistication) is consistent with the results of my analysis of specific severe adverse stresses.

6.5 I have considered a variety of potential severe adverse circumstances or extreme events that could affect the Transfer Companies, all of which represent stresses that fall outside the normal course of business. In selecting the scenarios to model, I have considered:

Current developments occurring in the insurance markets in which each Transfer Company operates.

The typical risks faced by an insurance business.

My overall understanding of each Transfer Company including its portfolio mix, structure and business model.

The key risks identified by each Transfer Company in its estimates of required economic capital from its ORSA.

The scenarios identified by each Transfer Company as part of its normal risk management processes.

I have considered each stress by assuming the outcomes of what might happen given each scenario, looking at how this would affect the entities both individually and Post Transfers based on their business and coverage, and consequently how this would affect each of their capital. I have then compared the lower capital position that would be in effect should each scenario (in isolation) happen to the capital requirements of each Transfer Company.

As discussed in section 5.13, the capital requirements under the Solvency II regime are based on policyholders being secure at the 99.5% confidence level. For an even more rigorous check on the level of security, I further consider the capital levels against a capital requirement based on a 99.8% confidence level.

Whilst these stresses do not represent an exhaustive list of all adverse events that could impact the Transfer Companies, they include those risks I consider most material and relevant to my analysis. I note that the Transfer Companies perform such stress testing as part of their




business as usual risk management processes as expected under Solvency II. Taking the base financial projections provided by the Transfer Companies as a starting point, the severe adverse scenarios I have considered include:

Large European windstorm: A windstorm hits the UK and other Northern European countries causing damage to thousands of buildings, agriculture and industrial sites.

Large US windstorm: A category 5 hurricane hits parts of Miami and Florida effecting buildings, airports and businesses and causing power outages.

Euro Economic Shock: Italy, Spain, Portugal, Ireland and Greece depart the Eurozone in favour of reverting to their national currencies causing global economic recession.

Casualty Systemic event: There is a systematic event, e.g. manufacturing defect in cars, which causes multiple losses across multiple periods.

Largest Reinsurer default: External reinsurers default resulting in a loss of reinsurance recoverables.

6.6 Severe adverse stress: Large European Windstorm

I consider a scenario in which a windstorm hits parts of Ireland, moving across to Northern England. The windstorm also causes damage to other Northern European countries which include Germany, Belgium, Netherlands and Denmark.

In the towns along the track, hundreds of thousands of buildings are damaged, including residential and major commercial buildings. There is also damage to agricultural and industrial sites. I assume no impact on the wider economy or stock market.

The industry wide loss for this scenario would be $34bn.

This event affects both AEGL and CICE, whilst exposure levels for CBII are immaterial

6.7 Severe adverse stress: Large US Windstorm

I consider a scenario where a Category 5 hurricane hits parts of Miami, Florida and Louisiana. The hurricane starts 20 miles southeast of Miami and continues to Marco, Florida. There is also a second landfall in Louisiana. Tropical storm strength wind can be felt along cities on the west coast of Florida such as Fort Meyers, Charlotte and Panama City.

The event is presumed to be a 1 in 250 year occurrence.

In the towns along the track, and along the eastern and western Florida coast, as well as southern Alabama coast, hundreds of thousands of buildings are damaged, including major commercial buildings. There is also damage to pipelines. Several airports are impacted: Miami International, Everglades, Marco Island, Kendall-Tamiami Executive, Dade-Collier Training and Transition, Fort Walton Beach, and Pensacola Regional Airport in Florida. Power outages and limited access aggravates the impact to business and this results in increased unemployment and reduced personal incomes.

An unrealised capital gain is expected to offset this impact slightly, due to investors reallocating their portfolios to high quality bonds to guard against the disaster.

The industry property loss for this scenario would be $144bn, which is nearly three times as large as the insured losses arising from Hurricane Katrina.




This event affects AEGL, whilst exposure levels for CICE and CBII are immaterial

6.8 Severe adverse stress: Euro Economic Shock

I consider a scenario of a global economic recession. This recession is caused by Italy, Spain, Portugal, Ireland and Greece leaving the Eurozone and reverting back to national currencies. This causes a movement of investments to US dollars instead of Euros. Global financial markets deteriorate as a result of the recession and there is an impact on the Eurozone political risk business. As a result of this the Euro strengthens against the national currencies of the countries which have left. This triggers a global economic recession and a deterioration of financial markets.

This event affects all entities; exposure levels for CBII are much smaller than AEGL and CICE, though material.

I note that the vote in the United Kingdom referendum held on 23 June 2016 to leave the EU has caused a significant readjustment of currency exchange rates and led to significant volatility in equity and bond markets. The assumptions in this stress test result in far greater market volatility than that recently observed following the UK referendum.

6.9 Severe adverse stress: Casualty Systemic event

I consider a scenario where the business is hit by a number of various liability losses which have arisen from a common cause. Issues include manufacturing defects in motor parts, defective medical products and contaminated food products. I assume that losses are equal to three times the average aggregated large loss amount. This average is based on 2003 – 2012 data.

Losses will either be incurred by the CICE or the new reinsurance programme depending on when policies are incepted. This event affects both AEGL and CICE, whilst exposure levels for CBII are immaterial.

6.10 Severe adverse stress: Largest Reinsurer default I consider a scenario where all of the above events (European windstorm, US windstorm, Economic Recession and a systematic liability loss) happen within 1 year. Due to the extreme market-wide events, a number of reinsurers default. I assume that only external reinsurers default, which provide 25% of reinsurance recoverables.

This event affects both AEGL and CICE, whilst exposure levels for CBII are immaterial.

6.11 Findings of stress test analysis

Having analysed the results of the stress tests outlined above, I find that none of the scenarios would result in the Transfer Companies falling short of their capital requirements, even at the higher estimated 99.8% percentile. After the Transfers, AEGL will continue to have a surplus of assets over liabilities in any single scenario. The proportion of surplus assets will be improved post-Transfers for policyholders of AEGL and CICE, and while it will decrease for policyholders of CBII, it will still be comfortably secure.




7. Summary of findings

Summary of changes in circumstances of transferring CICE policyholders

7.1 From a capital perspective, CICE policyholders see an improvement in the level of assets available to meet claims in proportion to the regulatory capital requirements as a result of the Transfer.

7.2 I do not identify any adverse effect arising from the Transfers in relation to the management of the business (in terms of claims handling, policy administration or other non-financial impacts) for any CICE policyholders transferring to AEGL.

7.3 There is a common prudential regulatory framework across the EU (and I expect that the UK will continue to adopt a Solvency II equivalent regime in the event of leaving the EU before the Transfers), so the current advantages of CICE’s legal status as an SE do not have a material value for existing CICE policyholders. CICE policies will continue to be in an environment regulated by the PRA and FCA and have no change in their protection under the FSCS.

7.4 I do not identify any real risk of the Transfers making it more difficult for a policyholder outside the EEA to bring a claim under a policy from CICE, nor any material risk of CICE’s non-EEA reinsurers not recognising the Transfers and so declining payment of future reinsurance recoveries, and therefore expect that any question of the enforceability of the Transfers outside of the EEA does not materially adversely impact CICE policyholders transferring to AEGL under the Transfers.

7.5 I do not identify any material change in any of the non-financial areas for CICE policyholders as a result of the Transfers, based on the analysis I have been able to carry out.

7.6 As a result of the above observations I do not identify any material adverse effect on any of the policyholders whose policies are transferring out of CICE to AEGL under the Transfers.

Summary of changes in circumstances of transferring CBII policyholders

7.7 From a capital perspective, CBII brokers and policyholders request a minimum dollar amount of capital from CBII currently to support the risks they are prepared to place with CBII. The Transfers leave CBII policyholders with a much larger and better diversified capital base to support their risks, with no detriment expected to the published credit ratings of their insurance carrier.

7.8 I do not identify any adverse effect arising from the Transfers in relation to the management of the business for any policyholders transferring to AEGL.

7.9 CBII will move from being regulated by the Central Bank of Ireland to the PRA and FCA after the Transfers. I do not identify any adverse effect on the policyholders by a change in prudential regulator due to the common prudential regulatory framework seen across the EU and the expectation that the UK will continue to adopt a Solvency II equivalent regime in the event of leaving the EU before the Transfers. With regard to conduct regulation, there are no retail or small commercial policyholders of CBII, so I do not expect there to be any impact on the CBII policyholders of the change in conduct regulator.

7.10 I do not identify any real risk of the Transfers making it more difficult for a policyholder outside the EEA to bring a claim under a policy from CBII, nor any material risk of CBII’s non-EEA reinsurers not recognising the Transfers and so declining payment of future reinsurance recoveries, and therefore expect that any question of the enforceability of the Transfers outside of the EEA does not materially adversely impact CBII policyholders transferring to AEGL under the Transfers.

7.11 I do not identify any material change in any of the non-financial areas for CBII policyholders as a result of the Transfers, based on the analysis I have been able to carry out.

7.12 There is the risk of a small tax charge arising from the Transfers in respect of any gain on assets transferred from the UK branch of CBII. I understand this potential charge (which could potentially be mitigated in any case) will not be material in the context of the combined post-Transfer AEGL balance sheet, and conclude that it does not introduce any material detriment to CBII policyholders.




7.13 As a result of the above observations I do not identify any material adverse effect on any of the policyholders whose policies are transferring out of CBII to AEGL under the Transfers.

Summary of changes in circumstances of existing AEGL policyholders

7.14 From a capital perspective, AEGL policyholders see an improvement in the level of assets available to meet claims in proportion to the regulatory capital requirements as a result of the Transfer. After the Transfers, AEGL policyholders will become protected by an entity that will sponsor and guarantee pension schemes unlike AEGL prior to the Transfers, however due to the size of the existing pension deficit compared to the capital resources that will be available post Transfer I do not believe this to be a concern.

7.15 There is no change in the regulation of AEGL or in the executive management responsible for administering the business of AEGL as a result of the Transfers. The executive management restructure has occurred as a result of the acquisition of Chubb to create a unified team which would have happened regardless of the proposed Transfers occurring.

7.16 AEGL policyholders will remain in their current underwriting entity. Processes and procedures have been reviewed and modified as part of the acquisition and would have occurred regardless of the Transfers taking place.

7.17 I do not identify any material risk of CICE’s or CBII’s non-EEA reinsurers not recognising the Transfers and so declining payment of future reinsurance recoveries, and therefore expect that any question of the enforceability of the Transfers outside of the EEA does not materially adversely impact AEGL policyholders.

7.18 I do not identify any material change in any of the non-financial areas for AEGL policyholders as a result of the Transfers, based on the analysis I have been able to carry out.

7.19 As a result of the above investigations I do not identify any material adverse effect on policyholders of AEGL as a result of the Transfers.




Appendix 1 Curriculum Vitae of the Independent Expert

Philip Tippin is a non-life actuarial partner in KPMG.

Philip Tippin has been an actuarial services partner since 2004. He joined in 2001 and has led KPMG’s general insurance actuarial business for much of his time with the firm. He has worked on a number of previous Part VII transactions over this period. Philip qualified as a Fellow of the Institute of Actuaries in 1998 with Watson Wyatt, having specialised in general insurance actuarial work since the start of his career.

Prior to joining KPMG Philip also worked as a consultant with Deloitte, and spent several years as a syndicate actuary in the Lloyd’s Market with Venton (latterly Alleghany) Underwriting.

Experience

Philip has a wide range of experience in finance, insurance and reinsurance, covering both retail and wholesale markets, as well as having performed engagements looking at financial guarantee products. He has assisted clients in reserving, pricing, risk management, underwriting control, capital management and strategic consulting projects. His experience includes substantial exposure to UK and US law and regulation as they apply to insurance. Examples of recent assignments include:

Acting as Independent Expert in general insurance Part VII business transfers.

Undertaking the formal role of Scheme Actuary for a large number of Schemes of Arrangement, for both insolvent and solvent companies.

Negotiation of commutations with policyholders and cedants on behalf of businesses in run-off.

Expert witness appointment in the United States, covering reinsurance, reserving and pricing of specialist products, providing advice through the lifecycle of the case.

Acting as independent expert for complex liability valuation determinations.

Estimation of claim emergence and quantification of liabilities from environmental disasters in the United States.

Gap analyses and development of implementation plans for Solvency II for large insurance groups.

Review of credit risk liability models.

Capital model design and review.

Providing actuarial due diligence reporting for a number of major London Market acquisitions.

Strategic reviews of business models for insurance risk management for providers and buyers of insurance.

Providing statements of actuarial opinion for Lloyd’s syndicates, including provision of opinions for US trust funds.

Technical pricing of retail and commercial insurance products.

Providing support to the audit of major UK and international insurance groups.

Professional & Educational

Philip is a Fellow of the Institute and Faculty of Actuaries (FIA). He holds a Practising Certificate to act as a Syndicate Actuary at Lloyd’s, and has previously held a similar certificate to act for insurance and reinsurance entities in Ireland. He acted as an examiner and senior examiner for the general insurance papers of the Institute and Faculty of Actuaries exams for 6 years until 2005.

He holds an MA in Mathematics and Philosophy from the University of Oxford.




Appendix 2 Extract from Letter of Engagement

Scope of the Independent Expert’s work – UK transfers

My role as Independent Expert will be to consider and to report to the Courts on the proposed Transfers from the perspectives of the policyholders of the Transferors and Transferee, and to give a reasoned opinion on the likely effects of the Transfers on the policyholders of the Transferors and Transferee including whether any of their interests could be in any way (either directly or indirectly) adversely affected by any of the Transfers. Under the regulators’ guidance, the Report must comply “with the applicable rules on expert evidence”. My understanding therefore is that the PRA expects an independent expert to prepare a report in accordance with Part 35 of the Civil Procedure Rules 1998 (“CPR”), the relevant Practice Direction and the protocol for the Instruction of Experts to give evidence in Civil Claims, to the extent relevant (“the Requirements”). I will therefore conduct my work as if the Requirements apply. In particular, I will owe an overriding duty to the Courts to assist the Courts and to give the Courts independent expert evidence on the Transfers.

For each Transfer, I expect that my work will include the following tasks in order for me to form my opinion:

reviewing existing company documentation, as set out in Appendix 1 to this letter;

reviewing the documentation for the Scheme and, if necessary, suggesting amended drafting

in order to eliminate any concerns;

reviewing the Transfers, considering the effect on policyholders of the Transferor and

Transferee, covering their contractual rights, benefit security, and benefit expectations;

reviewing any changes to reinsurance arrangements in connection with the Transfers;

reviewing the effects of the Transfers on the risks and policyholders remaining within the

Transferor and the resources of that company to meet those risks;

reviewing the effects of the Transfers on the risks within both Transferee and the resources of

each entity to meet those risks;

reviewing comparative solvency levels before and after the proposed transfers;

liaising and raising issues and questions as necessary with the appropriate persons at the

Transferors and Transferee;

liaising and raising issues and questions as necessary with your advisers, including tax and

legal advisers;

such other tasks as you, I or the PRA and/or FCA consider reasonably necessary for the proper

discharge of my role as independent expert.

Scope of the Independent Actuary’s work – Irish transfer

The scope of the Independent Actuary’s work will largely mirror that of the Independent Expert as set out above, but will involve liaison with the Central Bank of Ireland (“CBI”) and reporting to the High Court in Ireland.




Appendix 3 Letter of Representation







Appendix 4 List of Information provided

Financial Information

AEGL, CICE and CBII regulatory returns for the prior 3 years

AEGL, CICE and CBII Insurance Company accounts for the prior 3 years

Structure and Company Information

Company organisation charts

Details of current and post transfers Board(s), governance and administration arrangements

Significant Risk Sharing Arrangements & Material Counterparties

Reinsurance arrangements

Details of pension scheme guarantees

Transfer Information

Policy overview – premiums and claims – split over lines of business

Capital and Risk Management

Standard Formula estimates for AEGL, CICE and CBII pre and post Transfers, with accompanying methodology and documentation

2016 ORSA for AEGL (excerpts)

2015 ORSA for CICE (excerpts)

2015 FLAOR for CBII (excerpts)

Integration risk assessment report for AEGL

Internal reserve reviews for AEGL, CICE and CBII 2015

Internal reserve review for CICE 2014

Independent reserve reviews for AEGL for Q2 2015 and Q4 2015

Independent reserve review for CBII and CICE for Q4 2015

AEGL uncertainties report

Stress testing documentation

Balance sheet analysis under UK GAAP and Solvency II

Other information considered

Discussions with key staff within executive team. Numerous e-mails and documents confirming statements and information provided verbally during these meetings

Risk mitigation reports and documentation

Various Cyber Security related documents

Tax impact report




Appendix 5 Glossary of terms and definitions

ACE European Group Limited (“AEGL”) – This is the transferee, which from 2 November 2016 is a subsidiary of ACE European Holdings Limited and Chubb Insurance S.A/N.V. Adverse impact – A negative change of any size Approved persons regime - Regulation that the PRA applies to regulated firms which is designed to ensure senior management is appropriately experienced and qualified. Asset - Generally, any item of property whether tangible or intangible, that has financial or monetary value. Capital - Defined as total assets less total liabilities as measured using either an economic method of valuation, PRA mandated valuation rules or Statutory Accounting principles, as indicated by the accompanying text. Chubb Bermuda International Insurance Ireland Designated Activity Company (“CBII”) – One of the transferring companies, which is a subsidiary of ACE European Holdings No.2 Limited as from 2 November 2016. Chubb Insurance Company of Europe SE (“CICE”) – This is one of the transferring companies, which is a subsidiary of ACE European Holdings No.2 Limited as from 2 November 2016. Chubb Limited – This is the parent group of all entities in the Transfers. Claims Made – A type of policy cover where claims reported to an insurer within the policy period are covered regardless of when the incident occurred. Claims Reserves - Funds to be set aside for the future payment of incurred claims that have not yet been settled, and hence are classified as liabilities on the company’s balance sheet. CPR - Civil Procedure Rules 1998. The Courts - the High Court of Justice of England and Wales and the High Court of Ireland. Credit risk - The risk of financial loss resulting from changes in the value of assets due to actual default or perception of the risk of default in the future. The term is commonly used to describe the risk that the market value of a financial investment such as a bond will fall due to an increase in the perceived likelihood of default, for example, due to an opinion issued by a credit rating agency, but would also cover the risk of non-payment of reinsurance recoveries or broker balances. Earned Premium – See “Premium”. Economic basis - A method of measuring the value of assets and liabilities using market consistent valuation techniques including reflecting the time value of money on cashflows occurring in the future, and excluding “prudent” valuation margins included in estimates of the valuation of insurance liabilities. In this report the word “economic” is used to represent the closest representation to the real value of the assets or liabilities in question, disregarding the effect of accounting or regulatory measurement rules. Effective Date - The date and time on which the Transfers takes effect. FIA - Fellow of the Institute and Faculty of Actuaries.




Financial Conduct Authority - The Financial Services Authority was reorganised into two separate regulatory agencies during 2013. The successor organisations are the Prudential Regulation Authority and the Financial Conduct Authority. The Financial Conduct Authority focuses on the regulation of conduct by retail and wholesale financial services firms. FSMA - The Financial Services and Markets Act 2000, the legislation which under Part VII governs the transfers of insurance business between insurance undertakings. Gross - Excluding the effect of reinsurance arrangements. For example, “gross insurance liabilities” refers to insurance liabilities before taking into account any offsetting of reinsurance assets. Holding company - A holding company is a company established for the sole or main purpose of holding shares in subsidiary companies. ICA - Individual Capital Assessment. An insurance company’s own assessment of the capital it needs for regulatory purposes in order to mitigate the risks to which it is exposed and that could otherwise cause it to be unable to meet its liabilities as they fall due. Independent Expert - The person appointed to report on the terms of the Transfers pursuant to section 109 of FSMA, or any successor appointed to report on the same and whose appointment is approved by the PRA. The Independent Expert’s primary duty lies with the Courts, and the opinions of the expert are developed independently of the sponsoring Transfer Companies and the PRA. Insolvency - The condition of having more liabilities than assets which might be available to pay them, even if the assets were mortgaged or sold. Insured exposure – The maximum probable loss to the insurer. Insurance reserves - The estimated value of future claims costs recorded in the balance sheet of an insurance company, also referred to as the “value of insurance liabilities”. Jurisdiction - The concept that a court or government authority or regulator may exercise control over a person or property because of the location of the property, the activities of a person within a geographic area, or a person's request for assistance from that authority, thereby voluntarily subjecting themselves to jurisdiction. KPMG - KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. Liability - A claim against the assets, or legal obligations of a person or organisation, arising out of past or current transactions or actions. Losses occurring – A type of policy cover where incidents occurring within the policy period are covered regardless of when they are reported to an insurer. Material adverse impact – a negative change that is considered to have a material impact on policyholders. A material impact is one that could cause a policyholder to take a different view on the future performance of their policy. When considering policyholder security these would include changes to the assets or liabilities of the company such that there was a shift in the probability of a policyholder's claim being paid substantially larger than that which would be observed through the day-to-day fluctuation of the value of assets in a Transfer Company's investment portfolio, or from the reporting of a particularly large but not extreme claim to the Transfer Company's liabilities. In terms of non-financial impacts, an assessment of materiality is more subjective, but as an example a change in claims handling process that added a few hours to the customer response time is probably not material, but if it added a few days then it could be, depending on the type of claim.




Net - Including the effect of reinsurance arrangements. For example, “net insurance liabilities” refers to insurance liabilities after deducting any offsetting reinsurance assets from the gross insurance liabilities. Parameter / Parameterised - A numerical input which affects the result of a calculation. Part VII Transfer - A court process for transferring insurance business, ranging from single contracts to an entire portfolio, to another insurer. The insurers involved can either be in the same insurance/reinsurance group or from different corporate groups. For companies to achieve a successful transfer, they must appoint an Independent Expert who considers the impact of the proposed transfer on the various groups of affected policyholders and submits a report to the Courts. Policyholder obligation - The contractual obligation of an insurer to its policyholders. Policyholder security - The degree of certainty that policyholders have that an insurer will have the financial resources available to meet its policyholder obligations. Premium - The amount of money received by an insurer in return for providing an insurance policy providing protection to an insured against the financial consequences of a specified set of potential events. Premium can be measured gross or net of reinsurance, meaning before or after the deduction of any associated reinsurance premiums paid by the insurer. Premium is measured on a “written” basis, meaning all premiums receivable on policies commencing within a given period, or is measured on an “earned basis”, meaning the amount of premium attributable to the accounting period based on some allocation of the premium across the period during which the underlying policy is exposed to risk. Prudential Regulation Authority - The Financial Services Authority was reorganised into two separate regulatory agencies during 2013. The successor organisations are the Prudential Regulation Authority and the Financial Conduct Authority. The Prudential Regulation Authority is part of the Bank of England and carries out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies. Reinsurance - An insurance contract between one insurer (the reinsurer) and another insurer (the cedant) to indemnify against losses of the cedant on one or more contracts issued by the cedant in exchange for a consideration (the premium). Reinsurance is “insurance for insurers”, allowing insurers to share potential insurance losses with a reinsurer and hence reduce their own risk. Similar to insurance policies, reinsurance policies are written to cover specific pre-agreed risks and eventualities, as detailed in the reinsurance contract. The Report - the report produced by the Independent Expert. Reserves – See “Claims Reserves”. Solvency II - The European Commission’s revision of EU insurance law designed to improve consumer protection, modernise supervision, deepen market integration and increase the international competitiveness of European insurers, elements of which came into effect from 1st January 2016. Under this new system insurers are required to take into account a wide variety of different types of risk to which they are exposed and to demonstrate they manage those risks effectively. The new system has introduced more sophisticated solvency requirements for all EU insurers, in order to guarantee that they have sufficient capital to withstand adverse events (for example, floods or investment market crises). Stressed scenario - Consideration of the impact (current and prospective) of a particular defined set of alternative assumptions or outcomes that are adverse. Consideration is given to the effect on the insurance company assets, liabilities and operations of a defined adverse scenario. Subsidiary - An enterprise controlled by another (called the parent) through the ownership of greater than 50 percent of its voting stock.




Surplus – An insurance undertaking is obliged to hold assets of greater value than its contractual liabilities. The difference between these two amounts is often described as the surplus assets, and is usually compared against the amounts of regulatory capital that the undertaking is required to hold. TASs - Technical Actuarial Standards issued by the Financial Reporting Council. The Transfers - In the context of this report, I mean the proposal that CICE and CBII will transfer their insurance business to AEGL through English and Irish transfers under the provisions of Part VII of the Financial Services and Markets Act 2000 and the Irish Court. The Transfer Companies – ACE European Group Limited (“AEGL”), Chubb Bermuda Insurance Ireland Designated Activity Company (“CBII”) and Chubb Insurance Company of Europe SE (“CICE”). Transferring policyholders - includes policyholders of CICE and CBII for which any liability or contingent liability remains unsatisfied or outstanding at the Effective Date. Underwriting - In general insurance, this is the process of consideration of an insurance risk. This includes assessing the appropriate premium, together with the terms and conditions of the cover as well as assessing the risk in the context of the other risks in the portfolio. Well capitalised - Having capital resources comfortably in excess of the regulatory requirement; in this case we use it when the ratio is over 125%. Written premium - see “Premium”. Very well capitalised - Having capital resources comfortably in excess of the regulatory requirement, in this case we use it when the ratio is over 200%.




Appendix 6 List of interviews carried out

Name Business Unit Position

Adrian Crick AEGL / CICE Head of Complaints

Ashley Mullins Chubb General Counsel

Brian Hardwick CICE Chief Risk Officer & Head of Compliance (prior to 30 June

2016)

Denis Whelan Chubb Deputy General Counsel

Eileen Castolene AEGL / CICE Director of Operations

Jalil Rehman CICE Chief Business Operating Officer (Former CEO of CICE)

James Thornton Chubb European Information Security Officer, Information

Technology

Jim Duncan CBII Regional Manager

Jim Paugh CBII Head of Claims and Assistant General Counsel

Katerina Kikillou CICE Claims Manager

Mark McCausland AEGL Chief Risk Officer

Mark Hammond AEGL CFO

Max Gibbs AEGL / CICE Head of Operations

Michael Bass CICE Capital Actuary

Michael Trainor CBII CFO & Company Secretary for Chubb Bermuda

International

Mike Hutchinson Chubb Systems Director, Information Technology

Patrick Nolan AEGL Head of Capital

Paul Longville AEGL / CICE Head of Compliance

Peter Murray AEGL Claims Director

Robert Whelan AEGL Europe Consumer Lines Claims Manager

Sam Peters CBII Senior Vice President and Chief Actuary

Shane O'Dea AEGL Head of Actuarial Services

Stephen French CBII Chief Underwriting Officer

Steve Parry AEGL Claims Director

Stuart Dawes AEGL Head of Financial Reporting

Tim Saltmarsh CICE Senior Vice President and Actuary

Tony Jordan AEGL Chief Actuary

Victoria Broadfoot AEGL / CICE Customer Relations Manager




Appendix 7 Details of proposed policyholder communication (summarised from Witness Statements)

CICE policyholders

Subject to the approval of the Courts, save as provided below, CICE proposes to send by post or by email a cover letter and accompanying information leaflets, including a summary of this Report (together, the “Policyholder Letter”), to each policyholder who holds a policy under which:

(a) the period of insurance is continuing; or

(b) a claim has been made and is outstanding; or

(c) the period of insurance expired:

(i) after 5 December 2010 where the policy relates to commercial non-financial

insurance;

(ii) after 5 December 2013 where the policy relates to personal insurance; or

(iii) after 1 November 2016 where the policy relates to financial or accident and

health insurance,

in each case where the contact information of that policyholder are held by CICE.

Waivers are being sought in respect of certain groups of policyholders meaning that certain policyholders will not (subject to the Courts approval) be notified of the Transfers individually and I have considered the reasoning for each in turn. I believe the waivers still to be fair to each policyholder group given that the nature of the Transfers, the nature of some of the policies affected and given the substantial advertising campaign that will be in place for the Transfers will still inform these policyholders. The below lists these groups and the reasoning for each:

- Underlying policyholders of group policies will not receive individual notice of the Transfers from CICE. Instead, the group policyholder will be requested to notify its underlying policyholders in such a way as they consider appropriate. Underlying policyholders would include those who obtain cover from CICE due to their employment with, or membership of, a group policyholder and those who obtain insurance cover automatically through taking out a product (such as a card or cash plan) with a group policyholder. In the latter case, no separate or additional premium is paid to CICE by the underlying policyholder. This approach is reasonable given that the group policyholder holds data in respect of underlying policyholders, the underlying policyholders do not have individual influence on the policy purchasing process and I do not find any policyholder groups to be adversely affected by the Transfers;

- CICE does not hold policyholder data in respect of policyholders (a) who purchased their coverage through corporate partners (e.g. mobile phone companies) or (b) who purchased their coverage through a scheme offered by a sponsoring broker (affects certain small and medium corporate policyholders and high net worth policyholders). In both cases, CICE will request that the corporate partners and sponsoring brokers either provide CICE with policyholder data so that CICE can give them notice of the Transfer or, will give them the option of notifying policyholders themselves (using the Policyholder Letter provided by CICE). After engagement with its corporate partners and brokers, CICE anticipates that all of them will either send the notification themselves or provide data to CICE so that it can give notice. However, in the event that this does not happen, certain policyholders will not receive individual notice of the Transfer and a waiver will be requested to cater for this




eventuality. This approach is reasonable given that the corporate partner/broker holds data in respect of policyholders and I do not find any policyholder groups to be adversely affected by the Transfers;

- A specific waiver is being sought in respect of policyholders of a particular corporate partner. In that case, it is anticipated that a message will be included in the banking statements of such policyholders inviting them to visit the Chubb transfer website for more information on the Transfer. In addition to the points mentioned above, I find this waiver to be reasonable on cost-benefit grounds given the estimated cost of direct notification is greater than two years relevant premium for these risks;

- Policyholders who are individuals, subsidiaries or affiliates under directors and officers insurance will not receive individual notice of the transfer from CICE. Given the policy is purchased by the commercial firm and could cover past, current and potential directors or officers, approved persons and members of various committees, affiliates and subsidiaries, contacting the individual persons who may receive cover is difficult due to determining who may be covered by the policy. CICE intend to contact the commercial policyholder and request those commercial policyholders inform their D&O insureds of the Transfer in such manner as they consider appropriate. I believe this is reasonable given that these policies are purchased by the companies rather than the underlying beneficiaries, who may not know that they are protected by CICE;

- Save as described above, any individual whose name is not written in policy documents or with an incorrect or incomplete address meaning CICE has no means of contact. This seems practical given the lack of other contact options and the extensive advertising campaign proposed;

- Other than described in (c) (i) to (iii) on page 58, any policyholder whose policy is expired. CICE has carried out an analysis as to when new claims are brought under expired policies and the analysis showed that at least 95% of all claims under policies were brought either during the life of the policy or during the applicable period specified in (c) (i) to (iii) on page 58;

I note that the time periods suggested are expected to cover more than 95% of potential claims, that this assessment is consistent with my understanding of the reporting periods for the relevant lines of business from my wider experience, and that there is a substantial advertising campaign proposed to inform policyholders that are not otherwise contacted. Moreover, in my report I do not find any group of policyholders to be materially adversely affected by the Transfers. I therefore find this waiver request reasonable on cost-benefit grounds, but accept that others may come to a different conclusion as cost-benefit is a subjective judgement.

I believe the above list of waivers to be reasonable following consideration of the reasoning for each in turn. I would note that the above exempted groups can still submit claims following the Transfer and the means to do so will be appropriately accessible to them. I would also note that any policyholders in the above groups or third parties who have already notified claims under a policy will still be notified.

A Policyholder Letter will also be sent to each third party claimant who has claimed under a policy and all counterparties to inwards reinsurance agreements. Each new policyholder will be notified of the Transfer at fulfilment.

External reinsurers to CICE that are:

(a) counterparty to any in-force reinsurance contracts (both treaty and facultative), or

(b) counterparty to any treaty reinsurance contracts entered into post 2000, or

(c) a facultative reinsurance identified on CICE’s PRA returns for the last 2 years

will be notified by means of a letter stating that an application has been made for the Transfers (the “Reinsurer Letter”)




The reinsurers that are not covered by the above categories (subject to approval of the Courts) relate to situations where it is not possible, not appropriate or not proportional to directly mail a Reinsurer Letter to the reinsurer.

There are again exceptions where a lack of contact details are held, or where documents are not sent due to accidental omission

CBII policyholders

There are no waivers sought for CBII policyholders.

AEGL policyholders

Existing policyholders of AEGL will not be contacted individually for a variety of reasons including:

- The majority of AEGL’s policies renew annually and/or are terminable by the policyholder without penalty on short notice, so any policyholder who objected to the Transfers should be able to place their business with an alternative provider quickly and easily

- The policyholders of AEGL are not transferring to another insurer and the increase size of AEGL after the transfers is not expected to adversely impact the policyholders

- Chubb will implement a broad advertising campaign in order to notify the policyholders of AEGL of the Transfers. As described below, Chubb have selected newspapers and publications to match AEGL’s policyholder base, taking into account their geographic circulation and their size of readership to try to ensure that as many policyholders as possible are notified of the Transfers

- Copies of the Report, the Scheme, and the respective summaries of each will be given free of charge to anyone who requests them by telephone of in writing. They will also be made available on a new website which will be launched to provide information to policyholders about the Transfers.

- Given all of the above, and the fact that I do not find any policyholder groups to be materially adversely affected by the Transfers I believe this is reasonable given the cost of identification compared to the benefit to AEGL policyholders. I recognise that cost-benefit analyses are subjective and others’ views may differ.

Wider communication

The Transfers contains provisions for notice of the proposed Transfers to be advertised in the London, Belfast and Edinburgh gazettes, The Times, The Financial Times, The Sun, Insurance Day and the Daily Mail. As there are insurance risks situated outside of the UK, notice of the proposed Transfers will be advertised in the following publications: the European edition of the Financial Times, which is circulated in all EEA States, and the international edition of the Daily Mail, which is circulated in Spain, Portugal, France, Italy, the Benelux Countries, Greece, Cyprus, Turkey and the USA.

The Transfers will be published in two national newspapers in the Netherlands, Germany, Italy, France, Spain, Ireland, Demark, Sweden, Austria, Belgium, Luxembourg, Norway, Portugal and Poland. The Transfers will not, subject to the approval of the Courts, be published in national newspapers in the remaining EEA states as these are not considered to have a significant number of policyholders. The policyholders of the remaining EEA states will receive the individual notifications (subject to the above exemptions), have access to the European edition of the Financial Times, and/or be able to access the information on the Transfer Companies’ websites.

A website will also be operated on which the Policyholder Letter and a full copy of this Report will be posted.

Documents

INDEPENDENT EXPERT REPORT OF PHILIP TIPPIN … Classification - KPMG Public Stress test analysis 44 ... after the Swiss business has been transferred out, unless otherwise stated