MILLIMAN CLIENT REPORT Pacific Life Re Limited
Transcript of MILLIMAN CLIENT REPORT Pacific Life Re Limited
MILLIMAN CLIENT REPORT
Pacific Life Re Limited Supplementary Report of the Independent Expert on the proposed
transfer of life reinsurance business from Pacific Life Re Limited to Pacific
Life Re International Limited
Final Version
15 November 2021
Philip Simpson FIA
Contents
1. INTRODUCTION ...................................................................................... 1
2. THE CHANGES AND EVENTS SINCE THE MAIN REPORT THAT
ARE RELEVANT TO THE SCHEME ........................................................ 5
3. THE EFFECT OF THE SCHEME ON THE SECURITY OF POLICY
BENEFITS ..............................................................................................12
4. THE EFFECT OF THE SCHEME ON THE PROFILE OF RISKS TO
WHICH POLICYHOLDERS ARE EXPOSED ..........................................19
5. THE EFFECT OF THE APPLICABLE REGULATORY AND LEGAL
REGIME..................................................................................................23
6. THE EFFECT OF THE SCHEME ON SERVICES PROVIDED TO
POLICYHOLDERS .................................................................................24
7. CORRESPONDENCE AND OBJECTIONS RECEIVED FROM
POLICYHOLDERS .................................................................................26
8. MY CONCLUSIONS ................................................................................27
Appendix A Selected financial information before the implementation of the Scheme 29
Appendix B Selected financial information after the implementation of the Scheme
and the Other Business Novations ..........................................................30
Appendix C Definitions ...............................................................................................31
Appendix D Key sources of data .................................................................................36
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1. INTRODUCTION
THE PROPOSED SCHEME
1.1 Pacific Life Re Limited (“PLRL”) proposes to transfer a block of its long term reinsurance business to Pacific
Life Re International Limited (“International”) by an insurance business transfer scheme (the “Scheme"), as
defined in Section 105 of the Financial Services and Markets Act 2000 ("FSMA"). PLRL is the "Transferor"
and International is the "Transferee".
1.2 The purpose of the proposed Scheme is to transfer to the UK branch of International all of PLRL’s
reinsurance business that was originated in the UK and Ireland, including any remaining legacy business
within PLRL as at the date the Scheme is implemented (and with the exception of one Irish treaty written by
PLRL under Irish law referred to as the “Irish Law Treaty” and an intra-group retrocession arrangement in
place between PLRL and Pacific Life Re (Australia) Pty Limited (“PLRA”)).
1.3 The proposed Scheme, if implemented, will transfer all of the assets and liabilities associated with the
business of PLRL that is within the scope of the Scheme (the “Part VII Transferred Business”), with the
exception of any Excluded Policies1, to the UK branch of International on the Effective Date (i.e. the date
on and from which the Scheme will become effective).
1.4 I have been appointed by PLRL and International to report, pursuant to Section 109 of FSMA, in the capacity
of the Independent Expert, on the terms of the Scheme providing for this transfer from PLRL to International.
1.5 I prepared a report dated 7 September 2021 (the “Main Report”) in which I considered the proposed Scheme
in advance of the Directions Hearing at the High Court of Justice in England and Wales (the “Court”) on 16
September 2021.
1.6 If approved by the Court at the Sanction Hearing on 3 December 2021, the Scheme will become operative
on the Effective Date of 1 January 2022, at which point the Part VII Transferred Business will legally transfer
from PLRL to International.
1.7 The purpose of this report (the “Supplementary Report”) is to provide an updated assessment of the likely
effects of the proposed Scheme ahead of the Sanction Hearing.
1.8 The Part VII Transferred Business currently consists of 167 protection and longevity reinsurance and
outwards retrocession treaties across 54 cedants and retrocessionaires, as well as currently 9 legacy
treaties across 5 cedants. The Part VII Transferred Business has a pre-diversified regulatory capital
requirement (“SCR”) of £2,703m and a Best Estimate Liability (“BEL”) of £(914)m2 under Pillar 1 of the UK
Prudential Regulation Regime3 as at 30 June 2021. In comparison, the legacy business makes up a small
part of the business of PLRL, with a pre-diversified SCR of less than £1m and a BEL of c. £6m as at 30
June 2021. PLRL has been negotiating with cedants to recapture as much of the legacy business as
possible prior to the implementation of the Scheme. The Part VII Transferred Business also includes certain
retrocession agreements under which PLRL is currently cedant and various non-reinsurance contracts in
place between PLRL and third parties.
1.9 The Part VII Transferred Policies contains one longevity reinsurance treaty, which was written under English
law, where the cedant is domiciled in Guernsey, the “Guernsey Treaty”. The transfer of this treaty will be
conditional upon the approval from the Royal Court of Guernsey of the parallel “Guernsey Scheme”, with
the same planned effective date as the Effective Date of the Scheme, i.e. 1 January 2022. Whilst the
Guernsey Treaty is subject to a parallel transfer process, it is, for all purposes of the Scheme, part of the
Part VII Transferred Business.
1 The Excluded Policies are any policies that are excluded from the Scheme, either as determined by the Court or agreed
between PLRL and International, and would therefore remain with PLRL. The Excluded Policies would be fully reinsured to International with effect from the Effective Date. It is not intended that there will be any Excluded Policies.
2 PLRL holds a negative liability on its balance sheet in respect of its reinsurance contracts as it expects future income to exceed future outgo on a best estimate basis.
3 The solvency regime that now applies in the UK, which is based on Solvency II as modified and implemented in the UK following the end of the Brexit transition period.
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TRANSFERS AND NOVATIONS OUTSIDE OF THE SCHEME
1.10 As discussed in the Main Report, the proposed Scheme is one component of a wider global restructuring
programme currently being undertaken by Pacific Life Re Holdings LLC (“PLRH LLC”) and its subsidiaries
which is expected to complete in 2022. As part of this restructuring programme, the Pacific Life Re Division
(the “Division”), which comprises Pacific Life Group’s life reinsurance business and operations including
PLRL and International, will be consolidated under two reinsurers authorised in Bermuda: International and
its direct parent company, Pacific Life Re Global Limited (“Global”). A group restructure took place on 1 July
2021, and PLRL is now an indirect subsidiary of International.
1.11 In addition to the transfer of the Part VII Transferred Business from PLRL to International under the Scheme,
in order to effect the restructuring programme referred to above, there will be a series of separate additional
novations and a transfer, which together will transfer the business not included in the Scheme from PLRL
to International.
1.12 The novations taking place separately from the Scheme include the business written by PLRL’s Canada
branch (referred to as the “Canada Branch Business”) and the business written by PLRL’s Singapore branch
(referred to as the “Singapore Branch Business”), which will be novated to equivalent branches in
International, as well as the Canadian business within Global which will be novated to the Canada branch
of International, the Irish Law Treaty written by PLRL which will be novated to the UK branch of International,
and the intra-group retrocession arrangement between PLRL and PLRA which will be novated to
International’s Bermuda head office.
1.13 The novations detailed above are expected to occur on the same date as the Effective Date of the Scheme
and are referred to in this Supplementary Report as the “Other Business Novations”. The business novating
from PLRL to International under the “Other Business Novations” is referred to in this Supplementary Report
as the “Non-Part VII Transferred Business”. For the purposes of the analysis in this Supplementary Report,
it is assumed that the Other Business Novations take place immediately after but on the same date as the
Scheme.
1.14 In addition to the novations mentioned above, the business within the South Korea branch of PLRL (referred
to as the “South Korea Branch Business”) will be transferred to an equivalent branch in International by a
statutory South Korea law transfer process, which is similar to a Part VII transfer. The transfer of the South
Korea Branch Business will be subject to separate timescales, and it currently expected to take effect
sometime after the Effective Date, in the second half of 2022. I refer to this business within this
Supplementary Report as the “Remaining Business”.
1.15 Further, in addition to the novations mentioned above and the proposed transfer of the South Korea Branch
Business, a small subset of the business within the Singapore branch of PLRL was novated to the Singapore
branch of International with effect from 1 July 2021. I refer to these novations as the “Initial Singapore
Novations” and the underlying business as the “Existing Business” of International.
1.16 The combined effect of the Initial Singapore Novations and, if implemented as expected, the Scheme and
the Other Business Novations, is that by the end of the Effective Date all business of PLRL apart from
business in the South Korea branch would have become business of International, and PLRL would have
ceased writing new business, aside from new business in South Korea written out of the South Korea
branch. Following the completion of the subsequent transfer of the South Korea branch business of PLRL
to the South Korea branch of International, it is expected that PLRL would be deauthorised.
MY ROLE AS INDEPENDENT EXPERT
1.17 My appointment as Independent Expert was approved by the Prudential Regulation Authority (“PRA”) after
consultation with the Financial Conduct Authority (“FCA”). My terms of reference have been reviewed by
the FCA and the PRA.
1.18 My role as Independent Expert is set out in Section 3 of the Main Report and this Supplementary Report
has been produced for the Court to assist in its deliberations in respect of the Scheme.
1.19 I have considered the terms of the Scheme only and have not considered whether any other scheme or
schemes or alternative arrangement might provide a more efficient or effective outcome.
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THE PURPOSE OF THIS SUPPLEMENTARY REPORT
1.20 In Section 14 of the Main Report I set out my conclusions as follows:
I confirm that I have considered the issues affecting the various categories of policyholders of PLRL and
International separately, as set out in the Main Report in sections 7 to 13, and that I do not consider further
subdivisions (other than those in the Main Report) to be necessary.
I am satisfied that the implementation of the Scheme would not have a material adverse effect on:
• The security of the claims payments under the Part VII Transferred Policies, the Non-Part VII
Transferred Policies, the Remaining Policies and the Existing Policies;
• The profile of risks to which the Part VII Transferred Policies, the Non-Part VII Transferred Policies, the
Remaining Policies and the Existing Policies are exposed;
• The protection offered by the regulatory and legal regimes that apply to the Part VII Transferred
Policyholders, the Non-Part VII Transferred Policyholders, the Remaining Policyholders and the
Existing Policyholders; or
• The services provided to the Part VII Transferred Policyholders, the Non-Part VII Transferred
Policyholders, the Remaining Policyholders and the Existing Policyholders.
I am satisfied that the implementation of the Other Business Novations would not have a material adverse
effect on:
• The protection offered by the regulatory and legal regimes that apply to the Non-Part VII Transferred
Policyholders; or
• The services provided to the Non-Part VII Transferred Policyholders.
In addition, I am satisfied that my conclusions in relation to the various groups of policyholders above apply
equally to the policyholder of the Guernsey Treaty.
1.21 The purpose of this Supplementary Report is to provide an updated assessment of the likely effects of the
proposed transfer ahead of the Sanction Hearing on 3 December 2021 and to consider whether the
conclusions reached in the Main Report remain valid in light of the updated financial information received,
any other relevant significant events subsequent to the date of the finalisation of the Main Report, and any
policyholder feedback or queries in relation to the Scheme.
1.22 This Supplementary Report should be read in conjunction with the Main Report. Defined terms used in the
Main Report have the same meaning in this Supplementary Report and are set out in Appendix C.
1.23 The reliances and limitations set out in Section 1 of the Main Report apply equally to this Supplementary
Report. In addition, reliance has been placed upon, but is not limited to, the information set out in Appendix
D, as well as upon the information set out in Appendix L of the Main Report. My opinions depend on the
accuracy and completeness of this data, information and the underlying calculations. I have discussed the
information set out in Appendix D with PLRL and International, and have considered how it has changed
from similar information provided in support of the Main Report. PLRL and International have each confirmed
to me that, to the best of their knowledge and belief, all data and information they have provided to me is
accurate and complete. They have also informed me that there have been no material developments since
the latest information made available to me that are relevant to the Scheme.
1.24 Given the inherent uncertainty of the outcome of future events, it is not possible to be certain of the effect
of the proposed Scheme on the affected policies and, in order to acknowledge this inherent uncertainty, the
conclusions of the Independent Expert in relation to transfers of long-term insurance business are usually
framed using a materiality threshold. The framework in which I undertake my consideration of the proposed
Scheme in both this Supplementary Report and the Main Report is set out in Section 3 of the Main Report.
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REGULATORY AND PROFESSIONAL GUIDANCE
1.25 The Supplementary Report has been prepared in accordance with the approach and expectations of the
PRA, as set out in “The Prudential Regulation Authority’s approach to insurance business transfers” dated
April 2015, as well as Chapter 18 of the Supervision Manual contained in the FCA Handbook, and the FCA’s
Final Guidance “FG18/4: The FCA’s approach to the review of Part VII insurance business transfers” dated
May 2018.
1.26 On 8 July 2021, the FCA published a guidance consultation paper GC21/3 on proposed updates to the FCA
Guidance, in order to allow for changes in the regulatory landscape and to clarify its expectations on Part
VII transfers. The consultation period ended on 31 August 2021; however, the FCA is currently reviewing
responses to the consultation, and therefore the FCA Guidance remains the applicable guidance that I must
comply with in this Supplementary Report. Nonetheless, I have reviewed the proposed changes within
GC21/3 and am satisfied that this Supplementary Report would be compliant with this guidance in all
material respects, had these proposed changes been applicable at the time of writing this Supplementary
Report.
1.27 In addition, on 28 July 2021 the PRA published a consultation paper CP16/21 on proposed updates to the
PRA’s approach to insurance business transfers in order to reflect legislative changes following the UK’s
withdrawal from the EU and following the end of the transition period on 31 December 2020. The
consultation period ended on 28 October 2021; however, the PRA is currently reviewing responses to the
consultation, and therefore the PRA Statement of Policy remains the applicable guidance that I must comply
with in this Supplementary Report. Nonetheless, I have reviewed the proposed changes within CP16/21
and am satisfied that this Supplementary Report would be compliant with this guidance in all material
respects, had these proposed changes been applicable at the time of writing this Supplementary Report.
1.28 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 (“IFoA”), including TAS 100: Principles for
Technical Actuarial Work and TAS 200: Insurance. In my opinion, this Supplementary Report complies with
TAS 200: Insurance and is compliant with those elements of TAS 100: Principles for Technical Actuarial
Work that are applicable to transformations. In complying with these requirements, I note that a number of
the key documents listed in Appendix D have been prepared or reviewed by individuals who were subject
to professional standards in undertaking their work, including, where appropriate, the TAS requirements.
1.29 In the context of the TAS, the Main Report and this Supplementary Report are component reports, which
together form an aggregate report.
1.30 Actuarial Profession Standard X2, as issued by the Institute and Faculty of Actuaries, requires members to
consider whether their work requires an independent peer review.
1.31 In my view, this Supplementary Report does require independent peer review and this has been carried out
by a senior actuary in Milliman LLP who has not been part of my team working on this assignment.
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2. THE CHANGES AND EVENTS SINCE THE MAIN REPORT THAT
ARE RELEVANT TO THE SCHEME
THE UPDATED FINANCIAL INFORMATION AS AT 30 JUNE 2021 FOR PLRL AND INTERNATIONAL
2.1 The conclusions in the Main Report were based on the financial information in respect of PLRL and
International as at 31 December 2020.
2.2 The updated pro-forma financial results as at 30 June 2021 were finalised in September 2021 and I include
this updated financial information in Appendices A and B of this Supplementary Report. The pro-forma
financial results as at 30 June 2021 have been checked and approved by the Chief Actuaries of PLRL and
International.
2.3 I have reconsidered the conclusions set out in the Main Report in light of this updated financial information
in Sections 3 and 4 of this Supplementary Report. As described in the Main Report, the use of $230m
(equivalent to £166m as at 30 June 2021) of Ancillary Own Funds4 within International post-Scheme had
been discussed with the Bermuda Monetary Authority (“BMA”) in principle, and a formal application has
since been submitted on 24 September 2021. The financial information contained within this Supplementary
Report takes credit for these Ancillary Own Funds within International. It should be noted that, should the
Ancillary Own Funds be excluded from the calculation of the regulatory solvency ratio, the conclusions in
my Main Report would be unchanged.
2.4 The Initial Singapore Novations had not taken effect as at 31 December 2020 nor 30 June 2021, and
therefore the financial information for PLRL contained within the Main Report and this Supplementary
Report includes the business underlying the Initial Singapore Novations. However, I have had sight of pro-
forma financial information for PLRL assuming the Initial Singapore Novations had taken effect as at 30
June 2021. The impact of the Initial Singapore Novations on PLRL’s balance sheet is not material, the pre
diversification SCR of this business is £18m which is small compared to the size of the Part VII Transferred
Business SCR of £2,703m as at 30 June 2021 on a pro-forma basis. Therefore, the impact of the Initial
Singapore Novations on PLRL’s balance sheet does not change my conclusions within this Supplementary
Report. The Initial Singapore Novations do not impact the pro-forma financial information for International
in the Main Report or this Supplementary Report, as PLRL was assumed to be a subsidiary of International
as at both 31 December 2020 and 30 June 2021, and therefore the business underlying the Initial Singapore
Novations is already included within International’s pro-forma balance sheet on these dates. As outlined in
paragraph 1.10, PLRL became an indirect subsidiary of International on 1 July 2021. There have not been
any other new policyholders of International since the date of the Main Report.
2.5 A capital injection of £50m into PLRL from International took place in August 2021 to broadly offset the
impact of the Sterling Overnight Index Average (“SONIA”) transition. An additional £50m capital injection
into PLRL was made in September 2021 intended to largely offset the expected impact of basis changes
arising from the annual review of assumptions. In addition, in the second half of 2021 the International Board
put in place a $100m loan facility with its affiliate PLIC to cater for any changes in the solvency position of
International. I understand that repayment of any loans under this facility would rank below the repayment
of policyholder liabilities in the event of International insolvency.
2.6 The impact of the SONIA transition, and the cash injections described above, are not reflected in the
financial information contained in the Main Report or this Supplementary Report, since the transition and
capital injections took place after 30 June 2021. I discuss this further in paragraphs 2.45 and 2.46 below.
4 Ancillary Own Funds are committed but unpaid sources of capital, which can be drawn on by demand by the insurer without attaching conditionality. Insurers are permitted to use Ancillary Own Funds to meet capital requirements, subject to regulatory approval.
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UPDATED PART VII TRANSFERRED BUSINESS POLICY COUNTS
2.7 The table below summarises the key components of the current Part VII Transferred Business.
CONTRACT TYPE NO. OF CEDANTS /
RETROCESSIONAIRES NO. OF
TREATIES
UK PRUDENTIAL REGULATION REGIME BEL AS AT 30 JUNE 2021* (£’M)
Protection reinsurance 25 62 (32)
Longevity reinsurance 18 60 (888)
Protection retrocession 9 24 **
Longevity retrocession 2 21 **
Legacy 5 9 6
Source: Agreed Policy List, Part VII Treaty Due Diligence and PLRL Chief Actuary Report
* Inwards reinsurance contracts are held on PLRL’s balance sheet as a liability, whereas outwards retrocession contracts are held as an
asset. PLRL holds a negative liability on its balance sheet in respect of its reinsurance contracts as it expects future income to exceed
future outgo on a best estimate basis.
** PLRL does not publicly disclose the volume of reinsurance business that it retrocedes to external parties.
THE POLICYHOLDER COMMUNICATIONS
Court approvals
2.8 The following two waivers were sought at the Directions Hearing on 16 September 2021:
• A waiver for PLRL from the regulatory requirements to send a written notice to policyholders of PLRL
for whom no valid contact details are held on PLRL’s policyholder database (however PLRL considers
that it holds valid contact details for all policyholders).
• A waiver for PLRL and International from the regulatory requirement to send a written notice to
policyholders of PLRL and International, as the policyholder letters will provide policyholders with
more background, detail and context of the proposed Scheme than the notice would provide.
2.9 The waivers were approved by the court on 16 September 2021.
Formal communications
2.10 PLRL sent a letter to each Part VII Transferred Policyholder by post, notifying them of the proposed Scheme.
This letter provided an overview of the proposed Scheme, what this means for policyholders of PLRL, details
of how to obtain further information, and details of the rights of policyholders to object to the proposed
Scheme.
2.11 In addition, the letter enclosed a statement containing the terms of the Scheme and a summary of the Main
Report.
2.12 In addition to the Part VII Transferred Policyholders, the Non-Part VII Transferring Policyholders, Remaining
Policyholders and Existing Policyholders were also sent the letter. For these policyholders, if the treaty is
written in English then the formal communication was provided in English. If any translation requirements
arose, these were managed accordingly by PLRL.
2.13 This Supplementary Report will be made available on the Pacific Life Re website:
https://www.pacificlifere.com/home/about-us/our-company/corporate-structure.html.
Further publication of the Scheme
2.14 The Scheme was also publicised in the following ways:
• On the Pacific Life Re website https://www.pacificlifere.com/home/about-us/our-
company/corporate-structure.html
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• In the following publications:
o London Gazette;
o Edinburgh Gazette;
o Belfast Gazette;
o Financial Times;
o The Times; and
o In certain other publications as required by Guernsey law in relation to the Guernsey Scheme.
Policyholder responses
2.15 In Section 7 of this Supplementary Report I provide further detail of the responses received to the
policyholder communications, including PLRL and International’s approach to dealing with general enquiries
or any objections or expressions of dissatisfaction received from policyholders regarding the Scheme.
THE PROPOSED SCHEME
2.16 There have been no changes to the proposed Scheme, and the proposed Scheme remains as described in
section 5 of the Main Report.
2.17 There is no intention that there will be any Excluded Policies.
TRANSFERS AND NOVATIONS OUTSIDE OF THE SCHEME
2.18 As described in the Main Report, it remains the case that the Other Business Novations are expected to
take effect on the same date as the Effective Date of the Scheme, and the South Korea Branch Business
is expected to be transferred to the South Korea branch of International sometime after the Effective Date,
in the second half of 2022 following the authorisation of the South Korea branch.
2.19 As described in the Main Report, it remains the case that the Irish Law Treaty and the PLRA Retrocession
are due to be novated to International on the Effective Date as planned. If, for any reason, the Irish Law
Treaty does not novate to International on the Effective Date as planned, this would have a minimal impact
on the financial information I have considered in the Main Report and in this Supplementary Report, due to
the immaterial size of this treaty (which as at 30 June 2021 has a pre-diversification SCR of c.£5m and a
BEL of less than £(1m) compared to an overall PLRL pre-diversification SCR of £3,682m and a BEL of
£(942)m under Pillar 1 of the UK Prudential Regulation Regime). As a result, this would not impact the
conclusions in the Main Report and in this Supplementary Report.
2.20 At the time of writing the Main Report, PLRL and International were considering utilising an intra-group
retrocession arrangement under which International would 100% reinsure the liabilities of PLRL in the event
that any of the Non-Part VII Transferred Business is not able to be novated to International on the Effective
Date. I understand that such retrocession is still currently being considered for any part of the Singapore
Branch Business or Canada Branch Business (if authorisation is granted for the Canada branch of
International as described further in paragraph 2.22 below) that does not novate to International on the
Effective Date as planned.
2.21 At the time of writing the Main Report, International was considering whether it should apply to set up its
operations in China as a branch or as a representative office. I understand that International’s intention is
to submit a branch application during 2022. PLRL’s representative office in China will continue to provide
client liaison services and to conduct market research pending authorisation of International’s China branch.
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2.22 The Canada branch of International remains subject to authorisation. I understand that the application for
the branch has been made, and that the branch is planned to be set up ahead of the Effective Date. The
process requires approval from the Canadian Finance Minister who must approve the already received
Canadian regulators’ recommendation of the establishment of the branch. A temporary delay to this part of
the process has now arisen due to the recent general election in Canada. In the event that the authorisation
of the Canada branch of International is not granted prior to the Effective Date, the Canada Branch Business
would remain within PLRL and the Global Canadian Business would remain within Global until such time
as the Canada branch of International is granted authorisation. I have been provided with information on
the expected impact on the PLRL and International balance sheets in this scenario, and I note that these
impacts are not significant. In particular, the SCR ratio of PLRL and the BSCR ratio of International each
remain above the normal operating range under the PLRL Capital Management Policy and the International
Capital Management Policy respectively. Therefore the potential delay to the authorisation of the Canada
branch of International would not impact the conclusions in the Main Report and in this Supplementary
Report.
2.23 As described in the Main Report, notwithstanding the above paragraph regarding the authorisation of the
Canada branch of International, it remains the case that the novation from Global to International in Canada
is due to take place on the Effective Date as planned (the “Global Canadian Business” as defined in the
Main Report); however the subsequent quota share retrocession between the Canada branch of
International and Global is expected to take place on 1 July 2022 (the “Canadian Retro Agreement” as
defined in the Main Report). I note that the short deferral of this retrocession arrangement is expected to
have a minor temporary beneficial impact on the financial position of International, and therefore does not
impact the conclusions in the Main Report and in this Supplementary Report.
2.24 As described in paragraph 1.34 of the Main Report, I am not aware of any future plans of the Pacific Life
Group and its entities or other matters that I have not taken into account in undertaking my assessment of
the Scheme and in preparing this Report, but which nonetheless should be drawn to the attention of
policyholders in their consideration of the Scheme.
Business Transfer Agreement
2.25 There have been no changes to the Business Transfer Agreement, which remains as described in section
6 of the Main Report.
Capital transition plan
2.26 There have been no changes to the capital transition plan, which remains as described in section 6 of the
Main Report. The various scenarios in which the Scheme, the Other Business Novations and the transfer
of the South Korea Branch Business to International do not take place in the planned order have been
updated for the financial information as at 30 June 2021. Based on the pro-forma position as at 30 June
2021, there are two scenarios where PLRL’s SCR ratio would lie within the amber range of the PLRL Capital
Management Policy, however these scenarios are considered remote, and were it to look like one of these
scenarios were going to happen, PLRL would seek a capital injection in line with its Capital Management
Policy. Therefore this does not change the conclusions in the Main Report and in this Supplementary Report.
2.27 In light of the potential delay to the authorisation of the Canada branch of International described in
paragraph 2.22 I note that, according to the capital transition plan, under all scenarios where the Canada
Branch Business remains with PLRL as at the Effective Date, PLRL continues to be within the normal
operating range under the PLRL Capital Management Policy.
KEY DEPENDENCIES FOR THE SCHEME TO PROCEED AS INTENDED
2.28 In preparing my Main Report, I placed reliance on the UK branch of International being granted authorisation
from the PRA and the FCA prior to the Effective Date, in order for the Scheme to be successfully
implemented as intended. In addition, the analysis in the Main Report is based on the assumption that the
UK branch of International is granted a ‘Solvency II waiver’ by the PRA prior to the Effective Date, such that
the UK branch of International would report to the PRA on a Bermudan basis. The UK branch of International
was granted authorisation by the PRA and the FCA in October 2021, and the BMA has also confirmed its
non-objection to the authorisation. In addition, the Solvency II waiver was granted by the PRA in October
2021 for an initial period of three years.
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2.29 As described in the Main Report, whilst not a formal requirement for the Scheme to proceed, another
assumption I have made when preparing the Main Report and the Supplementary Report is that the Other
Business Novations also take effect on the Effective Date as planned. As set out in paragraph 2.18 above,
to the extent that any of the Singapore Branch Business or Canada Branch Business is not able to be
novated to International on the Effective Date as planned, this business is expected to be reinsured by
International from the Effective Date. As set out in paragraph 2.22 above, whilst there may be a delay in the
authorisation of the Canada branch of International, I have been provided with information on the expected
impact of such a delay on the PLRL and International balance sheets, and in summary it would not impact
the conclusions in the Main Report and this Supplementary Report. In addition, as set out in the Main Report,
the capital transition plan contains detailed analysis of the implications should the Scheme and Other
Business Novations not take place as planned on the Effective Date, and I consider this analysis to be
robust.
CORRESPONDENCE AND OBJECTIONS RECEIVED FROM THE PRA AND THE FCA
2.30 Following the publication of the Main Report I have been in correspondence with the PRA and the FCA.
2.31 The PRA prepared a report dated 13 September 2021 and concluded that it did not have any objections to
the directions sought at the Directions Hearing on 16 September 2021 but that its assessment of the
Scheme was ongoing. The PRA expects to file a report at the Sanction Hearing confirming its objection or
non-objection to the proposed Scheme.
2.32 The FCA prepared a report dated 13 September 2021, in which it considered the proposed Scheme for the
Directions Hearing on 16 September 2021. The FCA also concluded that it did not have any objections to
the directions sought at the Directions Hearing on 16 September 2021 and that its assessment of the
Scheme was ongoing. The FCA also expects to file a report at the Sanction Hearing confirming its objection
or non-objection to the proposed Scheme.
CAPITAL MANAGEMENT
2.33 As described in my Main Report, International has its own Capital Management Policy approved by the
International Board. The International Capital Management Policy details the capital that International
should hold to cover its regulatory capital requirement (the “International BSCR”) under Pillar 1 of the
Bermudan Prudential Regulation Regime and its internal economic capital requirement (the “International
ICR”) under Pillar 2 of the Bermudan Prudential Regulation Regime, which is based on International’s
internal view of its risk profile. The International Capital Management Policy also contains details of the
actions that can be taken should International’s capital position deteriorate, and the management
information (“MI”) produced to monitor capital levels.
2.34 The International Capital Management Policy contains details on the use of various solvency buffers:
• The Regulatory Solvency Buffer, which represents the sum of:
o A monetary amount based on the target proportion of Own Funds to the International BSCR
under Pillar 1 of the Bermudan Prudential Regulation Regime that is to be held in addition to
the International BSCR; and
o An additional monetary amount which will reduce from the Effective Date.
These components of the Regulatory Solvency Buffer together are calibrated such that there is at most
a 1 in 5 chance of being exhausted over a one year period;
• The Economic Solvency Buffer, which represents a monetary amount based on the target proportion
of Own Funds to the International ICR under Pillar 2 of the Bermudan Prudential Regulation Regime
that is to be held in addition to the International ICR, and is calibrated such that there is at most a 1 in
5 chance of being exhausted over a one year period; and
• The solvency buffer implied by the sum of the solvency targets for each branch of International (once
authorised) and PLRA. The solvency target for each branch of International and PRA is a monetary
amount based on:
o For the UK, South Korea, Canada and Singapore branches of International (once authorised, in
the case of the UK, South Korea and Canada branches), the higher of a target proportion of Own
Funds to the capital requirements on the economic basis and a target proportion of Own Funds
to the capital requirements on the respective local regulatory bases; and
10
o The PLRA capital requirement as determined in line with the Australian Prudential Regulatory
Authority (“APRA”) regime.
2.35 The update to the Regulatory Solvency Buffer to include an additional monetary amount which will reduce
from the Effective Date was formally approved by the International Board on 21 September 2021. This
approval ratified the agreement in principle made ahead of the Directions Hearing.
2.36 The additional monetary amount materially reduces the gap between the BSCR and the SCR components
of the capital management policies that exists currently as a result of the two regimes’ different sensitivity
to the current historically low interest rate environment, which is discussed in paragraphs 7.13 and 8.85 of
the Main Report. As this gap in respect of the Part VII Transferred Policyholders is expected to reduce
significantly over the next 8 years, the additional monetary amount will reduce to zero on a linear basis over
this time period. I am aware that this approach has been discussed with the PRA as part of the PRA’s
consideration of the Scheme.
2.37 Under the International Capital Management Policy, International is required to hold sufficient capital to
meet the higher of:
• The International BSCR plus the Regulatory Solvency Buffer;
• The International ICR plus the Economic Solvency Buffer; and
• The sum of the solvency targets for each branch of International and PLRA.
This is referred to as the “International Target Capital Amount”.
2.38 For the reasons set out in paragraphs 8.30 of the Main Report, overall I am satisfied that there should be
no impact to the claims payments for the Part VII Transferred Policyholders due to being subject to the
International Capital Management Policy and risk appetite statement compared to the PLRL Capital
Management Policy and risk appetite statement currently. For the reasons set out in section 9 of my Main
Report, I am satisfied that this should also be the case in relation to the Non-Part VII Transferred
Policyholders.
POTENTIAL AMENDMENTS TO SOLVENCY II
2.39 As described in my Main Report, during 2020 EIOPA conducted a review of Solvency II and published its
opinion on this review in December 2020. It is now up to the European Commission to adopt, amend or
reject the proposals made by EIOPA, with the implementation of these changes for insurers based in the
EU likely to be in or around 2025. The European Commission published its proposed amendments to the
Solvency II directive on 22 September 2021, as well as an impact assessment. The impact assessment
included potential changes to the risk margin which would make it less onerous, including amending the
cost of capital rate, and an amendment to the extrapolation methodology for the risk-free rate. Proposed
amendments to the Solvency II Delegated Acts, including any changes to the risk margin and risk-free rate
calculations, will be published at a later date. However, as the UK is not part of the EU, the UK regime would
not be impacted immediately as the UK government would decide whether they would bring the changes
into UK law.
2.40 As described in my Main Report, on 20 July 2021 the PRA launched its Quantitative Impact Study (“QIS”)
exercise covering the review of Solvency II in the UK, and the deadline for submitting a response to the QIS
exercise is 20 October 2021. There have been no material updates to the QIS since my Main Report. There
will also be a second consultation published later in 2021 on the Future Regulatory Framework Review
(following an initial consultation in late 2020).
2.41 As was the case in my Main Report, I acknowledge that both the Solvency II regime and the UK’s adoption
of the Solvency II regime are currently under review and subject to possible change. In particular, HM
Treasury has now issued a response to its review of Solvency II and its call for evidence in order to seek
the views of the insurance industry on potential changes to the regime. The response published stated that
the government seeks for the prudential regulatory regime to become more flexible and proportionate, and
they accepted it is currently overly rigid and prescriptive. The response document included the following
points:
• They believe that there is a strong argument that risk margin should be reformed, in order to reduce
volatility and free up resources;
11
• There is also an argument to reform the Matching Adjustment, including the criteria for eligibility of
assets and its approval process;
• There are grounds to reform calculation of the SCR, including the approval process for the use of
internal models; and
• Improvements could be made to Solvency II reporting requirements.
2.42 Throughout this Supplementary Report I define the ‘UK Prudential Regulation Regime’ as the solvency
regime that now applies in the UK, which is based on Solvency II as modified and implemented in the UK
following the end of the Brexit transition period.
CHANGES TO THE BERMUDAN PRUDENTIAL REGIME
2.43 Since my Main Report, there have not been any material changes to the Bermudan Prudential Regime. The
BMA has stated that the informal requirement to provide quarterly returns will be made permanent from
2022; these returns were introduced to monitor the impact of COVID-19 for Class D and Class E
(re)insurers, of which International is one.
2.44 In my Main Report I stated that the BMA is currently considering expanding its scope for conduct of business
regulation. It is expected that codes of conduct for (re)insurers will be updated by the end of 2021, and there
have been some extensions to the Banks and Deposit Companies Act 1999 legislation to include protection
for customers and promote the fair treatment of customers.
IMPACT OF SONIA TRANSITION
2.45 As described in the Main Report, with effect from 31 July 2021 there was a transition of the referenced risk-
free rate curve in the production of UK Prudential Regulation Regime technical information from the London
Inter-Bank Offered Rate (“LIBOR”) to the SONIA rate. Given the timing of the SONIA transition, its impact
is not reflected in the financial information included in the Main Report or in this Supplementary Report,
which is as at 31 December 2020 and 30 June 2021 respectively.
2.46 I stated in the Main Report that the impact of the SONIA transition on PLRL’s SCR ratio was not expected
to be material. As expected, the transition to the SONIA curve resulted in an immaterial reduction of c.3%
to PLRL’s SCR ratio as at 30 June 2021 on a pro-forma basis. Nonetheless, I understand that during August
2021, International made a capital injection of £50m into PLRL in order to broadly offset this immaterial
impact, and therefore overall there has been no impact on the financial position of PLRL as a result of the
SONIA transition.
2.47 Following the implementation of the proposed Scheme, International would use rates published by the BMA
rather than SONIA-based risk-free rates (or, prior to the SONIA transition, LIBOR-based risk-free rates).
THE ONGOING EFFECTS OF COVID-19
2.48 At the time of writing the Main Report, COVID-19 had been declared a pandemic by the World Health
Organisation, the prevalence of COVID-19 continued to be volatile and to vary significantly across different
countries. In the UK, almost all previous COVID-19 lockdown measures had been removed, and the number
of daily cases of COVID-19 had declined and appeared to have plateaued. In the Main Report, I considered
my conclusions regarding the Scheme in light of the potential market risk, mortality risk and operational
disruption arising due to COVID-19.
2.49 The prevalence of COVID-19 and the lockdown measures in place in the UK has remained broadly
consistent since writing the Main Report. As there is not a major change in the ongoing effects of COVID-
19 since the Main Report, I continue to be satisfied that the COVID-19 pandemic does not provide any
reason to change the conclusions in the Main Report and in this Supplementary Report.
12
3. THE EFFECT OF THE SCHEME ON THE SECURITY OF
POLICY BENEFITS
PART VII TRANSFERRED POLICYHOLDERS
The effect on the security of Part VII Transferred Policy claims payments of a change in the applicable risk
appetite statements and capital management policies
3.1 As set out in Section 8 of the Main Report, both PLRL and International set out in their Capital Management
Policies the capital they will hold in terms of both a Regulatory Solvency Buffer and an Economic Solvency
Buffer. Both firms hold sufficient capital to meet their respective Target Capital Amounts, which for both
PLRL and International is set to be the higher of the regulatory capital requirement plus the Regulatory
Solvency Buffer, the internal economic capital requirement plus the Economic Solvency Buffer, and, for
International, the sum of the solvency targets for each branch of International and PLRA.
3.2 There have been no material changes to the PLRL and International Capital Management Policies, and the
calibration of these policies is as described in the Main Report. Additionally, the governance around the
Capital Management Policies of PLRL and International, and the Risk Management Frameworks of the two
companies, remain as described in the Main Report.
3.3 It remains the case that as at 30 June 2021, the biting capital basis was the regulatory basis for PLRL and
the internal economic basis for International. As was the case as at 31 December 2020, there is a modest
reduction in the amount of capital required to be held by International post-Scheme compared to PLRL pre-
Scheme based on the updated financials as at 30 June 2021 in accordance with their Capital Management
Policy, due to the modest reduction in the International ICR compared to the PLRL SCR. However, as was
the case in the Main Report, the International Capital Ratios post-Scheme and, post-Scheme and Other
Business Novations remain above the normal operating range of the International Capital Management
Policy, and each is expected to be higher than the PLRL Capital Ratio.
3.4 As a result, I remain satisfied that the reduction in the amount of capital required to be held by International
will not affect the policyholder protection resulting from International’s Capital Management Policy.
Therefore, there is in my opinion no material reduction in the strength of the Capital Management Policy for
the Part VII Transferred Policies following the implementation of the proposed Scheme.
The effect of being part of International after implementation of the Scheme compared to PLRL currently
3.5 The conclusions in the Main Report were based on the financial information provided by PLRL and
International as at 31 December 2020.
3.6 The financial results for PLRL and International as at 30 June 2021 were finalised in September 2021 and
are included in Appendix A and Appendix B. I have reconsidered my conclusions in light of this updated
financial information.
3.7 The table below sets out the regulatory solvency ratios for PLRL pre-Scheme, International post-Scheme,
and International post-Scheme and Other Business Novations as at 31 December 2020, as shown in the
Main Report, and 30 June 2021.
FIGURE 3.1 REGULATORY SOLVENCY RATIOS AS AT 31 DECEMBER 2020 AND 30 JUNE 2021
SCR/BSCR RATIO PLRL PRE-SCHEME INTERNATIONAL POST-
SCHEME
INTERNATIONAL POST-
SCHEME AND OTHER
BUSINESS NOVATIONS
31 December 2020 139% 356% 355%
30 June 2021 136% 326% 347%
Source: Appendices A and B
13
3.8 As can be seen, there has been no material change to the SCR ratio of PLRL pre-Scheme between 31
December 2020 and 30 June 2021. There has been a decrease in the BSCR ratio of International post-
Scheme and the BSCR ratio of International post-Scheme and Other Business Novations between 31
December 2020 and 30 June 2021, this is driven by a reduction in Own Funds which is caused mostly by
an increase in liabilities due to a range of factors including the change in yields over the period and new
business written over the period balanced with the run-off of existing business. As at 30 June 2021, if the
proposed Scheme were to have been implemented at this date, the International BSCR ratio would be
above the normal operating range under the International Capital Management Policy; however, as noted
in paragraph 3.3, this was not the biting capital basis. Therefore, the reduction in the BSCR ratio does not
affect my conclusions in relation to the security of Part VII Transferred Policyholder claims payments.
3.9 As noted in Appendix B, the International BSCR ratios post-Scheme, and post-Scheme and Other Business
Novations shown above include $230m (equivalent to £166m as at 30 June 2021) of Ancillary Own Funds;
this has been discussed in principle with the BMA and a formal application was submitted on 24 September
2021. If these Ancillary Own Funds were to be excluded, the International BSCR ratios post-Scheme, and
post-Scheme and Other Business Novations would be 296% and 318% respectively as at 30 June 2021,
compared to the corresponding figures shown above of 326% and 347%. Given the International BSCR
ratios post-Scheme, and post-Scheme and Other Business Novations are above the normal operating range
of the International Capital Management Policy in either scenario (if this were to be the biting capital basis),
as was the case in the Main Report, the inclusion or exclusion of the $230m of Ancillary Own Funds on the
International Bermudan Prudential Regulation Regime balance sheet does not impact my conclusions in
relation to the security of Part VII Transferred Policyholder claims payments.
3.10 As noted in paragraph 2.22, there is a risk that the Canada branch of International is not authorised prior to
the Effective Date, which would result in a temporary delay to the novation of PLRL’s Canada branch
business. This would result in a temporary reduction in the SCR Ratio for International post-Scheme and
Other Business Novations from 347% to 326% until the novation can be completed, however the solvency
position of International would still be above the normal operating range of the International Capital
Management Policy. Therefore, a temporary delay to the approval of the International Canada branch and
subsequent novation of the Canada Branch Business would not impact my conclusions on the security of
the Part VII Transferred Policyholders’ claims payments.
3.11 As was the case in the Main Report, for PLRL pre-Scheme, International post-Scheme, and International
post-Scheme and Other Business Novations, the ICR ratios as at 30 June 2021 are each above the amber
trigger levels and above their normal operating ranges.
3.12 As discussed in the Main Report, the South Korea Branch Business of PLRL will not be included within the
Other Business Novations, but is expected to transfer to the South Korea branch of International after the
Other Business Novations in the second half of 2022. It continues to be the case that the International BSCR
and ICR ratios following the subsequent transfer of the South Korea Branch Business are each expected to
be unchanged from their positions post-Scheme and Other Business Novations.
3.13 As described in the Main Report, both PLRL and International carry out a range of stress and scenario tests
to test the resilience of the solvency position in key scenarios as part of the annual ORSA and CISSA
processes. These stress and scenario tests for PLRL have not yet been undertaken again as at 30 June
2021, and for International they would be undertaken as at 31 December 2021. There was a decrease in
the base solvency figures for PLRL pre-Scheme and International pre-Scheme, post-Scheme, and post-
Scheme and Other Business Novations as at 30 June 2021 compared to 31 December 2020. However, as
the regulatory solvency ratios remain above the normal operating ranges for PLRL and International I do
not expect there to be a change to the impact of the stress and scenario tests that would affect the
conclusions from my Main Report. I therefore continue to be satisfied that the stress and scenario testing
carried out by International is appropriate; it includes a comparable range of scenarios to those considered
by PLRL. I do not expect there to be a significant change in the relative impact of the scenarios that would
affect the security of claims payments for the Part VII Transferred Policyholders.
3.14 Some transactions and methodology changes are not reflected in the financial position of PLRL as at 30
June 2021. These include: the £50m cash injection in August 2021 largely in respect of the SONIA transition;
the additional £50m cash injection received in September 2021; expected basis changes at 31 December
2021 due to an annual review of Solvency II assumptions; and the impact of deferred tax assets and
liabilities in PLRL. However, the combined impact of these changes is expected to be broadly neutral, and
not to materially affect the PLRL solvency ratio, and therefore to have no effect on my conclusions.
14
3.15 Additionally, there will be an annual review of basis changes for International for the regulatory basis in the
second half of 2021, which is not reflected in the financial position as at 30 June 2021. This may result in a
reduction in the International BSCR ratio; however, that ratio would still be above the amber trigger level
under the International Capital Management Policy, and therefore would not affect my conclusions.
3.16 In summary, I remain satisfied that the Part VII Transferred Policies would not experience a reduction in
financial strength as a result of the transfer.
3.17 There have been no changes since the date of the Main Report to the group support available to PLRL and
International or the retrocession arrangements of PLRL and International. I note that no objections or
expressions of dissatisfaction relating to the Scheme have been raised by any of the retrocessionaires
whose retrocession treaties are transferring from PLRL to International under the proposed Scheme.
Therefore, the analysis within my Main Report continues to apply in respect of these areas.
Overall conclusion on the effect of the Scheme on the security of Part VII Transferred Policyholders’ claims
payments
3.18 Overall, the financial information as at 30 June 2021 does not change the conclusions in the Main Report
regarding the security of the Part VII Transferred Policyholders’ claims payments, and I remain satisfied that
the implementation of the proposed Scheme would not have a material adverse effect on the security of the
Part VII Transferred Policyholders’ claims payments.
NON-PART VII TRANSFERRED POLICYHOLDERS
3.19 The Part VII Transferred Business accounts for approximately 73% of PLRL’s pre-diversified SCR as at 30
June 2021 on a pre-Scheme basis. In comparison the Non-Part VII Transferred Business which is currently
part of PLRL accounts for approximately 20% of PLRL’s pre-diversified SCR as at 30 June 2021 on a pre-
Scheme basis. Therefore, the Part VII Transferred Business is more significant in SCR terms than the Non-
Part VII Transferred Business.
3.20 As described in Section 8 of the Main Report, the Non-Part VII Transferred Policyholders that are currently
part of PLRL will be subject to the PLRL Capital Management Policy both before and immediately after the
proposed Scheme. After the Non-Part VII Transferred Business is novated to International, it will be subject
to the International Capital Management Policy.
3.21 There have been no material changes to the PLRL and International Capital Management Policies, and the
calibration of these policies is as described in the Main Report. Additionally, the governance around the
Capital Management Policies of PLRL and International, and the Risk Management Frameworks of the two
companies, remain as described in the Main Report.
3.22 The conclusions in the Main Report were based on the financial information provided by PLRL and
International as at 31 December 2020.
3.23 The financial results for PLRL and International as at 30 June 2021 were finalised in September 2021 and
are included in Appendix A and Appendix B. I have reconsidered my conclusions in light of this updated
financial information.
3.24 The table below sets out the regulatory solvency ratios for PLRL pre-Scheme, PLRL post-Scheme, and
International post-Scheme and Other Business Novations as at 31 December 2020, as shown in the Main
Report, and 30 June 2021.
FIGURE 3.2 REGULATORY SOLVENCY RATIOS AS AT 31 DECEMBER 2020 AND 30 JUNE 2021
SCR/BSCR RATIO PLRL PRE-SCHEME PLRL POST-SCHEME
INTERNATIONAL POST-
SCHEME AND OTHER
BUSINESS NOVATIONS
31 December 2020 139% 141% 355%
30 June 2021 136% 153% 347%
Source: Appendices A and B
SCR/BSCR Ratio PLRL PRE-SCHEME International POST-
Scheme
International post-
scheme and other
business novations
31 December 2020 139% 356% 355%
30 June 2021 136% 324% 319%
15
3.25 As can be seen, there has been no material change to the SCR ratio of PLRL pre-Scheme between 31
December 2020 and 30 June 2021. There has been a relatively small increase in the SCR ratio of PLRL
post-Scheme as at 30 June 2021 compared to 31 December 2020. This is a result of a small increase in
Own Funds, which is mainly driven by a reallocation of assets between the Part VII Transferring Business
and the Other Business Novations during the first half of 2021, combined with a small reduction in SCR,
which is mainly driven by the expected run-off of business within PLRL. There has also been a decrease in
the BSCR ratio of International post-Scheme and Other Business Novations as at 30 June 2021 compared
to 31 December 2020. This is due to a decrease in Own Funds, which is caused by a range of factors
including the change in yields over the period and new business written over the period, balanced with the
run-off of existing business. Overall as at 30 June 2021, if the proposed Scheme were to have been
implemented at this date, the PLRL SCR ratio and International BSCR ratio would each be above the normal
operating range under their respective Capital Management Policies. As described in my Main Report,
PLRL’s post-Scheme state is expected to be temporary. If the Other Business Novations were delayed for
any reason, it remains the case that I would not expect the Non-Part VII Transferred Policyholders to be
materially adversely affected by the continued reliance on the financial strength of PLRL, given the increase
to the PLRL SCR ratio post-Scheme.
3.26 As described in paragraph 3.9, the International BSCR ratio post-Scheme and Other Business Novations
includes $230m (equivalent to £166m as at 30 June 2021) of Ancillary Own Funds, and a formal application
for the use of the Ancillary Own Funds was submitted to the BMA on 24 September 2021. Given the
International BSCR ratio post-Scheme and Other Business Novations is above the normal operating range
of the International Capital Management Policy (if this were to be the biting capital basis), the inclusion or
exclusion of the $230m of Ancillary Own Funds on the International Bermudan Prudential Regulation
Regime balance sheet does not impact my conclusions in relation to the security of Non-Part VII Transferred
Policyholder claims payments.
3.27 As noted in paragraph 2.22, there is a risk that the Canada branch of International is not authorised prior to
the Effective Date, which would result in a temporary delay to the novation of PLRL’s Canada branch
business. This would result in a temporary reduction in the SCR Ratio for International post-Scheme and
Other Business Novations from 347% to 326% until the novation can be completed, however the solvency
position of International would still be above the normal operating range of the International Capital
Management Policy. Therefore, a temporary delay to the approval of the International Canada branch and
subsequent novation of the Canada Branch Business would not impact my conclusions on the security of
the Non-Part VII Transferred Policyholders’ claims payments.
3.28 As was the case in the Main Report, for PLRL pre-Scheme, PLRL post-Scheme, and International post-
Scheme and Other Business Novations, the ICR ratios as at 30 June 2021 are each above the amber trigger
levels and above their normal operating ranges.
3.29 As discussed in the Main Report, the South Korea Branch Business of PLRL will not be included within the
Other Business Novations, but is expected to transfer to the South Korea branch of International after the
Other Business Novations during the second half of 2022. It continues to be the case that the International
BSCR and ICR ratios following the subsequent transfer of the South Korea Branch Business are each
expected to be unchanged from their positions post-Scheme and Other Business Novations. This is
because the South Korea Branch Business is already captured within the financial position of International
since, for the purposes of this Supplementary Report, it is assumed that PLRL was a subsidiary of
International as at 30 June 2020.
3.30 As described in the Main Report, both PLRL and International carry out a range of stress and scenario tests
to test the resilience of the solvency position in key scenarios as part of the annual ORSA and CISSA
processes. The stress and scenario tests as at 30 June 2021 for the PLRL ORSA will be produced for
submission in Q1 2022. There was a decrease in the base solvency figures for PLRL pre-Scheme and
International pre-Scheme, post-Scheme, and post-Scheme and Other Business Novations as at 30 June
2021 compared to 31 December 2020. However, as the regulatory solvency ratios remain above the normal
operating ranges for PLRL and International, I do not expect there to be a change to the impacts of the
stress and scenario tests that would affect the conclusions from my Main Report. I therefore continue to be
satisfied that the stress and scenario testing carried out by International is appropriate, includes a
comparable range of scenarios to those considered by PLRL, and there is not expected to be a significant
change in the relative impact of the scenarios that would affect the security of claims payments for the Non-
Part VII Transferred Policyholders.
16
3.31 There have been no changes since the date of the Main Report to the group support available to PLRL and
International or the retrocession arrangements of PLRL and International. Therefore, the analysis within my
Main Report continues to apply in respect of these areas.
3.32 Overall, the financial information as at 30 June 2021 does not change the conclusions in the Main Report
regarding the security of the Non-Part VII Transferred Policyholders’ claims payments, and I remain satisfied
that the implementation of the proposed Scheme would not have a material adverse effect on the security
of the Non-Part VII Transferred Policyholders’ claims payments.
REMAINING POLICYHOLDERS
3.33 The Remaining Business in PLRL represents approximately 7% of PLRL’s pre-diversified SCR as at 30
June 2021, in comparison to the Part VII Transferred Business which represents 73%, and the Non-Part VII
Transferred Business that represents 20% as at 30 June 2021. The Remaining Business therefore
represents a small proportion of the PLRL SCR pre-Scheme.
3.34 There have been no material changes to the PLRL Capital Management Policy, and the calibration of this
policy is as described in the Main Report. Additionally, the governance around the Capital Management
Policy of PLRL, and the Risk Management Framework, remain as described in the Main Report.
3.35 The table below sets out the regulatory solvency ratios for PLRL pre-Scheme, PLRL post-Scheme, and
PLRL post-Scheme and Other Business Novations as at 31 December 2020, as shown in the Main Report,
and 30 June 2021.
3.36 As can be seen, there has been no material change to the SCR ratio of PLRL pre-Scheme between 31
December 2020 and 30 June 2021, and a relatively small increase in the SCR ratio of PLRL post-Scheme,
and post-Scheme and Other Business Novations. This is a result of a small increase in Own Funds, which
is mainly driven by a reallocation of assets between the Part VII Transferring Business and the Other
Business Novations during the first half of 2021, combined with a small reduction in SCR, which is mainly
driven by the expected run-off of business within PLRL. Overall as at 30 June 2021, if the proposed Scheme
were to have been implemented at this date, the PLRL SCR ratio would be above the normal operating
range under the PLRL Capital Management Policy.
3.37 As noted in paragraph 2.22, there is a risk that the Canada branch of International is not authorised prior to
the Effective Date, which would result in a temporary delay to the novation of PLRL’s Canada branch
business. This would result in a temporary reduction in the SCR Ratio for PLRL post-Scheme and Other
Business Novations from 254% to 240%, until the novation can be completed, however the solvency position
of PLRL would still be above the normal operating range of the PLRL Capital Management Policy. Therefore,
a temporary delay to the approval of the International Canada branch and subsequent novation of the
Canada Branch Business would not impact my conclusions on the security of the Remaining Policyholders’
claims payments.
3.38 As was the case in the Main Report, for PLRL pre-Scheme, PLRL post-Scheme, and PLRL post-Scheme
and Other Business Novations, the ICR ratios as at 30 June 2021 are each above the amber trigger levels
and above their normal operating ranges.
3.39 There have been no changes since the date of the Main Report to the group support available to PLRL or
the retrocession arrangements of PLRL. Therefore, the analysis within my Main Report continues to apply
in respect of these areas.
FIGURE 3.3 REGULATORY SOLVENCY RATIOS AS AT 31 DECEMBER 2020 AND 30 JUNE 2021
SCR RATIO PLRL PRE-SCHEME PLRL POST-SCHEME
PLRL POST-SCHEME
AND OTHER BUSINESS
NOVATIONS
31 December 2020 139% 141% 229%
30 June 2021 136% 153% 254%
Source: Appendices A and B
SCR/BSCR Ratio PLRL PRE-SCHEME PLRL POST-Scheme
International post-
scheme and other
business novations
31 December 2020 139% 141% 355%
30 June 2021 136% 155% 319%
Source: Appendices A and B
SCR/BSCR Ratio PLRL PRE-SCHEME International POST-
Scheme
International post-
scheme and other
business novations
31 December 2020 139% 356% 355%
30 June 2021 136% 324% 319%
Source: Appendices A and B
17
3.40 In summary, I remain satisfied that, should the proposed Scheme be implemented, there would be no
material adverse effect on the security of claims payments for the Remaining Policyholders of PLRL.
EXISTING POLICYHOLDERS
3.41 The Existing Business consists of business that novated to the Singapore branch of International with effect
from July 2021, and will remain in International after the Effective Date. The Existing Business comprises 4
treaties across 2 cedants that were originally written by the Singapore branch of PLRL. The 4 novated
treaties are small, with a total pre-diversification SCR of less than 1% of the total pre-diversification PLRL
SCR as at 30 June 2021.
3.42 There have been no material changes to the International Capital Management Policy, and the calibration
of this policy is as described in the Main Report. Additionally, the governance around the Capital
Management Policy of International, and the Risk Management Framework, remain as described in the
Main Report.
3.43 The table below sets out the regulatory solvency ratios for International pre-Scheme, International post-
Scheme, and International post-Scheme and Other Business Novations as at 31 December 2020, as shown
in the Main Report, and 30 June 2021.
3.44 As can be seen, there is a decrease in the BSCR ratio of International pre-Scheme, post-Scheme, and post-
Scheme and Other Business Novations between 31 December 2020 and 30 June 2021. This is due to a
decrease in Own Funds which is driven by the change in yields over the period, and new business written
over the period balanced with the run-off of existing business. However, despite this decrease, as at 30
June 2021, if the proposed Scheme were to have been implemented at this date, the International BSCR
ratio would be above the normal operating range under the International Capital Management Policy. I
therefore remain satisfied that the decrease in BSCR ratio of International post- Scheme, and post-Scheme
and Other Business Novations, compared to the equivalent ratios as at 31 December 2020, would not have
a material adverse effect on the security of the Existing Policyholders benefits.
3.45 As noted in paragraph 2.22, there is a risk that the Canada branch of International is not authorised prior to
the Effective Date, which would result in a temporary delay to the novation of PLRL’s Canada branch
business. This would result in a temporary reduction in the SCR Ratio for International post-Scheme and
Other Business Novations from 347% to 326% until the novation can be completed, however the solvency
position of International would still be above the normal operating range of the International Capital
Management Policy. Therefore, a temporary delay to the approval of the International Canada branch and
subsequent novation of the Canada Branch Business would not impact my conclusions on the security of
the Existing Policyholders’ claims payments.
3.46 As was the case in the Main Report, for International pre-Scheme, International post-Scheme, and
International post-Scheme and Other Business Novations, the ICR ratios as at 30 June 2021 are each
above the amber trigger levels and above their normal operating ranges.
3.47 There have been no changes since the date of the Main Report to the group support available to
International or the retrocession arrangements of International. Therefore, the analysis within my Main
Report continues to apply in respect of these areas.
3.48 In summary, I remain satisfied that, should the proposed Scheme be implemented, there would be no
material adverse effect on the security of claims payments for the Existing Policyholders of International.
FIGURE 3.4 REGULATORY SOLVENCY RATIOS AS AT 31 DECEMBER 2020 AND 30 JUNE 2021
BSCR RATIO INTERNATIONAL PRE-
SCHEME
INTERNATIONAL POST-
SCHEME
INTERNATIONAL POST-
SCHEME AND OTHER
BUSINESS NOVATIONS
31 December 2020 326% 356% 355%
30 June 2021 296% 326% 347%
Source: Appendices A and B
SCR Ratio PLRL PRE-SCHEME PLRL POST-Scheme PLRL post-scheme and
other business novations
31 December 2020 139% 141% 229%
30 June 2021 136% 155% 240%
Source: Appendices A and B
SCR/BSCR Ratio PLRL PRE-SCHEME PLRL POST-Scheme
International post-
scheme and other
business novations
31 December 2020 139% 141% 355%
30 June 2021 136% 155% 319%
Source: Appendices A and B
SCR/BSCR Ratio PLRL PRE-SCHEME International POST-
Scheme
International post-
scheme and other
business novations
31 December 2020 139% 356% 355%
30 June 2021 136% 324% 319%
Source: Appendices A and B
18
CONCLUSION
3.49 Overall, given the developments since the Main Report, there is no reason to change the conclusions set
out in the Main Report and I remain satisfied that the implementation of the Scheme would not have a
material adverse effect on the security of the claims payments of the Part VII Transferred Policies, the Non-
Part VII Transferred Policies, the Remaining Policies or the Existing Policies.
19
4. THE EFFECT OF THE SCHEME ON THE PROFILE OF RISKS
TO WHICH POLICYHOLDERS ARE EXPOSED
INTRODUCTION
4.1 As in the Main Report, I consider the risk profile on the economic capital bases rather than the regulatory
capital bases that apply to PLRL and International since, as described in section 7 of the Main Report, the
economic capital bases are set to more accurately reflect the nature of PLRL’s and International’s business.
However, as is also described in section 7 of the Main Report, both PLRL and International’s internal views
of the risk profile of the Part VII Transferred Business are broadly aligned to the UK Prudential Regulation
Regime regulatory view of the risk profile of this business.
PART VII TRANSFERRED POLICYHOLDERS
4.2 If the proposed Scheme were to be implemented, the Part VII Transferred Policies would be direct policies
of International and directly exposed to the risk profile of International.
4.3 The table below shows the undiversified risk profile on an economic capital basis as at 31 December 2020,
as shown in the Main Report, and 30 June 2021 of:
• PLRL pre-Scheme;
• International immediately after the transfer in of the Part VII Transferred Business; and
• International after the transfer in of the Part VII Transferred Business and the novation of the Other
Business Novations.
FIGURE 4.1: UNDIVERSIFIED RISK PROFILE ON AN ECONOMIC CAPITAL BASIS AS AT 31 DECEMBER 2020 AND 30 JUNE
2021
PLRL PRE-SCHEME INTERNATIONAL
POST-SCHEME
INTERNATIONAL
POST-SCHEME AND
OTHER BUSINESS
NOVATIONS
31 December 2020
Mortality 36% 36% 36%
Morbidity 18% 18% 18%
Longevity 15% 14% 13%
Other life underwriting risk 15% 15% 16%
Market 15% 16% 15%
Counterparty default 1% 1% 1%
Total 100% 100% 100%
30 June 2021
Mortality 37% 37% 37%
Morbidity 19% 19% 18%
Longevity 13% 12% 12%
Other life underwriting risk 15% 15% 15%
Market 15% 16% 17%
Counterparty default 1% 1% 1%
20
Total 100% 100% 100%
Source: ‘HY21 RIBM BMA EC Balance Sheets’
4.4 As shown above, there have been no material changes to the risk profile of PLRL pre-Scheme, International
post-Scheme or International post-Scheme and Other Business Novations between 31 December 2020 and
30 June 2021. In addition, it continues to be the case that the expected subsequent transfer of the South
Korea Branch Business from PLRL to the South Korea branch of International does not result in a change
to the risk profile of International as this business is already captured within the financial position of
International.
4.5 Overall, the risk profile of PLRL prior to the implementation of the proposed Scheme and the expected risk
profile of International following the implementation of the proposed Scheme, and post-Scheme and Other
Business Novations remain as described in the Main Report. Therefore, I remain satisfied that the Part VII
Transferred Business will not be materially adversely affected by the change in profile of risks to which it is
exposed as a result of the implementation of the proposed Scheme or the Other Business Novations.
NON-PART VII TRANSFERRED POLICYHOLDERS
4.6 As described in the Main Report, the Non-Part VII Transferred Business currently within PLRL is exposed
to the risk profile of PLRL, which also includes the risks associated with the Part VII Transferred Business
and the South Korea Branch Business. Immediately following the implementation of the proposed Scheme,
the Non-Part VII Transferred Business currently within PLRL will no longer be exposed to the risks
associated with the Part VII Transferred Business. However, following the subsequent novation of the Non-
Part VII Transferred Business into International, the Non-Part VII Transferred Policies would be direct
policies of International and directly exposed to the risk profile of International.
4.7 The table below shows the undiversified risk profile on an economic capital basis as at 31 December 2020,
as shown in the Main Report, and 30 June 2021 of:
• PLRL pre-Scheme;
• PLRL immediately post-Scheme; and
• International post-Scheme and Other Business Novations.
FIGURE 4.2: UNDIVERSIFIED RISK PROFILE ON AN ECONOMIC CAPITAL BASIS AS AT 31 DECEMBER 2020 AND 30 JUNE
2021
PLRL PRE-SCHEME PLRL POST-SCHEME
INTERNATIONAL
POST-SCHEME AND
OTHER BUSINESS
NOVATIONS
31 December 2020
Mortality 36% 22% 36%
Morbidity 18% 31% 18%
Longevity 15% 2% 13%
Other life underwriting risk 15% 22% 16%
Market 15% 22% 15%
Counterparty default 1% 1% 1%
Total 100% 100% 100%
30 June 2021
Mortality 37% 21% 37%
Morbidity 19% 30% 18%
21
Longevity 13% 2% 12%
Other life underwriting risk 15% 20% 15%
Market 15% 26% 17%
Counterparty default 1% 1% 1%
Total 100% 100% 100%
Source: ‘PLRL SII & EC Balance Sheets (HY21 values)’
4.8 As shown above, there have been no material changes to the risk profile of PLRL pre-Scheme, PLRL post-
Scheme or International post-Scheme and Other Business Novations between 31 December 2020 and 30
June 2021, aside from a small increase in the proportion of market risk for PLRL post-Scheme. This is due
to a shift in the planned mix of bond and cash holdings for PLRL post-Scheme, which in my view does not
represent a material change in the risk exposure of PLRL, in particular since the pro-forma PLRL post-
Scheme SCR is materially unchanged between 31 December 2020 and 30 June 2021.
4.9 It continues to be the case that the expected subsequent transfer of the South Korea Branch Business from
PLRL to the South Korea branch of International does not result in a change to the risk profile of International
as this business is already captured within the financial position of International.
4.10 Overall, aside from the small increase in market risk for PLRL post-Scheme which I do not consider material,
the risk profile of PLRL prior to the implementation of the proposed Scheme, the expected risk profile of
PLRL following the implementation of the proposed Scheme, and the expected risk profile of International
post-Scheme and Other Business Novations remain as described in the Main Report. Therefore, I remain
satisfied that any change in risk profile would not have a material adverse effect on the Non-Part VII
Transferred Policies.
REMAINING POLICYHOLDERS
4.11 If the proposed Scheme were to be implemented, the Remaining Policies would no longer be exposed to
the risks of the Part VII Transferred Business, and following the Other Business Novations, the Remaining
Policyholders would also no longer be exposed to the risks of the Canada Branch Business or Singapore
Branch Business.
4.12 The table below shows the undiversified risk profile on an economic capital basis as at 31 December 2020,
as shown in the Main Report, and 30 June 2021 of:
• PLRL pre-Scheme;
• PLRL immediately after the transfer out of the Part VII Transferred Business; and
• PLRL after the novation of the Canada Branch Business and Singapore Branch Business.
FIGURE 4.3: UNDIVERSIFIED RISK PROFILE ON AN ECONOMIC CAPITAL BASIS AS AT 31 DECEMBER 2020 AND 30 JUNE
2021
PLRL PRE-SCHEME PLRL POST-SCHEME
PLRL POST-SCHEME
AND OTHER
BUSINESS
NOVATIONS
31 December 2020
Mortality 36% 22% 5%
Morbidity 18% 31% 58%
Longevity 15% 2% 0%
Other life underwriting risk 15% 22% 18%
Market 15% 22% 17%
22
Counterparty default 1% 1% 2%
Total 100% 100% 100%
30 June 2021
Mortality 37% 21% 4%
Morbidity 19% 30% 47%
Longevity 13% 2% 0%
Other life underwriting risk 15% 20% 15%
Market 15% 26% 31%
Counterparty default 1% 1% 3%
Total 100% 100% 100%
Source: ‘PLRL SII & EC Balance Sheets (HY21 values)’
4.13 As can be seen, there have been no material changes to the risk profile of PLRL pre-Scheme or PLRL post-
Scheme between 31 December 2020 and 30 June 2021, aside from a small increase in the proportion of
market risk for PLRL post-Scheme. This is due to a shift in the planned mix of bond and cash holdings for
PLRL post-Scheme, which in my view does not represent a material change in the risk exposure of PLRL,
in particular since the pro-forma PLRL post-Scheme SCR is materially unchanged between 31 December
2020 and 30 June 2021.
4.14 For PLRL post-Scheme and Other Business Novations, there is also an increase in the proportion of market
risk between 31 December 2020 and 30 June 2021 due to the change in the planned mix of bond and cash
holdings for PLRL after the implementation of the proposed Scheme. This change is more pronounced for
PLRL post-Scheme and Other Business Novations than for PLRL post-Scheme, due to the smaller volume
of business within PLRL following the Other Business Novations. However, in my view this does not
represent a material change in the risk exposure of PLRL, in particular since the pro-forma PLRL post-
Scheme and Other Business Novations SCR is materially unchanged between 31 December 2020 and 30
June 2021.
4.15 Overall, aside from the increase in market risk for PLRL post-Scheme and PLRL post-Scheme and Other
Business Novations which I do not consider material, the risk profile of PLRL prior to the implementation of
the proposed Scheme, and the expected risk profile of PLRL following the implementation of the proposed
Scheme, and post-Scheme and Other Business Novations remain as described in the Main Report.
Therefore, I remain satisfied that any change in risk profile would not have a material adverse effect on the
Remaining Policies.
EXISTING POLICYHOLDERS
4.16 If the proposed Scheme were to be implemented, the Existing Business would be directly exposed to the
risks of the Part VII Transferred Business. Additionally, following the subsequent novation of the Non-Part
VII Transferred Business into International, the Existing Business will become exposed to the risks
associated with the Non-Part VII Transferred Business.
4.17 There have been no material changes to the risk profile of International pre-Scheme, International post-
Scheme or International post-Scheme and Other Business Novations between 31 December 2020 and 30
June 2021.
4.18 Overall, the risk profile of International at all stages, prior to the proposed Scheme, post-Scheme, and post-
Scheme and Other Business Novations, remain as described in the Main Report. Therefore, I remain
satisfied that any change in risk profile would not have a material adverse effect on the Remaining Policies.
23
5. THE EFFECT OF THE APPLICABLE REGULATORY AND
LEGAL REGIME
PART VII TRANSFERRED POLICYHOLDERS
5.1 It remains the case that, if the proposed Scheme were to be implemented, the Part VII Transferred
Policyholders would become protected by the regulatory environment in Bermuda rather than the UK as
currently. This includes the change to the supervisory body responsible for prudential regulation, the
applicable solvency regulations, regulation in respect of conduct of business and the legislation that applies
on insolvency.
5.2 The analysis in the Main Report regarding the change in protection offered by the regulatory and legal
regimes that would apply to the Part VII Transferred Policyholders should the proposed Scheme be
implemented remains valid. I therefore remain satisfied that the implementation of the proposed Scheme
would not have a material adverse effect on the protection offered by the regulatory and legal regimes that
apply to the Part VII Transferred Policyholders.
NON-PART VII TRANSFERRED POLICYHOLDERS
5.3 It remains the case that the implementation of the proposed Scheme would not result in a change in the
regulatory and legal regime that applies to the Non-Part VII Transferred Policies. The Non-Part VII
Transferred Policies would continue to be subject to the UK regulatory and legal regime.
5.4 Should the Other Business Novations be implemented, then the Non-Part VII Transferred Policyholders
would become protected by the regulatory environment in Bermuda rather than the UK as currently, which
includes the change to the supervisory body responsible for prudential regulation, the applicable solvency
regulations, regulation in respect of conduct of business and the legislation that applies on insolvency.
5.5 The analysis in the Main Report regarding the change in protection offered by the regulatory and legal
regimes that would apply to the Non-Part VII Transferred Policyholders should the Other Business
Novations be implemented remains valid. I therefore remain satisfied that the implementation of the Other
Business Novations would not have a material adverse effect on the protection offered by the regulatory
and legal regimes that apply to the Non-Part VII Transferred Policyholders.
REMAINING POLICYHOLDERS
5.6 It remains the case that the implementation of the proposed Scheme would not result in a change in the
regulatory and legal regime that applies to the Remaining Policies. The Remaining Policies would continue
to be subject to the UK regulatory and legal regime.
5.7 I therefore remain satisfied that the implementation of the proposed Scheme would not have a material
adverse effect on the protection offered by the regulatory and legal regimes that apply to the Remaining
Policyholders.
EXISTING POLICYHOLDERS
5.8 It remains the case that the implementation of the proposed Scheme would not result in a change in the
regulatory and legal regime that applies to the Existing Policies. The Existing Policies would continue to be
subject to the Bermudan regulatory and legal regime.
5.9 I therefore remain satisfied that the implementation of the proposed Scheme would not have a material
adverse effect on the protection offered by the regulatory and legal regimes that apply to the Existing
Policyholders.
24
6. THE EFFECT OF THE SCHEME ON SERVICES PROVIDED
TO POLICYHOLDERS
INTRODUCTION
6.1 The Part VII Transferred Policyholders, Non-Part VII Transferred Policyholders, Remaining Policyholders
and Existing Policyholders are solely cedants who have reinsurance contracts in place with either PLRL or
its branches, or International through its Singapore branch, as the reinsurer. Therefore, as described in the
Main Report, the expectations of each group of Policyholders in respect of their reinsurance treaties are
that:
• Their treaties continue to be administered and serviced in line with terms and conditions, and with no
reduction in service standards; and
• The governance of the treaties after implementation of the Scheme and Other Business Novations is
in line with that applied prior to the Scheme and Other Business Novations.
PART VII TRANSFERRED POLICYHOLDERS
6.2 There have been no changes since the date of the Main Report to the planned administration and servicing
of the Part VII Transferred Policies following the implementation of the proposed Scheme. In addition, there
have been no changes to the planned governance of the Part VII Transferred Policies following the
implementation of the proposed Scheme.
6.3 In my Main Report, I stated that International was negotiating the provision of services from the investment
managers, banks and custodians, and it was expected that these arrangements will replicate the services
currently provided by these parties to PLRL. Since my Main Report, International’s capabilities to manage
the transferring assets have been established. A custody agreement between the UK branch of International
and the same custodian that PLRL uses, covering the same services as the current PLRL agreement, has
been signed. The required operational accounts for the UK branch of International are in place and the UK
branch of International mandates are expected to be provided to relevant banks imminently. International’s
investment management agreement with the same investment manager as used by PLRL was prepared to
replicate the services under the existing PLRL agreement and extended to reflect the new UK branch of
International, and is expected to be signed imminently. Based on discussions with PLRL, I can now confirm
I am satisfied that these arrangements will replicate the services currently provided by these parties to
PLRL.
6.4 Therefore, the analysis within my Main Report continues to apply in respect of these areas and I remain
satisfied that the implementation of the proposed Scheme would not have a material adverse effect on the
levels and standards of administration and service or the governance that would apply to the Part VII
Transferred Policies.
NON-PART VII TRANSFERRED POLICYHOLDERS
6.5 There have been no changes since the date of the Main Report to the planned administration and servicing
of the Non-Part VII Transferred Policies following the implementation of the proposed Scheme and Other
Business Novations. In addition, there have been no changes to the planned governance of the Non-Part
VII Transferred Policies following the implementation of the proposed Scheme and Other Business
Novations.
6.6 In my Main Report, I stated that International was negotiating the provision of services from the investment
managers, banks and custodians, and it was expected that these arrangements will replicate the services
currently provided by these parties to PLRL. As detailed above in paragraph 6.3, I can now confirm I am
satisfied that these arrangements will replicate the services currently provided by these parties to PLRL.
6.7 Therefore, the analysis within my Main Report continues to apply in respect of these areas and I remain
satisfied that the implementation of the proposed Scheme and Other Business Novations would not have a
material adverse effect on the levels and standards of administration and service or the governance that
would apply to the Non-Part VII Transferred Policies.
25
REMAINING POLICYHOLDERS
6.8 There have been no changes since the date of the Main Report to the planned administration and servicing
of the Remaining Policies following the implementation of the proposed Scheme. In addition, there have
been no changes to the planned governance of the Remaining Policies following the implementation of the
proposed Scheme. Therefore, the analysis within my Main Report continues to apply in respect of these
areas and I remain satisfied that the implementation of the proposed Scheme would not have a material
adverse effect on the levels and standards of administration and service or the governance that would apply
to the Remaining Policies.
EXISTING POLICYHOLDERS
6.9 There have been no changes since the date of the Main Report to the planned administration and servicing
of the Existing Policies following the implementation of the proposed Scheme and Other Business
Novations. In addition, there have been no changes to the planned governance of the Existing Policies
following the implementation of the proposed Scheme and Other Business Novations. Therefore, the
analysis within my Main Report continues to apply in respect of these areas and I remain satisfied that the
implementation of the proposed Scheme and Other Business Novations would not have a material adverse
effect on the levels and standards of administration and service or the governance that would apply to the
Existing Policies.
26
7. CORRESPONDENCE AND OBJECTIONS RECEIVED FROM
POLICYHOLDERS
7.1 Following the Directions Hearing on 16 September 2021 and in accordance with the Scheme
communication proposal, subject to the specific waivers received, a letter was sent to the Part VII
Transferred Policyholders, Existing Policyholders, Non-Part VII Transferring Policyholders and Remaining
Policyholders (approximately 110 policyholders in total).
7.2 PLRL is keeping copies of any relevant correspondence with policyholders, maintaining a central log of all
correspondence and categorising whether the correspondence is considered an objection or request for
further information in order to meet FCA requirements.
7.3 PLRL is collating weekly management information on the correspondence with policyholders, which are
being provided to the PRA, the FCA and me.
7.4 Any objections or expressions of dissatisfaction regarding the Scheme raised by policyholders before the
Sanction Hearing but not included within the updates referred to above will be provided to the PRA, the FCA
and myself, and will also be presented to the Court at the Sanction Hearing.
7.5 At the time of writing this Supplementary Report, there have been no formal objections to the Scheme by
policyholders (of either PLRL or International) and no expressions of dissatisfaction regarding the Scheme.
I understand that there have been four requests for information, two technical enquiries and three general
enquiries from Part VII Transferred Policyholders which PLRL is currently addressing.
CONCLUSION
7.6 I am satisfied that PLRL and International are dealing with enquiries regarding the Scheme in a reasonable
way, and have adequate processes in place to deal with any objections or expressions of dissatisfaction
that may arise regarding the Scheme prior to the Sanction Hearing.
7.7 Overall, the outcome of the policyholder communications does not provide any reason to change the
conclusions of the Main Report.
27
8. MY CONCLUSIONS
8.1 I prepared the Main Report dated 7 September 2021 in which I considered the proposed Scheme based on
information available at that time and the purpose of this Supplementary Report is to provide an updated
assessment of the likely effects of the proposed Scheme ahead of the Sanction Hearing on 3 December
2021.
8.2 I have considered whether anything has happened since the date of finalisation of the Main Report, including
the updated financial information as at 30 June 2021 and the pro-forma figures showing the financial
information for PLRL and International as if the Scheme had been implemented on that date, that would
cause me to change the conclusions in the Main Report.
8.3 In summary:
• The updated financial information (Section 3).
Overall, the financial information as at 30 June 2021 does not change the conclusions in the Main
Report regarding the security of the Part VII Transferred Policy claims payments, the Non-Part VII
Transferred Policy claims payments, the Remaining Policy claims payments and the Existing Policy
claims payments, and I remain satisfied that the implementation of the proposed Scheme would not
have a material adverse effect on the security of the Part VII Transferred Policy claims payments, the
Non-Part VII Transferred Policy claims payments, the Remaining Policy claims payments and the
Existing Policy claims payments.
• The profile of risks to which the Transferring Business and Remaining Business is exposed (Section
4).
Having considered the developments since the Main Report, there is no reason to change the
conclusions set out in the Main Report and I remain satisfied that the implementation of the proposed
Scheme would not have a material adverse effect on the profile of risks to which the Part VII Transferred
Policyholders, the Non-Part VII Transferred Policyholders, the Remaining Policyholders and the
Existing Policyholders are exposed.
• The applicable regulatory and legal regime (Section 5).
Having considered the developments since the Main Report, there is no reason to change the
conclusions set out in the Main Report and I remain satisfied that the implementation of the proposed
Scheme would not have a material adverse effect on the protection offered by the regulatory and legal
regimes that would apply to the Part VII Transferred Policyholders, the Non-Part VII Transferred
Policyholders, the Remaining Policyholders and the Existing Policyholders. In addition, I remain
satisfied that the implementation of the Other Business Novations would not have a material adverse
effect on the protection offered by the regulatory and legal regimes that apply to the Non-Part VII
Transferred Policyholders.
• Standards of servicing (Section 6).
Having considered the developments since the Main Report, there is no reason to change the
conclusions set out in the Main Report and I remain satisfied that the implementation of the proposed
Scheme would not have a material adverse effect on the services provided to the Part VII Transferred
Policyholders, the Non-Part VII Transferred Policyholders, the Remaining Policyholders and the
Existing Policyholders. In addition, I remain satisfied that the implementation of the Other Business
Novations would not have a material adverse effect on the services provided to the Non-Part VII
Transferred Policyholders.
8.4 Therefore nothing has happened since the finalisation of the Main Report to provide any reason to change
the conclusions in Section 14 of the Main Report that:
• I have considered the issues affecting the various categories of policyholders of PLRL and International
separately, as set out in the Main Report in sections 7 to 13, and I do not consider further subdivisions
(other than those in the Main Report) to be necessary.
• I am satisfied that the implementation of the Scheme would not have a material adverse effect on:
28
o The security of the claims payments under the Part VII Transferred Policies, the Non-Part VII
Transferred Policies, the Remaining Policies and the Existing Policies;
o The profile of risks to which the Part VII Transferred Policyholders, the Non-Part VII Transferred
Policyholders, the Remaining Policyholders and the Existing Policyholders are exposed;
o The protection offered by the regulatory and legal regimes that apply to the Part VII Transferred
Policyholders, the Non-Part VII Transferred Policyholders, the Remaining Policyholders and the
Existing Policyholders; or
o The services provided to the Part VII Transferred Policies, the Non-Part VII Transferred Policies,
the Remaining Policies and the Existing Policies.
• I am satisfied that the implementation of the Other Business Novations would not have a material adverse
effect on:
o The protection offered by the regulatory and legal regimes that apply to the Non-Part VII
Transferred Policyholders; or
o The services provided to the Non-Part VII Transferred Policyholders.
• Finally, I am satisfied that my conclusions in relation to the various groups of policyholders above apply
equally to the policyholder of the Guernsey Treaty.
Philip Simpson 15 November 2021
Principal of Milliman LLP Fellow of the Institute and Faculty of Actuaries
29
Appendix A
Selected financial information before the implementation of the
Scheme
FIGURE A.1 REGULATORY FINANCIAL INFORMATION AS AT 30 JUNE 2021
£’M PLRL INTERNATIONAL
Total assets 2,165 2,450
Total liabilities 667 773
Own Funds 1,498 1,677
SCR/BSCR 1,104 566
Excess Own Funds 395 1,111
SCR/BSCR ratio 135.7% 296.2%
Source: ’PLRL SII & EC Balance Sheets (HY21 values)’ and ’HY21 RIBM, BMA & EC Balance Sheets’
Notes:
1. The assets for PLRL include £165m of Ancillary Own Funds.
2. The figures for International are on a pro-forma basis, assuming that PLRL was a subsidiary of International
as at 30 June 2021.
30
Appendix B
Selected financial information after the implementation of the
Scheme and the Other Business Novations
FIGURE B.1 REGULATORY POST-SCHEME PRO-FORMA FINANCIAL INFORMATION AS AT 30 JUNE 2021
£’M
PLRL INTERNATIONAL
Post-Scheme
Post-Scheme and
Other Business
Novations
Post-Scheme
Post-Scheme and
Other Business
Novations
Total assets 1,005 359 2,616 3,156
Total liabilities 409 54 773 1,174
Own Funds 596 305 1,843 1,982
SCR/BSCR 390 120 566 571
Excess Own Funds 206 185 1,277 1,411
SCR/BSCR ratio 152.7% 253.9% 325.6% 347.2%
Source: ’PLRL SII & EC Balance Sheets (HY21 values)’ and ’HY21 RIBM, BMA & EC Balance Sheets’
3. Notes:
1. The £165m of Ancillary Own Funds included within the assets for PLRL in Appendix A will expire after the
implementation of the proposed Scheme, and are therefore not included in the assets for PLRL in the
table above. The use of the $230m (equivalent to £166m as at 30 June 2021) of Ancillary Own Funds
within International post-Scheme has been discussed with the BMA in principle, and a formal application
was submitted to the BMA on 24 September 2021; however, the assets for International in the table above
take credit for these Ancillary Own Funds.
2. The figures for International are on a pro-forma basis, assuming that PLRL was a subsidiary of
International as at 30 June 2021.
3. The “Post-Scheme” figures for PLRL and International are on a pro-forma basis, assuming that the Part
VII Transferred Business had been transferred from PLRL to International under the proposed Scheme
as at 30 June 2021.
4. The “Post-Scheme and Other Business Novations” figures for PLRL and International are on a pro-forma
basis, assuming that the Part VII Transferred Business had been transferred from PLRL to International
under the proposed Scheme, and that the Non-Part VII Transferred Business had been transferred to
International under the Other Business Novations as at 30 June 2021. For the avoidance of doubt, these
figures assume that the South Korea Branch Business remains within PLRL as at 30 June 2021.
31
Appendix C
Definitions
TERM DEFINITION
Ancillary Own Funds Ancillary Own Funds are committed but unpaid sources of capital, which can be drawn on by demand by the insurer without attaching conditionality. Insurers are permitted to use Ancillary Own Funds to meet capital requirements, subject to regulatory approval.
BEL The best estimate liability (“BEL”) is a market consistent value of liabilities calculated under Solvency II.
Bermudan Prudential Regulation Regime
The regulatory regime applied to insurance companies and reinsurance companies domiciled in Bermuda.
BMA The Bermuda Monetary Authority (“BMA”) is the regulator of the financial services sector in Bermuda, including banks, investment business and (re)insurance companies.
Brexit The UK’s departure from the EU, which took place on 31 January 2020 following the UK Referendum on Continuing EU Membership in June 2016. The transition period, during which the trading relationships between the UK and the EU continued unaltered and future trading relationships were negotiated, expired on 31 December 2020.
BSCR The Bermuda Solvency Capital Requirement (“BSCR”), under the Bermudan Prudential Regulation Regime, which is calculated to cover unexpected losses arising from existing business that correspond to the Tail Value at Risk subject to a confidence level of 99% over a one-year timeframe, and can be calculated using the BMA’s standard model, or a BMA-approved internal model.
Canada Branch Business The business within the Canada branch of PLRL (the “Canada Branch Business”) that will be novated to the Canada branch of International, separately from the Scheme.
CISSA Commercial Insurer’s Solvency Self Assessment
COVID-19 COVID-19 is an illness caused by the novel coronavirus SARS-CoV-2, the outbreak of which was declared a pandemic by the World Health Organisation in March 2020. At the time of this Report, the COVID-19 pandemic is ongoing, with varying degrees of severity and volatility worldwide.
The Court The High Court of Justice in England and Wales.
The Division The Pacific Life Re Division (the “Division”), comprising the Pacific Life Group’s life reinsurance business and operations. This includes both PLRL and International.
Economic Solvency Buffer In the context of PLRL, a monetary amount based on the target proportion of Own Funds to the PLRL ICR under Pillar 2 of the UK Prudential Regulation Regime that is to be held in addition to the PLRL ICR, as defined under the PLRL Capital Management Policy. In the context of International, a monetary amount based on the target proportion of Own Funds to the International ICR under Pillar 2 of the Bermudan Prudential Regulation Regime that is to be held in addition to the International ICR, as defined under the International Capital Management Policy.
EEA The European Economic Area, consisting of member states of the European Union and three member countries of the European Free Trade Association (Iceland, Liechtenstein and Norway).
Effective Date The date on and from which the Scheme shall become effective, which is expected to be 1 January 2022.
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Existing Business The business originally sold by the Singapore branch of PLRL that novated to the Singapore branch of International with effect from 1 July 2021.
Existing Policies The reinsurance contracts underlying the Existing Business.
Existing Policyholders The policyholders of the Existing Business.
FCA The Financial Conduct Authority (“FCA”) is the UK regulatory agency that focuses on the regulation of conduct by retail and wholesale financial services firms. The FCA operates as part of the regulatory framework implemented under the Financial Services Act 2012.
Global Pacific Life Re Global Limited, previously Pacific Life Re Barbados Limited.
Global Canadian Business The Canadian business within Global (the “Global Canadian Business”) that will be novated to the Canada branch of International, separately from the Scheme.
Guernsey Scheme The parallel transfer of the Guernsey Treaty from PLRL to the UK branch of International, subject to approval of the Royal Court of Guernsey.
Guernsey Treaty A longevity reinsurance treaty written under English law, contained within the Part VII Transferred Policies, in which the cedant is domiciled in Guernsey.
ICR In the context of PLRL, the Internal Capital Requirement (“ICR”) is the capital requirement under Pillar 2 of the UK Prudential Regulation Regime. In the context of International, the ICR is the capital requirement under Pillar 2 of the Bermudan Prudential Regulation Regime.
IFoA The Institute and Faculty of Actuaries, the professional body for actuaries in the UK.
Independent Expert The Independent Expert prepares the Independent Expert’s Report and provides it to the Court in order that it may properly assess the impact of the proposed transfer, including the effect on the policyholders of the insurance companies in question. In the case of the Scheme, I have been appointed as the Independent Expert.
Initial Singapore Novations The policies which novated from the Singapore branch of PLRL to the Singapore branch of International with effect from 1 July 2021.
International Pacific Life Re International Limited, an indirect subsidiary of PMHC.
International BSCR The International regulatory capital requirement (the “International BSCR”) under Pillar 1 of the Bermudan Prudential Regulation Regime.
International BSCR ratio The proportion of Own Funds to the International BSCR under Pillar 1 of the Bermudan Prudential Regulation Regime.
International Capital Management Policy
The capital management policy for International approved by the International Board and adopted to comply with the requirements of the Bermuda Prudential Regulation Regime.
International Capital Ratio The ratio of Own Funds to the International BSCR under Pillar 1 of the Bermudan Prudential Regulation Regime if the regulatory basis is the biting capital basis, and the ratio of Own Funds to the International ICR under Pillar 2 of the Bermudan Prudential Regulation Regime if the internal economic basis is the biting capital basis.
International ICR The International Capital Management Policy details the capital that International should hold to cover its internal economic capital requirement (the “International ICR”) under Pillar 2 of the Bermudan Prudential Regulation Regime.
International ICR ratio The proportion of Own Funds to the International ICR under Pillar 2 of the Bermudan Prudential Regulation Regime.
International Target Capital Amount
The capital that International is required to hold under the International Capital Management Policy, which is the higher of the International BSCR plus the Regulatory Solvency Buffer, the International ICR plus the Economic Solvency Buffer, and the sum of the solvency targets for each branch of International and PLRA.
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International Target Capital Ratio The ratio of the International Target Capital Amount to the capital requirement underlying International’s biting capital basis.
Irish Law Treaty The Irish treaty written by PLRL under Irish law.
LIBOR London Inter-Bank Offered Rate
Main Report The report dated 7 September 2021 in which I considered the proposed Scheme for the Directions Hearing at the Court on 16 September 2021.
MI Management Information
Milliman Milliman LLP, a member of the Milliman Group.
Non-Part VII Transferred Policyholders
The policyholders of PLRL whose policies are planned to be transferred to International outside the Scheme (referred to in other reports associated with the Scheme as “Other Transferring Policyholders”).
ORSA The Own Risk and Solvency Assessment (“ORSA”) is a fundamental set of processes under Solvency II and the UK Prudential Regulation Regime 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.
Other Business Novations The novations that are expected to take place on the Effective Date separately from the Scheme.
Other Part VII Transferred Agreements
Non-reinsurance contracts in place between PLRL and third parties that are transferring to International under the proposed Scheme.
Other Transferring Policyholders See “Non-Part VII Transferred Policyholders”, above.
Own Funds The excess of assets over liabilities, plus any subordinated liabilities and Ancillary Own Funds, defined under the UK Prudential Regulation Regime, the Bermudan Prudential Regulation Regime, PLRL’s internal economic basis or International’s internal economic basis as appropriate.
Pacific Life Group I refer to PMHC and its direct and indirect subsidiaries collectively as the “Pacific Life Group”.
Part VII Transferred Business The UK head office business of PLRL, including reinsurance contracts written under English law under which PLRL is the reinsurer, retrocession contracts under which PLRL is the cedant and certain non-reinsurance contracts between PLRL and third parties which is transferring to International under the proposed Scheme.
Part VII Transferred Policies The reinsurance contracts written by the head office of PLRL under English law under which PLRL is the reinsurer, with the exception of any Excluded Policies, and which are transferring to International under the proposed Scheme.
Part VII Transferred Policyholders The policyholders of PLRL whose policies would be transferred to International under the Scheme.
PLC Pacific LifeCorp
PLIC Pacific Life Insurance Company
PLRA Pacific Life Re (Australia) Pty Limited
PLRA Business The intra-group retrocession agreement between PLRL and PLRA, under which PLRL is the retrocessionaire, to be novated to International.
PLRH LLC Pacific Life Re Holdings LLC
PLRH (UK) Pacific Life Re Holdings Limited
PLRL Pacific Life Re Limited
PLRL Capital Management Policy The capital management policy for PLRL approved by the PLRL Board and adopted to comply with the requirements of the UK Prudential Regulation Regime.
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PLRL Capital Ratio The ratio of Own Funds to the PLRL SCR under Pillar 1 of the UK Prudential Regulation Regime if the regulatory basis is the biting capital basis, and the ratio of Own Funds to the PLRL ICR under Pillar 2 of the UK Prudential Regulation Regime if the internal economic basis is the biting capital basis.
PLRL ICR The PLRL Capital Management Policy details the capital that PLRL should hold to cover its internal economic capital requirement (the “PLRL ICR”) under Pillar 2 of the UK Prudential Regulation Regime.
PLRL ICR ratio The proportion of Own Funds to the PLRL ICR under Pillar 2 of the UK Prudential Regulation Regime.
PLRL SCR The PLRL regulatory capital requirement (the “PLRL SCR”) under Pillar 1 of the UK Prudential Regulation Regime.
PLRL SCR ratio The proportion of Own Funds to the PLRL SCR under Pillar 1 of the UK Prudential Regulation Regime.
PLRL Target Capital Amount The capital that PLRL is required to hold under the PLRL Capital Management Policy, which is the higher of the PLRL SCR plus the Regulatory Solvency Buffer, and the PLRL ICR plus the Economic Solvency Buffer.
PLRL Target Capital Ratio The ratio of the PLRL Target Capital Amount to the capital requirement underlying PLRL’s biting capital basis.
PMHC Pacific Mutual Holding Company
Policies The reinsurance treaties under which PLRL or International is the reinsurer.
Policyholders The cedants of PLRL and International.
PRA The Prudential Regulatory Authority (“PRA”) is part of the Bank of England and carries out the prudential regulation of financial firms in the UK, including banks, investment banks, building societies and insurance companies. The PRA operates as part of the regulatory framework implemented under the Financial Services Act 2012.
Regulatory Solvency Buffer In the context of PLRL, a monetary amount based on the target proportion of Own Funds to the PLRL SCR under Pillar 1 of the UK Prudential Regulation Regime that is to be held in addition to the PLRL SCR, as defined under the PLRL Capital Management Policy. In the context of International, the sum of: a monetary amount based on the target proportion of Own Funds to the International BSCR under Pillar 1 of the Bermudan Prudential Regulation Regime that is to be held in addition to the International BSCR, and an additional monetary amount which will reduce from the Effective Date, as defined under the International Capital Management Policy.
Remaining Policyholders The policyholders of PLRL whose policies would remain with PLRL as of the Effective Date after the Scheme and the Other Business Novations have taken place.
The Scheme In the context of this Report, the proposal that the transferring business of PLRL be transferred to International under the provisions of Part VII of FSMA.
The Scheme Report The Scheme Report consists of this report (the “Report”) and any subsequent supplementary reports.
SCR The Solvency Capital Requirement (“SCR”) under Solvency II and the UK Prudential Regulation Regime is the amount of capital required to ensure continued solvency over a one year trading time frame with a likelihood of 99.5%.
Singapore Branch Business The business within the Singapore branch of PLRL (the “Singapore Branch Business”) that will be novated to the Singapore branch of International, separately from the Scheme.
Solvency II The current regulatory solvency framework for the EEA insurance and reinsurance industry, defined under Solvency II Directive 2009/138/EC.
SONIA Sterling Overnight Index Average
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South Korea Branch Business The business within the South Korea branch of PLRL (the “South Korea Branch Business”) that will be transferred to the South Korea branch of International by a statutory South Korea law transfer process akin to a Part VII transfer.
Supplementary Report This report which I have prepared in advance of the Court hearing to sanction the Scheme covering any relevant matters that might have arisen since the date of the Main Report.
Transferee The entity to which business is being transferred – in the case of the Scheme, this is International.
Transferor The entity from which business is being transferred – in the case of the Scheme, this is PLRL.
UK United Kingdom
UK Prudential Regulation Regime The solvency regime that now applies in the UK, which is based on Solvency II as modified and implemented in the UK following the end of the Brexit transition period.
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Appendix D
Key sources of data
In writing this Supplementary Report, I relied upon the accuracy of certain documents provided by PLRL and
International. These included, but were not limited to, the following:
DOCUMENT
DATE OF
DOCUMENT
Financial information for PLRL 30/06/2021
Financial information for International 30/06/2021
The 2020 ORSA of PLRL 13/04/2021
The 2020 CISSA of International 21/04/2021
Business plans for PLRL and International 31/12/2020
The PLRL Capital Management Policy 26/02/2021/
The International Capital Management Policy 21/09/2021
Various risk management documents and policies n/a
Division System of Governance 19/11/2020
Updated Division System of Governance (to reflect restructuring programme) 06/10/2020
Capital Transition Plan May 2021
The Scheme Document Undated
The PLRL Witness Statement 07/09/2021
The International Witness Statement 07/09/2021
Business Transfer Agreement 25/06/2021
Consequential Amendments Document 31/08/2021
Excluded Policies Reinsurance Agreement 09/08/2021
Agreed Policy List 09/08/2021
Policyholder communications 10/11/2021
The supplementary report of the PLRL Chief Actuary on the proposed transfer 11/11/2021
The supplementary report of the International Chief Actuary on the proposed transfer 11/11/2021
Relevant correspondence with PRA, FCA and BMA n/a
Various additional underlying documentation n/a