Report of the Independent Expert on the proposed transfer of the ...

05 November 2015

Milliman Report

Report of the Independent Expert on the proposed transfer of the business of Dowa Insurance Company (Europe) Limited to Aioi Nissay Dowa Insurance Company of Europe Limited

Prepared by:

Derek Newton

FIA

Milliman Report

2 Report of the Independent Expert on the proposed transfer of the business of Dowa Insurance Company (Europe) Limited to Aioi Nissay Dowa Insurance Company of Europe Limited 05 November 2015

TABLE OF CONTENTS

1. PURPOSE AND SCOPE 3

2. REGULATORY BACKGROUND 8

3. BACKGROUND ON THE ENTITIES CONCERNED IN THE TRANSFER 13

4. THE PROPOSED TRANSFER 22

5. GENERAL CONSIDERATIONS OF THE INDEPENDENT EXPERT 29

6. THE IMPACT OF THE TRANSFER ON THE TRANSFERRING POLICYHOLDERS OF DICEL 31

7. THE IMPACT OF THE TRANSFER ON THE CURRENT ANDIE POLICYHOLDERS 45

8. OTHER CONSIDERATIONS 47

9. CONCLUSIONS 52

APPENDIX A DEFINITIONS 53

APPENDIX B TERMS OF REFERENCE 58

APPENDIX C CV FOR DEREK NEWTON 60

APPENDIX D KEY SOURCES OF DATA 62

APPENDIX E MINIMUM CAPITAL REQUIREMENT FOR GENERAL INSURANCE BUSINESS AS AT THE 2014 YEAR-

END 66

APPENDIX F OUTWARDS EXCESS OF LOSS REINSURANCE PROGRAMMES FOR DICEL 67

APPENDIX G OUTWARDS REINSURANCE PROGRAMMES FOR ANDIE 68

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1. PURPOSE AND SCOPE

PURPOSE OF REPORT

1.1 It is proposed that all assets and liabilities of Dowa Insurance Company (Europe) Limited (“DICEL”) be transferred to

Aioi Nissay Dowa Insurance Company of Europe Limited (“ANDIE”) by an insurance business transfer agreement (“the

Transfer”) as defined in Section 105 of the Financial Services and Markets Act 2000 (“FSMA”). It is also proposed that

known inwards reinsurance policies of DICEL will become subject to a solvent Scheme of Arrangement (”the Scheme”),

pursuant to Part 26 of the Companies Act 2006. It is proposed that all residual liabilities of DICEL arising from the

Scheme will be included in the liabilities being transferred to ANDIE, along with the corresponding assets, as part of

the Transfer.

1.2 Section 109 of FSMA requires that an application to the High Court of Justice of England and Wales (“the Court”) for

an order sanctioning an insurance business transfer scheme must be accompanied by a report on the terms of the

transfer (“the FSMA Report”) by an independent person (“the Independent Expert”) who has the skills necessary to

make the report and who is nominated or approved by the Prudential Regulatory Authority (“PRA”) and the Financial

Conduct Authority (“FCA”). The FSMA Report is required in order that the Court may properly assess the impact of the

proposed transfer, including the effect on the policyholders of the insurance companies in question.

1.3 DICEL and ANDIE have nominated me to act as the Independent Expert to provide the FSMA Report in respect of the

Transfer, and the PRA has approved my appointment in consultation with the FCA (see paragraph 1.13 below).

1.4 This report (“the Report”) describes the Transfer and discusses its possible effects on the policyholders of ANDIE and

DICEL (in respect of all business of ANDIE and DICEL), including effects on security and levels of service. As such,

the Report fulfils the requirements of the FSMA Report.

1.5 A list of terms defined in the Report is shown in Appendix A. Otherwise I use the same defined terms as are in the

Transfer.

THE PROPOSED TRANSFER

1.6 MS&AD Insurance Group Holdings, Inc. (“MS&AD”) was established in April 2008 under its original name Mitsui

Sumitomo Group (“MSIG”). It adopted its current name in April 2010 on completion of the merger of MSIG with Aioi

Insurance Company Limited and Nissay Dowa General Insurance Company Limited.

1.7 MS&AD currently regards itself as the largest insurer in Asia and operates in over forty countries. MS&AD is currently

rated1 A+ by Standard and Poor’s and AM Best, and A1 by Moody's. Aioi Nissay Dowa Insurance Company Limited

(“ANDIC Japan”) is a wholly owned subsidiary of MS&AD; ANDIE is a wholly owned subsidiary of ANDIC Japan; and

DICEL is a wholly owned subsidiary of ANDIE.

1.8 Under the Transfer, all of the business written by DICEL (including business transferred into DICEL via an earlier

insurance business transfer scheme as defined in FSMA, but excluding business written by DICEL but subsequently

novated into ANDIE) and all of DICEL’s outstanding liabilities and assets are to be transferred to ANDIE, and DICEL

will be dissolved without winding-up under the Court Order approving the Transfer. DICEL’s business comprises solely

general insurance policies; it has never underwritten life assurance contracts. DICEL ceased writing new, and renewing

existing, business in 2010; thereafter its existing business, insofar as it continued, was renewed into ANDIE. The

outstanding liabilities to be transferred under the Transfer will include all residual liabilities arising from the Scheme

under Continuation of Coverage arrangements, assuming that the Scheme is approved prior to the date on which the

Transfer is effected (“the Transfer Effective Date”). The Transfer is not dependent on the prior approval of the Scheme.

_______________________________________________________________________________

1 Correct as of 15 August 2014

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1.9 In her judgement regarding the recent case of PA(GI) Ltd v (1) GICL 2013 Ltd (2) Cigna Insurance Services (Europe)

Ltd (2015), Mrs Justice Andrews DBE said that “..an intention to make provision for the transfer of mis-selling liabilities

would quantify as an unusual feature which might have a material financial impact on the scheme, and which one would

therefore expect to be expressly disclosed in the context of an application for a transfer under a Part VII scheme.”

Neither DICEL nor ANDIE are aware of any actual or potential mis-selling liabilities within DICEL. Having considered

the information provided by DICEL relating to the (small) number and the nature of the retail policies that it sold, I think

that the likelihood of any such liabilities emerging is very small and therefore it would be reasonable to assume the

expected cost of such liabilities to be at most negligible. In any event, it is the intended that the Transfer will transfer

any such liabilities, should they arise, from DICEL to ANDIE. I have not considered it necessary to comment further on

this matter in the Report.

1.10 The servicing of DICEL’s business is currently handled by staff of Aioi Nissay Dowa Insurance Management Limited

(“ANDIM”), a wholly owned subsidiary of ANDIE, under a service agreement dated 1 January 2014 (which replaced

earlier version of a similar agreement). Under this service agreement ANDIM agrees to provide the following services

to DICEL:

Business management and managerial support

Financial administration (including accounting, treasury, payments, budgeting, forecasting preparation of all

annual, monthly and tax accounts, and all obligatory filings

Actuarial services

Appropriate office space and facilities with which to conduct business

Appropriate systems and systems support with which to conduct business.

ANDIM provides similar services to ANDIE, using much the same staff.

1.11 The Transfer Effective Date is expected to be 30 March 2016.

1.12 The business involved in the Transfer, the arrangements for the Transfer and the effect of the Transfer are discussed

in more detail in Sections 3 to 8 of the Report.

THE INDEPENDENT EXPERT

1.13 I, Derek Newton, have been appointed by DICEL and ANDIE as the Independent Expert to consider the Transfer under

Section 109 of FSMA. My appointment has been approved by the PRA in consultation with the FCA; this was confirmed

in a letter dated 30 April 2014.

1.14 I am a Principal of Milliman LLP (“Milliman”) and I am based in its UK General Insurance practice in London. I am a

Fellow of the Institute and Faculty of Actuaries which was established in 2010 by the merger of the Institute of Actuaries

and the Faculty of Actuaries. I became a Fellow of the Institute of Actuaries in 1988. My experience of general insurance

includes the (reserved) roles as the Signing Actuary to Lloyd’s syndicates and Irish non-life insurance companies, as

well as acting as the Independent Expert in an insurance business transfer agreement that was sanctioned during 2014.

I have included my Curriculum Vitae in Appendix C.

1.15 I do not have, and have never had, any policies issued by any part of MS&AD. I have undertaken no work for DICEL,

ANDIE, or any other part of MS&AD, although I note that Milliman is part of Milliman, Inc., a global consulting firm, and

that other Milliman, Inc. practices have worked with parts of MS&AD on assignments globally. The main assignments

carried out for MS&AD worldwide over the last five years were

Consultancy assignments undertaken by the Milliman, Inc. offices in Tokyo, Hong Kong and Singapore relating to

life assurance business;

The licencing to ANDIE of software developed by Milliman, Inc. that relates to regulatory reporting under the

forthcoming solvency capital regime, Solvency II – a software support agreement exists on an ongoing basis

between Milliman Inc. and ANDIE; and

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Gary Wells, another Principal of Milliman, acted as the Independent Expert in relation to the transfer of the

European branch business of Mitsui Sumitomo Insurance Company (Europe) Limited to MSIG Insurance Europe

AG. The transfer was effective 31 December 2013. I provided peer review support to Gary Wells in respect of his

work relating to that transfer.

1.16 The overall fee income that Milliman, Inc. has received from MS&AD Insurance Group Holdings, Inc. worldwide in any

of the last 7 years (2008 to 2014) has not exceeded 0.5% of Milliman, Inc.’s corresponding annual global revenue.

1.17 I do not believe that the involvement of other consultants within Milliman, Inc. with DICEL, ANDIE or MS&AD affects

my ability to act independently in my assessment of the Transfer.

1.18 The Transfer is subject to sanction by the High Court of Justice in England and Wales under Section 111 of FSMA.

1.19 DICEL will be responsible for payment of all fees in respect of my work as Independent Expert. However, any

outstanding costs and expenses in respect of my work as Independent Expert which have not been paid as at the

Transfer Effective Date shall be paid by ANDIE, as, with effect from the Transfer Effective Date, ANDIE will assume all

of DICEL’s outstanding obligations.

THE SCOPE OF MY REPORT

1.20 My terms of reference have been reviewed by the PRA and are set out in Appendix B.

1.21 The Report describes the Transfer and the likely effects on the policyholders of DICEL and ANDIE, including effects on

security and levels of service.

1.22 I have considered the terms of the Transfer only and have not considered whether any other arrangement might provide

a more efficient or effective outcome. I have also considered the terms of the Scheme but only insofar as necessary

to enable me to consider the likely impact of the Transfer on the policyholders of DICEL and ANDIE. Further

consideration of the Scheme is outside the scope of my engagement and I am not, in the Report, expressing any opinion

on the terms or appropriateness of the Scheme.

1.23 The Report should be read in conjunction with the full terms of the Transfer.

1.24 My work has required an assessment of the liabilities of DICEL and ANDIE for the purposes of describing the effect of

the Transfer. My review of the liabilities was based on the actuarial reserve assessments conducted by internal

actuaries of ANDIE, by the management of DICEL, and by external actuaries. I have reviewed the methodology and

assumptions used in their work and assessed the key areas of uncertainty in relation to these liabilities. I have not

attempted to review in detail the calculations performed by the internal actuaries of ANDIE, by the management of

DICEL or by the external actuaries, or to produce independent estimates of the liabilities.

1.25 In addition to the liabilities, I have assessed the appropriateness in nature and amount of any assets to be transferred

under the Transfer, and the capital position of DICEL and ANDIE pre and post the Transfer. Again, I have not attempted

to review in detail the calculations of the capital position performed by ANDIE or to produce independently my own

estimates.

1.26 As far as I am aware, there are no matters which I have not taken into account in undertaking my assessment of the

Transfer and in preparing the Report, but which nonetheless should be drawn to the attention of policyholders in their

consideration of the Transfer.

1.27 In reporting on the Transfer as the Independent Expert, I recognise that I owe a duty to the Court to assist the Court on

matters within my expertise. This duty overrides any obligation to DICEL and/or to ANDIE. I confirm that I have

complied with this duty.

1.28 I am aware of the requirements regarding experts set out in Part 35 of the Civil Procedure Rules, Practice Direction 35

and the Protocol for Instruction of Experts to give Evidence in Civil Claims.

1.29 I confirm that I have made clear which facts and matters referred to in the 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.

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1.30 Shortly before the date of the Court hearing at which an order sanctioning the Transfer will be sought, I will prepare a

supplementary report (“the Supplementary Report”) covering any relevant matters which might have arisen since the

date of the Report. It is intended that the Supplementary Report will be published on the ANDIE website at least one

week before the date of the Court hearing.

THE STRUCTURE OF MY REPORT

1.31 The remainder of the Report is set out as follows:

Section 2: I provide some background to the regulatory environment in which DICEL and ANDIE operate.

Section 3: I provide some background to DICEL and ANDIE.

Section 4: I summarise the key provisions of the Transfer.

Section 5: I describe the matters I need to consider as Independent Expert.

Section 6: I consider the likely impact of the Transfer on the policyholders whom the Transfer would move from

DICEL to ANDIE (“the Transferring Policyholders”).

Section 7: I consider the likely impact of the Transfer on the current policyholders of ANDIE.

Section 8: I cover more general issues relating to the Transfer and the management of DICEL and ANDIE.

1.32 I summarise my conclusions in Section 9.

RELIANCES AND LIMITATIONS

1.33 In carrying out my review and producing the Report I have relied, without detailed verification, upon the accuracy and

completeness of the data and information provided to me, in both written and oral form, by ANDIE and DICEL. Reliance

has been placed upon, but not limited to, the information detailed in Appendix D. My opinions depend on the substantial

accuracy of this data, information and the underlying calculations. I am unaware of any issue that might cause me to

doubt the accuracy of the data and other information provided to me. All information that I have requested in relation

to my review has been provided.

1.34 The Report has been prepared for the purposes of the Transfer in accordance with Section 109 of FSMA. A copy of

the Report will be sent to the FCA and PRA, and will accompany the Transfer application to the Court.

1.35 The Report must be considered in its entirety as individual sections, if considered in isolation, may be misconstrued.

1.36 Neither the Report, nor any extract from it, may be published without me having provided my specific written consent,

save that copies of the Report may be made available for inspection by policyholders and by the financial regulatory

authorities in Jersey, Guernsey and the Isle of Man, and copies may be provided to any person requesting the same in

accordance with legal requirements. I also consent to the Report being made available on the website to be operated

by ANDIE in connection with the Transfer.

1.37 No summary of the Report may be made without my express consent. I will provide a summary of the Report (the

“Report Summary”) for inclusion in a document that will be made available to policyholders of ANDIE and DICEL, to

reinsurers of DICEL, and to others affected, e.g. anyone with an interest in the policies being transferred who has

notified DICEL of their interest. That document will be sent to the FCA and PRA, will accompany the Transfer application

to the Court, will be available for inspection by the financial regulatory authorities in Jersey, Guernsey and the Isle of

Man, and will be available on the website to be operated by ANDIE in connection with the Transfer.

1.38 The Report has been prepared within the context of the assessment of the terms of the Transfer, and must not be relied

upon for any other purpose. No liability will be accepted by Milliman, or me, for any application of the Report to a

purpose for which it was not intended or for the results of any misunderstanding by any user of any aspect of the Report.

In particular, no liability will be accepted by Milliman or me under the terms of the Contracts (Rights of Third Parties)

Act 1999.

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1.39 Actuarial estimates are subject to uncertainty from various sources, including changes in claim reporting patterns, claim

settlement patterns, judicial decisions, legislation, economic and investment conditions. Therefore, it should be

expected that the actual emergence of claims, premiums, expenses and investment income will vary from any estimate.

Such variations in experience could have a significant effect on the results and conclusions of the Report. No warranty

is given by Milliman or me that the assumptions, results and conclusions on which the Report is based will be reflected

in actual future experience.

1.40 This review does not comprise an audit of the financial resources and liabilities of DICEL or ANDIE.

1.41 The Report should not be construed as investment advice.

1.42 In considering the background to DICEL and ANDIE, and in considering the likely impact of the Transfer, I have made

extensive use of financial information as at 31 December 2014 as that is the most recent date at which audited financial

information is available. I have asked the management of DICEL and ANDIE for information regarding any

developments since 31 December 2014 that would have affected DICEL and/or ANDIE, in particular any development

that might have affected the security of their policyholders and the standards of service provided to them. The

managements of both DICEL and ANDIE have assured me that there have been no such developments. I have also

searched using on-line resources for information regarding any such developments. At the date of the Report, I am

not aware of any material changes in circumstances since 31 December 2014 other than those referred to in the Report.

The Report also takes no account of any information that I have not received, or of any inaccuracies in the information

provided to me.

1.43 The use of Milliman’s name, trademarks or service marks, or reference to Milliman directly or indirectly in any media

release, public announcement or public disclosure, including in any promotional or marketing materials, websites or

business presentations is not authorised without Milliman’s prior written consent for each such use or release, which

consent shall be given in Milliman’s sole discretion.

1.44 The Report should not be used or relied upon for any purpose other than as the expression of my opinion on the impact

of the Transfer in accordance with Section 109 of FSMA. I hereby expressly disclaim any liability to any party who

relies or purports to rely on the Report for any other purpose whatsoever.

1.45 Nothing in the Report should be regarded as providing a legal opinion on the effectiveness of the Transfer or of the

Scheme.

PROFESSIONAL AND REGULATORY GUIDANCE

1.46 I am required to comply with relevant professional standards and guidance maintained by the Financial Reporting

Council and by the Institute and Faculty of Actuaries, including Transformations Technical Actuarial Standard (as

published in December 2010), Insurance Technical Actuarial Standard (as published in October 2010), Technical

Actuarial Standard D: data (as published in November 2009), Technical Actuarial Standard M: modelling (as published

in April 2010) and Technical Actuarial Standard R: reporting actuarial information (as published in November 2009). I

have complied with such standards, subject to the principles of proportionality and materiality. In particular, in reaching

the opinions expressed in the Report, I have applied all of the relevant principles in Transformations Technical Actuarial

Standard.

1.47 The Report has been prepared under the terms of the guidance set out in the Statement of Policy entitled The Prudential

Regulation Authority’s approach to insurance business transfers (“the Policy Statement”), issued in April 2015, and in

Section 18 of the FCA Supervision Manual (“SUP18”) contained in the Handbook of Rules and Guidance to cover

reports on the transfer of insurance business.

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2. REGULATORY BACKGROUND

INTRODUCTION

2.1 UK insurers, as well as other financial services organisations, are regulated by both the PRA and the FCA using a

system of dual regulation. Between them, the PRA and the FCA have around 3500 employees and an annual budget

of over £600 million. The PRA and the FCA are statutory bodies set up under the Financial Services Act 2012 ("FinSA"),

and whose roles and objectives are defined by FSMA 2000 (as amended).

2.2 The PRA is part of the Bank of England and is responsible for:

Prudential regulation of banks, building societies and credit unions, insurers and major investment firms;

Promoting the safety and soundness of the firms it regulates, seeking to minimise the adverse effects that they can

have on the stability of the UK financial system; and

Contributing to ensuring that insurance policyholders are appropriately protected.

2.3 The FCA is a separate institution and is responsible for:

Ensuring that the markets that its regulates function well;

Conduct regulation of all financial firms; and

Prudential regulation of those financial services firms that are not supervised by the PRA.

2.4 A Memorandum of Understanding ("MoU") has been established between the PRA and the FCA, which sets out the

high level framework by which the two new regulatory bodies will co-ordinate. In particular, the MoU requires the PRA

and FCA to co-ordinate with each other in advance of insurance business transfers under Part VII of FSMA.

2.5 The PRA sets the regulations governing the amount and quality of solvency capital held by firms; these are summarised

below. The solvency regime is designed to protect the benefit security of policyholders, as well as the stability of the

insurance industry.

2.6 The FCA is concerned with achieving fair outcomes for consumers and seeks to ensure that firms adhere to its conduct

principles. Its strategic objective is ensure that the relevant markets function well. To support this, it has three

operational objectives, which are:

To secure an appropriate degree of protection for consumers;

To protect and enhance the integrity of the UK financial system; and

To promote effective competition in the interests of consumers.

2.7 For the purposes of the Report where I refer to “the Regulator" this should be taken to refer to the FCA and/or the PRA

(or their predecessor body, the Financial Services Authority (“FSA”)) as appropriate.

TAXATION

2.8 In the UK, general insurance companies are taxed on profits achieved at the main rate of corporation tax (currently

20.25%2 for the calendar year ending 31 December 2015).

_______________________________________________________________________________

2 The UK Corporation Tax rate is expected to reduce to 20% in 2016, to 19.25% in 2017 and to 18.25% from 2018 onwards.

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FINANCIAL SERVICES COMPENSATION SCHEME

2.9 As well as through the PRA and FCA regulations, consumer protection is also provided by the Financial Services

Compensation Scheme (“FSCS”). This is a statutory “fund of last resort” which compensates customers in the event

of the insolvency (or other defined default) of a financial services firm authorised by the PRA or FCA, subject to certain

eligibility rules. Insurance protection exists for private policyholders and small businesses (those with annual turnover

less than £1 million) that hold eligible policies in the situation when an insurer is unable to meet fully its liabilities. For

general insurance business, the FSCS will pay 100% of any claim incurred before the default:

in respect of a liability subject to compulsory insurance (such as employers’ liability cover); or

arise in respect of a liability subject to professional indemnity insurance; or

that arise from the death or incapacity of the policyholder due to injury, sickness, or infirmity compulsory insurance

and at least 90% of the claim incurred before the default for other eligible types of insurance (such as home insurance).

These limits have been effective since 3 July 2015; prior to that date, for general insurance business, only claims in

respect of compulsory insurance were eligible for 100% payment by the FSCS in the event of the default of an authorised

firm. The FSCS is funded by levies on firms authorised by the PRA.

FINANCIAL OMBUDSMAN SERVICE

2.10 The Financial Ombudsman Service (“FOS”) provides private individuals (and micro enterprises3) with a free,

independent service for resolving disputes with financial companies. It is not necessary for the private individual (or

micro enterprise) to live or be based in the UK for a complaint regarding an insurance policy to be dealt with by the

FOS; it is necessary for the insurance policy concerned to be, or have been, administered from within the UK.

RISK-BASED CAPITAL FRAMEWORK

2.11 At the end of 2004 the FSA introduced a risk-based capital framework (known as the ICAS framework) under which

companies are required to assess solvency under two regimes, referred to as Pillar I and Pillar II. This framework is

now supervised by the PRA.

Pillar I

2.12 Under ICAS Pillar I, each insurer has both to meet statutory requirements based on EU Directives and to provide a

more risk-based enhanced capital requirement (“ECR”) calculation to the PRA. This includes setting up Technical

Provisions in accordance with those Directives and having sufficient available capital to meet at least the Minimum

Capital Requirement (“MCR”).

2.13 Details of the calculation of the MCR as it relates to general insurance are given in Appendix E but essentially it

comprises the greater of a premium measure, a claims measure, a prior year MCR measure, and a minimum amount,

currently set at €3.7 million. The ECR is the sum of an asset charge, a premium charge and a charge for technical

provisions less the claims equalisation reserve (“CER”). Insurers are not required to make publicly available their ECR

calculation and supporting documentation insofar as it relates to non-life insurance.

2.14 The Technical Provisions required under the EU Directives as relating to general insurance business are:

The unearned premium provision (“UPR”) – the UPR is the amount set aside from premiums written before the

valuation date to cover risks incurred after that date;

_______________________________________________________________________________

3 Micro-enterprises (an EU term covering smaller businesses) can bring complaints to FOS as long as they have an annual turnover of less than €2 million and

fewer than ten employees.

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The additional amount for unexpired risk (“URR”) – the URR is the amount held in excess of the UPR, to allow for

any expectation as at the valuation date that the UPR will prove to be insufficient to cover the cost of claims and

expenses incurred during the period of unexpired risk; and

The claims outstanding provision – the reserve set up in respect of the liability for all outstanding claims at the

valuation date, whether reported or not.

2.15 The UPR is typically calculated on a daily basis (but alternative methods may be acceptable where the daily basis is

not appropriate) and makes no allowance for the time value of money (i.e. discounting).

2.16 The claims outstanding provision typically comprises

the case reserves the amounts estimated on a case-by-case basis as being required to settle reported (open)

claims), plus

the amount, if any, for claims still to be reported to the insurer as at the valuation date which related to claim events

that have occurred before that date – these are often referred to as “incurred but not reported” (“IBNR”) reserves,

plus

the amount, if any, for any perceived shortfall between the projected ultimate costs and the case estimates for

claims already notified – these are often referred to as “incurred but not enough reported” (“IBNER”) reserves. .

The IBNR and IBNER reserves would typically be evaluated using statistical techniques based on grouped data. It

should be noted that they can collectively be referred to as IBNR reserves, with the IBNER element being implicitly

included. For the remainder of this Report, where I have used the term “IBNR reserves” it should be taken to include

IBNER reserves unless stated otherwise.

2.17 Under UK regulatory practices, only in particular limited circumstances may the claims outstanding provision estimate

include any allowance for the time value of money (i.e. discounting). Therefore, all other things being equal, a margin

exists in the provision to cover (at least in part) unexpectedly adverse claims development.

Pillar II

2.18 The capital that must be held under Pillar II is an amount based upon the Individual Capital Assessment (“ICA”), which

is the company’s own assessment of its capital requirements. Pillar II is intended to provide a more realistic and

complete view (than is provided by the MCR under Pillar I) of the risks to which the company is exposed, and to provide

a framework within which the company should be managed.

2.19 The PRA requires each insurer, when preparing its ICA, to identify the major risks it faces and, where capital is

appropriate to mitigate those risks, to quantify how much (and what type of) capital is appropriate. The PRA expects

each insurer to conduct stress tests and scenario analyses in respect of each risk. The capital requirements so

determined are then aggregated, allowing for diversification between risks where appropriate. These stress tests and

scenario analyses, together with the supporting analysis, must be documented and, along with the results, submitted

to the PRA (on request) as the ICA. The insurer is not required to publish its Pillar II capital requirement.

2.20 The PRA will review the ICA periodically and may prescribe an additional amount of capital that must be held by the

insurer in addition to the ICA. The total amount of Pillar II capital prescribed by the PRA is called Individual Capital

Guidance (“ICG”). The ICG is usually set as a percentage of the ECR, gross of CER. The ICG is not published and

details of this remain private between the insurer and the PRA.

2.21 For the ICA, an insurer will assess the amount of capital it needs to hold to remain able to meet its liabilities as they fall

due in all but extreme circumstances. The PRA has indicated that ICG will be given taking into consideration capital

resources consistent with a 99.5% confidence level that the insurer will be able to meet its liabilities over a one-year

timeframe or, if appropriate to the insurer’s business, an equivalent lower confidence level over a longer timeframe.

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FCA CONDUCT PRINCIPLES

2.22 Within its “Journey to the FCA” document, the FCA noted that it expects firms to continue to demonstrate that they are

achieving the six consumer outcomes set out in an earlier document, published in July 2006 under the auspices of the

FSA and entitled “Treating customers fairly – towards fair outcomes for consumers” (“TCF”). The aim of this document

was to develop Principle 6 of the FSA’s Principles for Businesses (PRIN 2.1.1) which stated that each insurer “must

pay due regard to the interests of its customers and treat them fairly”. Principle 7 outlines that each insurer “must pay

due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and

not misleading” while Principle 8 states that each insurer “must manage conflicts of interest fairly, both between itself

and its customers and between a customer and another client”.

2.23 The TCF document lists six outcomes that collectively outline insurers’ regulatory obligations for the fair treatment of

customers. These are as follows:

Outcome 1: Consumers can be confident that they are dealing with insurers where the fair treatment of customers

is central to the corporate culture;

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of

identified consumer groups and are targeted accordingly;

Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and

after the point of sale;

Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances;

Outcome 5: Consumers are provided with products that perform as insurers have led them to expect, and the

associated service is both of an acceptable standard and as they have been led to expect; and

Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by insurers to change product, switch

provider, submit a claim or make a complaint.

THE INSURERS (REORGANISATION AND WINDING UP) REGULATIONS 2004

2.24 Under UK law, the winding-up of an insurance undertaking is governed by the Insurers (Reorganisation and Winding

Up) Regulations 2004. Under these regulations, insurance claims have precedence over any claim on the insurance

undertaking with the exception of certain preferential claims (e.g. claims by employees, etc.) with respect to the whole

of the insurance undertaking’s assets. Therefore, direct policyholders rank equally and above inwards reinsurance

policyholders and all other unsecured/non preferential creditors in the event that an insurer is wound up.

SOLVENCY II

2.25 The regulatory solvency reporting requirements for insurers and reinsurers regulated within the EU will undergo major

change as a new solvency regime, which has been developed by the European Commission, is implemented. This

new regime is commonly referred to as Solvency II and aims to introduce, consistently across the EU, solvency

requirements that reflect better than the existing solvency regimes the risks that insurers and reinsurers actually face.

UK insurers and reinsurers will be required to adhere to the new capital requirements. There are similarities between

the existing ICAS regime and the proposed Solvency II regime, but there are also significant differences. For example,

in contrast to the position under the current UK Pillar II requirements, some of the results under Solvency II will be

public. The formal date for implementation of these new rules is 1 January 2016, although there will be a transitional

period during which insurers need not meet all of the minimum solvency capital requirements.

2.26 In accordance with EU requirements for member states, the Solvency II Directive was transposed into UK legislation

ahead of a 31 March 2015 deadline. As such:

the PRA has incorporated the provisions of the Solvency II regime into the PRA Rulebook; and

HM Treasury has published the Solvency II Regulations 2015 which, together with FSMA, transpose the Solvency

II Directive into UK legislation and establish a regulatory system for operating the Solvency II regime.

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2.27 Like the ICAS regime, Solvency II has been formulated using the image of pillars supporting the overall regime.

Solvency II will be based on three pillars:

Under Pillar I, quantitative requirements define a market-consistent4 framework for valuing the assets and liabilities

of insurers, and determining the Solvency Capital Requirement (“SCR”);

Under Pillar II, insurers must meet minimum standards for their corporate governance, and also for their risk and

capital management. There is a requirement for permanent internal audit and actuarial functions. Insurers must

each regularly complete an Own Risk and Solvency Assessment (“ORSA”);

Under Pillar III, there are explicit requirements governing disclosures to supervisors and policyholders.

These pillars are different from those supporting the ICAS regime.

2.28 The SCR under Solvency II is the amount of capital required to ensure continued solvency over a 1 year timeframe with

a probability of 99.5%. The SCR is calculated based on the particular risks to which the insurer in question is exposed.

2.29 The Solvency II Minimum Capital Requirement (“MCR2”), which will be lower than the SCR, defines the trigger point for

intensive regulatory intervention. The MCR2 calculation is more formulaic and less risk sensitive than the SCR

calculation.

THE FINANCIAL INFORMATION IN THE REPORT

2.30 The ICAS Pillar I balance sheet items as at 31 December 2014 are shown in Section 4. These have been published,

externally audited and approved by the respective Boards of ANDIE and DICEL.

2.31 As stated above, ICAS Pillar II financial information is not published and remains private between the PRA and the

company. I have therefore reviewed this information and have commented on it in general terms, but I have not included

any ICAS Pillar II figures in the Report.

_______________________________________________________________________________

4 A market-consistent framework requires the values placed on assets and liabilities to be consistent with the market prices of listed securities and traded derivative

instruments.

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3. BACKGROUND ON THE ENTITIES CONCERNED IN THE TRANSFER

DICEL

Background

3.1 DICEL is an insurance company, registered as a private limited company in England and Wales (registered number

1235550) under the Companies Act 2006. It is a wholly owned subsidiary of ANDIE which in turn is a wholly owned

subsidiary of ANDIC Japan, itself a wholly owned subsidiary of MS&AD. DICEL is jointly regulated by the PRA and

FCA. DICEL is authorised to write general insurance and reinsurance business in the UK5, although it ceased writing

new and renewal business during 2010.

Types of business written

3.2 DICEL wrote, exclusively through Brokers, a general insurance and reinsurance portfolio comprising the following

categories of insurance:

3.2.1 Category 1 – “JIA Direct”: this business was written between 1988 and 2010, primarily as wholesale

combined policies issued on a coinsurance basis to Japanese commercial entities. There were also thirteen

personal lines policies issued to Japanese individuals who had been seconded by their employers to the UK

to cover their personal possessions. Remaining business was renewed by ANDIE when DICEL ceased

underwriting. The prior years’ policies relating to the business renewed by ANDIE were novated to ANDIE in

2012. Therefore, the most recent policy remaining with DICEL expired in 2007.

There are two policyholders with five open claims between them, for which the case estimates as at 31

December 2014 totalled £34,700 gross of reinsurance, and £828 net of reinsurance. In addition, as at 31

December 2014, DICEL was holding IBNR reserves in respect of this business totalling £173,506 gross of

reinsurance, and £4,140 net of reinsurance.

3.2.2 Category 2 – “ILU Direct Liability”: this business was a direct portfolio written in London between 1977 and

1985, primarily via line slips, with DICEL taking small shares following the market. The policyholders include

US energy companies.

The Institute of London Underwriters (“ILU”), the former trade association for the company market specialising

in marine, aviation and transportation insurance business in London, required guarantees for overseas

company members writing marine insurance and reinsurance business in London. Such business included

the ILU Direct Liability portfolio.

There are 161 policies, spread between 33 US policyholders, against which claims have been reported (all

relating to asbestos, pollution and health hazard (“APH”)). Of these, seven policyholders have open claims

(some have multiple claims – in total there are 17 open claims), for which the case estimates as at 31

December 2014 totalled £58,640 gross of reinsurance, and £19,546 net of reinsurance. In addition, as at 31

December 2014 DICEL was holding IBNR reserves in respect of this business totalling £318,482 gross of

reinsurance, and £106,160 net of reinsurance.

Within this category there are also 819 policies that include incidental liability coverage, principally energy

related. To date, no claims have been reported against these policies.

Holders of these policies benefit from the guarantee required by the ILU (“the ILU Guarantee”), provided by

the parent company which now, following various mergers, is ANDIC Japan.

_______________________________________________________________________________

5 In 2008 DICEL wrote business for one particular client where the risks were located in Ireland and France under the freedom of services principlel established by

the Freedom of Services Directive 88/357/EEC (second Council Directive amending 73/239/EEC). I have been told by DICEL management that, while it is confident

that all insurance business was written and concluded in the UK, including the business written under the freedom of services principle, it is unable to establish

that as an absolute fact from the available records and other information.

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3.2.3 Category 3 – “ILU Direct Marine Hull and Cargo”: this business was written between 1977 and 1985, with

DICEL taking small shares following the market.

There are no open claims, no claims have been reported for at least 10 years, and no IBNR reserves are held

in respect of this category.

3.2.4 Category 4 – “London Market Reinsurance Business”: this business was written between 1968 and 1985

and comprises over 10,000 policies which are predominantly facultative and treaty reinsurance, including

multiple policies accepted under 463 line slips. Between 1968 and 1977 these had been written by the UK

branch of Dowa Fire and Marine Insurance Company Limited (the branch business also included elements of

Marine Hull/Cargo covers), and subsequently they were written by DICEL. In 2006 these branch policies (“the

Branch Business”) were transferred to DICEL by an insurance business transfer scheme as defined in Section

105 of FSMA. The Branch Business is subject to a guarantee (“the Branch Guarantee”) from ANDIC Japan

(into which, after several mergers, Dowa Fire and Marine Insurance Company Limited has been incorporated).

The London Market Reinsurance Business that was originally written by DICEL is also subject to the ILU

Guarantee. I have reviewed the terms of the transfer of the branch policies to DICEL. I am satisfied that the

terms of that transfer impose no limitations upon, and have no other consequences for, the Transfer. I note

that the policy record for the Branch Business is incomplete. I further note that no new claims have been

reported to DICEL in respect of the Branch Business since it was transferred to DICEL.

DICEL had a Marine reinsurance involvement in the Patrick and Merrett Lloyd’s syndicates for the period 1986

– 1990. These liabilities were the subject of separate commutations in 2001 (Merrett) and 2005 (Patrick) and

no residual liability remains with DICEL.

During the years 2008 and 2009, DICEL effected several other commutations, including those with Equitas

and Mutual Marine Office, Inc., which significantly reduced DICEL’s exposure and liabilities in respect of this

category of business. As at 31 December 2014, there were 303 open claims; 23 of these claims had been

notified to DICEL during 2014 (there had been two notifications during 2013 and none during 2012). Gross

open claim reserves total £166,330 (£49,287 net of reinsurance) and IBNR reserves total £231,278, gross of

reinsurance (£27,114 net of reinsurance). The open claims reported to DICEL are all reinsurance claims

relating to either catastrophic claim events from the 1980s or APH claims, all of which have developed

minimally in recent years.

3.2.5 Category 5 – Aviation: this business comprised DICEL’s participation as a reinsurer of three Aviation Pools,

namely English & American (1977-1981), Transglobe Re (1982-1983) and Transglobe (1990-1992). All

liabilities were subject to a Scheme of Arrangement as part of the English & American Schemes sanctioned

by the Court on 6 October 2010. No objections were made to the Court when the scheme was sanctioned in

2010 and I understand that none were made when the scheme was closed in September 2013. No further

claims remain to be paid to third parties and as such there are no remaining liabilities.

3.2.6 Category 6 – JIA Fronted Policies: this business comprised insurance of European-based Japanese entities

by Royal Sun Alliance (“RSA”) and other insurers on DICEL’s behalf for licensing reasons between 1995 and

2010, with DICEL then 100% reinsuring these covers. These reinsurance arrangements with RSA were

novated to ANDIE in November 2011 and those with the other insurers were novated in January 2012.

Therefore, there remain in DICEL no policies, policyholders or liabilities for this category.

3.2.7 Category 7 – Reinsurance Treaties from Japan: From 1991 until 2007, DICEL accepted reinsurance lines

in (what was to become) ANDIC Japan’s own domestic commercial treaties. All remaining liabilities were

commuted in 2010. DICEL also accepted reinsurance lines in Sri Muang’s Property, Marine and Miscellaneous

domestic treaties, retroceded from ANDIC Japan. DICEL participations were cancelled in 2009. All remaining

liabilities were commuted in 2012. Therefore, there are no policies, policyholders or liabilities remaining in

DICEL that relate to this category.

3.3 There are no unexpired general insurance or reinsurance risks within DICEL. No general insurance or reinsurance

premium income is now received by DICEL.

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Key financial information

3.4 As at 31 December 2014 the gross outstanding claim reserves (including IBNR reserves) within DICEL were £983k6,

of which:

£208k related to JIA Direct business;

£377k related to ILU Direct Liability business; and

£397k related to London Market Reinsurance Business.

In addition, DICEL held £240k in respect of unallocated future claims handling expenses.

3.5 DICEL’s reported gross general insurance and reinsurance liabilities are following an uneven but generally declining

trend as the claims run-off, as demonstrated by the following total gross undiscounted outstanding claim reserves:

As at 31 December 2010: £1,490k

As at 31 December 2011: £1,134k

As at 31 December 2012: £862k

As at 31 December 2013: £1,179k.

As at 31 December 2014: £983k.

The increase during 2013 in gross undiscounted outstanding claim reserves was due to the adoption of more prudent

assumptions in respect of the IBNR reserves for the JIA Direct and the London Market Reinsurance Business. The

case estimates, gross of reinsurance, and the outstanding amounts, net of reinsurance, have decreased steadily in

recent years.

3.6 As at 31 December 2014, the capital resources of DICEL available to cover its capital resources requirement amounted

to £14,167k7, compared with a statutory MCR for the business of £2,902k8, i.e. the capital resources in excess of

regulatory requirements as at 31 December 2014 were £11,265k. This implied cover for the MCR (capital available to

meet the MCR divided by the MCR) of 488% as at 31 December 2014.

Eurozone exposures

3.7 As at 31 December 2014, DICEL had no direct credit exposure to sovereign debt or financial institutions in Eurozone

countries, other than in respect of a supranational bond issued by the European Investment Bank. This bond is rated

AAA by Standard & Poor’s and is denominated in sterling. While the European Investment Bank has Eurozone

exposure, the capital for this bond is guaranteed and hence I believe that the risk to DICEL from this potential exposure

to the Eurozone is immaterial.

Reinsurance arrangements

3.8 Prior to its closure to new and renewal business, DICEL was partially protected against liabilities arising from the direct

and indirect policies which it had written by outwards reinsurance programmes. These comprised Excess of Loss

covers which applied to the Marine business (see Appendix F below) and the following proportional covers, provided

by ANDIC Japan:

3.8.1 JIA Direct: 90% - 99.5% quota share reinsurance, the precise percentage varying between the sub-classes

within this category to which the reinsurance attaches;

_______________________________________________________________________________

6 Based on Form 20A, line 20, columns 2 & 3, of DICEL’s Returns to the PRA as at 31 December 2014

7 Based on Form 1, Line 13 of DICEL’s Returns to the PRA as at 31 December 2014

8 Based on Form 1, Line 36 of DICEL’s Returns to the PRA as at 31 December 2014

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3.8.2 ILU Direct Liability: 60% - 66.66% quota share reinsurance, the precise percentage varying between the

underwriting years to which the reinsurance attaches; and

3.8.3 London Market Reinsurance: 60% - 80% quota share reinsurance, the precise percentage varying between

the underwriting years to which the reinsurance attaches.

3.9 As at 31 December 2014, there were no outstanding recoverable amounts in respect of the Excess of Loss covers and

no further recoveries were expected. The total of outstanding recoverable amounts under the outwards proportional

reinsurance arrangements was £776k in respect of claims, plus £194k in respect of unallocated future claims handling

expenses.

Guarantees

3.10 As noted above, the business that was written by DICEL through the ILU is subject to a guarantee provided by ANDIC

Japan which means that, in the event of DICEL being unable to fulfil its obligations to holders of ILU policies, ANDIC

Japan will make good any shortfall. There is a further guarantee provided by ANDIC Japan (the Branch Guarantee) in

respect of the London Market Reinsurance Business originally written by the UK branch of Dowa Fire and Marine

Insurance Company Limited. There are no similar guarantees in respect of the JIA Direct business.

Servicing arrangements

3.11 As noted in paragraph 1.9 above, the administration and accounting of DICEL’s business is performed by ANDIM under

a service agreement with DICEL. While DICEL retains responsibility for the statutory accounts and PRA Returns in

respect of its business, they are actually prepared by ANDIM staff.

Claims management

3.12 With the exception of the 13 JIA Direct policies issued to Japanese individuals who had been seconded by their

employers to the UK, all of DICEL’s business was sold through brokers, with DICEL acting as a following co-

insurer/reinsurer. As noted above, DICEL ceased underwriting JIA Direct business in 2010 since when policy renewals

have been underwritten by ANDIE, to which prior years’ policies of the renewed business were novated in 2012. ANDIE

has undertaken all claims handling activities in respect of the JIA business since DICEL ceased underwriting the

business.

3.13 Claims relating to the ILU Direct Liability business are handled by London Market Claims Services Limited (“LMCS”).

LMCS keeps the participants in each claim informed of developments and requests from each their share of payments

made and legal costs incurred in defending any claim. As such, DICEL has no direct involvement in the handling or

management of claims relating to ILU Direct Liability business. For the London Market Reinsurance Business is either

handled by Xchanging plc (“Xchanging”) or by the lead reinsurer. In neither case does DICEL have any direct

involvement in the handling or management of claims relating to London Market Reinsurance Business, rather, as and

when necessary, Xchanging or the lead reinsurer requests that it pays its share of claim costs or of incurred legal

expenses.

ANDIE

Background

3.14 ANDIE is an insurance company, registered as a private limited company in England and Wales (registered number

5046406) under the Companies Act 2006. It is a wholly owned subsidiary of ANDIC Japan which in turn is a wholly

owned subsidiary of MS&AD. It is authorised to write general insurance and reinsurance business. It is not authorised

to write life business.

3.15 The main elements of the business are as follows (percentages in brackets are the proportions of total gross premiums

written in 2014 which totalled £180.6 million9):

_______________________________________________________________________________

9 Based on Column 1 of Form 20A of ANDIE’s draft Returns to the PRA as at 31 December 2014

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Personal Lines Motor (69%);

Personal Lines Financial Loss (15%);

Commercial Lines Motor (6%);

Goods-in-Transit (3%); and

Commercial Property (4%).

3.16 ANDIE is authorised to write business in the UK and has branches in Germany, France, Italy, Spain, and Belgium. It

has an agency in Norway. It is also allowed to operate under a freedom of services licence in all EU/EEA countries

except Iceland. It has recognised insurer status in Guernsey and a “Category A” permit for Jersey. It also provides

cover in the Isle of Man.

3.17 On 24 December 2014, MS&AD signed a contract to acquire a 75.01% holding in Box Innovation Group Limited, the

holding company of Insure The Box Group (“ITB”). ITB currently has the largest share of the UK telematics motor

insurance market. MS&AD has stated its intention to use this acquisition as a platform from which to enter the UK

telematics motor insurance market on a full scale basis, to realise further enhancement of its retail operations in Europe,

in particular ANDIE, and to utilise the know-how within ITB across MS&AD. The acquisition was finalised on 31 March

2015. With effect from that date, ANDIE has been the indirect owner of ITB.

3.18 ITB does not underwrite its own business; historically the insurance risks have been carried mostly by Catlin Insurance

Company (UK) Limited and by Great Lakes Reinsurance (UK) plc, with Brit Syndicates Limited underwriting part of the

policies from 1 July 2014 onwards. Liability for all business sold up to the date on which the sale was finalised remain

with those insurers that underwrote the business; no existing insurance risks, and hence no reserves, have been

transferred to ANDIE as part of the acquisition. The insurance risks for business written through ITB after 31 May 2015

will be carried by ANDIE; the insurance risks for business written through ITB between 1 April 2015 and 31 May 2015

inclusive will be carried by Catlin Insurance Company (UK) Limited and reinsured into ANDIE under a quota share

arrangement. I have been told by members of ANDIE’s senior management team that ANDIE expects to write roughly

£50 million per annum in additional gross premiums as a result of its acquisition of ITB. This is consistent with

management papers that I have seen and also with MS&AD’s publically stated intentions regarding ITB. Tightening of

the underwriting controls since the date of purchase have resulted in lower than planned underwriting volumes in June

2015.

3.19 There is a Deed of Guarantee, dated 19 March 2008, between (predecessor companies of) ANDIC Japan and ANDIE,

whereby ANDIC Japan has guaranteed that, in the event that ANDIE fails to fulfil its obligations to its policyholders,

ANDIC Japan will make good any shortfall (“the ANDIC Guarantee”). The ANDIC Guarantee will lapse as and when

ANDIE achieves a financial strength credit rating on its own, without reliance upon the ANDIC Guarantee. I discuss in

paragraphs 6.73-6.78 and 7.7 below the possible impact were this and/or the other guarantees mentioned in this Report

to be unenforceable for any reason.

3.20 Standard & Poor’s has rated10 ANDIC Japan as:

A+ Stable (Financial Strength Rating) – this rating indicates that ANDIC Japan has strong financial security

characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with

higher ratings (such as AA or AAA);

A+ Stable (Long-Term Issuer Credit Rating) – this rating indicates that ANDIC Japan has strong capacity to meet

its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances

and economic conditions than obligors in higher-rated categories (such as AA or AAA); and

A-1 (Short-Term Issuer Credit Rating) this rating indicates that ANDIC Japan has strong capacity to meet its

financial commitments. It is rated in the highest category by Standard & Poor's.

_______________________________________________________________________________

10 Correct as of 15 August 2014

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By virtue of the ANDIC Guarantee, ANDIE has the same credit rating as ANDIC Japan. It does not have its own rating

independent of the ANDIC Guarantee.

Key financial information

3.21 As at 31 December 2014 the gross outstanding claims reserves within ANDIE were £101.0 million11, of which:

£79.6 million related to Personal Lines Motor;

£1.6 million related to Personal Lines Financial Loss;

£8.7 million related to Commercial Lines Motor;

£1.2 million related to Goods-in-Transit; and

£5.5 million related to Commercial Property.

In addition, £3.8 million related to Commercial Liability, despite this class comprising only 1% of the gross premium

written during 2014.

3.22 As at 31 December 2014, the most recent date for which full audited financial information on ANDIE is available, the

Technical Provisions of ANDIE consisted of12:

Unearned premiums amounting to £91.0 million, gross of reinsurance (£72.2 million net of reinsurance);

Claims outstanding provisions amounting to £102.7 million, gross of reinsurance (£59.2 million net of reinsurance),

claims handling expenses, and salvage and subrogation (which amounted to £1.5 million); and

Other technical provisions (£0.4 million).

There were no equalisation provisions in respect of ANDIE.

3.23 Together, the discounted gross technical provisions amounted to £194.1 million. In addition, there were as at 31

December 2014 other provisions and creditors amounting to £26.4 million13, resulting in total discounted gross

provisions, non-technical and technical, of £220.5 million.

3.24 As at 31 December 2014, the total admissible assets of ANDIE, including the reinsurers’ share of the technical

provisions, amounted to £324.7 million14, which left ANDIE with capital resources (i.e. assets available to meet the

regulatory capital requirements relating to the business) of £110.1 million15 compared with a statutory minimum capital

requirement of £26.6 million16, i.e. the assets in excess of regulatory requirements as at 31 December 2014 were £83.5

million. The cover for the MCR (defined as the assets available to meet the regulatory capital requirements expressed

as a proportion of the MCR) is 414%.

3.25 Subsequent to the 2014 year-end, ANDIE received a capital injection of £185 million from ANDIC Japan. £105 million

was used to acquire ITB, leaving, with effect from 31 March 2015 (the date on which the acquisition was finalised), £80

million as additional capital resources to meet capital requirements. The MCR would not have been affected by the

acquisition at the date that the acquisition was finalised and would only be affected as additional business was written

and additional claims paid.

_______________________________________________________________________________

11 Based on Columns 2 & 3 of Form 20A of ANDIE’s Returns to the PRA as at 31 December 2014

12 Based on Form 15 of ANDIE’s Returns to the PRA as at 31 December 2014

13 Based on Form 15, Lines 21-51 of ANDIE’s Returns to the PRA as at 31 December 2014

14 Based on Form 13, Line 89 of ANDIE’s Returns to the PRA as at 31 December 2014



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Eurozone exposures

3.26 I have reviewed a listing of cash deposited by ANDIE in various European banks. Over 50% of those deposits are in

banks headquartered in the UK, and there are also significant percentages deposited in banks headquartered in France

and Germany. Only 3% is deposited in banks that are based in other countries.

Risks

3.27 ANDIE is exposed to a large number of risks in the course of its operations. The key risks may be classified under the

headings of insurance (both underwriting and reserving), market, credit, liquidity and operational risk.

3.28 Insurance risk comprises:

Loss ratio risk: the risk of adverse variation in current year loss ratio due to underlying volatility in the market loss

ratio, resulting from factors such as competitive pressures, changes in the claims environment, and variation in

driving conditions. This risk is most material in respect of the Italian motor portfolio due to the multi-year duration

of its policies.

Catastrophe risk: the risk that the ultimate cost of catastrophe claims is greater than expected in pricing and in

the strategic plan. The catastrophes to which ANDIE is exposed are all weather-related, such as hail, flood,

earthquake, and windstorm. ANDIE’s largest exposures to catastrophe risk are in Italy and Germany, where there

is significant hail risk.

Large claims risk: the risk that the number of large claims which occur is greater than expected, or that the ultimate

cost of those claims is greater than expected in pricing and in the strategic plan.

Volume risk: the risk that the volume of business underwritten differs materially from that expected in pricing and

in the strategic plan. There is a further volume related risk in respect of Toyota Insurance Management Ltd (“TIM”),

which is a wholly owned subsidiary of ANDIE. Were the income of TIM to fall materially due to reduction in volume

of business, there may be a need for ANDIE to subsidise TIM expenses.

Reserving risk: the risk that the reserves, as set at the start of the projection period, prove to be inadequate

(especially in respect of the UK and Germany motor portfolios). This includes risks associated with other elements

of the ICA model, notably the impact of varying interest rates, claims inflation, claims handling expenses,

reinsurance default risk and salvage and subrogation. This risk is compounded by the risk of reserve shocks,

caused by unforeseen events such as legislative changes with retrospective effect.

3.29 Market risk for ANDIE reflects the risk of a fall in the market value of the assets of ANDIE over the course of a year

due to an increase in overall yields and/or an increase in credit spreads on corporate bonds and/or defaults on bonds.

A decrease in the value of the assets backing the insurance contracts could adversely affect the financial position of

ANDIE to the extent that movement (in particular, a fall) in asset values were not matched by a corresponding movement

in liability values.

3.30 Credit risk comprises the risk that a reinsurer fails to make promised payments either wholly or partly.

3.31 Liquidity risk for ANDIE is primarily the risk of failure of one of the banks holding ANDIE deposits, leading to ANDIE

being unable to liquidate its deposits.

3.32 Operational risks are the risks to which ANDIE is exposed during its day-to-day operations, mainly arising from

possible failures of control and external events.

3.33 Because the above risks are not wholly correlated with one another, ANDIE takes credit in its ICA calculation for some

risk diversification.

3.34 ANDIE has considered other types of risk (reputational, strategic and emerging risks) which do not contribute to its

capital requirements:

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Reputational risk: This stems mostly from ANDIE’s relationship with Toyota for which it acts as a white label

insurer. Were ANDIE to underperform in terms of customer service and competitiveness then it could damage its

own reputation with Toyota and its credibility as an insurance partner, and could in turn damage the Toyota brand.

ANDIE is also exposed to collateral damage from problems within co-insurance partners, failures by outsourced

suppliers and problems in other parts of MS&AD.

Strategic risk: ANDIE follows a mono-customer/distribution channel strategy and hence would be vulnerable to

any deterioration in its relationship with Toyota. Its strategy also forces it to use service partners to mitigate fixed

costs, which leads to associated outsourcing risks.

Emerging risks: ANDIE maintains a list of other moderate/high likelihood risks (mostly economic/political in

nature).

Risk appetite and reinsurance

3.35 The Board-approved solvency risk appetite is three-fold:

That the probability of insolvency in a three-year time horizon, without any further capital support (or application of

the ANDIC Guarantee), is no more than 1.5%;

That ANDIE will always maintain adequate capital to cover a £30 million one-off hit, plus the cost of an orderly

runoff; and

That the regulatory solvency margin forecast over the next two-year time horizon does not fall below £20 million.

3.36 The Board has identified 14 other measures that quantify ANDIE’s risk appetite, covering underwriting, premium volume

and concentration, investment performance, asset and liability matching, and credit risk. Moreover, all reinsurance

providers must have a credit rating of at least Standard and Poor’s A-.

3.37 Details of ANDIE’s reinsurance programme are set out in Appendix F. As at 31 December 2014, the major external

treaty reinsurer was ANDIC Japan, with Ageas (UK) Ltd and, to a lesser extent, Mapfre Asistencia Compania

Internacional De Seguros Y Reaseguros SA also providing significant cover under quota share agreements.

Other intra-group relationships

3.38 I have been told that, currently, ANDIE’s other relations with various parts of MS&AD are limited, although it is

investigating the possibility of reciprocal Business Continuity arrangements, e.g. the sharing of desk space in the event

of offices being involved in an incident. I am unaware of any further intra-group relations affecting ANDIE or DICEL.

CONDUCT RISK – TCF

3.39 I have seen ANDIE’s Treating Customers Fairly Commitment Statement which has been in place since June 2008,

subject to subsequent amendment. This makes clear that ANDIE is committed to achieving the six consumer outcomes

as explained in paragraphs 2.222.23 above in all areas of its day-to-day business activities. It recognises that, in so

doing, fair treatment of its customers is about aiming to:

protect the interests of its customers at each stage of the product life cycle, from promotion right through to after-

sales service; and

meet as best it can the unique needs of each customer by offering a transparent, efficient and professional service,

and constantly reviewing its service to identify areas for improvement.

3.40 In practical terms this means:

ensuring that promotional material is clear, compliant, jargon free and appropriately targeted

finding ways to encourage non sales staff to identify and implement TCF in their day-to-day business activities

keeping detailed records of customer instructions – to help ensure that ANDIE identifies their needs and treats

customers fairly and that it can deal with any complaints that may arise swiftly and fairly

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encouraging after-sales contact with clients where appropriate to correct or improve on the service already offered

ensuring that customer claims are dealt with fairly and in a timely manner

ensuring that customer complaints are assessed fairly, promptly and impartially, and in line with FCA deadlines

and rules

encouraging staff to recommend improvements to service following customer feedback and complaints – and

analysing and monitoring the root cause of complaints

ensuring that staff are kept up-to-date via the provision of relevant training in relation to competence, data

protection and other matters directly affecting the quality of service offered to customers

offering regular training and updates on the principle of TCF at all levels of the business

regularly monitoring and reporting on all of the above TCF activities as part of the company’s monthly statistics/

management information, in order to assess TCF performance across the business and recommend changes

where appropriate

ensuring that TCF values, which are set and communicated by senior management, are supported by all staff and

understood in the same way

3.41 The above principles are embedded in the cultural values of ANDIE, and of its parent, of honour, respect and integrity

as well as the philosophy of “Customer First”.

3.42 In the UK, ANDIE has outsourced the administration of its retail operations (policy issue and claims) to three third party

outsourced service providers (“OSPs”). The OSPs are FCA-regulated and part of the process by which ANDIE selected

those OSPs was to consider their TCF culture to ensure that this was in line with ANDIE’s own approach to TCF.

Training is given to the OSPs’ staff on TCF. All ANDIE staff also have to undertake on-line training on TCF, even if

they have no direct contact with customers, to ensure widespread awareness of the principle and requirements.

3.43 A quarterly report, with supporting colour-coded spreadsheet records (dashboard) and monthly complaint statistics, is

submitted to the Board/Audit Committee which enables monitoring of key metrics over the three OSPs. I have seen

examples of these. I have also seen an example where the dashboard reporting identified an issue with a particular

product which, as a result, led to the product being reviewed, revised and re-launched. Performance will continue to

be monitored. I have read the minutes of a recent Complaints Forum meeting (this is an internal group, not an open

forum). This reviewed progress with the handling of recent complaints and considered how emerging themes could be

addressed. In my opinion, this was consistent with good practice. ANDIE also holds quarterly review meetings with

each of the OSPs. While these meetings are not held specifically to discuss TCF, I have been told that any issues

identified in preparing the material for the Board/Audit Committee would be raised in these meetings with the OSPs. I

have not sought further evidence, e.g. through observing TCF discussions within the Board or Audit Committee, as I

considered that further investigation would be disproportionate, especially as most of the business being transferred

relates to commercial lines insurance.

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4. THE PROPOSED TRANSFER

4.1 In this Section of the Report, I describe the Transfer. I also describe the Scheme as it is germane for my consideration

of the Transfer, but I make no comment on the terms or structure of the Scheme as part of the Report.

MOTIVATION FOR THE TRANSFER

4.2 DICEL was formally put into run-off in October 2010 and no longer has any active business; its last policy expired on

31 March 2011. Its parent, ANDIE, wishes to eliminate the additional administrative cost of operating an insurer in run-

off and to release the capital tied up in DICEL.

4.3 DICEL’s strategy is to apply for the sanction of:

a Scheme of Arrangement in respect of the London Market Reinsurance Business; and

a transfer, under Part VII of FSMA, of all of its policies to ANDIE.

4.4 The applications for sanction of the Scheme and of the Transfer will be heard at the same Court session, but the

Scheme application will be heard first.

4.5 The management of DICEL and of ANDIE believe that such a transfer to ANDIE and consolidation of DICEL’s business

with that of ANDIE will increase efficiency of the run-off, which is likely to continue for many years. Furthermore, they

believe that the Scheme (assuming that it is approved by creditors) will further reduce the time and administrative cost

involved in the run-off in respect of the London Market Reinsurance Business.

TRANSFER AND SCHEME OUTLINE

The Scheme

4.6 The proposed Scheme of Arrangement will be limited to the London Market Reinsurance Business and will include

unpaid agreed claims, Notified Outstanding Claims and IBNR claims as at the effective date of the Scheme (“the

Scheme Effective Date”). The most recent policy to be included in the Scheme was written in 1985.

4.7 The Scheme would recognise DICEL as a solvent company. Under the terms of the Scheme, it is expected that DICEL

would then make, to Scheme Creditors with respect to Scheme Claims for which it holds Paid Loss, Notified

Outstanding and/or IBNR reserves (i.e. known claimants), payments roughly equal to the provisions held in respect of

those claims (those provisions for known claims having been increased as at 31 December 2014 to match the expected

cost of payments under the Scheme), and would also make payments to Scheme Creditors with respect to Scheme

Claims for it holds no reserves in respect of outstanding claims.

4.8 As to maintaining Continuation of Coverage, the Scheme would provide that DICEL would continue to be liable for

future claims due to types of claim that are unknown, and for all claims under policies that are unknown, as at the date

of the Scheme (“Continuation of Coverage”).

4.9 If the Scheme has been approved then, post the Transfer Effective Date, ANDIE would assume from DICEL the role of

the company carrying out the Scheme of Arrangement in respect of making all payments under the Scheme, other than

those already made under the Scheme by DICEL prior to the Transfer Effective Date, and would also assume

responsibility for the Continuation of Coverage. In practice, if both the Scheme and Transfer are sanctioned, the

Transfer should become effective within 14 days of the Scheme Effective Date and therefore it is likely that DICEL will

have made no payments under the Scheme by the Transfer Effective Date.

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The Transfer

4.10 Under the Transfer, the business to be transferred comprises all of the business underwritten by DICEL and all business

transferred to DICEL by an insurance business transfer scheme as defined in Section 105 of FSMA that has not already

been commuted, novated, or subject to a now closed Scheme of Arrangement (collectively “the Transferring

Business17”). All liabilities in respect of the Transferring Business, all assets supporting those liabilities (including the

applicable reinsurance protections and the right to future premiums), and all liabilities and supporting assets within

DICEL will be transferred on the Transfer Effective Date. The liabilities would include the outstanding payment

obligations under the Scheme, assuming that the Scheme had been enacted prior to the Transfer Effective Date, but

would not include any policy that is identified as not capable of being transferred pursuant to Part VII of FSMA on the

Transfer Effective Date or that the Court deems should not be included within the Transfer (an “Excluded Policy”). The

assets would include all outwards reinsurance contracts and also the Branch Guarantee and the ILU Guarantee

provided by ANDIC Japan (DICEL has procured from ANDIC Japan written acknowledgement that it will observe and

perform the obligations stated in the Transfer Scheme document to be undertaken by ANDIC Japan, which include that

the reinsurance contracts and guarantees will be held, from the Transfer Effective Date, for the benefit of ANDIE).

DICEL will retain its share capital of £10 million, which is expected to be more than sufficient to enable DICEL to meet

its post-Transfer regulatory capital (should the regulatory capital requirements exceed the amount of share capital then

additional funds would be retained within DICEL to ensure DICEL’s continuing compliance with its regulatory

requirements). All future income and outgoings arising from the Transferring Business will pertain to ANDIE. Existing

policyholders of DICEL in respect of the Transferring Business will become policyholders of ANDIE.

4.11 It is intended that the Transfer proceeds irrespective of whether or not the Scheme has been approved.

4.12 Because of uncertainty regarding the applicability of the ANDIC Guarantee to the liabilities being transferred from DICEL

to ANDIE, a further guarantee has been agreed (“the Transferring Liabilities Guarantee”, dated 13 February 2015)

between ANDIE and ANDIC Japan whereby if, for any reason, ANDIE failed to fulfil any of the obligations of the

Transferring Business or of the Scheme that had been transferred to it from DICEL then ANDIC Japan would cover

those obligations.

4.13 I have considered in paragraphs 6.73-6.78 below the likely impact, both pre- and post-Transfer, were one or more of

the guarantees not to operate as expected.

Balance sheets

4.14 Table 4.1 below shows simplified balance sheets for DICEL (based on the PRA Returns for DICEL as at 31 December

2014) in four possible situations:

4.14.1 before either the Scheme or the Transfer are approved and implemented;

4.14.2 prior to the Transfer but immediately after approval of the Scheme, assuming that that is approved ahead of

the Transfer;

4.14.3 still prior to the Transfer but after all payments under the Scheme have been made, again assuming that the

Scheme is approved ahead of the Transfer; and

4.14.4 post-Transfer (irrespective of whether or not the Scheme has by then been approved).

_______________________________________________________________________________

17 It should be noted that, in the Transfer document, this business is referred to as “Transferred Business”, consistent with the Transfer having taken place when the

Transfer Scheme becomes effective.

Milliman Report


Table 4.1

Simplified Balance Sheets for DICEL

as at 31 December 2014

4.15 In preparing this I have assumed that:

The total amount paid out under the Scheme equals the outstanding case estimates plus the IBNR reserves as at

31 December 2014 (£397,608 gross of reinsurance, with expected recoveries against reinsurance of £321,207)

The cost of handling the payments under the Scheme is equal to 24% of the payments (£96,935 gross of

reinsurance, with expected recoveries against reinsurance of £80,401)

The provisions held in respect of the Continuation of Coverage post the Scheme are equal to 10% of the provisions

that were held pre-Scheme in respect of the ILU business (£49,454 gross of reinsurance, with expected recoveries

against reinsurance of £40,161)

I explain the reasoning behind this and the preceding two assumptions in paragraph 4.16 below.

The post-Transfer balance sheet assumes that DICEL will have been dissolved without winding-up as will be

requested to the Court. In practice, DICEL will be required to maintain its requisite regulatory capital until it is de-

authorised by the PRA, at which point it can be dissolved. With this in mind, it is intended that the share capital,

which totals £10 million, will remain as an entry in both Investments and Capital & Reserves until the dissolution of

DICEL. This assumes that the amount of share capital exceeds DICEL’s regulatory capital requirements – should

the regulatory capital requirements exceed the amount of share capital then, as explained in paragraph 4.10 above,


requirements.

Pre-Scheme,

Pre-Transfer

(£ '000)

Scheme

approved, pre-

Transfer

(£ '000)

Post-Scheme,

pre-Transfer

(£ '000)

Post-Transfer

(£ '000)

Assets

Investments 13,022 13,022 13,022 0

Reinsurers' share of technical provisions 970 1,008 569 0

Debtors and salvage 914 914 914 0

Other assets 608 608 491 0

Accrued income 0 0 0 0

15,514 15,552 14,996 0

Liabilities

Capital and reserves 14,167 14,156 14,156 0

Gross technical provisions 1,223 1,272 728 0

Other provisions 24 24 12 0

Creditors 79 79 79 0

Accruals and deferred income 21 21 21 0

15,514 15,552 14,996 0

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4.16 The basis for the assumptions regarding the costs of the Scheme are as follows:

4.16.1 The reserves held as at 31 December 2014 in respect of the London Market Reinsurance Business have been

set equal to the expected amount to be paid out under the Scheme. These reserves have been set to be at a

75% confidence level estimate of the ultimate outcome. At such a level it is projected that there will be no more

than a 25% likelihood that the eventual outcome of all of the claims will exceed the outcome estimated at a

75% confidence level. I have reviewed the methodology and the assumptions used in deriving the ultimate

outcome at a 75% confidence level. I consider both to be reasonable, although I accept that other, not

unreasonable, assumptions could also have been used which might have resulted in IBNR reserves either

bigger or smaller than those held as at 31 December 2014. I also acknowledge that Scheme creditors are

free to use their own valuation methodology if they consider that the above approach does not provide a fair

valuation in their particular circumstances. As such it is likely that the actual amount paid out under the

Scheme will differ from the amount assumed in paragraph 4.15 above but I do not expect it to differ by an

amount that materially alters the projected values shown in Table 4.1 above.

4.16.2 DICEL currently holds no provision in respect of any claims that might emerge under Continuation of Coverage

as it does not expect any such claim to emerge. I consider it prudent to make some allowance for such claims

in my analysis, so as to demonstrate what impact they might have. In the circumstances I consider an

allowance of 10% of pre-Scheme provisions for the cost of claims emerging under Continuation of Coverage

to be a prudent assumption.

4.16.3 Finally, the provisions held by DICEL as at 31 December 2014 in respect of future claims handling costs for

London Market Reinsurance Business were equal, gross of reinsurance, to 24% of the provisions held in

respect of the equivalent outstanding claim payments (including IBNR reserves). Assuming that the future

costs of operating the Scheme were no greater than the costs of managing the claims in run-off, and allowing

for the Scheme payments to be equal to the provisions held as at 31 December 2014 in respect of the liabilities

to be Schemed, the assumption that the cost of handling the payments under the Scheme is equal to 24% of

the payments is reasonable. As with the Scheme payments, it is likely that the actual cost of operating the

Scheme will differ from the amount assumed in paragraph 4.15 above but I do not expect it to differ by an

amount that materially alters the projected values shown in Table 4.1 above.

4.17 In Table 4.1 above, the gross technical provisions increase by £49k (4%) on approval of the Scheme as, based on the

above assumptions, I have not allowed for any administrative cost saving through not running-off this business to final

settlement and I have allowed for additional provisions to be set up in respect of the Continuation of Coverage. Similarly,

the reinsurers’ share of the technical provisions are also increased on approval of the Scheme, by £38k (4%). The

£11k increase in net technical provisions is balanced by a corresponding decrease in capital and reserves.

4.18 In practice, it is unlikely that many, if any, payments under the terms of the Scheme (if approved) will have been made

prior to the Transfer. Therefore, the situation outlined in paragraph 4.14.3 would be extremely unlikely to occur but I

have included it in the third column of Table 4.1 above as it illustrates that the impact on DICEL’s balance sheet of all

of the Scheme payments being made would be small and that, by implication, the effect on DICEL’s balance sheet of

some of the Scheme payments being made would also be small. It also reflects the ultimate position were the Scheme

to be approved but the Transfer not to be approved.

4.19 I have also tested the impact of other assumptions regarding the margin of the Scheme payments above the existing

provisions, the claims handling expenses as a proportion of the Scheme payments, and the cost of the Continuation of

Coverage. While other assumptions would result in different figures within columns 2 and 3 of Table 4.1 in respect of

gross and ceded technical provisions and the capital and reserves, any such changes would be minor relative to the

size of the balance sheet, for not unreasonable assumptions.

4.20 Table 4.2 below shows simplified balance sheets for ANDIE pre and post the Transfer (based on the PRA Returns for

ANDIE as at 31 December 2014). For the post-Transfer position, I have considered how the balance sheet would

appear in three possible situations:

prior to approval of the Scheme (or were the Scheme to be rejected);

immediately following approval of the Scheme but before any payments were made under the Scheme; and

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after all payments under the Scheme have been made.

Table 4.2

Simplified Balance Sheets for ANDIE

as at 31 December 2014

4.21 DICEL is currently recorded within the ANDIE balance sheet as an investment of value £14.2 million. The value post-

Transfer would be nil as, following its dissolution (see paragraph 4.15 above), DICEL would then have no assets or

liabilities. In Table 4.2 above I have adjusted accordingly the post-Transfer investments and the capital and reserves.

4.22 Table 4.2 shows that the Transfer is expected to have little overall impact on ANDIE’s balance sheet, whether or not

the Scheme goes ahead.

4.23 It should be noted that Table 4.2 is shown prior to ANDIE’s acquisition of ITB which was finalised on 31 March 2015,

and before the capital injection from ANDIC Japan referred to in paragraph 3.25 above.

4.24 Post the proposed transfer, the administration and management of the Transferring Business will be undertaken by

ANDIE in the same manner as currently.

POLICYHOLDERS AFFECTED

4.25 I have considered the effects of the Transfer on three groups of policyholders, namely:

those policyholders of DICEL whose policies are to be transferred and whose policies are proposed to be subject

to the Scheme;

those policyholders of DICEL whose policies are to be transferred and whose policies will not be subject to the

Scheme; and

the current policyholders of ANDIE.

Pre-Transfer

(£ '000)

Pre-Scheme,

post-Transfer

(£ '000)

Scheme

approved,

post-Transfer

(£ '000)

Post-Scheme,

post-Transfer

(£ '000)

Assets

Investments 191,229 190,084 190,084 190,084

Reinsurers' share of technical provisions 62,347 63,317 63,317 62,915

Debtors and salvage 40,192 41,106 41,106 41,106

Other assets 9,926 10,534 10,534 10,417

Accrued income 30,859 30,859 30,859 30,859

334,552 335,899 335,899 335,381

Liabilities

Capital and reserves 114,032 114,032 114,021 114,021

Gross technical provisions 194,074 195,297 195,308 194,802

Other provisions 0 24 24 12

Creditors 17,001 17,080 17,080 17,080

Accruals and deferred income 9,445 9,466 9,466 9,466

334,552 335,899 335,899 335,381

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4.26 It is intended that no policies will remain within DICEL following the Transfer which will, from an English law perspective,

transfer all DICEL contracts to ANDIE. DICEL wrote business only through Brokers and as such has placing slips for

the business that it wrote but no copies of the policies themselves, save for a few examples in respect of the ILU

business. It also has no policy records for the business written by the UK branch of Dowa Fire and Marine Insurance

Company Limited, and subsequently transferred to DICEL. DICEL management has told me that some policies written

by DICEL were governed by non-EEA law. Under the terms of the Transfer, should a policy be identified that is not

capable of being transferred pursuant to Part VII of FSMA on the Transfer Effective Date or which the Court deems

should not be included within the Transfer (an “Excluded Policy”), DICEL and ANDIE would make all reasonable efforts

to obtain as soon as practical any necessary consent to effect its novation from DICEL to ANDIE, or (if appropriate) its

commutation. If a policy is an Excluded Policy because of the existence or imposition of one or more conditions which

are required to be fulfilled, then under the Transfer the Excluded Policy would be transferred from DICEL to ANDIE

immediately upon and with effect from the fulfilment of all outstanding conditions.

4.27 As it is thought unlikely that there will be any Excluded Policies, I have not considered their position in great depth within

the Report.

4.28 I do not consider that the policyholders of any other insurance companies are affected by the Transfer.

COMPENSATION AND COMPLAINTS

4.29 After the implementation of the Transfer, as with all other insurance companies with an establishment in the UK, ANDIE

will be required to participate in the FSCS, as it has done since its inception. The Transfer will have no impact on the

eligibility of any policyholder or group of policyholders for compensation under the FSCS.

4.30 The Transfer will have no effect on the eligibility of any policyholder or group of policyholders to bring complaints to the

UK FOS. If, as described in Section 2, they are currently able to bring complaints to the FOS, then this will remain the

case after the implementation of the Transfer. If they are currently not eligible to complain to the FOS then this will also

remain the case after the implementation of the Transfer.

STRUCTURE AND ADMINISTRATION AFTER THE TRANSFER

4.31 ANDIE will remain in existence after the Transfer has been implemented, as an on-going solvent insurance and

reinsurance operation. Post-Transfer, assuming that there are no Excluded Policies, DICEL will be a company without

liabilities and it is intended that it be dissolved under the Court Order approving the Transfer, subject only to retaining

its required regulatory capital pending cancellation of its permissions and de-authorisation.

4.32 After implementation of the Transfer, ANDIE will continue to operate as it currently does in respect of underwriting,

claims, operations, risk management and systems.

4.33 As noted in Section 2, there is an FCA requirement that companies treat customers fairly in all their regulated activities.

These requirements will still apply to ANDIE in respect of all policyholders in ANDIE after the proposed transfer.

4.34 The ANDIE approach to TCF is outlined in Section 3 above and is applied equally to policies underwritten by ANDIE

and to those underwritten by DICEL. I have no reason to believe that implementing the Transfer will affect the way in

which the claims are currently being handled, and the management of ANDIE has assured me that there will be no

change.

CAPITAL POLICY AFTER THE TRANSFER

4.35 ANDIE management has told me that the capital policy of ANDIE will not be impacted by the Transfer. I am unaware

of any reason why this should not be the case. ANDIE will continue to maintain capital to support its ICA risk based

capital assessments.

4.36 Capital in ANDIE is currently maintained using a risk based approach in line with the ICA, as set out in Section 2, such

that the company has a low likelihood of falling below regulatory required capital or of being unable to absorb a major

one-off hit in any one year (as set out in paragraph 3.35 above).

4.37 The capital policy set out above will be replaced by a suitable alternative following the implementation of Solvency II.

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APPROACH TO COMMUNICATION WITH POLICYHOLDERS

4.38 DICEL and ANDIE have set out the approach they intend to take in communicating information about the proposed

Transfer to the affected policyholders and other parties.

4.39 The main objectives of the communications are to:

Give affected policyholders the information that they need to understand the proposed changes;

Inform affected policyholders about the implications for them of the proposed changes;

Give affected policyholders access to further relevant information (beyond that in the communications pack);

Let affected policyholders know what steps they should take if they object to any of the proposed changes;

Maintain customers’ confidence in ANDIE’s willingness and ability to continue to meet their obligations under

transferring and non-transferring policies; and

Meet legal and regulatory requirements.

4.40 ANDIE and DICEL propose the following contact with policyholders/potential claimants and third parties:

Letters to

o Known holders of DICEL London Market Reinsurance policies that would be included within the Scheme;

o Known Brokers or other agents who had represented holders of DICEL London Market Reinsurance policies

that would be included within the Scheme;

o Known Brokers of DICEL risks covered by line-slips;

o DICEL policyholders with claims outstanding as at the date of the directions hearing (a letter would also be

sent to any DICEL policyholder who reported a claim subsequent to that date, as soon as possible after the

claim had been reported); and

o All known holders of JIA Direct or ILU Direct Liability policies.

The letters in respect of policies that would be affected by the Scheme differ from those in respect of policies that

would not be affected by the Scheme.

The letters will include a policyholder guide with the following content: Introduction, Contents, Q&A, Transfer

Summary, Summary of the Independent Expert’s Report, and Legal Notices;

Notices in the London, Edinburgh and Belfast Gazettes;

Advertisements in a selection of UK and international newspapers, including a Japanese language paper.

The letters, notices and advertisements will refer all queries to a postal address or a telephone number or a website

address, all of which will be dedicated to responding promptly to any such queries.

4.41 The overall approach proposed by ANDIE and DICEL to communication with policyholders has been constructed to be

proportionate to the expected impact of the relevant Transfer on affected policyholders.

4.42 The companies do not intend to send the communication pack to, or otherwise notify, any customers of ANDIE, other

than those who would be included in the DICEL policyholders noted in paragraph 4.40 above.

4.43 I comment on this proposed approach to communications with policyholders in Section 8.

Milliman Report


5. GENERAL CONSIDERATIONS OF THE INDEPENDENT EXPERT

Introduction

5.1 I have compiled my report in accordance with the Policy Statement and with SUP18.

5.2 From the policyholders’ perspective, the acceptability of the Transfer must be on the basis that it will not have a

materially adverse effect on their benefits or fair treatment. To be able to understand the likely effect of the Transfer

on the way that customers will be treated in the future it is necessary to understand how they have been treated in the

past.

5.3 I need to consider the terms of the Transfer generally and how the different groups of policyholders are likely to be

affected by the Transfer and, in particular:

The effect of the Transfer on the security of the policyholders’ contractual rights, including the likelihood and

potential effects of the insolvency of the insurer; and

The likely effects of the Transfer on policyholder servicing levels (e.g. claims handling).

5.4 The main factors that determine the risks to which a policyholder is exposed are:

Size of company;

Amount of capital held, other calls on that capital and capital support currently available to the company;

Reserve strength;

Investment strategy;

Mix of business written; and

Company strategy – for example, whether it is open or closed to new business.

Security of Policyholder Benefits

5.5 As part of my role as Independent Expert for this Transfer, I need to consider the security of policyholder benefits, i.e.

the likelihood that policyholders will receive their payment of claims when due.

5.6 In considering and commenting upon policyholder security I shall consider the financial strength of each entity. Financial

strength is provided by the margins for prudence in the assumptions used to calculate the Technical Provisions, by the

shareholder capital and by any specific arrangements for the provision of financial support. In considering policyholder

security it is also necessary to take into account the potential variability of future experience (including claim frequency

and severity). Security is also affected by the nature and volume of future new business.

5.7 The nature of the assets that constitute each company’s capital and surplus is also relevant. The shareholder is able

to withdraw surplus shareholder assets (i.e. retained profits, but not share capital) in the form of realised profits, provided

minimum capital requirements are met. The security provided by such assets may therefore be temporary.

The Scheme

5.8 I need to consider the likely impact of the Transfer on the affected groups of policyholders both in the event that the

Scheme is approved and also in the event that the Scheme is not approved.

Treating Customers Fairly

5.9 As Independent Expert for the Transfer I need also to consider the proposals in the context of the FCA’s TCF regime

and, in particular, the impact of the proposals on the benefit expectations of policyholders.

5.10 This involves consideration of areas where discretion is involved on behalf of the relevant insurance company with

regard to charges applied to a policy and the benefits granted to the policyholder, and also to service standards applied.

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Other Considerations

5.11 Paragraph 2.34(4)(b) of the Policy Statement and paragraph 2.36 of SUP18 both require me, as Independent Expert,

to consider the likely effects of the Transfer on matters such as investment management, new business, administration,

expense levels and valuation bases insofar as they might impact on levels of service to policyholders or on the security

of policyholders’ contractual rights.

5.12 I am also required to consider the cost of the Transfer and the tax effects of the Transfer insofar as they might impact

on the security of policyholders’ contractual rights.

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6. THE IMPACT OF THE TRANSFER ON THE TRANSFERRING POLICYHOLDERS OF

DICEL

INTRODUCTION

6.1 Under the Transfer, the business of DICEL will be transferred to ANDIE, along with all assets and liabilities remaining

within DICEL (subject to maintaining sufficient funds to meet regulatory capital requirements prior to de-authorisation

by the PRA – see paragraph 4.15 above).

6.2 The main issues affecting the Transferring Policyholders of DICEL as a result of the Transfer are likely to arise from

relative differences in:

The financial strength of ANDIE after the Transfer compared with that of DICEL. Financial strength is derived from:

o the strength of the reserves held;

o excess assets or capital; and

o specific financial support arrangements.

The risk exposures in ANDIE compared with those in DICEL.

The policy servicing levels provided by ANDIE after the Transfer compared with those currently enjoyed by the

policyholders of DICEL.

In this Section I deal with each of these in turn. In case the Scheme is not approved, I need to compare the position of

the Transferring Policyholders of DICEL post-Transfer with their position pre-Transfer, pre-Scheme as well as post-

Scheme.

6.3 As I have mentioned earlier in the Report, certain capital requirements are private matters between insurers and the

PRA and therefore I am not at liberty to disclose in the Report actual figures relating to those requirements, or figures

by which those amounts could be calculated. In the Report I have considered the extent to which DICEL and ANDIE

each hold capital in excess of their regulatory solvency level. I refer to the ratio of the actual capital that the entity under

consideration holds to the minimum regulatory solvency capital requirement as the “Capital Cover Ratio”. Each entity

will have different Capital Cover Ratios for the different solvency measures. Purely for comparative purposes in the

Report I have defined the following terms:

“sufficiently capitalised” refers to a Capital Cover Ratio between 100% and 120%;

“more than sufficiently capitalised” refers to a Capital Cover Ratio between 120% and 150%;

“well capitalised” refers to a Capital Cover Ratio between 150% and 200%, and

“very well capitalised” refers to a Capital Cover Ratio in excess of 200%.

Where I use these terms I specify the capital measures to which they relate.

THE FINANCIAL STRENGTH OF DICEL

Reserving

6.4 I have been provided with details of the reserves for DICEL as at 31 December 2014 and the process by which the

reserves are established by DICEL management. I have not attempted to review in detail the calculations performed.

Instead, I have reviewed the process by which reserves are set, the approach followed by the DICEL management, the

key areas of reserve uncertainty and the apparent strength of the reserves based on this review. I have noted that the

reserving performed by DICEL management is reviewed by reserving actuaries within ANDIE.

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6.5 Different approaches have been taken for the three classes that are considered to have outstanding claim liabilities:

6.5.1 For JIA Direct business, there were, as at 31 December 20143, just five reported outstanding claims (of which

one had been reported during 2014). These claims are all respiratory or noise-induced hearing loss claims,

under Employers’ Liability. The total gross outstanding amount in respect of these claims is £34,701 (£828

net of reinsurance).

6.5.2 Triangulated claim development methods would suggest that this business is already close to being fully

developed. However, in light of the unexpectedly large number of new notifications during 2013 (which

numbered seven and which relate to covers written in the years between 1992 and 2006), DICEL management

thought it wise to add a further allowance, both for possible future notifications and for possible deterioration

in the existing case estimates. The IBNR reserves thus added were set as a multiple of the outstanding

amounts, the multiplier being five, gross IBNR reserves therefore being £173,506 (£4,140 net of reinsurance).

6.5.3 For ILU Direct Liability business, there were, as at 31 December 2014, 17 reported outstanding claims (the

same number as at the end of 2013), with total gross outstanding amounts of £58,640. Seven of these

outstanding claims relate to the Exxon pollution claims.

6.5.4 There has been little recent payment activity in respect of these claims, save payment of attorneys’ fees. The

gross IBNR reserves are therefore set at £318,482 (£106,160 net of reinsurance) which is based upon the

estimated maximum loss (“EML”) for the claims. I have seen a report prepared by external actuaries that

provides the basis of the EML calculations. I consider the approach outlined in that report and its conclusions

to be reasonable. I consider appropriate the reserving approach for this business that has been adopted by

DICEL.

6.5.5 Outstanding claims (£166,330 gross of reinsurance, £49,287 net of reinsurance) in respect of London Market

Reinsurance Business relate to 48 cedants and can be split between APH (150 claims outstanding as at 31

December 2014, with gross outstanding amounts totalling £111,649) and non-APH (153 claims outstanding

as at 31 December 2014, with gross outstanding amounts totalling £54,681). The outstanding claims include

23 cases that were newly notified to DICEL during 2014, following 99 notifications during 2013. Further

notifications of similar volumes are considered unlikely: the large number of notifications during 2013 is thought

largely to have been triggered by direct communication from DICEL during 2012 regarding an earlier proposed

Scheme; the notifications in 2014 appear to be largely attributable to a reconciliation exercise whereby DICEL

has been able to access all slips in respect of this business that were written between 1977 and 1985, which

has enabled the accurate reclassification of many claims. I have been told that case reserves for most of the

2014 notifications were negligible and I note that the total outstanding claim amounts reduced during 2014,

which would have been unlikely without material payments during 2014 had the new notifications been for

substantial amounts.

6.5.6 As with the JIA Direct business, the IBNR for these claims has been calculated by applying multipliers to the

outstanding claim amounts, those multipliers being 5.0 for APH business and 1.25 for non-APH business.

These multipliers have been increased by 25% from those used as at 31 December 2013 (which were not out-

of-line with those that I have seen used elsewhere in the market for other similar blocks of business) and are

intended to result in estimates at the 75th percentile of the range of possible ultimate outcomes. As explained

in paragraph 4.16.1 above, I have reviewed the methodology and assumptions used in deriving the ultimate

outcome at the 75th percentile and consider both to be reasonable, although I accept that other, not

unreasonable, multipliers could also have been used which might have resulted in IBNR reserves either bigger

or smaller than those held as at 31 December 2014.. As at 31 December 2014, the total IBNR reserve for

London Market Reinsurance Business was £231,278 gross of reinsurance (£27,114 net of reinsurance).

6.6 Reserve estimates are always uncertain as they can be affected by decisions, actions and events that are yet to occur.

While the incidents that have led to claims on DICEL’s business have all already taken place, there remains plenty of

scope for the development of the existing claims to differ from what might reasonably be expected. The aggregate

development of small volumes of outstanding claims, such as seen in DICEL, is usually more volatile than the aggregate

development of larger volumes of similar outstanding claims.

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DICEL reserve strength pre-Scheme and pre-Transfer

6.7 As at 31 December 2014, DICEL had gross claims reserves across all classes of business (excluding provisions for

unallocated claims handling expenses) of £983k and net claims reserves of £207k. This equates to a gross survival

ratio (gross reserves at the year-end as a proportion of gross claim payments made in the preceding 12 months) of 87

years. Taking the average payments over the last three years, the survival ratio is 32 years, gross of reinsurance. The

payment figures that I have used in calculating survival ratios exclude payments made over the last three years in

respect of novations and commutations.

6.8 Because of the small number of outstanding claims and their nature, it is not possible to construct statistically a

distribution of possible future claim outcomes for this portfolio, and therefore it is not possible to determine statistically

the degree of prudence within the booked claims provisions for DICEL. I consider the approaches taken to evaluating

the outstanding claim liabilities to be appropriate in the circumstances and, based on my experience of reviewing

portfolios containing similar types of business, I consider the assumptions adopted and hence the reserves calculated

to be a reasonable estimate of the expected value of the range of possible outcomes.

DICEL reserve strength post-approval of the Scheme and pre-Transfer

6.9 As explained in paragraph 4.17 above, based on my assumptions and on DICEL’s balance sheet as at 31 December

2014, I would expect that the DICEL technical provisions after approval of the Scheme would be 4% more than they

are currently, both gross and net of reinsurance. I further note that other, not unreasonable, assumptions could further

increase the DICEL technical provisions post-approval of the Scheme, or alternatively could result in a slight reduction

in the technical provisions.

6.10 Based on DICEL’s balance sheet as at 31 December 2014, as and when the payments under the Scheme are made

and the corresponding liabilities cancelled, the DICEL technical provisions would reduce, to (net of all liabilities under

the Scheme) £728,296, gross of reinsurance, and £159,485, net of reinsurance.

6.11 As with the provisions pre-Scheme, it is not possible to determine statistically the degree of prudence within the booked

claims provisions for DICEL. If there were equal degrees of prudence between the provisioning by class pre-Scheme

then post-Scheme the provisions would be relatively stronger, if only because of any additional provision in respect of

Continuation of Coverage. I consider the expected provisions, post-Scheme, to be a reasonable estimate of the

expected value of the range of possible outcomes.

Conclusion

6.12 Based on my review as described above concerning the reserves of DICEL pre-Transfer, the reserves appear

reasonable as at 31 December 2014.

Excess assets of DICEL

6.13 As at 31 December 2014, DICEL had pre-Scheme capital resources available to cover business capital resource

requirements of £14,167k compared with a MCR of £2,902k, a Capital Cover Ratio of 488 %. The MCR is equal to the

minimum level of €3.7 million and as such is 237% of the gross claims reserves including provisions for unallocated

claims handling expenses (1,149% of the net claims reserves).

6.14 An ICA was last prepared for DICEL based largely on data as at 31 December 2009. This resulted in a range of capital

requirements, the upper end of which was materially lower than the MCR held as at 31 December 2014. I have read

the report summarising the ICA calculation and consider the approach and assumptions adopted to be reasonable.

Because the business is in run-off and because of the small size of the outstanding claims reserves relative to the

assets, the insurance risk and the credit risk relating to reinsurance comprised only about 40% of the capital

requirements pre-diversification credit. Since 31 December 2009 the net reserves for outstanding claims have reduced

by about 20%, due primarily to the Aviation business, which was subject to a scheme of arrangement in 2010, and the

Japanese reinsurance business, commuted during 2012. I would expect that the ICA amount as at 31 December 2014

would have continued to be materially lower than the MCR and therefore for DICEL to be very well capitalised in respect

of its ICA.

Milliman Report


6.15 Post-Scheme the MCR would be unaltered, as it is already at the minimum level allowed by regulation. However, the

capital resources available to cover the MCR would have been reduced by an amount equal to the net provision set up

in respect of Continuation of Coverage (see paragraph 4.17 above). I have estimated this additional amount to have

been, as at 31 December 2014, £11,344. Thus the post-Scheme capital resources available to cover business capital

requirements would be slightly worse than their pre-Scheme level.

Solvency II

6.16 While, as at the time of me writing this Report, DICEL management hoped that the Transfer would take place during

2015 there was a strong possibility that it would not and that DICEL would still be operational as at 1 January 2016, the

date on which Solvency II will be implemented. As such I should consider the excess asset position of DICEL on a

Solvency II basis, as well as on the bases already covered. However, as discussed in paragraph 8.30 below, DICEL

is not yet ready for the implementation of the Solvency II regime at the beginning of next year and has not yet established

either its Solvency II balance sheet or its SCR. Therefore I cannot currently provide a definitive statement regarding

the Capital Cover Ratio for the SCR on a Solvency II basis. Nevertheless, based on my experience of reviewing SCRs

and ICAs for other insurers, I consider it very likely that the SCR on a Solvency II basis will be materially smaller than

the MCR and that it is also very likely that DICEL would be very well capitalised on a Solvency II basis.

6.17 I would expect that a Solvency II balance sheet and SCR calculation would have been prepared by DICEL by the time

that I drafted the Supplementary Report, and therefore I would then be able to confirm, or correct, my view expressed

above as to DICEL’s likely excess asset position under Solvency II.

Eurozone exposure

6.18 Developments in recent years within the Eurozone have resulted in the yields on peripheral European government debt

to increase with subsequent falls in value, in particular on Greek bonds and, to a lesser extent, those of Ireland, Italy,

Portugal and Spain. Through contagion, this has resulted in difficulties and, in some cases, failure in financial institutions

elsewhere in Europe. My concern is whether DICEL (and ANDIE which I discuss later in this Section) are at risk from

the Eurozone problems.

6.19 As noted in paragraph 3.7 above, as at 31 December 2014 DICEL had no exposure, either direct or indirect, to Eurozone

debt, other than in respect of a supra-national bond issued by the European Investment Bank and rated AAA by

Standard & Poor’s. It is possible that this bond has Eurozone exposure but the capital is guaranteed and hence the

risk to DICEL from this potential exposure to the Eurozone is negligible.

Conclusion

6.20 The Transferring Policyholders currently enjoy a very high level of financial security as a result of the reserve

adequacy and excess assets of DICEL. The Transferring Policyholders with ILU-related contracts also benefit

from either the ILU Guarantee or the Branch Guarantee provided by ANDIC Japan to make good any failure by

DICEL to fulfil its obligations to these policyholders.

THE FINANCIAL STRENGTH OF ANDIE

6.21 As I have explained in paragraph 6.3 above, certain capital requirements are private matters between insurers and the

PRA and, as a result, I am restricted as to what I can disclose within the Report relating to those requirements. For

example, I cannot disclose the actual Capital Cover Ratios for the ECR, ICA or ICG. Therefore, purely for comparative

purposes, I continue to use in the Report the terms “sufficiently capitalised”, “more than sufficiently capitalised”, “well

capitalised” and “very well capitalised” in the way that I have defined them in paragraph 6.3 above.

Reserving

6.22 I have been provided with details of the reserves as at 31 December 2014, as well as at previous year-ends, and of the

process by which the reserves are established

6.23 I have not attempted to review in detail the calculations performed by the respective actuaries. Instead, I have reviewed

the process by which reserves are set, the approach followed by the relevant actuaries, the key areas of reserve

uncertainty and the apparent strength of the reserves based on this review.

Milliman Report


6.24 The internal actuaries have used generally accepted actuarial methods to estimate reserve requirements (termed “best

estimate reserves”). The best estimate reserves that underlie the booked reserves as at each year-end are based on

the best estimate reserves actuarially estimated as at the preceding September-end, rolled forward by a quarter (i.e.

adjusted for differences between the actual experience over the quarter and that which would have been expected

based on the preceding quarter-end’s analysis of reserves). This approach is not unusual and I am satisfied that the

methodologies, major assumptions and results as at 31 December 2014 appear reasonable.

6.25 Reserve estimates are always uncertain as they can be affected by decisions, actions and events that are yet to occur.

As at 31 December 2014, the ANDIE actuaries have identified several specific sources of uncertainty, in particular:

6.25.1 France – Third Party Injury: Under French law injured parties have 10 years to make a claim if the nature of

their injuries remains constant, and an unlimited time to claim if their injuries worsen. ANDIE closes policies

for which it considers there to be no foreseeable chance of a claim being made. There remains a possibility

that a claim which has been closed in this way would need to be reopened after a long delay.

6.25.2 France – insourcing of claims handling: claim handling has been performed in-house since 1 April 2008, but

during the last 6-7 years there have been other changes, to the claims record system and to the way that

claims are recorded, that have altered the claim development patterns. During 2014, there has been a further

complication caused by shortages in available claims handling staff, leading to the build-up of processing

backlogs.

6.25.3 Germany – tail factor for bodily injury claims: historic studies of large motor portfolios in the German market

show that, generally, there is a need for tail factors of 2-4% in the reserve projections, even after 15-20 years

of development. As ANDIE has only been writing business in Germany since 2000, it does not have any data

of its own to analyse for the causes of this pattern of late development. ANDIE believes that its portfolio has

faster settlement of claims than is typical in the market, and does not expect there to be any kick in the

development tail. Nevertheless, it has experienced some recent development in respect of its earliest accident

years, and as a result has increased its IBNR reserves for all accident periods to allow for possible future late

movements.

6.25.4 UK – Periodical Payment Orders ("PPOs"): the uncertainty arises from two sources, the valuation of those

claims already settled as PPOs (for which ANDIE would have an ongoing liability until the date of death of the

claimant) and the additional cost, over and above the cost of lump sum payments, of future PPO settlements

in respect of incurred claims.

6.25.5 To date just one PPO has been awarded against ANDIE18. As the claimant is elderly, the risk of mis-estimation

of ultimate claim costs, through incorrect assumptions regarding mortality, care cost inflation or return on

investments, is limited.

6.25.6 The additional costs of future PPOs compared with equivalent lump sum payments arise because reserves

for future payments under the former are usually calculated using lower discount rates than those underlying

lump sum payments. The approach by ANDIE to calculate the additional cost, using proportions of large

claims historically settled as PPOs, is in line with market practice. However, it is very sensitive to the chosen

assumptions, which themselves are based on historic data which is limited, and it is possible that the actual

cost of a single future PPO award could exceed, perhaps materially so, the additional provision set up for all

future PPO settlements. Indexation of Excess of Loss covers usually means that the additional costs to

insurers of PPO settlements over and above the cost of equivalent lump sum payments cannot be recovered

against Excess of Loss reinsurers. The additional costs to ANDIE of PPOs is reduced by ANDIE’s material

outwards quota share reinsurance arrangements.

_______________________________________________________________________________

18 During 2014, a second PPO was awarded against ANDIE, albeit on a contingent basis. At the time of settlement the claimant’s care costs were being met by

the NHS. The provisions of the settlement were such that ANDIE would only assume responsibility for funding care if and when the NHS ceased providing the

necessary funding. The claimant has subsequently died and ANDIE has not been required to make any payments under the PPO.

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6.25.7 UK - discount rate applied when evaluating lump sum payments: this is set by the Lord Chancellor, who

reviews it from time-to-time, and is intended to reflect real rates of return to be earned on lump sum payments

invested in low risk assets. Currently, the rate is set at 2.5% per annum which many commentators regard as

high relative to underlying interest rates. A reduction has been anticipated for several years but, as yet, other

than instigating two consultation exercises, the Lord Chancellor has declined to act.

6.25.8 Retirement ages: there is a move across Europe towards increasing retirement ages or abolishing compulsory

retirement ages altogether. Such changes would impact those claims whereby ANDIE compensates for loss

of lifetime earnings.

6.25.9 Choice of methodology: different (but still reasonable) reserving methodologies or different weightings

between the results of using various calculation methods could alter the selected results materially.

6.26 The above list of sources of uncertainty is not exhaustive; the internal actuaries have also highlighted in their report

other, lesser, sources of uncertainty.

6.27 The uncertainty has been partially mitigated by the addition as at 31 December 2014 of an explicit management margin

to the actuarially calculated best estimate reserves (£5.4m, the equivalent of 11.0% of the best estimate reserves, both

net of reinsurance).

6.28 In my view, considering the experience to date, such other possible sources of uncertainty do not increase materially

the uncertainty in the ultimate gross amount of claims.

Strength of the reserves

6.29 I have been provided with a report prepared by ANDIE’s auditor entitled Final Report to the Audit Committee on the

2014 Audit and dated 17 March 2015 (“the Auditor’s Report”).

6.30 The Auditor’s Report summarises conclusions reached by ANDIE’s auditor in support of its audit opinion on the

accounts of ANDIE as at 31 December 2014. The Auditor’s Report examined six specific areas which it considered

presented significant audit risks. Of these, two related to reserving: the accuracy of reserving data; and the estimation

of reserves including PPOs. The Auditor’s Report did not highlight any issues with the data and concluded that the

methodology and assumptions used by ANDIE in making its actuarial best estimates of reserves are reasonable.

6.31 The best estimate reserves are not deliberately biased upwards or downwards, and do not include any explicit margins.

I interpret this measure to be on a basis higher than a 50% confidence level, as the claim distribution is expected to be

positively skewed19. However, there is, as noted above, much uncertainty as to what assumptions are appropriate and

therefore there is a range of values within which a best estimate might be considered reasonable.

6.32 The reserves held by ANDIE are based on the actuarial best estimate plus an explicit management margin which is

intended to make allowance for various sources of uncertainty surrounding the actuarial best estimate. The Auditor’s

Report did not comment explicitly on the magnitude of the booked reserves; implicitly, in providing an audit opinion,

ANDIE’s auditor believes them to be within an acceptable range. I thus consider the reserves held by ANDIE as at 31

December 2014 to be on a basis stronger than a 50% confidence level.

ANDIE reserve strength pre-Transfer

6.33 As at 31 December 2014, ANDIE held gross claims reserves of £101.0 million (net of handling expenses, salvage and

subrogation), and net claims reserves of £58.1 million. When compared with payments during 2014 relating to prior

accident years, this equates to a gross survival ratio of 2.6 years. The survival ratios vary between classes of business.

I am satisfied that the reserves held by ANDIE for these liabilities appear to be reasonable as at the 2014 year end.

_______________________________________________________________________________

19 In probability theory and statistics, skewness is a measure of the asymmetry of the probability distribution of a variable. A distribution is skewed if the majority

of values lie to one side of the mean. It is positively skewed if the majority of values lie to the left of the mean, i.e. have values lower than the mean, but that

there are a few values higher, possibly much higher, than the mean.

http://en.wikipedia.org/wiki/Probability_theory

http://en.wikipedia.org/wiki/Statistics

http://en.wikipedia.org/wiki/Probability_distribution

Milliman Report


6.34 As at 31 December 2014, ANDIE reported technical provisions, net of reinsurance, of £131.7 million20 of which the

provision for claims outstanding (after discounting and net of reinsurance, salvage and subrogation) amounted to £57.7

million21.

Conclusion

6.35 Based on my review as described above concerning the reserves of ANDIE as at 31 December 2014, the

reserves appear reasonable as at 31 December 2014.

ANDIE reserve strength post-Transfer

6.36 The technical provisions, pre-Scheme and as at 31 December 2014, in respect of the liabilities to be transferred to

ANDIE as part of the Transfer are 0.6% and 0.2% of the technical provisions already within ANDIE, gross and net of

reinsurance respectively. Based on my assumptions as set out in paragraph 4.15 above, these percentages would be

marginally increased immediately post-approval of the Scheme, but would be reduced post all payments under the

Scheme to 0.4% and 0.1% respectively. Assuming no change post-Transfer in the way that the Transferring Policies

are reserved, the reserves established by ANDIE after the Transfer Effective Date will continue to be on a basis stronger

than a 50% confidence level, i.e. a continuation of the reserving basis adopted by ANDIE pre-Transfer under the

Transfer.

Conclusion

6.37 Having concluded that both DICEL and ANDIE were reasonably reserved pre-Transfer, I am satisfied that ANDIE

will be reasonably reserved after the Transfer Effective Date.

Excess assets of ANDIE

6.38 At a simple level, one measure of capital strength is the ratio of capital to net written premiums. This ratio was 100.4%

using shareholders’ funds as at 31 December 2014, which is reasonable when considered alongside the risks facing

ANDIE (as discussed in paragraphs 3.27 - 3.31 above).

6.39 There are four primary capital measures within ANDIE by which I evaluate the excess assets of ANDIE in the following

paragraphs: the MCR; the ECR, the ICA; and the ICG. As described above in paragraph 6.13, the MCR is also available

for the business of DICEL and so a direct comparison can be made of the Capital Cover Ratio based on the MCR for

the Transferring Policyholders before and after the Transfer Effective Date. However, the MCR calculation is based

upon factors that are not risk-sensitive. Hence, I have also considered the Capital Cover Ratios applying to the

Transferring Policyholders after the Transfer Effective Date based on the ECR, the ICA and the ICG, even though I

cannot compare all of them with equivalent measures in respect of DICEL. In my opinion, the ECR, the ICA and the

ICG better reflect the risks within the business than does the MCR and therefore the Capital Cover Ratios based on the

ECR, ICA and ICG provide a more robust indication of the excess assets within the business than does the Capital

Cover Ratio based on the MCR. I note that the ECR does not adequately reflect the risks of a business in run-off and

so a Capital Cover Ratio based on the ECR for DICEL would not provide a meaningful comparison with the equivalent

ratio for ANDIE.

MCR

6.40 As at 31 December 2014, the policyholders of ANDIE enjoyed the security of capital resources (i.e. assets available to

meet regulatory capital requirements as measured in ANDIE’s Returns to the PRA as at 31 December 2014) of £110.1

million compared with a MCR of £26.6 million. The Capital Cover Ratio for the MCR was therefore 414% and the free

assets were equal to £83.5 million (i.e. capital resources less MCR). Based solely on the MCR, ANDIE was very well

capitalised as at 31 December 2014. As noted in paragraph 6.13 above, the Capital Cover Ratio for the DICEL’s MCR

was 488% and based on this measure alone DICEL was also very well capitalised as at 31 December 2014.

_______________________________________________________________________________

20 Based on Form 15, line 19, less Form 13, lines 60 and 61 of ANDIE’s Returns to the PRA as at 31 December 2014

21 Based on Form 15, line 12, less Form 13, line 61, less Form 13, line 73 of ANDIE’s Returns to the PRA as at 31 December 2014

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6.41 I note that the ITB transaction will have had no immediate impact upon the ANDIE’s MCR. However, between 31

December 2014 and 31 March 2015 (the date on which the acquisition of ITB was finalised), ANDIE received a capital

injection from ANDIC Japan, part of which was used as finance for the acquisition, leaving the remainder (£80 million)

within ANDIE’s balance sheet as additional available capital resources.

ECR

6.42 On an ECR basis ANDIE was very well capitalised as at 31 December 2014. Although I have not seen a recalculation

of the ECR post the acquisition of ITB, all other things being equal the additional £80 million of available capital

resources that I mentioned in paragraph 6.41 above means that ANDIE remained very well capitalised post the

acquisition of ITB.

6.43 On both the MCR and ECR (free asset and Solvency I cover ratio) measures, the capital resources of ANDIE are

broadly reasonable when considered alongside the risks facing ANDIE.

ICA

6.44 In line with regulatory requirements, ANDIE makes regular ICAs of the capital it needs to retain in order to maintain its

ability to meet its obligations to a level of certainty prescribed by the PRA – the level of capital so determined is intended

to ensure that ANDIE is less than 0.5% likely to become insolvent at any time, allowing for one year’s trading (or the

equivalent percentage over a longer trading period) and the subsequent run-off to extinction of the liabilities.

6.45 The ICA is a complicated process that relies on an assessment of the risks in the business, extensive modelling and

management judgement to determine an appropriate figure. I have reviewed document (dated January 2014) produced

by ANDIE detailing its ICA as at 31 December 2012. It describes the work conducted in order to make the assessment,

including a discussion of the risks to which ANDIE is subject in the course of its business.

6.46 The document noted the view of the Group Risk Committee regarding the key stresses and scenarios to be considered,

the quantification of which can be compared with the ICA to develop a view of the strength of the ICA capital. The key

stresses identified were

Mass lapse in Italy;

The emergence new forms of latent claims (the document accepts that the costs of this are unquantifiable);

Strategy change enforced by parent;

Toyota Motor Europe ceases to use ANDIE as underwriter of its insurance products;

Loss of ANDIE’s Munich site;

Bank failure (with no bail-out);

Major currency exchange rate movement;

Large natural catastrophe, resulting in reinsurer defaults;

Political upheaval in Italy and/or Spain.

These key stresses were also identified in the ORSA Report as at 31 December 2013.

6.47 I have considered the appropriateness of the methodology and modelling techniques used by ANDIE in formulating its

ICA as at 31 December 2012. I have also considered the reasonableness of the key assumptions used in the

calculations and the results of these calculations. In assessing the reasonableness of the methodology, assumptions

and results, I have considered how they compare against my knowledge of the market. I consider the methodology

and modelling techniques used by ANDIE to be broadly appropriate and in line with current market practice. The

assumptions used within any ICA calculation are a matter of judgement.

6.48 A key set of assumptions employed in deriving the ICA amount are the correlations used for obtaining the diversification

benefits between risk categories (i.e. an allowance for the benefit that not all the risks within a risk category will

deteriorate at the same time).

Milliman Report


6.49 The derivation of the various dependency structures involves a large amount of judgement. Based on my high-level

review of the various dependency structures, the assumptions adopted by ANDIE for ICA purposes appear broadly

reasonable. However, given the level of judgment involved, considerable uncertainties surround the assessment of the

diversification benefits utilised in deriving the ICA amount. The document highlighted the sensitivity of the ICA to

assumptions regarding correlations between the risk categories – had ANDIE assumed 100% correlation then its ICA

would have been increased by £11 million (i.e. the ANDIE ICA allows for a risk diversification benefit of £11 million).

6.50 The ICA results are disclosed as required to the PRA but are not made publicly available. Therefore, I have not

disclosed in the Report the results of ANDIE’s ICA. In my view the results provided to me appear reasonable, but I

recognise that other results could have been generated using different sets of assumptions that would have been within

the bounds of reasonableness.

6.51 Nothing emerged from my review of the ICA document or from my discussions to give me concern as to the financial

strength of ANDIE, or for me to conclude that the ICA does not form a reasonable basis for assessing the capital

requirements of ANDIE. I have noted that the ICA assumes that reserves are held at best estimate levels. Therefore,

the explicit margin above best estimate within the reserves held may be included within the capital resources available

to meet the ICA. Based on the ICA amount as at 31 December 2012, I consider ANDIE to be very well capitalised

relative to its ICA.

6.52 I have not seen a stand-alone report relating to the ICA as at any later date. However, I have reviewed the ORSA

Report for ANDIE as at 31 December 2013 which lists various capital measures as at that date, including the ICA.

There is nothing within the ORSA Report that suggests to me that the ICA as at 31 December 2013 was calculated on

a basis materially different from that underlying the ICA as at 31 December 2012. On that basis, I also consider ANDIE

to have been well capitalised relative to its ICA as at 31 December 2013.

6.53 The ICA as at 31 December 2013 is the most recent ICA with which I have been provided. Bearing in mind the

magnitude of business written during 2014, the movement in the technical provisions between 31 December 2013 and

31 December 2014 and the general movement over the same period in asset values, I consider it very likely that, as at

31 December 2014, ANDIE would have been at least well capitalised relative to its ICA.

6.54 I have also not seen any ICAs relating to ANDIE that allow for the acquisition of ITB. However, I consider it very likely

that ANDIE would have been better capitalised relative to its ICA immediately post finalisation of the acquisition of ITB

than it had been as at 31 December 2014, due to the following:

the additional £80 million of capital resources that, as I mentioned in paragraph 6.41 above, was available to ANDIE

immediately post finalisation of the acquisition;

the ICA calculation takes into account new business to be written over the following 12 month period, during which

it is expected that the acquisition will result in roughly £50 million per annum of additional written premiums, all

relating to Private Motor business; and

the current level of profitability of the ITB business is such that I consider it to be very unlikely that the new business

from ITB, at the volume anticipated, will utilise fully the additional capital resource. All other things being equal, I

would expect the additional capital resource to be able to absorb ITB business, at the volume anticipated, for

several years.

ICG

6.55 The Regulator provided ICG to ANDIE. This guidance set out the results of the Regulator’s review of the ICA and the

minimum level of capital that it would have expected ANDIE to hold based on its view of the ICA and the risk

management framework of ANDIE. The ICG was intended to target the same level of confidence as described above

for the ICA, but it represented the FSA’s view rather than that of ANDIE.

Milliman Report


6.56 Due to limitations on the degree of disclosure permitted by the Regulator, I am not able to provide details of the results

of this exercise in the Report. However, based on the figures contained within ANDIE’s Returns to the PRA dated 31

December 2014 and upon the ECR as at 31 December 2014 as submitted to the PRA, I consider ANDIE to be more

than sufficiently capitalised as at the 2014 year-end relative to its ICG (as notified to it in a letter from the FSA dated 9

December 2009 – this is the most recent ICG received by ANDIE from the Regulator). Had the acquisition of ITB being

finalised on 31 December 2014, with the capital injection from ANDIC Japan occurring beforehand, then the increase

in the available capital resources would have been such that I would have considered ANDIE to be very well capitalised

as at that date relative to its ICG.

6.57 I note that the ICG issued on 9 December 2009 was based on the ICA as at 31 December 2008. At that stage, as

noted by the Regulator, the ICA was not fully embedded within the business and there was an over-reliance on the

actuarial function for its creation and substantiation. The margin between the ICA and the ICG as at 31 December

2008 was intended to reflect the Regulator’s perception of weaknesses in ANDIE’s control functions. As these

deficiencies have since been addressed, it would be expected that, all other things being equal, the margin between

the ICA and the ICG would have reduced since 31 December 2008, at least in percentage terms. Instead, the margin

has grown significantly.

6.58 The reason for this growth in the gap between the ICG and ICA amounts is that the ICG is defined as a percentage of

the ECR which itself is formula-driven and, unlike the ICA, does not fully reflect changes in risk profile. The ECR

increased by 41% between the end of 2008 and 31 December 2013, whereas the ICA increased by just 14% over the

same period. One reason for the ECR having increased is that ANDIE’s overall net written premium has grown, the

premium component of the ECR increasing in direct proportion to the increase in net written premium. However, that

growth has been largely in respect of ANDIE’s Italian motor portfolio, wherein the policies cover short-tailed risks such

as fire, theft, hail and other first-party damage perils (but not injury, which is subject to a separate line of business,

which ANDIE does not underwrite). Because these claims are generally paid very quickly, this business does not pose

as much risk of adverse reserve runoff as do other portfolios with slower payment patterns (e.g. UK motor, with a high

proportion of third party claims). The ICA reflects the lower risk nature of this additional business, whereas the ECR,

and consequently the ICG, does not. Were ICG to be reissued based on ANDIE’s most recent ICA then I would expect

it be less than that based on the earlier ICG percentage and the most recent ECR, and the corresponding Capital Cover

Ratio to be larger.

6.59 I note that the acquisition of ITB would not have had an immediate impact upon the magnitude of the ECR, but would

have resulted in an immediate increase to the ICA, as the ICA, unlike the ECR, allows for business expected to be

transacted over the following 12 months.

Solvency II

6.60 Although the Solvency II regime will not be implemented until the beginning of next year, I note that recent standard

formula calculations performed by ANDIE resulted in an SCR figure as at 31 December 2013 which was less than the

most recent ICA amount (ANDIE’s calculation using its own partial internal model, rather than the standard formula,

generated an SCR figure that was even less, although I note that, as at the time of me drafting this Report, ANDIE’s

partial internal model has not yet received PRA approval and that ANDIE is intending to use the standard formula

calculation to its SCR submission under Solvency II, at least initially). On this basis, I do not believe that the introduction

of Solvency II will greatly change ANDIE’s excess assets from those under the ICAS regime. Based on movements

during 2014 in other capital measures, I would expect ANDIE to have been well capitalised (if not very well capitalised)

relative to its Solvency II SCR as at 31 December 2014 and that the Capital Cover Ratio will have been enhanced post

the acquisition of ITB as I have estimated that the increase in the Solvency II SCR generated by the additional planned

revenue from ITB will have been more than offset by the addition in the available capital resources, following the capital

injection by ANDIC Japan.

Eurozone exposure

6.61 I note that ANDIE has little exposure, either direct or indirect, to non-UK sovereign debt. Therefore, ANDIE’s business

should be largely unaffected by any further deterioration in the sovereign debt within Eurozone countries (other than by

contagion, which would affect the business whether or not the Transfer were implemented).

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Conclusion

6.62 Overall, based on my review as described above concerning the excess assets of ANDIE as at 31 December

2014, I believe the policyholders of ANDIE currently enjoy a fairly high level of security.

ANDIE excess assets post-Transfer

6.63 The Transfer will result in little relative change in the assets available within ANDIE to meet the various capital

requirements, regardless of whether or not the Scheme had been approved prior to the Transfer.

6.64 The inclusion of the Transferring Business within ANDIE will increase the MCR, ECR, ICA and, by implication, the ICG.

As explained in paragraph 6.36 above, as at 31 December 2014 the pre-Scheme technical provisions, both gross and

net of reinsurance, of the Transferring Business were less than 1% of the equivalent technical provisions of ANDIE and

would be an even smaller proportion post-completion of the Scheme. Moreover, there is no underwriting risk attached

to the Transferring Business. I note that no equity risk was assumed in the ICA calculations as at either 31 December

2012 or 31 December 2013 in respect of ANDIE’s investments in group undertakings, the most significant of which

(prior to the acquisition of ITB) is DICEL. This was assumed appropriate because the outstanding liabilities are heavily

reinsured and because the investments are largely held in bank deposits. I have not seen any illustrative calculations

of the ECR, ECR, ICA or ICG post-Transfer but I believe that they would not be materially larger than their values pre-

Transfer, regardless of whether or not the Scheme had been approved or completed. Therefore, the corresponding

Capital Cover Ratios post-Transfer would also be very similar to what they had been pre-Transfer.

Conclusion

6.65 The Transfer will have only a marginal effect on the excess assets of ANDIE.

Position of Transferring Policyholders in the event of the insolvency of ANDIE

6.66 I need to consider and contrast the position of Transferring Policyholders in the event of the insolvency of ANDIE post-

Transfer.

Pre-Transfer

6.67 Pre-Transfer, were ANDIE to become insolvent, the Transferring Policyholders would not be directly affected, although,

as DICEL is a wholly-owned subsidiary of ANDIE and therefore a tangible asset of ANDIE, the ownership of DICEL

might change.

Post-Transfer

6.68 Post-Transfer, Transferring Policyholders would no longer have access to capital resources within DICEL. On the other

hand, post-Transfer the Transferring Policyholders who held direct policies would rank as creditors alongside those

existing ANDIE policyholders with direct policies. This would apply to both the direct Transferring Policyholders who

were subject to the Scheme, if approved, and to those unaffected by the Scheme. Moreover, ANDIE benefits from the

ANDIC Guarantee such that, if ANDIE were unable to meet fully its obligations to its policyholders (both those with

direct policies and those with reinsurance contracts), then ANDIC Japan would meet any shortfall. This guarantee

would remain in place post-Transfer but there are doubts whether it would also apply to the Transferring Policyholders.

To close this potential gap in the guarantees provided by ANDIC Japan, as explained in paragraph 4.12 above, the

Transferring Liabilities Guarantee has been agreed and put in place

Comparison of the position pre and post-Transfer

6.69 In essence, pre-Transfer, the funds currently within DICEL mean that there is negligible risk of DICEL becoming

insolvent and of the Transferring Policyholders not having their claims met fully. However, were DICEL to become

insolvent, the ILU policyholders would benefit from either the Branch Guarantee or the ILU Guarantee provided by

ANDIC Japan, but the JIA Direct policyholders, who are not covered by any parental guarantee, would be creditors of

DICEL.

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6.70 Post-Transfer, the likelihood of ANDIE becoming insolvent is also very small (albeit probably larger than the likelihood

of DICEL becoming insolvent pre-Transfer). In the event of the insolvency of ANDIE, the direct Transferring

Policyholders, regardless of whether or not they were subject to the Scheme (assuming its approval), would rank

alongside the existing direct ANDIE policyholders and would share with them in the shortfall of assets against liabilities,

albeit ranking ahead of some classes of liability. The Transferring Policyholders holding reinsurance contracts would

rank alongside the existing ANDIE policyholders holding reinsurance contracts, but behind the direct ANDIE

policyholders and direct Transferring Policyholders.

6.71 In the event of the Transferring Policyholders being affected by insolvency post-Transfer, the Transferring Liabilities

Guarantee would mean that their claims were met in full. The Transferring Liabilities Guarantee would be equivalent,

post-Transfer, to the existing ILU and Branch Guarantees in respect of the transferring ILU business but would provide

a guarantee where none had previously existed in respect of the JIA Direct business.

Conclusion

6.72 In the event that, subsequent to the Transfer Effective Date, ANDIE were to become insolvent then, based on

the financial position of DICEL as at 31 December 2014, the Transfer would disadvantage the Transferring

Policyholders of DICEL to a small extent (the effect on Transferring Policyholders holding reinsurance

contracts being greater than on those holding direct insurance contracts). However, as stated above, I regard

ANDIE to be both reasonably reserved and well-capitalised as at 31 December 2014, and therefore consider the

probability of ANDIE becoming insolvent in the next few years to be small. Taking this and the existence of

parental guarantees into account, I conclude that, overall, the security of the policyholders of DICEL

transferring to ANDIE under the Transfer is not affected to a material extent by the risk of ANDIE becoming

insolvent.

Position of Transferring Policyholders in the event of that one or more of the guarantees is unenforceable

6.73 I need to consider and contrast the position of Transferring Policyholders in the event of that one or more of the ILU

Guarantee, the Branch Guarantee, the ANDIC Guarantee and the Transferring Liabilities Guarantee are unenforceable.

The foreseeable circumstances in which this might occur are:

That ANDIE achieved a financial strength credit rating on its own, without reliance upon the ANDIC Guarantee, at

which point the ANDIC Guarantee would lapse; or

That ANDIC Japan were insolvent at which point all parties to whom it had obligations under any of the guarantees

that it had provided would be creditors of ANDIC Japan. The extent to which the obligations under the guarantees

were met would depend on the assets remaining in ANDIC Japan after allocation of assets to higher ranking

creditors. I have been informed by the management of ANDIE and by the lawyers advising ANDIE and DICEL in

respect of the Transfer that none of these guarantees takes precedence over any of the others. Based on my

reading of the guarantee agreements I consider this to be a reasonable view.

In the event that the ANDIC Guarantee lapsed due to ANDIE achieving a financial strength credit rating on its own,

there would be no change to the ILU Guarantee, the Branch Guarantee or the Transferring Liabilities Guarantee and it

would be expected that ANDIC Japan would continue to honour these.

6.74 The existence of the guarantees makes no difference to the level of the reserves, capital requirements or surplus of

either DICEL or ANDIE. The guarantees also have no impact upon customer service levels. However, the guarantees

could be relevant in the context of the Transfer, were ANDIE to become insolvent.

6.75 Were such an insolvency to occur before the Transfer, there would be no effect on the Transferring Policyholders. Were

it to occur after the Transfer then:

6.75.1 the direct Transferring Policyholders would stand alongside the direct ANDIE policyholders in the distribution

of the remaining assets of ANDIE, and would expect ANDIC Japan to make good any shortfall according to

the Transferring Liabilities Guarantee and those Transferring Policyholders with direct ILU policyholders would

claim for any shortfall from the ILU Guarantee; and

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6.75.2 the indirect Transferring Policyholders would rank behind the direct ANDIE and direct Transferring Business

in the appropriation of the remaining assets of ANDIE, although, as the indirect Transferring Business was all

written via the ILU, the indirect Transferring Policyholders would claim for any shortfall from both the

Transferring Liabilities Guarantee and either the ILU Guarantee or the Branch Guarantee.

6.76 If, in the event of a post-Transfer failure of ANDIE, the Transferring Liabilities Guarantee, Branch Guarantee and the

ILU Guarantee were not to be honoured, then the direct Transferring Policyholders would be disadvantaged, the degree

of their disadvantage being dependent on the degree to which ANDIE was insolvent and could not meet its direct

insurance liabilities. In such circumstances Transferring Policyholders holding reinsurance contracts would be even

more disadvantaged as their claims would only be met out of assets remaining in ANDIE after other assets had been

allocated to meet fully the liabilities in respect of the direct policies.

6.77 However, as noted in paragraph 6.72 above, I consider the likelihood of ANDIE’s insolvency in the near future to be

small. The circumstances in which none of the ILU Guarantee, the Branch Guarantee and the Transferring Liabilities

Guarantee would be honoured involve the insolvency of ANDIC Japan, which I also consider to be unlikely in the near

future. There is some, but not perfect, correlation between the risk profiles of ANDIE and ANDIC Japan. I consider the

likelihood of both ANDIE and ANDIC Japan becoming insolvent in the near future to be very remote, and therefore I

conclude that the current security of the Transferring Policyholders would not be materially adversely affected by the

Transfer, taking into account this possibility.

6.78 The enforcement or otherwise of the ANDIC Guarantee would not affect the security of the Transferring Business.

Conclusion on the financial strength for policyholders transferring to ANDIE

6.79 Based on the reserve strength and capital position of ANDIE, I have concluded that the Transfer will not

adversely affect, to any material extent, the security of the policyholders of DICEL transferring to ANDIE. I

have reached this conclusion whether or not the Scheme is approved either ahead of the Transfer or

afterwards.

THE CHANGE IN RISK EXPOSURE DUE TO THE TRANSFER

6.80 The outstanding claims within DICEL (both pre and post-Scheme) relate to longer tailed business than the average

profile of business written by ANDIE and, as such, the Transferring Business is probably more risky than that within

ANDIE. Moreover, the small amount of outstanding liability within DICEL is inherently more volatile than the much

larger amount of outstanding liability within ANDIE. This would be true whether or not the Scheme were approved.

Therefore, I believe that the Transferring Policyholders will be exposed to less risk post-Transfer than they are pre-

Transfer. The Transferring Policyholders will also benefit from the risk diversification provided by being part of a portfolio

with a wider range of risk types which are not wholly correlated with one another.

6.81 The asset profile of ANDIE is inherently riskier than that of DICEL. However, I do not regard the change in the risk

profile of the assets supporting the Transferring Business to be material. I note that DICEL and ANDIE have a common

investment strategy.

Conclusion

6.82 I am satisfied that the Transfer will not have a materially adverse effect on the security of the Transferring

Policyholder benefits through any change of the risk exposures.

THE CHANGE IN POLICY SERVICING DUE TO THE TRANSFER

6.83 The business being transferred to ANDIE is already wholly administered by ANDIM staff who will continue to administer

it after the Transfer Effective Date. Therefore, there will be no change to the administration of claims and policies

following the Transfer.

6.84 The business of ANDIE and DICEL is currently under the regulatory domain of the PRA and FCA in the UK and, after

the Transfer has been enacted, will continue to be so. Further, the Transferring Policyholders of DICEL will continue

to be protected by the FSCS as summarised in Section 2, insofar as they were eligible to do so before the Transfer.

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6.85 I have been told that the centralisation for the servicing of all policies written in the UK by entities within MS&AD is

being considered. The decision whether or not this should occur would be unaffected by the Transfer. I would not

anticipate that any such centralisation would materially affect the level of policy servicing currently enjoyed by existing

policyholders of DICEL or ANDIE.

Conclusion

6.86 I believe that the Transfer will not have a materially adverse effect on the policy servicing levels enjoyed by the

Transferring Policyholders compared with their current position.

Conclusion for the policyholders of DICEL transferring under the Transfer

6.87 I am satisfied that the Transfer does not affect in a materially adverse way either the security or the policy

servicing levels of the policyholders of DICEL transferring under the Transfer.

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7. THE IMPACT OF THE TRANSFER ON THE CURRENT ANDIE POLICYHOLDERS

7.1 Under the Transfer, the policyholders within DICEL, including those subject to the Scheme, if approved prior to the

Transfer Effective Date, will become policyholders of ANDIE. All assets (including DICEL’s outwards reinsurance

contracts with ANDIC Japan and the ANDIC Japan guarantees in respect of the ILU contracts) and other liabilities

remaining in DICEL will be passed from DICEL to ANDIE.

7.2 I have explained, in paragraph 6.36 above, that the technical provisions in respect of the liabilities to be transferred

from DICEL to ANDIE are very small relative to the size of the technical provisions currently within ANDIE, both gross

and net of reinsurance. Therefore, it is my view that any change to the reserve strength within ANDIE as a result of the

Transfer would be very slight in relative terms.

7.3 In paragraph 6.80 I explained that the liabilities being transferred were longer tailed than the liabilities within ANDIE,

and that, because of their small size relative to those in ANDIE, they were more volatile. Thus the risk profile in ANDIE

will be greater post-Transfer than pre-Transfer. However, the business to be transferred is small relative to the existing

ANDIE portfolio and so I consider it unlikely that any increase in the risk profile of the ANDIE reserves as a result of the

Transfer will be material. There would also be a small benefit to the ANDIE policyholders from the Transfer in that it

would widen the range of risk types, which would not be wholly correlated with one another, within the portfolio, thus

providing additional risk diversification.

7.4 Finally, in paragraph 6.64 above, I have stated that the pre-Transfer Capital Cover Ratios within ANDIE would not be

materially altered as a result of the Transfer.

7.5 Therefore, there will be no material change to the strength of the reserves, financial strength or risk exposures in ANDIE

as a result of the Transfer. The current ANDIE policyholders will continue to enjoy a high level of security in respect of

their benefits. No other changes in policy servicing or administration will result from the Transfer.

Position of current ANDIE policyholders in the event of the insolvency of ANDIE

7.6 Pre-transfer, should ANDIE become insolvent, the policyholders of ANDIE who have outstanding insurance claims

would become creditors of ANDIE. DICEL policyholders currently have no direct relationship with ANDIE and would

have no call on the assets of ANDIE (assuming DICEL itself is solvent DICEL policyholders should have no need to

resort to third parties for payment in respect of their outstanding liabilities).

7.7 Post transfer, Transferring Policyholders holding direct policies would be direct policyholders of ANDIE and would

therefore rank alongside those current ANDIE policyholders holding direct policies. Similarly, Transferring Policyholders

holding reinsurance policies would rank alongside those current ANDIE policyholders holding reinsurance policies, but

behind holders of direct polices. In the event of ANDIE becoming insolvent, the existing direct policyholders of ANDIE

would be better-off post-Transfer than pre-Transfer, as proportion of inwards reinsurance business within the

Transferring Business is larger than that currently within ANDIE; conversely, the existing indirect policyholders of ANDIE

would be worse-off post-Transfer than pre-Transfer. However, neither the advantage nor disadvantage would be to a

material degree; the liabilities to be transferred, whether or not the Scheme were approved pre-Transfer, are, as stated

above, small relative to the current liabilities within ANDIE..

7.8 The likelihood of ANDIE becoming insolvent in the near future is small (as noted in paragraph 2.21, an insurer that is

“sufficiently capitalised” relative to its ICA has a probability of insolvency within the next 12 months of no more than

0.5% – an insurer which, like ANDIE, is “well capitalised” relative to its ICA would have a smaller likelihood of insolvency

over the next 12 months); the likelihood of it becoming very insolvent in the near future is smaller still. I therefore

conclude that, in the unlikely event of the insolvency of ANDIE in the foreseeable future, the Transfer does not

disadvantage the existing ANDIE policyholders to a material degree.

7.9 None of the ILU Guarantee, the Branch Guarantee and the Transferring Liabilities Guarantee affect the security of the

current ANDIE policyholders. Were the ANDIC Guarantee not to be enforceable for any reason then the security of the

current ANDIE policyholders would be diminished, but the extent to which it would be diminished would not be affected

by the Transfer.

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Conclusion for the ANDIE policyholders

7.10 For the reasons discussed above, I am satisfied that the Transfer will not have a materially adverse effect on

the security of existing ANDIE policyholders. Further, the service levels provided to the policyholders of ANDIE

will not be adversely affected by the Transfer.

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8. OTHER CONSIDERATIONS

THE LIKELY EFFECTS OF THE TRANSFER UPON REINSURERS OF DICEL

8.1 In accordance with both paragraph 2.30(12) of the Policy Statement and paragraph 2.33 of SUP18, I have considered

the likely effects of the Transfer on the reinsurers whose reinsurance contracts are to be transferred by the Transfer

from DICEL to ANDIE.

8.2 As noted in paragraph 1.9 above, the run-off of DICEL’s business is currently handled by ANDIM. This will remain the

case post the Transfer Effective Date of the Transfer. I have no reason to expect any change in the standards of claims

handling or management. Therefore, the magnitude and timing of recoveries claimed against reinsurance contracts

relating to the business be transferred by the Transfer from DICEL to ANDIE will be unaffected by the Transfer.

8.3 The proportional reinsurance programme protecting DICEL has been wholly underwritten by ANDIC Japan. Therefore,

there is no likelihood that the reinsurance policies protecting DICEL will not be moved by the Transfer with the

corresponding liabilities to ANDIE. All matters between DICEL and ANDIC Japan regarding these reinsurance

arrangements are currently dealt with by ANDIE. This will remain the case post the Transfer Effective Date of the

Transfer.

8.4 The non-proportional reinsurance programme protecting DICEL has been written by a selection of third party reinsurers.

I have not been advised whether any of the Excess of Loss contracts within this programme have been written under

non-EEA law. However, as no further recoveries against the non-proportional programme have been assumed in the

technical provisions I consider that it would be immaterial were any of these contracts not to be transferred to ANDIE

as part of the Transfer.

Conclusion for the reinsurers of DICEL whose contracts of reinsurance are to be transferred by the Transfer

8.5 For the reasons discussed above, I am satisfied that the Transfer will not have a materially adverse effect on

the reinsurer of DICEL whose contracts of reinsurance are to be transferred by the Transfer.

THE APPROACH TO COMMUNICATION WITH POLICYHOLDERS

8.6 Regulations made under the FSMA require a communication regarding the proposed transfer to be sent to every

policyholder of the parties to the Transfer (“the Parties”). However, consideration may be given to the practicality and

costs of sending notices against the likely benefits for policyholders of receiving such communications. In order to

comply with both paragraph 2.53 of the Policy Statement and paragraph 2.46G of SUP18, the Parties would be

expected to notify the policyholders, or interested persons, at least six weeks before the date of the Court hearing at

which the application to sanction the Transfer will be heard.

8.7 The Parties’ approach to communicating the Transfer to affected policyholders is outlined in Section 4.

8.8 As set out in Section 3 above, DICEL has identified a significant number of policyholders within DICEL who might

conceivably be affected by the Transfer, although the likelihood of claims emerging from most of these policyholders is

considered to be low by DICEL, due to the length of time since the covers ceased. These numbers do not include

policyholders whose contracts have been novated or commuted (e.g. the JIA Fronted Policies). There are 1.4 million

policyholders currently in-force within ANDIE, of whom three are also DICEL policyholders (these relate to JIA policies).

The level of data that is held on the policyholders varies by nature of the customer relationship.

8.9 Measured by technical provisions, both gross and net of reinsurance, the portfolio transferring into ANDIE is much

smaller than ANDIE’s own business. Accordingly, the Parties do not intend to notify directly any of the ANDIE

policyholders (other than those who would be notified through being DICEL policyholders – see below) of the proposed

transfer, as it considers that any such direct communication would incur a disproportionate cost relative to the effect of

the Transfer on those policyholders.

8.10 The Parties will communicate with DICEL policyholders as follows:

Letters to:

o Known holders of DICEL London Market Reinsurance policies that would be included within the Scheme

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o Known Brokers or other agents who had represented holders of DICEL London Market Reinsurance policies

that would be included within the Scheme

o Known Brokers of DICEL risks covered by line-slips;

o DICEL policyholders with claims outstanding as at the date of the directions hearing (a letter would also be

sent to any DICEL policyholder who reported a claim subsequent to that date, as soon as possible after the

claim had been reported); and

o All known holders of JIA Direct or ILU Direct Liability policies.

Indirectly with all other policyholders via notices in the London, Edinburgh, and Belfast, and in a selection of

newspapers, including Lloyd’s List and various marine and insurance publications.

It is intended to support this communication with a “help-line”, contactable by post and telephone, which will be

dedicated to responding promptly to any queries arising from the communication.

8.11 I have seen calculations that indicate that communicating with ANDIE’s current policyholders would cost roughly £1.4

million, a cost that would increase to roughly £4.2 million were communication extended to all past policyholders. These

calculations appeared reasonable to me. In view of the size of the portfolio being transferred I consider that

communicating directly with ANDIE policyholders would be disproportionate. I have also discussed with ANDIE and

DICEL the potential cost of communicating directly with the DICEL policyholders who are not already due to be

contacted. These are essentially holders of ILU Direct Marine Hull and Cargo policies. Records for this class indicate

over 12,240 policies (all but a handful of which relate to commercial vessels) and it would be reasonable to assume

that the number of policyholders is a similar (but smaller) number. The cost of notifying these policyholders directly

would be roughly £25k. However, as the policy records do not necessarily record the names and addresses of the

policyholders (instead having full particulars on the insured vessel), a substantial cost would be incurred locating the

name and current address of each policyholder. There have been no direct marine claims for over 10 years and there

are no open claims. In the circumstances I am satisfied that the proposed approach to communication with

policyholders in respect of the Transfer is both proportionate and reasonable.

SERVICE STANDARDS

8.12 Administrative services for ANDIE and the business being transferred to ANDIE are currently largely undertaken by

ANDIM staff according to common service standards and there will be no change to the administration of claims and

policies, or to the standards applied, following the Transfer. Those policies and claims in which DICEL participates

which are currently serviced by LMCS or by Xchanging will continue to be serviced by LMCS or by Xchanging after the

Transfer.

8.13 The claims service standards for the business of ANDIE are required to meet regulatory standards and requirements

including (as appropriate) TCF criteria. These arrangements will continue following the implementation of the Transfer.

8.14 The Transfer will have no effect on the service standards experienced by existing ANDIE and DICEL policyholders.

8.15 Therefore, I am satisfied that there should be no changes to the service standards for transferring and non-transferring

policyholders as a result of the Transfer.

ASSETS

8.16 The assets to be transferred to ANDIE, aside from the reinsurers’ share of the technical liabilities and the guarantees

provided by ANDIC Japan, principally comprise cash, intra-group payments, short term bonds and similar financial

instruments. ANDIE’s balance sheet is more diverse, as befits a larger organisation, but also contains large amounts

of cash, short term bonds and similar financial instruments. The investment strategies for DICEL and ANDIE are the

same. Therefore, I am satisfied that the transfer will not materially affect the risk profile of ANDIE’s balance sheet.

8.17 The Court has the power to order (and the Transfer provides for) the transfer of the relevant outwards reinsurance

contracts of DICEL to ANDIE. On the basis that the relevant outwards reinsurance contracts of DICEL are transferred

as part of the Transfer, the net (of reinsurance) positions of ANDIE should not be adversely impacted as a result of the

Transfer.

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OPERATIONAL PLANS AND CHANGES IN ASSETS AND LIABILITIES UP TO THE TRANSFER EFFECTIVE

DATE

8.18 The balance sheets show amounts as at 31 December 2014. I have chosen this date because it is the latest date for

which audited financial information is available.

8.19 I expect that the current activities of ANDIE and DICEL have continued, and will continue, between 31 December 2014

and the Transfer Effective Date. ANDIE has continued, and will continue, to write new business, albeit with effect from

31 March 2015 with additional business being written in respect of ITB, and has continued, and will continue, to

administer business for both itself and DICEL. I do not consider that any material additional risk to any group of affected

policyholders will emerge as a result of the continuation of normal business, other than the additional risk generated by

business written post acquisition of ITB, although, as explained in paragraph 6.60 above, I have estimated that the

additional capital requirements relating to that risk will have been more than offset by the post 2014 year-end capital

injection from ANDIC Japan.

8.20 It is expected that ANDIE will continue to operate after the Transfer Effective Date in the same way as it currently does,

albeit with an increase in future new business following the acquisition of ITB. As DICEL will retain no liabilities after

the Transfer Effective Date it is intended that it be dissolved under the Part VII Court Order. In practice, DICEL will not

be dissolved immediately, rather it will be dissolved without winding up from the date which is the later of three months

from the Effective Date and the date on which the Insurance Regulator cancels DICEL’s permissions granted under

Part 4A of FSMA. As it must remain authorised in order to effect the Transfer, it must retain the requisite regulatory

capital until at least the time by which the Transfer has been fully implemented. Only then will the PRA permit DICEL

to be de-authorised, thereby enabling it to be dissolved. As mentioned in paragraph 4.15 above, it is intended that

DICEL will retain its share capital of £10 million, which is expected to be more than sufficient to enable DICEL to meet

its post-Transfer regulatory capital (should the regulatory capital requirements exceed the amount of share capital then


requirements), until it has been de-authorised and can be dissolved.

8.21 I believe that it is unlikely that any events occurring between 31 December 2014 and the Transfer Effective Date would

affect any conclusion that I have reached based on my review as at 31 December 2014.

8.22 I have asked management of both DICEL and ANDIE whether there exist any plans (other than those already discussed

elsewhere in this Report) for either operation that could be expected to change materially the solvency capital position

of either company or the standards of service provided to policyholders and claimants, or which could change materially

the risk profile of either operation. I have been told that there are none, and that the business plans underlying the

latest set of solvency capital calculations that I have been shown remain in place.

8.23 A short time before the final Court hearing, I will consider the extent to which actual changes in assets and liabilities

have been in line with expectations (relative to the position as at 31 December 2014) and hence whether there have

been any changes (including those associated with current economic conditions) that would affect my overall opinion,

and, if necessary, I will report on these separately.

What would happen were the Scheme not to proceed?

8.24 As already discussed, the Transfer is not dependent on the prior approval of the Scheme. Therefore, even were the

Scheme not to proceed, the application for approval of the Transfer would still be made.

What would happen were the Transfer not to proceed?

8.25 I have discussed with ANDIE and DICEL management what would happen were the Transfer not to proceed. There

are various possibilities, depending on the circumstances.

8.26 If the Transfer were not sanctioned, DICEL would remain in place for an indefinite period. The Scheme does not depend

on the Transfer – if the Transfer were not sanctioned, the Scheme would proceed (subject to approval) with DICEL as

the single Scheme Company providing the Continuation of Coverage. However, DICEL management does not believe

that this would be an efficient use of resources since the cost of administering DICEL far exceeds the cost of the

outstanding claims. Also, a disproportionate amount of capital is tied up in DICEL which could be used more

productively the parent insurer, ANDIE. The alternatives would be to:

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8.26.1 Continue the existing programmes of commutations and novations. Such techniques alone would not enable

DICEL management to conclude that the run-off has been completed, since it is not possible to deal with all

policies in this way. Continuing these programmes would also not reduce administration costs to any significant

extent and as a result the aforementioned imbalance between administration and claims costs would increase.

8.26.2 Sell DICEL or transfer its liabilities externally: initial enquiries indicate that DICEL’s technical provisions are

too small to make either of these options economically viable. Furthermore, DICEL and ANDIE have no

enthusiasm of selling the liabilities in respect of JIA policyholders (which is business that ANDIE currently

underwrites) to a possible competitor.

What would happen were a policyholder to not recognise the Transfer or a policy to be otherwise excluded by the Court?

8.27 DICEL and ANDIE management consider that holders of DICEL policies written under non-EEA Law will be bound by

the Transfer and will have full rights against ANDIE which will be bound to respond to them. They also consider it

unlikely that holders of policies within DICEL written under non-EEA law would decline to recognise the power of the

Court to authorise the Transfer from DICEL to ANDIE as that would imply that they would prefer for their policies to stay

within a much smaller insurance company that was deep into run-off. However, the Court may decide, for some reason,

that one or more policies should be excluded from the Transfer. If this were to happen then ANDIE and DICEL would

make their best efforts to novate or to commute any such policies as soon as possible. Pending the conclusion of such

efforts, these policies would remain liabilities of DICEL which therefore could not be dissolved. DICEL would need to

retain funds in excess of its liability reserves equal to at least the minimum solvency capital requirement.

8.28 The security of benefits available to any such policyholder remaining within DICEL would be very high. However, as

DICEL is wholly owned by ANDIE, the non-dissolution of DICEL would not affect the value of the assets within ANDIE

and hence would not affect the security of benefits available to either the Transferring Policyholders or the policyholders

already within ANDIE compared with their position had all policies been transferred by the Transfer and DICEL then

dissolved.

SOLVENCY II

8.29 As described in Section 2, the regulatory solvency reporting requirements for EU insurers and reinsurers are about to

undergo a major overhaul. The date by which the changes for firms will be implemented is 1 January 2016.

8.30 Until recently DICEL had done little to prepare itself for Solvency II as its management had expected the Transfer to

take place well ahead of 1 January 2016 and the company then to be dissolved. Management therefore expected it to

be no longer operational by the time that Solvency II is implemented. DICEL management now accepts that DICEL will

still be operational as at the date on which Solvency II will be implemented and is therefore taking steps intended to

ensure DICEL’s compliance with Solvency II by the 2015 year-end. DICEL has recently appointed Moore Stephens

LLP (“Moore Stephens”) to provide support to DICEL in its preparations for Solvency II. As part of its engagement

Moore Stephens has agreed to develop tools with which to produce DICEL’s SCR, to set up DICEL’s Solvency II

balance sheet and to generate 3-year SCR projections, all by mid-October 2015. DICEL will then instruct Moore

Stephens regarding what further work Moore Stephens should do to help DICEL become Solvency II compliant by the

year-end.

8.31 I am informed that ANDIE’s preparation for Solvency II is currently on schedule. It has been developing a partial internal

model (“PIM”) for the calculation of its solvency under Solvency II (the PIM would calculate the underwriting risk, with

other risks such as market and credit being calculated using the standard formulae). Initially ANDIE applied to, and

was accepted by, the FSA for inclusion in the Internal Model Approval Process (“IMAP”). ANDIE then withdrew from

IMAP when the FSA announced that effectively its resources would be focused on the ten largest firms. ANDIE intends

to reapply for approval of its PIM but that is unlikely to be granted until after the January 2016 implementation of

Solvency II. In the meantime, ANDIE plans to use standard formulae to calculate all of its risks.

8.32 ANDIE ran a “gap analysis” in December 2012 that indicated 80% completion of its preparations. ANDIE informed the

PRA in January 2014 that the majority of outstanding preparatory work related to reporting under Pillar 3 but that,

subject to final clarification of requirements, it expected to be production-ready by the end of 2014 and shadow running

during 2015.

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8.33 ANDIE considers itself sufficiently advanced in its preparations to be ready for the implementation of Solvency II in

January 2016. However, it is currently re-reviewing all aspects of its preparation, including those items that were

considered “green” by its December 2012 gap analysis, and will be reporting on the outcome of this review to the Group

Risk Committee as well as to the Board. An internal audit review of ANDIE’s processes and controls in relation to

Solvency II and its readiness for implementation has been carried out. The review identified both good practices and

also some issues that needed to be dealt with, and action plans have been put in place to address these. A further

similar internal audit review is scheduled for later in 2015.

Conclusion

8.34 I am satisfied that, as the Transfer does not alter materially the overall risk in ANDIE, it will not impact ANDIE’s

approach to meeting and complying with Solvency II requirements. In my view, the additional costs involved

in complying with Solvency II will not impact in a materially adverse way the security and policy serving levels

of any group of policyholders affected by the Transfer.

PENSION TRANSFER

8.35 DICEL does not employ staff; rather, as explained in paragraph 1.9 above, all of DICEL’s staffing needs have been met

by ANDIM. Insofar as there will be staffing needs in respect of the DICEL after the Transfer these will continue to be

met by ANDIM. Therefore, I do not believe that there will be any staff transfers as a result of the Transfer and hence

no pensions or TUPE consequences.

TAX

8.36 I have been informed by ANDIE that the Transfer is expected to have minimal tax implications. While this expectation

does not appear to me to be unreasonable I have been unable to verify it. However, I note that both ANDIE and DICEL

have brought forward tax losses in their balance sheets. Therefore, insofar as there would be corporation tax liabilities

to either or both of ANDIE and DICEL arising from the Transfer, I would expect these to be offset, wholly or in substantial

part, by the brought forward tax losses in the balance sheet. In view of the sums involved, I would also expect any tax

implications to the balance sheet to be small, regardless of the ability or otherwise to use brought forward tax losses.

Therefore, I consider it reasonable to assume that the Transfer will not have tax implications that would adversely affect

any policyholders impacted by the Transfer to a material extent.

COSTS OF THE TRANSFER

8.37 The external costs of the Transfer, while initially being met by DICEL and ANDIE, will be reimbursed by ANDIC Japan.

I have not been provided with an estimate of the total costs of the Transfer but recognise that they are one-off in nature

and would not expect them to be material in the context of ANDIE’s capital as at 31 December 2014.

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9. CONCLUSIONS

9.1 In summary, in my opinion, provided the proposed Transfer operates as intended, and I have no grounds for believing

that they will not do so:

The security of benefits of policyholders of DICEL and ANDIE will not be materially adversely affected by the

implementation of the Transfer on the Transfer Effective Date; and

The Transfer will have no impact on service standards (operated in accordance with TCF criteria) experienced by

the policyholders of DICEL and ANDIE.

9.2 In reaching this opinion I have applied the following principles (as set out in the Transformations TAS):

I have considered which parties might be affected by the Transfer and in what way. I have documented my findings.

Although I have not performed my own modelling, rather I have used the results of models developed and operated

within DICEL and ANDIE, I have reviewed documentation describing the models, describing and justifying the

assumptions underlying those models, and explaining the derivation of the data underlying the models and

assumptions, in particular explaining how its accuracy, completeness and relevance has been verified.

To the best of my knowledge there are no beneficiaries for whom the impact of the Transfer has not been

considered.

I have considered how the Transfer might lead to any changes in the material risks to the benefits of the different

interested parties.

I have considered the impact on the actuarial information provided to me of DICEL and ANDIE having adopted

alternative plausible assumptions, for example in the scenario and sensitivity tests within ANDIE’s ICA calculation.

Derek Newton

Fellow of the Institute and Faculty of Actuaries

05 November 2015

Milliman Report


APPENDIX A DEFINITIONS

Accident Year The year to which a claim is allocated based on the date of that accident/claim

Admissible

Assets

Assets valued in accordance with applicable regulations, which can be taken into account for the purposes

of demonstrating that insurance companies – or the separate long-term and other-than-long-term funds

within insurance companies - meet their solvency requirements

ANDIC

Guarantee

A Deed of Guarantee, dated 19 March 2008, between (predecessor companies of) ANDIC Japan and

ANDIE, whereby ANDIC Japan has guaranteed that, were ANDIE to fail to fulfil its obligations to its

policyholders, ANDIC Japan would make good any shortfall

ANDIC Japan Aioi Nissay Dowa Insurance Company Limited

ANDIE Aioi Nissay Dowa Insurance Company of Europe Limited

ANDIM Aioi Nissay Dowa Insurance Management Limited

APH Asbestos, pollution and health hazard

The Auditor’s

Report

A report prepared by ANDIE’s auditor entitled Final Report to the Audit Committee on the 2014 Audit and

dated 17 March 2015

Branch

Business

The marine reinsurance business written by the UK branch of Nissay Dowa General Insurance Co Limited

and transferred to DICEL under Part VII of the Financial Services and Markets Act 2000 in December

2006 being a general marine account of facultative hull and cargo and treaty business written through UK

brokers between 1968 and 1977

Branch

Guarantee

The guarantee dated 21 September 2006 put in place for the Branch Business as part of the Part VII

Transfer of the branch policies to DICEL in 2006 by Nissay Dowa General Insurance Co Ltd, Japan, now

ANDIC Japan

Capital Cover

Ratio

The ratio of the actual capital that the entity under consideration holds to the minimum regulatory solvency

capital requirement

CER Claims Equalisation Reserve: a reserve that may be included within an insurer’s balance sheet for the

purpose of smoothing volatility from period to period in the cost of claims

Continuation of

Coverage

Continue of liability under the Scheme for future claims due to types of claim that are unknown, and for all

claims under policies that are unknown, as at the date of the Scheme

Correlation Correlation (in the context of the Report) is a number that describes the statistical relationship between

two variables (e.g. equity prices and interest rates)

The Court The High Court of Justice of England and Wales

DICEL Dowa Insurance Company (Europe) Limited

ECR Enhanced Capital Requirement: A more risk sensitive capital requirement (than the MCR) for UK insurers

as measured by the PRA under the ICAS regime

EML The estimated maximum loss or cost of a claim or a claim event

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Excluded Policy A contract of insurance or reinsurance (if any) written or assumed by DICEL under which any liability

remains unsatisfied or outstanding as at the Transfer Effective Date and which, for any reason, is not

transferred by order of the Court pursuant to Part VII of FSMA on the Transfer Effective Date

FCA The Financial Conduct Authority which, along with the PRA, regulates financial services in the UK

FinSA The Financial Services Act 2012

FOS The Financial Ombudsman Service which provides private individuals (and micro enterprises) with a free,

independent service for resolving disputes with financial companies

FSA The Financial Services Authority, the predecessor as regulator to the FCA and PRA

FSCS The Financial Services Compensation Scheme, a statutory “fund of last resort” which compensates

customers in the event of the insolvency (or other defined default) of a financial services firm authorised

by the PRA or FCA, subject to certain eligibility rules

FSMA The Financial Services and Markets Act 2000

IBNR reserves These are reserves in respect of claims which relate to claim events that have occurred before the

valuation date but which were still to be reported to the insurer as at that date. For the purposes of this

Report they also include reserves in respect of any perceived shortfall between the projected ultimate

costs and the case estimates for claims already notified

ICA Individual Capital Assessment: insurer’s own assessment of the capital it needs for regulatory purposes in

order to mitigate appropriately the risks to which it is exposed and that could otherwise cause it to be

unable to meet its liabilities as they fall due

ICAS Individual capital adequacy standards: the ICAS regime is the solvency regime pertaining to insurers

regulated by the PRA and FCA until its replacement by Solvency II with effect from 1 January 2016

ICG Individual Capital Guidance: the PRA’s assessment of the minimum level of capital that it would expect an

insurance company to hold based on its view of the insurance company’s ICA and risk management

framework

ILU The Institute of London Underwriters, the former trade association for the company market specialising in

marine, aviation and transportation insurance business in London; established in 1884, the ILU required

guarantees for overseas company members writing marine insurance and reinsurance business in

London. When the ILU and LIRMA (the London Insurance and Reinsurance Market Association which was

the trade association acting for non-marine insurance companies) merged in December 1998 to form the

IUA (the International Underwriting Association of London), the ILU retained responsibility for the parental

guarantees given by companies who had been members of the ILU. The ILU’s then members ceased their

membership of ILU and became members of the IUA

ILU Guarantee The ILU Guarantee is the guarantee now supported by ANDIC Japan in respect of the London Market

Reinsurance Business written by DICEL. This guarantee was originally given on 15 October 1976 by Dowa

Fire & Marine Insurance Co Ltd, Japan which merged with Nissay General Insurance Co Ltd, Japan to

form the Nissay Dowa General Insurance Co Ltd which then merged with Aioi Insurance Co. Ltd to form

ANDIC Japan. Generically, an ILU guarantee was the guarantee required by the ILU for overseas company

members writing marine insurance and reinsurance business in London

ILU Direct

Liability

business

This business was a direct portfolio written by DICEL in London between 1977 and 1985, primarily via line

slips, with DICEL taking small shares following the market

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IMAP Internal Model Approval Process

ITB Insure The Box Group

JIA Direct

business

This business was written between 1988 and 2010, primarily as wholesale combined policies issued on a

coinsurance basis to Japanese commercial entities. There were also thirteen personal lines policies

issued to Japanese individuals who had been seconded by their employers to the UK to cover their

personal possessions

LMCS London Market Claims Services Limited

London Market

Reinsurance

Business

The facultative and treaty reinsurance business written by DICEL through the ILU between 1977 and 1985

plus the Branch Business, being part of the Transferring Business.

MCR Minimum Capital Requirement: the required minimum level of capital under Solvency I rules. See

Appendix D for further details

MCR2 Minimum Capital Requirement: the required minimum level of capital under Solvency II rules

MoU The Memorandum of Understanding that has been established between the PRA and the FCA, which sets

out the high level framework by which the two regulatory bodies will co-ordinate

MS&AD MS&AD Insurance Group Holdings, Inc., the ultimate parent company of ANDIE, ANDIM, ANDIC Japan

and DICEL

ORSA Own Risk and Solvency Assessment: this is a key part of Solvency II and comprises a set of processes

constituting a tool for decision-making and strategic analysis. It aims to assess, in a continuous and

prospective way, the overall solvency needs related to the specific risk profile of the insurance company.

OSP Third party outsourced service provider

The Parties These are the parties to the Transfer

The Policy

Statement

The Statement of Policy issued by the PRA entitled The Prudential Regulation Authority’s approach to

insurance business transfers, issued in April 2015

PPO Periodical Payment Order: a PPO may be imposed by a UK court as part of the settlement of an injury

claim, and comprises a stream of future payments intended to meet the future care costs

PRA The Prudential Regulation Authority which, along with the FCA, regulates financial services in the UK

PRA Returns Accounts, balance sheets, abstracts and statements relating to the business of an insurance company

required under PRA rules to be submitted periodically to the PRA. Prior to May 2013, companies were

required to submit this information to the FSA

The Regulator In the Report this should be taken to refer to the FCA and/or the PRA and/or one or more of their

predecessors as regulators of financial services in the UK

Reinsurance An arrangement with another insurer whereby risks are shared (or passed on)

The Report This report

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Report

Summary

A summary of the Report, prepared specifically to be included a document that also summarises the

Transfer and which will be made available to policyholders of ANDIE and DICEL, to reinsurers of DICEL,

and to others who might be affected by the Transfer

The Scheme The Scheme of Arrangement proposed by DICEL in respect of which an application for sanction will

proceed in parallel with the Parties’ application for sanction of the Transfer. The terms of the Scheme are

outlined in paragraphs 4.6-4.9 above

Scheme

Effective Date

The date on which the Scheme becomes effective

SCR Solvency Capital Requirement: within the Report, “SCR” is used solely in the context of Solvency II and is

defined as the amount of capital required to ensure continued solvency over a 1 year timeframe with a

probability of 99.5%

Solvency I The system for establishing minimum capital requirements for EU insurers under relevant EU Directives

presently in-force

Solvency II A codification and harmonisation of EU insurance regulation, primarily concerning the amount of capital

that EU insurers must hold to reduce the risk of insolvency. Solvency II will be effective from 1 January

2016 and will replace Solvency I and existing national solvency regimes such as the ICAS regime in the

UK

SUP18 Section 18 of the FCA Supervision Manual, which covers much of the same material as the Policy

Statement issued by the PRA

Supplementary

Report

A report that will be prepared by the Independent Expert shortly before the date of the Court hearing at

which an order sanctioning the Transfer will be sought, which will cover any relevant matters which might

have arisen since the date of the Report

Technical

Provisions

Liabilities determined for regulatory purposes. In particular, the provisions for the ultimate costs of settling

all claims arising from events which have occurred up to the balance sheet date, including provision for

claims incurred but not yet reported, less any amounts paid in respect of these claims; plus the provisions

for future claims arising on unexpired periods of risk

TCF Treating Customers Fairly, which is espoused in the six consumer outcomes set out in a document,

published by the FSA in July 2006, entitled “Treating customers fairly – towards fair outcomes for

consumers”, and reiterated subsequently by the FCA in its “Journey to the FCA” document

The Transfer The insurance business transfer agreement by which it is proposed that all assets and liabilities of DICEL

will be transferred to ANDIE

Transfer

Effective Date

The date on which the Transfer becomes effective

Transferring

Business

The business to be transferred from DICEL to ANDIE by the Transfer which comprises all business

underwritten by DICEL and all Branch Business that has not already been commuted, novated, or subject

to a now closed Scheme of Arrangement. Transferring Business shall include the policies that are the

subject of the Scheme (whether or not the Scheme is sanctioned by the Court) but shall exclude any

Excluded Policy or Policies

Transferring

Liabilities

Guarantee

The guarantee dated 13 February 2015 entered into by ANDIC Japan to secure ANDIE’s obligations to

the Transferring Policyholders in respect of the Transferring Business

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Transferring

Policyholders

The policyholders of the Transferring Business whom the Transfer would move from DICEL to ANDIE

UPR The reserve within the technical provisions in respect of unearned premiums

URR An additional reserve which may be included within the technical provisions in respect of unexpired risk

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APPENDIX B TERMS OF REFERENCE

B.1. The Independent Expert’s Report will consider the terms of the Transfer generally and the effect which the Transfer will

have on the holders of insurance policies issued by DICEL and by ANDIE (“the Companies”).

B.2. The Independent Expert’s review and Report will address generally the way in which of DICEL and ANDIE has

conducted its insurance business, taking into account the particular circumstances of each class of business to be

transferred. In summary the review and Report will consider the merits of the Transfer from the perspective of each of

the groups of policyholders affected by the Transfer and deemed to require separate consideration. This will involve

any policyholders remaining in DICEL, policyholders being transferred and the existing policyholders of ANDIE.

B.3. The Independent Expert will carry out the work necessary to enable him to form an opinion on the Transfer. This is

likely to include, amongst other things, all or part of the following:

B.3.1. Production and provision of a data request detailing the information Milliman requires from the Companies in

order to provide services under the Transfer.

B.3.2. Support to the Companies’ dialogue with the Regulator and provision of information required by that dialogue

including:

information about the Independent Expert, Milliman and its clients in order that the Regulator may assess

whether it is appropriate for Milliman to carry out this work; and

information to enable the Regulator to assess whether the proposed Independent Expert is suitably

qualified for the role.

B.3.3. Agreement of the scope of Milliman’s work with the PRA, including the provision of the documented agreed

scope.

B.3.4. For each of the Transferor and Transferee, an analysis (where necessary) of the:

liabilities being transferred (including reserves for incurred but not reported claims, unearned premium

reserves and any additional reserve for unexpired risks), including the likely scope for deteriorations in the

technical reserves (i.e. the likelihood and extent to which reserves may prove inadequate);

assets in respect of outwards reinsurance;

bad debt provision in relation to outwards reinsurance;

allocation of reinsurance protection to different groups of policyholders, if appropriate;

other assets and liabilities to be transferred;

current profitability; and

exposure to catastrophic losses.

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B.3.5. Comparison of the solvency positions of the Companies, including consideration of any intra group reinsurance

contracts and/or guarantees that may be provided, with the aim of comparing the current solvency position

with the anticipated solvency position immediately after the Transfer is implemented and after other planned

material corporate changes that the Companies have advised to the Independent Expert are completed. The

consideration of the solvency position of these companies is expected to be carried out by comparing available

capital against regulatory minimum capital based on Solvency I, ICA and the proposed Solvency II (as

presently understood) regulations, and taking into account the qualitative and quantitative aspects of these

solvency regimes (using, but not limited to, the Companies’ internal models for ICA and Solvency II purposes)

produced by the Companies for the Transferor and the Transferee (as necessary).

B.3.6. Analysis of publicly available information on the financial strength of each of the Transferors and Transferees,

where available, including rating agency reports, analysts’ reports annual report and accounts and financial

statements.

B.3.7. Analysis of the effect of the Transfer on non-financial aspects, including existing policyholder service levels

and agreements, for the policyholders remaining in the Transferor (if any), policyholders being transferred and

the policyholders of the Transferee.

B.3.8. Discussion with the Companies regarding the initial findings in respect of the Transfer, which may involve the

provision by Milliman of exhibits documenting various findings from its work including where appropriate, but

not limited to, work carried out in items D to G above.

B.3.9. Discussion with the Regulator as required, in line with the discussions with the Companies in item H above.

B.3.10. Production of the Report, for submission to the Court.

B.3.11. Production or approval of a summary of the Independent Expert Report that forms part of the Transfer

summary for inclusion within letters to policyholders.

B.3.12. Production of the Independent Expert Update Report, for submission to the Court.

B.3.13. If required attendance at Court hearings. For the avoidance of doubt, Milliman’s fee estimates included in this

agreement include its attendance at an uncontested Court hearing. Its costs associated with attendance at

Court for additional Court hearings or those extended owing to parties contesting the Transfer, and for its

preparation time for contested hearings will be charged in addition at Milliman’s hourly rates.

B.4. Milliman will liaise with the Companies and their professional advisors where necessary, in order to complete its work

under the Transfer. The Independent Expert will request from the Companies the information required by the

Independent Expert which is necessary to complete his work.

B.5. The scope of Milliman’s services and any deliverables will be limited solely to the services and deliverables set out in

this agreement. Milliman will make no representation in respect of, and will not consider any other aspect of, the

Companies’ operations.

These terms of reference were reviewed by the PRA when it approved the appointment of Derek Newton as Independent Expert

in respect of the Transfer.

Milliman Report


APPENDIX C CV FOR DEREK NEWTON

C.1. Derek Newton is a principal and actuarial consultant in Milliman's London office. He is co-leader of Milliman's UK

General Insurance practice. He joined the firm in 2003.

C.2. Derek started his actuarial career in 1983. Since 1994 he has worked exclusively within General Insurance, where he

has experience with reserving, mergers and acquisitions (M&A) activity, portfolio transfers, Solvency II, the underwriting

process, management reporting, designing and evaluating non-traditional risk transfer mechanisms, capital modelling

and evaluation, and the design and construction of model office software. His experience includes:

Providing a full actuarial reserving service to several Lloyd's syndicates. These syndicates were multi-line

insurance providers, writing direct and reinsurance covers, covering short-term and long-term, marine and non-

marine, property and casualty risks. The service included providing statements of actuarial opinion for Lloyd's and

for the relevant US insurance departments, and assisting with the preparation of internal capital assessments, in

accordance with the relevant solvency requirements

Providing independent assessments of the unpaid claims liabilities of several UK motor insurers, both on a regular

and a one-off basis

Leading a review of the reserving processes, procedures and practices for a major UK insurer, covering both

commercial and personal lines

Leading assignments to review the underwriting effectiveness of several insurance operations, both commercial

and personal lines

Leading teams reviewing reserves for major divisions of global reinsurers

Providing expert-witness support to lawyers involved in legal action concerning insurance companies both in the

UK and elsewhere

Developing a stochastic model to help a motor insurer evaluate the benefits of a multi-year funding layer as a

replacement for more conventional layers of reinsurance cover

Leading the development of an innovative strategic planning tool for a UK insurer

Leading the review of reserves of various Europe insurers as part of due diligence assignments

Providing advice and support to UK insurers preparing for Solvency II.

C.3. Of particular relevance in this context, Derek acted as the independent expert in the Part VII transfer of the general

insurance business of RL(CIS) limited to CIS General Insurance Ltd, a transfer which was sanctioned earlier this year.

In addition, Derek has been involved (mostly as peer reviewer to the Independent Expert) in the following transfers

(some of which were cross border).

the business of various UK-regulated subsidiaries of RSAIG to a smaller number of UK-regulated subsidiaries of

RSAIG. The transfers were approved by the Court on 12 December 2011

the business of PA(GI) Limited to RSAI and to Marine Insurance Company. The transfers were approved by the

Court on 12 December 2011

the Irish branch business of RSAI to EGI. The transfer was approved by the Court on 18 December 2008

business of Euler Hermes Guarantee plc to Euler Hermes UK plc in 2010

business of Euler Hermes UK plc to Euler Hermes Belgium in 2011

certain business of the Italian branch of Sompo Japan Insurance Company of Europe Limited to Berkshire

Hathaway International Insurance Limited. The transfer was effective 31 March 2013

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the business of Chevanstell Limited to R&Q Insurance (Malta) Limited. The transfer was effective 31 December

2013

the European branch business of Mitsui Sumitomo Insurance Company (Europe) Limited to MSIG Insurance

Europe AG. The transfer was effective 31 December 2013.

C.4. Before joining Milliman, Derek was:

A director of Heath Lambert's ART division (2002-2003)

A partner within Ernst & Young's UK property & casualty consulting practice (1998-2001)

In a variety of roles within Prudential plc (1983-1998), culminating in finance director and actuary for Prudential's

UK general insurance operation.

C.5. Derek was awarded Fellowship of the Institute of Actuaries in 1988 and of the Society of Actuaries in Ireland in 2004.

He has been a member of the General Insurance Board of the Institute & Faculty of Actuaries since 2002 and chaired

the Board 2005-2007. He also served on the Council of the Institute of Actuaries between 2005 and 2010. He has

chaired various actuarial working parties and authored or co-authored several papers. Until earlier this year he chaired

the profession's General Insurance Reserving Oversight Committee. In 2013 Derek received a special award from the

profession to mark his Outstanding Contribution to General Insurance Research.

Milliman Report


APPENDIX D KEY SOURCES OF DATA

D.1. In writing the Report, I relied upon the accuracy of certain documents provided by ANDIE. These included, but were

not limited to the following:

General

A paper entitled Dowa Insurance Company (Europe) Ltd (“Dowa”) Exit strategy (November 2013)

A schematic showing the background to group integration, from the formation of both The Chiyoda Fire & Marine

Insurance Company Ltd and The Dowa Fire & Marine Insurance Company Ltd in 1897 to the creation of MS & AD

in 2010

A single sheet extract from a larger presentation, the sheet being a summary of ANDIE’s objectives for 2020 in

respect of its acquisition of Insure The Box

A draft, dated 29 September 2015, of Paul Matthews’ witness statement in connection with the Transfer

Legal documents

A draft, dated 29 September 2015, of the Transfer document

A draft, dated 5 July 2015, of a proposal in relation to a solvent scheme of arrangement pursuant to part 26 of the

companies act 2006 between DICEL and its scheme creditors (i.e. the Scheme)

A service agreement, dated 1 January 2014, between ANDIM and DICEL

A Deed of Guarantee, dated 15 October 1976, between the Nissay Dowa General Insurance Company Ltd (the

Guarantor) and the ILU (this is the ILU Guarantee – see paragraph 3.2.2)

A Deed of Guarantee, dated 21 September 2006, between the Dowa Fire and Marine Insurance Company Ltd,

Osaka (the Guarantor) and DICEL (this is the Branch Guarantee – see paragraph 3.2.4)

A Deed of Guarantee, dated 19 March 2008, between ANDIC Japan (the Guarantor) and ANDIE (this is the ANDIC

Guarantee – see paragraph 3.19)

A Deed of Guarantee, dated 13 February 2015, between ANDIC Japan (the Guarantor) and ANDIE, which acts in

addition to the Deed of Guarantee dated 19 March 2008 (this is the Transferring Liabilities Guarantee – see

paragraph 4.12)

Report of the Independent Expert in relation to the transfer of the Insurance Business of Nissay Dowa General

Insurance Company Limited to DICEL (see paragraph 3.2.4)

Commutation agreements relating to DICEL’s involvement in reinsuring business written by the Patrick and Merrett

Lloyd’s syndicates (see paragraph 3.2.4)

A transcript of the Court proceedings relating the Sanctions Hearing for the Scheme of Arrangement relating to the

English & American Schemes (see paragraph 3.2.5)

Novation agreements that transferred to ANDIE DICEL’s 100% reinsurance of business 100% written by RSA and

nine other insurers (see paragraph 3.2.6)

Commutation agreements relating to DICEL’s reinsurance of business written by ANDIC Japan and Sri Muang

(see paragraph 3.2.7)

A schematic presentation of the proposed Continuation of Coverage under the Scheme

A letter (dated 13 February 2015) from ANDIC Japan to ANDIE, entitled Proposed transfer of all insurance and

reinsurance business from Dowa Insurance Company (Europe) Limited (“DICEL”) to Aioi Nissay Dowa Insurance

Company of Europe Limited (“ANDIE”) (“the Transfer Scheme”)

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A draft letter, dated 13 May 2015, to DICEL suppliers and creditors advising them of the proposed Transfer and

immediately subsequent dissolution of DICEL

Financial returns and performance

An extract from the Board papers dated December 2014 showing the capital resources for ANDIE as at the end of

each calendar year 2011-2014, as well as at each quarter end during 2014, together with several capital measures.

These figures were unaudited.

A spreadsheet file entitled 2015-19 Business Plan.xlsx, showing, for ANDIE, gross written premiums and pre-tax

profits, by territory, for calendar years 2011-2013 (actual), 2014 (forecast) and 2015-2019 (planned).

A spreadsheet file entitled Output Summary Sheet Budget 2015.xlsx, showing, for ANDIE, the component parts of

the revenue accounts and KPIs, by territory, for calendar years 2011-2013 (actual), 2014 (forecast) and 2015-2019

(planned).

PRA Returns for ANDIE for the year ending 31 December 2013

PRA Returns for ANDIE for the year ending 31 December 2014

A short report entitled Independent auditor’s report to the directors pursuant to Rule 9.35 of the Interim Prudential

Rulebook for Insurers (“IPRU(INS)”), dated 26 March 2014, which related to the PRA Returns for ANDIE for the

year-end 2013

A certificate entitled Certificate required by Rule 9.34 (Chapter 9 “Financial Reporting – Accounts and Statements”)

of the Interim Prudential Rulebook for Insurers, dated 26 March 2013 (sic), which related to the PRA Returns for

ANDIE for the year-end 2013

Financial Statements for DICEL and for ANDIE for the 2013 year

Financial Statements for DICEL and for ANDIE for the 2014 year

Half-year Pro Forma Financial Statements for DICEL and for ANDIE as at 30 June 2014

A paper addressed to the ANDIE Audit Committee, entitled Final Report to the Audit Committee 31 December

2013, prepared by Deloitte and dated 26 March 2014

A paper addressed to the ANDIE Audit Committee, entitled Final Report to the Audit Committee on the 2014 Audit,

prepared by Deloitte and dated 17 March 2015 (this is the Auditor’s Report – see paragraph 6.29)

A listing prepared by Goldman Sachs of the bond holdings of ANDIE as at the date the listing was prepared (4

June 2014)

A further listing prepared by Goldman Sachs of the bond holdings of ANDIE as at the date the listing was prepared

(24 February 2015)

A listing dated 31 May 2014 of ANDIE’s exposure to counterparty risks with European banks

A further listing of ANDIE’s exposure to counterparty risks with European banks as at 31 December 2014

Proforma balance sheets for DICEL and ANDIE as at 31 December 2013 as if the Transfer and the Scheme had

taken place on that date

Corporation Tax Calculation for ANDIE as at 31 December 2013

Corporation Tax Calculation for DICEL as at 31 December 2013

Solvency / Capital information

A copy of the Enhanced Capital Requirement reporting form for ANDIE as at 31 December 2013, dated 28 March

2014

A draft copy of the Enhanced Capital Requirement reporting form for ANDIE as at 31 December 2014, undated

Milliman Report


A document entitled ORSA report - ANDIE solo as at 31 December 2013, dated November 2014

A copy of the Enhanced Capital Requirement reporting form for DICEL as at 31 December 2013, dated 28 March

2014

A report for DICEL on its Risk Based Capital, dated 9 November 2010

A document setting out ANDIE’s quantitative risk appetite

Documentation of the ANDIE ICA as at 31 December 2012, dated January 2014

Documentation of the ANDIE ICA as at 31 December 2010, dated September 2011

An undated internal document entitled Investment Strategy 2014, the scope of which stated that the guidelines

contained therein applied to ANDIE and DICEL

A letter dated 9 December 2009 from the FSA to ANDIE providing ICG

A letter dated 2 July 2010 from the FSA to ANDIE regarding Risk Mitigation Programme action

A paper entitled Executive Review Pack (V6): Forecast 2013, Budget 2014-2018, as at 26 November 2013

An extract from the minutes of the Board meeting of ANDIE held on 21 November 2014

Reserving

A Report on Reserves for ANDIE as at 30 September 2012, dated 10 January 2013

A Reserve Roll Forward Report on Reserves for ANDIE as at 31 December 2012, dated 22 February 2013


A Report on Reserving Methodology for ANDIE as at 30 September 2014, dated 19 January 2015


A Reserve Roll Forward Report on Reserves for ANDIE as at 31 December 2014, dated 5 March 2015

A Report entitled Dowa Insurance Company (Europe) Limited Reserve Analysis as at 31 October 2012, prepared

by Patrick Nolan of Pro Insurance Solutions Limited

A Reserve Roll Forward Report on Reserves for ANDIE as at 31 December 2013, dated 29 May 2014

A note dated 6 February 2015 on DICEL’s reserves as at 31 December 2014 in respect of its London Market

Marine Legacy Claims

A spreadsheet file provided by Pro to DICEL on 27 January 2015 summarising the payment history in respect of

DICEL’s inwards and outwards reinsurance contracts, up to 31 December 2014

Outwards reinsurance

A summary of ANDIE’s outwards reinsurance programme as at June 2014, together with a note explaining that in

previous years ANDIE had different combinations of reinsurers, and in some places ANDIE also had different levels

of protection

Treating Customers Fairly

An ANDIE internal document entitled “Treating Customers Fairly Commitment Statement”

Two undated listings, with comments, of UK Financial Ombudsman Service cases for ANDIE (the more recent

listing contains three cases, the most recent of which was incurred in April 2014)

A report, dated March 2014, on European complaints to the end of December 2013 and on developments during

the quarter on cases reported to the UK Financial Ombudsman Service in respect of ANDIE

Milliman Report


A report, dated December 2014, on European complaints to the end of November 2014 and on developments

during the quarter on cases reported to the UK Financial Ombudsman Service in respect of ANDIE

Statistics showing, separately by country and month by month throughout 2012, the numbers of claims reported in

the period, the numbers decided in the period (by result) and the numbers of policies sold and in-force during the

period. These statistics were also provided for 2013 and for January – November 2014

Copies of reports to the ANDIE Board entitled “TCF Dashboard”, dated March 2014 and December 2014

Colour coded spreadsheets supporting the above reports

Communications

A draft notice letter dated 5 July 2015 to DICEL’s outwards reinsurers and relevant outwards reinsurance brokers

advising of the proposed Transfer

A draft advertisement dated 29 September 2015 of the proposed Transfer

A draft notice letter dated 29 September 2015 to DICEL’s policyholders and brokers advising of the proposed

Transfer

A letter from DICEL dated 9 April 2014 entitled “Proposed Solvent Scheme of Arrangement for Dowa Insurance

Company (Europe) Limited (“DICEL” or “the Company”)

A draft undated letter entitled Aioi Nissay Dowa Insurance Company of Europe Ltd (No.05046406) (“ANDIE”)

Proposed Part VII Transfer from and Solvent Scheme of Arrangement for business of Dowa Insurance Company

(Europe) Limited (No.01235550) (“DICEL”), addressed to those believed by ANDIE/DICEL to be Scheme Creditors

or Broker or other agencies who have represented such Scheme Creditors, setting out the key features of the

Transfer and the Scheme.

D.2. Information relating to the items listed above was also gathered during discussions with staff of DICEL and ANDIE.

Milliman Report


APPENDIX E MINIMUM CAPITAL REQUIREMENT FOR GENERAL INSURANCE

BUSINESS AS AT THE 2014 YEAR-END

E.1. In the UK the process of setting minimum solvency margins changed with effect from 2005. However, UK general

insurers remain subject to statutory requirements based on EU Directives and, for the time being, provide their risk-

based enhanced capital requirement (“ECR”) calculation to the PRA in private. In addition, all UK general insurers are

required to make ICAs of their own capital needs which will be used by the PRA when giving ICG.

E.2. The minimum capital requirement (“MCR”), based on EU Directives, is calculated as the greater of:

a premium measure

a claims measure

a prior year MCR measure

a minimum amount, currently set at €3.7 million.

E.3. The premium measure (A) is based on gross adjusted premiums (P) as follows:

If P ≤ €61.3 million then A1 = P x 18%, A2 = 0

If P > €61.3 million then A1 = €11.034 million, A2 = (P - €61.3 million) × 16%

A = A1 + A2

E.4. The claims measure (B) for other than health insurance is based on gross adjusted incurred claims (C) as follows:

If C ≤ €42.9 million then B1 = C × 26%, B2 = 0

If C > €42.9 million then B1 = €11.154 million, B2 = (C - €42.9 million) × 23%

B = B1 + B2

E.5. A credit for reinsurance factor (r) is then determined as the ratio of net incurred claims over the 3 year period (to the

valuation date) to gross incurred claims ratio over the same 3 year period. If r < 0.5 then r is set to 0.5.

E.6. The prior year MCR measure (M) is based on the MCR as at the prior financial year-end and changes in outstanding

claims:

Where net outstanding claims are greater than zero as at the end of the current and previous financial years then

M = Prior year MCR × min(1, net outstanding claims as at the end of the current financial year divided by the net

outstanding claims as at the end of the previous financial year);

Where net outstanding claims are zero as at the end of the current and previous financial years then

M = Prior year MCR × min(1, gross outstanding claims as at the end of the current financial year divided by the

gross outstanding claims as at the end of the previous financial year);

Where gross outstanding claims are zero as at the end of the current and previous financial year then

M = MCR as at the end of the previous financial year.

E.7. Minimum solvency margin = max {max (A,B) × r, M, €3.7million}

E.8. For the purposes of this calculation, inwards reinsurance business is treated as insurance business.

E.9. The currency amounts within this calculation are subject to periodic revision.

Milliman Report


APPENDIX F OUTWARDS EXCESS OF LOSS REINSURANCE PROGRAMMES FOR

DICEL

F.1. The following summarises DICEL’s Excess of Loss reinsurance programmes as applied to the Marine business by

underwriting period.

1 April 1977 – 31 March 1978: £190,000 xs £100,000; £310,000 xs £290,000

1 April 1978 – 31 March 1979: £75,000 xs £25,000; £200,000 xs £100,000; £325,000 xs £300,000

1 April 1979 – 31 March 1980: £75,000 xs £25,000; £200,000 xs £100,000; £325,000 XS £300,000

1 April 1980 – 31 March 1981: £75,000 xs £25,000; £200,000 xs £100,000

1 April 1981 – 31 March 1982: £100,000 xs £25,000: £250,000 xs £125,000

1 April 1982 – 31 March 1983: £100,000 xs £25,000; £500,000 xs £1,000,000

1 April 1983 – 9 June 1983: £10,000 xs £25,000; £125,000 xs £35,000; £340,000 xs £160,000; £750,000 xs

£500,000; £500,000 xs £1,250,000

10 June 1983 – 9 June 1984: £40,000 xs £10,000; £100,000 xs £50,000; £150,000 xs £150,000;£300,000 xs

£300,000

10 June 1984 – 9 June 198522: £35,000 xs £15,000; £125,000 xs £35,000; £150,000 xs £150,000; £300,000 xs

£300,000; £1,000,000 xs £500,000

10 June 1985 – 31 March 1986: £465,000 xs £35,000; £1,000,000 xs £500,000

1 April 1986 – 31 March 1987: £465,000 xs £35,000; £1,000,000 xs £500,000

1 April 1987 – 31 March 1988: £430,000 xs £70,000;

1 April 1988 – 31 March 1989: £430,000 xs £70,000; £1,650,000 xs £500,000

1 April 1989 – 31 March 1990: £430,000 xs £70,000

1 April 1990 – 31 March 1991: £430,000 xs £70,000

_______________________________________________________________________________

22 The records that remain regarding the Excess of Loss cover protecting DICEL for the period 10 June 1984 – 9 June 1985 suggest some overlaps and some

gaps in coverage. I consider that this is more likely to reflect flaws in the remaining records rather than flaws in the programme. However, I do not believe that

this matter is material to my analysis or that it affects my conclusions in any way.

Milliman Report


APPENDIX G OUTWARDS REINSURANCE PROGRAMMES FOR ANDIE

G.1. The following summarises ANDIE’s reinsurance programme for 2015. In earlier years the programme was broadly

similar, although with different combinations of reinsurers, and in some places different levels of protection.

G.2. Proportional reinsurances:

100% quota share (from ANDIC Japan) of all Japanese Interests Abroad risks

40% quota share (from Ageas) of UK motor portfolio (the proportion reduces to 20% for policies incepting or

renewing on or after 1 April 2015)

40% quota share (from ANDIC Japan) of Germany motor portfolio

20% quota share (from ANDIC Japan) of France motor portfolio

50% quota share (from ANDIC Japan) of France GAP portfolio (“GAP” insurance covers owners of private motor

vehicles, in the event of their total loss, for the gap between the amount paid for the vehicle and the amount that

an insurer would pay out based on the current value)

50% quota share (from Mapfre Abraxas) of UK GAP portfolio

G.3. Non-proportional reinsurances:

European motor Excess of Loss treaty – part 1

o Covers large claims in excess of £2 million gross for UK and €2 million gross for Germany, France, Norway,

and Spain – up to a limit of £10 million/€10 million gross

o Covers accumulations of claims from Natural Catastrophes in Germany - €8 million in excess of €2 million

o Reinsurers for 2014 are Amlin, Argo Syndicate 1200, Liberty Syndicate 4472, Partner Re, QBE Syndicate 566,

R&V, SCOR, , XL Re, Canopius

European motor excess of loss treaty – part 2

o Covers large claims in excess of £10 million gross for UK and €10 million gross for Germany, France, Norway

and Spain

o Reinsurer for 2014 is ANDIC Japan

Italy NatEvent protection

o Covers accumulations of claims from Natural Events, €4.5 million in excess of €350k per event

o Reinsurer is Swiss Re

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