report of the independent actuary - liberty insurance 4.3 financial profile 24 4.4 reinsurance 28...

27 June 2018

Report of the Independent Actuary

Liberty Insurance dac

Contents

1 Introduction 4

1.1 Purpose of the report 4

1.2 Independent Actuary 7

1.3 Scope of Report 8

1.4 Assurances 9

1.5 Qualifications and Limitations 10

1.6 Limits of Liabilities and Legal Jurisdiction 10

1.7 Commercial sensitivities 10

1.8 Terminology 11

1.9 Currency 11

1.10 Brexit 11

1.11 Policyholders Affected 11

1.12 Impact on policyholders of LSCSR subsidiaries 11

2 Executive Summary and Conclusion 13

2.1 Executive Summary 13

2.2 Conclusions 17

3 Regulation 18

3.1 Introduction 18

3.2 Solvency II 18

3.3 Consumer Protection Schemes 19

3.4 Dispute Resolution 20

3.5 Winding-up Regulations 20

3.6 Conduct Regulation 21

4 Liberty Insurance dac 22

4.1 Structure and Background 22

4.2 Nature of the business 22

4.3 Financial profile 24

4.4 Reinsurance 28

4.5 Risk profile and management 29

4.6 Other Regulatory matters 31

4.7 Operational arrangements 31

4.8 Treating customers fairly 32

5 Liberty Seguros Compania de Seguros y Reaseguros, S.A 34


5.2 Nature of business written 36


5.4 Reinsurance 44

5.5 Risk profile and management 45

5.6 Other Regulatory matters 46

5.7 Operational arrangements 46

5.8 Treating customers fairly 47

6 Liberty Seguros S.A 48


6.2 Nature of business written 48


6.4 Reinsurance 55

7 The proposed Scheme 56

7.1 Background to the proposed Scheme 56

7.2 Motivation for Branching 57

7.3 Licence and Branch Extensions 57

7.4 Transfer of Assets and Liabilities 57

7.5 Continuity of proceedings 58

7.6 Rights and obligations 58

7.7 Maintenance of existing reinsurance arrangements 58

7.8 Capital support arrangements 58

7.9 Administration arrangements 59

7.10 Costs of the proposed Scheme 59

7.11 Effective Date 59

7.12 The Approach to Communication with Policyholders 59

7.13 Operational Plans and Changes in Assets and Liabilities up to the Effective Date 60

7.14 What would happen were the Scheme not to proceed? 60

8 General considerations of the proposed Scheme 61

8.1 Introduction 61

8.2 Policyholders affected 61

8.3 Materiality 61

8.4 Security of policyholder benefits 62

8.5 Levels of service provided to policyholders 62

8.6 Other Considerations 62

8.7 Development of the Scheme 62

9 Impact of the Scheme 63

9.1 Introduction 63

9.2 Security of policyholders’ benefits 63

9.3 Policy Servicing, Information Systems, Governance, Internal Controls and other matters 72

Appendix 1 - Data 75

Appendix 2 - Scope 76

Appendix 3 – Curriculum vita 78

Appendix 4 - Glossary 79

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1 Introduction

1.1 Purpose of the report Liberty Insurance dac (“LIDAC”) is a wholly owned subsidiary of Liberty Seguros Compañía de Seguros y Reaseguros, S.A (“LSCSR”)1, a company incorporated in Spain in 1964. The ultimate parent is Liberty Mutual Group Inc. (“Liberty Group”) which is the fourth largest property and casualty insurer in the U.S. based on 2016 direct written premium data as reported by the National Association of Insurance Commissioners. It also ranks 75th on the Fortune 100 list of largest corporations in the U.S. based on 2016 revenue. Liberty Group employs more than 50,000 people in over 800 offices throughout the world, offering a wide range of insurance products and services, including personal automobile, homeowners, commercial automobile, general liability, property, surety, workers compensation, specialty lines, and reinsurance. As of 31 December 2016, Liberty Group had $38.3 billion in annual consolidated revenue.

1.1.1 Liberty Insurance dac

LIDAC writes a broad range of lines of business including Private Motor, Commercial Motor, Household, Commercial Liability, Commercial Property and other lines. Business has been written in the Republic of Ireland (“RoI”), Great Britain (“GB”) and Northern Ireland (“NI”).

LIDAC is regulated by the Central Bank of Ireland (“CBI”).

The RoI non-life insurance business was transferred from Quinn Insurance Limited (in administration) (“QIL”) to LIDAC on 11 November 2011, with the exception of QIL’s healthcare business and a claim relating to the Anglo Irish Beef Processors.

LIDAC also wrote the renewal business of Commercial Property and Commercial Liability transferred from the Dublin office of Liberty Mutual Insurance Europe Limited (“LMIE”). LMIE had been operating in Dublin since 1997 offering core lines of Commercial Property and Liability, Professional Indemnity, Directors’ & Officers and Financial Institutions insurances. LMIE worked with a select network of Irish brokers.

LIDAC commenced writing Private Motor business in NI and mainland GB during Q4 2012 on a Freedom of Services (“FoS”) basis. This included renewal of legacy QIL GB insurance policies. A strategic decision was taken to withdraw from the GB market and this business was put into run-off with no ongoing exposure from Q3 2016 onwards.

During 2014 Liberty Group acquired Hughes Insurance, a major insurance broker in Northern Ireland, with the intention of LIDAC becoming its primary underwriter. Hughes Insurance has since reverted to operating as an independent broker, offering cover primarily through a panel of 3rd party underwriters. LIDAC’s NI Private Motor segment has gone into run-off with no ongoing exposure from Q4 2016 onwards. LIDAC remains on the Hughes Insurance panel for Household business in the NI market.

During July 2017, LIDAC entered into a Managing General Agency (“MGA”) agreement with Amet Insurance Solutions Limited (“AMET”), a Financial Conduct Authority (“FCA”) authorised insurance intermediary in NI. This agreement provides delegated authority to AMET in respect of underwriting and claims services in relation to NI Commercial Motor and Liability business.

1 I am writing this Report from the perspective that LIDAC is a subsidiary of LSCSR. I note that this is phase II of the proposed restructuring process, shown in section 7.4.

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1.1.2 Liberty Seguros Compañía de Seguros y Reaseguros, S.A.

LSCSR is a composite insurance entity incorporated in Spain on 18 March 1964 as a public limited company. The principal activity of LSCSR is underwriting life and non-life insurance business including, but not limited to, Motor, Home, Fire, Transport, Personal Accident, Life Savings and Life Risk.

LSCSR is regulated by the Directorate General for Insurance and Pensions Funds (in Spanish the “Dirección General de Seguros y Fondos de Pensiones” or “DGS”). This is the Spanish government's financial regulatory agency that supervises and controls Spain's insurance and pension fund sector. It is responsible for ensuring that the sector functions properly and provides customers of insurance agencies and members of pension funds with appropriate protection. To that end, it is empowered to regulate, issue instructions to, and supervise the institutions that comprise the sector, thus guaranteeing proper operation in accordance with current legislation. Therefore the DGS regulates LSCSR in an equivalent manner to how the CBI regulates LIDAC.

LSCSR is the parent company of a group of subsidiaries:

■ Liberty Insurance dac (Ireland)2;

■ Liberty Seguros, S.A. (Portugal);

■ Liberty Sïgorta A.S. (Turkey);

■ Seguros Caracas de Liberty Mutual, C.A. (Venezuela);

■ Liberty International Limited Brasil (Brazil); and

■ Liberty Insurance Berhad (Malaysia).

In addition, there is an associate company Servihogar Gestión 24 hours whose activity is to provide Home services. LSCSR also writes unit linked life business via a branch in Ireland and prior to 2018 underwrote non-life insurance business via a branch in Poland. The Polish branch portfolio has been sold in its entirety to AXA Ubezpieczenia TUiR S.A.

LSCSR has been rationalising operations and we note the following in respect of the subsidiaries and branches above:

■ An agreement was entered into 22 January 2018 to sell its entire 99.44% equity interest Liberty Sïgorta A.S. (Turkey) to Talanx International. The sale has recently received regulatory approval and has been closed as at the date of this Report.;

■ LIDAC has become a subsidiary of LSCSR as a preliminary step to the proposed transfer and cross border merger with LSCSR2, see section 1.1.3 below;

■ Liberty Seguros, S.A. (Portugal) will be absorbed by LSCSR as part of a cross board merger at the same time as the portfolio transfer, see section 1.1.3 below;

■ The booked value of Seguros Caracas de Liberty Mutual, C.A. (Venezuela) has been written down to zero given current economic situation in Venezuela and LSCSR are seeking to dispose of this entity; and

■ LSCSR has ceased writing business via the Polish branch.

I will comment further in my Supplementary Report on any revisions to the Group structure.


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1.1.3 Proposed portfolio transfer

The Liberty Group has carefully examined its operations in Europe with a view to enhancing its efficiency and optimising its structure, with particular regard to the markets in which it operates, as well as to changes to regulation and efficient capital management. Having considered a number of proposals, the Group intends to consolidate its Irish, Portuguese and Spanish operations under a single regulated entity, LSCSR in Spain.

This would be implemented by a High Court application to transfer the non-life insurance business of LIDAC to LSCSR by way of a portfolio transfer (“the Transfer”) under the provisions of Section 13 of the Assurance Companies Act 1909, Section 36 of the Insurance Act 1989 and Regulation 41 of the European Union (Insurance and Reinsurance) Regulations 2015. I refer to the proposed Transfer as the “Scheme”.

The terms covering the proposed Transfer are set out in the Scheme that will be presented to the High Court of Ireland (the “Court”) during July 2018 under Section 13 of the 1909 Act. The Scheme document has been prepared by LIDAC’s legal advisors, A&L Goodbody, for the purposes of this process.

Under the 1909 Act, a petition to the Court for a transfer of long term (or life insurance) business must be accompanied by a report on the terms of the proposed transfer by an Independent Actuary. I understand that there is no equivalent legal requirement for any such report for the transfer of non-life insurance business.

■ Unlike life insurance business, non-life insurance business typically provides insurance protection for a term of 12 months. At the portfolio transfer date the average length of insurance protection remaining for inforce policyholders will typically be 6 months, at which time policyholders will be free to renew or lapse cover.

■ Claimants (existing or future) may however be more affected with average claim durations (from date of loss to date of settlement) of between 2 to 3 years. I note however that claims can remain unsettled for many years e.g. complex liability claims can in some circumstances remain open for up to and in excess of 15 years and in addition recent legislation will allow for Periodic Payment Orders (“PPOs”) that can remain in payment for the remainder of the claimant’s life.

As at 31 December 2017 LIDAC has 274,200 inforce policyholders and 7,367 open claims with 5 currently having the potential to become PPOs.

Despite no requirement for such LIDAC and LSCSR (the “Scheme Companies”) have engaged me to act in a similar and broadly comparable manner for the transfer of non-life insurance business under this Scheme. This Report is a report prepared by me, the appointed Independent Actuary, in order to aid the Court and the regulators in their deliberations.

I note that LSCSR require a Class 15 licence extension from the DGS for LIDAC’s Surety Bond product. I understand that LSCSR has made an application to DGS for a licence extension and I will comment further in my Supplementary Report on success or otherwise of this application.

1.1.4 Other Schemes

In addition, and simultaneously with the Scheme discussed in section 1.1.3, LSCSR will absorb LIDAC via a Cross Border Merger (“CBM” or the “Merger”) and its Portuguese subsidiary Liberty Seguros, S.A. (“Liberty Portugal”), by virtue of another CBM (the “Merger by Absorption of Liberty Portugal”, and, together with the Merger, the “Mergers”)). LIDAC and Liberty Portugal will continue to operate in Ireland and Portugal respectively as branches of LSCSR.

As it is assumed to be completed in the same timeframe as the Transfer, I have considered how the proposed Merger by Absorption of Liberty Portugal will impact the Scheme and in particular the security of benefits of the transferring LIDAC policyholders. Note that for clarity I have not considered how the

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proposed Merger by Absorption of Liberty Portugal will impact Liberty Portugal or LSCSR policyholders as this CBM does not form part of the Scheme presented to the Court. I have been provided with all relevant information in relation to Liberty Portugal and I include a significant amount of this detail in my Report, see section 6.

LSCSR currently has UK FoS authorisation for all required classes for LIDAC’s current NI business and GB claims in run off. I have therefore assumed that all of LIDAC’s policyholders i.e. including GB and NI, will transfer to LSCSR.

In relation to Brexit planning I note that LSCSR has submitted a Third Country branch application to the Prudential Regulatory Authority (“PRA”) in order to be able to service LIDAC’s GB and NI policyholders. This is no different to Brexit planning that would need to take place were the Scheme not sanctioned by the Court i.e. Liberty Group either LIDAC or LSCSR will likely need to establish a Third Country branch to service GB and NI policyholders.

1.1.5 My Report layout

This Report describes the proposed Transfer and discusses its possible effects on the relevant policyholder groups, including effects on security and levels of service. The Report is organised into eight sections as follows:

■ Section 1: Describes the purpose of this Report and the role of the Independent Actuary;

■ Section 2: Conclusion;

■ Section 3: Provides relevant background on the regulatory environment;

■ Section 4: Provides relevant background information on LIDAC;

■ Section 5: Provides relevant background information on LSCSR;

■ Section 6: Provides relevant background information on Liberty Portugal;

■ Section 7: Commentary on the proposed Scheme;

■ Section 8: Describes the general considerations when reviewing the proposed Scheme; and

■ Section 9: An assessment of the Impact of the Scheme.

1.2 Independent Actuary I, Noel Garvey, am a Director in KPMG Ireland (“KPMG”) specialising in non-life insurance actuarial services. I am a Fellow of the Society of Actuaries in Ireland (“SAI”) having qualified as an actuary in 2001. My curriculum vita is included in Appendix 3.

I have been appointed by LIDAC and LSCSR to act as the Independent Actuary in connection with the Scheme. The CBI and DGS have been informed of my appointment and I understand have not raised any objections to my appointment. The terms on which I was formally appointed as the Independent Actuary are set out in an engagement letter dated 23 February 2018 and an extract of my scope is included in Appendix 2.

To the best of my knowledge, I have no conflicts of interest in connection with the parties involved in the proposed Scheme and I consider myself able to act as an Independent Actuary on this transaction. I note that while this is a Transfer of non-life insurance business the receiving entity, LSCSR, underwrites life insurance business. I have therefore involved Brian Morrissey FSAI, Partner in KPMG specialising in life insurance actuarial services in my considerations of impact of the Scheme on life insurance policyholders. I am however satisfied that I have reached all conclusions set out herein and the final assessment of the Scheme is my own.

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I do not consider that my previous role as the Reviewing Actuary to LIDAC’s Head of Actuarial Function (“HoAF”) impairs my independence. While my Reviewing Actuary role gives me significant insight to the Technical Provisions of LIDAC I have never previously reviewed the Solvency Capital Requirement (“SCR”) of LIDAC. My Report to the Court will therefore be appropriately informed but in no way prejudiced or anchored to previous work.

My understanding of the requirements and independence is as follows:

■ Transfer Schemes are presented to the High Court of Ireland under Section 13 of the Assurance Companies Act 1909. A petition in relation to the transfer of long term (or life assurance) business and must be accompanied by a report on the terms of the Scheme by an Independent Actuary. There is no equivalent legal requirement for any such report for the transfer of non-life insurance business, such as the Transfer.

■ No professional guidance exists in respect to the transfer of non-life insurance business, I have however had regard to Actuarial Standard of Practice LA-6 version 2.2 effective 01.11.2010 (ASP LA-6) issued by the SAI which deals with the role of the Independent Actuary in the transfer of “long-term business”. Section 3.3 of this guidance is shown below:

“The amount of investigative work that the Independent Actuary will need to do will depend on the circumstances of the case. The Independent Actuary should communicate with the Appointed Actuaries of all affected companies. It is reasonable for the Independent Actuary to expect the Appointed Actuary of the transferor company to provide such valuations of the assets and liabilities as the Independent Actuary may require, and to disclose information on such matters as how bonus rates have been determined in recent years in respect of any with profit business. If the transferee company already has a long-term business fund of its own, similar information from the Appointed Actuary of that company may be necessary. It has become customary in cases of any complexity for the petition to be accompanied by a report from any Appointed Actuary concerned, although this is not a legal requirement. There may also be private actuarial reports to one or more of the parties, production of which would assist the Independent Actuary in appraising the terms of the scheme. The Independent Actuary must, however, form an independent judgment on the quality of the information supplied, the reasonableness of the work of other actuaries, and, therefore, the extent of any investigative or verification work the Independent Actuary needs to do. “

■ I have carried out an independent actuarial review of the 31 December 2017 Technical Provisions of LIDAC and I will therefore have carried out significantly more investigative work and will have more detailed knowledge to make informed judgements on the quality of the transferring liabilities than would otherwise be the case.

In terms of direct and indirect interests, I confirm that I have none. I have no policies with LIDAC, LSCSR or any other subsidiary of Liberty Group.

I have also considered the position of KPMG. I can confirm that I have carried out appropriate internal checks in line with KPMG’s internal risk management procedures.

Neither I, nor any member of my team, is a qualified lawyer or tax expert. I have not considered it necessary to seek my own specific legal or tax advice on any element of the Scheme. The costs and expenses associated with my appointment as Independent Actuary and the production of this Report will be met by the Shareholders of LIDAC.

1.3 Scope of Report This Report has been prepared for the purposes of section 13 of the Assurance Act 1909 in accordance with:

■ Regulation 41 of the European Union (Insurance and Reinsurance) Regulations 2015 (S.I. No. 485 of 2015) (“2015 Regulations”). Regulation 41 of the 2015 Regulations makes express reference to

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Section 13 of the Assurance Companies Act 1909 and Section 36 of the Insurance Act 1989. Both sections concern the sanction of transfers by the Court.

■ The Actuarial Standard of Practice (“ASP”) issued by the Society of Actuaries in Ireland, ASP LA-6, “Transfer of long-term business of an authorised insurance company – role of the Independent Actuary”. Even though the ASP is related to life business, I consider it reasonable to consider it in my work.

I owe an overriding duty to the Court and to give the Court independent actuarial evidence on the proposed Transfer.

However, I note that the CBI and DGS will have access to my Report. In preparing this Report, LIDAC has consulted on my behalf with the CBI on the required contents as appropriate to the CBI’s interest in the Transfer process. Feedback from the CBI, where provided, has been considered in my drafting of this Report.

This Report is prepared primarily to assess the likely impact that the Scheme will have on all of the policyholders i.e. the transferring policyholders of LIDAC and the existing policyholders of LSCSR which will include those transferred from Liberty Portugal. It is limited in its scope to the assessment of this Scheme alone and not to any other possible scheme. It is intended that this Report be submitted, in full, as evidence to the Court when it considers whether or not to sanction the Scheme.

The term “Effective Date”, as used in this Report, refers to the date at which, if the Scheme proceeds, LIDAC’s non-life insurance business, incorporating the insurance policies, together with the associated liabilities and assets will be transferred to LSCSR, such that the policyholder liabilities are extinguished in LIDAC. This date also reflects the commencement of liability obligations to the aforementioned policyholders at LSCSR.

My consideration of the financial effects of the Scheme has been based on the method of reporting required for LIDAC and LSCSR’s regulatory returns to the CBI and DSG respectively i.e. Solvency II.

This report conforms with the Institute and Faculty of Actuaries APS X2 effective from 1 July 2015. The report, methodology and assumptions, has been peer reviewed by a senior actuary in KPMG.

1.4 Assurances Whilst I have been assisted by my team (including actuarial resources from my life insurance actuarial colleagues), the Report is written in the first person singular and the opinions expressed are my own.

In preparing this Report I have done my best to be accurate and complete. I have considered all matters that I regard as relevant to the opinions I have expressed and I have considered all matters that I believe may be relevant to the policyholders of LSCSR and LIDAC in their consideration of the Scheme. All the matters on which I have expressed an opinion lie within my field of experience.

The Chief Executive Officer of LIDAC, Sharon O’Brien and LSCSR, Tom McIlduff, have confirmed via email that the information contained in this Report which relates to LIDAC and LSCSR respectively and to how the Scheme will be effected in practice is factually correct, all material information has been provided and full access has been given to LIDAC and LSCSR staff as necessary.

In the course of carrying out my work and preparing this Report I have considered various documents provided to me by LIDAC and LSCSR. A summary list of the main documents I have considered is set out in Appendix 1.

All of the data and information which I have requested has been provided to me by LIDAC and LSCSR. I have relied upon the accuracy and completeness of this data and information, which has been provided to me both in written and oral form. I have not sought independent verification of data and information provided to me by the Scheme Companies, nor does my work constitute an audit of the

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financial and other information provided to me. In addition, I have, where possible, reviewed the information provided for reasonableness. Where critical information has been initially provided orally, I have requested and obtained written confirmation.

In my role as Independent Actuary I have contacted, or LIDAC has contacted on my behalf, the appropriate individuals within the CBI and the DGS. I have been made aware of relevant discussions between these regulators and the Scheme Companies, and specifically inquired of them whether there were specific issues I should be aware of.

I also held a discussion via tele-conference with the CBI on 6 March 2018 to understand any concerns that they may have had at that time with the proposed Scheme. No specific issues were raised by the CBI at that time.

1.5 Qualifications and Limitations This Report must be read in its entirety. Reading individual sections in isolation may be misleading.

A copy of this Report will be made available to the CBI and an executive summary of the full Report will be available to policyholders on request.

This Report has been produced for no other purpose other than to support my opinion as Independent Actuary.

This Report is prepared solely in connection with, and for the purposes of, informing the Court, the CBI and DGS, any other relevant supervisory or regulatory authority and relevant potentially affected policyholders of my findings in respect of the impact of the Scheme on the security of potentially affected policyholders and may only be relied on for this purpose. This Report is subject to the terms and limitations, including limitation of liability, set out in my firm’s engagement letter dated 23 February 2018. An extract from this contract describing the scope of my work is contained in Appendix 2.

This Report should not be regarded as suitable to be used or relied on by any party wishing to acquire any right to bring action against KPMG in connection with any other use or reliance. To the fullest extent permitted by law, KPMG will accept no responsibility or liability in respect of this Report to any other party.

In my role as Independent Actuary, I have in the normal course of conducting this role, been provided with a significant and appropriate amount of information and data about the Scheme Companies activities and performance. When forming my view as set out in this Report, these disclosures and information have formed a necessary and vital contribution.

This Report is based on information made available to me at or prior to the date of this Report and takes no account of developments after that date.

1.6 Limits of Liabilities and Legal Jurisdiction This Report is subject to the terms and conditions, including limitation of liability and legal jurisdiction, set out in the Engagement Letter.

1.7 Commercial sensitivities

Due to commercial sensitivities some of the information I have relied upon to reach my conclusions cannot be disclosed in a public report such as this. This approach has been discussed and agreed with LIDAC, LSCSR, their legal advisors and the CBI. I can confirm however that appropriate detailed information has been provided to me to enable me to form the opinions I express to the Court in this Report. If specifically required by the Court, I can comment in a private letter addressed to the High Court Judge only on specific areas of interest.

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1.8 Terminology In my discussion of the effects of the proposed Scheme on the Scheme Companies concerned, I use various technical terms. The definitions of these terms as used in this Report are contained in the Glossary in Appendix 4.

1.9 Currency I have identified clearly the currency of figures presented throughout the Report. The figures are largely in Euros except where otherwise stated. Where relevant, the exchange rate used, is identified in the relevant table.

1.10 Brexit There is as yet little clarity on whether passporting rights or the ability to underwrite on a FoS basis will be retained for UK (including NI) and EU incorporated companies respectively following the UK’s exit from the EU (the so-called “Brexit”).

If they are not, neither LSCSR (incorporated in Spain nor LIDAC incorporated in Ireland), will be able to operate inside of the UK (including NI). To overcome this, LSCSR plan to establish a Third Country UK branch, which will write NI business as well as hold the transferred GB and NI portfolios. Delivery of this plan will involve PRA authorising a Third Country UK branch.

LSCSR is currently authorized in the UK under FoS to write and service all required classes for LIDAC’s current NI business and GB portfolios. I have therefore assumed that all of LIDAC’s policyholders including GB and NI will transfer to LSCSR, subject to the Court’s approval.

The UK and EU are currently negotiating Brexit and this will carry on regardless of the proposed Scheme.

1.11 Policyholders Affected I have considered the effects of the Scheme on two main groups of policyholders, namely:

■ Policyholders of LIDAC whose policies are to be transferred to LSCSR. It is not currently expected that there will be any excluded policies and as such there will be no current policyholders of LIDAC who have policies that are not being transferred.

– When considering the transferring LIDAC policyholders I assume that they are being absorbed by LSCSR which will include Liberty Portugal policyholders i.e. I have assessed the future financial strength of the “to be” LSCSR merged entity.

– As discussed above I have assumed that the GB and NI LIDAC policyholders will also transfer to LSCSR which is authorised to operate in the UK under FoS. I have not considered the consequences or impact of Brexit as I do not believe that future arrangements will either impact the proposed Scheme or be impacted by the proposed Scheme.

■ The current policyholders of LSCSR.

1.12 Impact on policyholders of LSCSR subsidiaries In theory all of the policyholders of LSCSR subsidiaries i.e. the Portuguese, Irish3, Turkish, Malay, Venezuelan and Brazilian subsidiaries are impacted by the proposed Scheme and Mergers.


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Policyholders of the Portuguese, Turkish, Malay, Venezuelan and Brazilian subsidiaries have potentially been impacted by LIDAC becoming a subsidiary of LSCSR as there is now another potential draw on LSCSR capital that would otherwise have been available to these entities. LIDAC becoming a LSCSR subsidiary is the preliminary step to the proposed transfer and cross border merger with LSCSR, see section 1.1.3 above. This step is outside the scope of my Report to the Court.

The proposed transfer of LIDAC policyholders to LSCSR potentially and indirectly impacts the policyholder security of remaining subsidiaries in so far as financial strength of LSCSR and availability of group support is affected i.e. from LSCSR as opposed to Liberty Group.

For clarity, the overall financial strength of Liberty Group is not impacted by the Scheme and therefore Liberty Group support, available to LIDAC and LSCSR policyholders (including all subsidiaries) remains in place post Scheme.

I have also been provided with the regulatory capital coverage, historic dividends and capital injections for each subsidiary of LSCSR, see section 5. I consider that these are currently well capitalised and I have not been presented with any information to cause me concern that any of these subsidiaries currently need capital support from LSCSR.

In my considerations of the Scheme I have therefore restricted assessment of the impact of the Scheme to policyholders of LIDAC and of LSCSR and I have not considered policyholders of the Portuguese, Turkish, Malay, Venezuelan or Brazilian subsidiaries any further.

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2 Executive Summary and Conclusion

2.1 Executive Summary

2.1.1 Overview

Liberty Group currently has locally regulated insurance companies in Ireland, Spain and Portugal.

Having considered a number of proposals, it is intended to consolidate the Irish, Portuguese and Spanish insurance underwriting platforms in Europe with a view to enhancing the efficiency and optimizing of its structure.

Liberty Group intends to carry out an intra-group restructuring whereby LSCSR will absorb LIDAC by virtue of a Transfer and CBM. In addition, and simultaneously with this Merger, LSCSR will absorb Liberty Portugal, by virtue of another CBM.

Upon completion of this restructuring, the insurance business of LIDAC will be operated by LSCSR on a Freedom of Establishment (“FoE”) basis through an Irish branch i.e. the existing branch of LSCSR in Ireland which is currently registered as an external company with the Companies Registration Office in Ireland (since 29 August 2001) under branch number 904632.

From an Irish (including GB and NI) policyholder perspective, there will be no change to the way the LIDAC currently manages and plans in the future to conduct and manage its business through the branch arrangement.

Further background to the Scheme is included in section 7.

2.1.2 Motivation for proposed Scheme

The Merger will imply, among others, the following benefits:

■ The simplified structure will lead to operational synergies and reduced administrative and regulatory complexity;

■ It will avoid duplication and will take advantage of the significant infrastructure that the Liberty Group has established in Spain to service the needs of its clients;

■ It will facilitate greater capital efficiency within the Liberty Group by rationalizing the number of separate insurance companies in Europe; and

■ It will create a larger combined pool of tier 1 capital available to policyholders to meet claims.

2.1.3 Approach

My approach to assessing the likely effects of the Scheme on policyholders was to:

■ Understand the businesses of the entities affected by the Scheme; and

■ Understand the effect of the Scheme on the assets, liabilities and capital of the entities and businesses involved.

Having identified the effects of the Scheme on the various entities and businesses, I then:

■ Identified the groups of policyholders directly affected;

■ Considered the impact of the Scheme on the security of each group of policyholders; and

■ Considered other policyholder aspects of the impact of the Scheme.

In order to consider the effect of the proposed Scheme on each of the companies and groups of policyholders concerned, I have been provided with financial information for each of the Scheme Companies, including:

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■ LIDAC, LSCSR and Liberty Portugal historic financial information based on audited regulatory filings;

■ Summary historic financial information of key subsidiaries of LSCSR; and

■ In forming my opinion, I have raised queries with key personnel responsible for core functions in the Scheme Companies, and I have placed reliance on, amongst other information, the projected Solvency II financial information to support my assessment of financial strength.

In order to satisfy myself that these estimates are an appropriate basis on which to form an opinion, I have considered:

■ The appropriateness of the methods used by the Scheme Companies to calculate the estimate of regulatory capital required – current and future; and

■ Stress and scenario testing currently performed by the Scheme Companies to understand their respective regulatory capital strength and whether further testing is required.

Significant other information was provided as set out in Appendix 1.

2.1.4 Key assumptions

I understand that:

■ LSCSR intends to continue to manage LIDAC’s existing portfolio as currently managed prior to the Scheme, albeit through the Irish branch of LSCSR;

■ It is not intended that the Scheme will give rise to any changes in the following in relation to LIDAC’s transferring business or LSCSR:

– Products underwritten;

– Administration and infrastructure arrangements; and

– Policyholder terms and conditions.

■ Changes to the risk profile as a result of the Transfer will be managed through the proposed LSCSR governance structure which is equivalent to LIDAC’s current System of Governance;

■ The reinsurers will agree to the Scheme such that reinsurance arrangements remain in place post the transfer;

■ An extension is granted to extend LSCSR’s existing Irish branch licence to incorporate non-life business.

■ The DGS extends LSCSR licence to transact Class 15 which will allow LSCSR to service LIDAC’s Surety line of business.

All of the above assumptions underlie the analysis and conclusions in my Report. If any of these assumptions were to change, my opinion may also change. I have circulated this Report to the management of LIDAC and LSCSR respectively to ask for commentary on the detail within the Report including the underlying assumptions. No issues were noted with the commentary and detail presented in the Report by either set of management reflecting the fact that the key assumptions listed above correctly represent the current intentions, and that the information I have been provided accurately reflects these businesses.

2.1.5 Findings

The findings of my Report are summarised below.

■ LIDAC and LSCSR are both subsidiaries of Liberty Group the fourth largest Property and Casualty (“P&C”) insurer in the U.S. based on 2016 direct written premium data as reported by the National Association of Insurance Commissioners. It also ranks 75th on the Fortune 100 list of largest corporations in the U.S. based on 2016 revenue. The overall financial strength of Liberty Group is

15

not impacted by the Scheme and therefore group support available to LIDAC and LSCSR policyholders remains in place post Scheme.

■ Both LIDAC and LSCSR will operate under similar Liberty Group mandated governance arrangements and so there will be no change in the standards of governance which will apply.

■ There are no changes planned to policyholder terms and conditions.

■ There are no changes planned to how services are currently delivered to policyholders by LIDAC and LSCSR.

■ The regulatory regime of the receiving entity, LSCSR, is the same as that of the transferring business i.e. Solvency II. Therefore the transferring policyholders will continue to be benefit from the same regulatory requirements.

■ I have considered the relative capital strength of LIDAC and LSCSR both pre and post the Transfer.

■ I note in general that I am comfortable that the Scheme does not materially impact the financial security of all policyholders and that my solvency and financial projections err on the side of caution when I am testing the impact of the Scheme on policyholder groupings:

– I have assumed that LSCSR post Scheme does not apply for transitional measures in respect of Liberty Portugal business or LIDAC pre Scheme Ancillary Own Funds (“AOF”) which are not transferrable; and

– I have also set Loss Absorbing Capacity of Deferred Tax (“LACDT”) at a level lower than may be ultimately be justifiable to DGS.

■ I note for LIDAC policyholders:

– The level of solvency cover is expected to remain strong albeit lower than they currently experience. The absolute amount of available capital is however greater post Scheme than is currently the case for LIDAC pre Scheme;

– The key drivers of reduced solvency coverage for LIDAC policyholders is the loss of €40m AOF and the merger of Liberty Portugal which is less well capitalised than either of LIDAC or LSCSR. This is particularly true for the base case solvency projections for the merged entity which assumes transitional measures no longer apply to Portuguese Technical Provisions (although I note that LSCSR may apply to DGS for AOF or transitional measures in respect of Liberty Portugal);

– If the Merger with Liberty Portugal were not to proceed the projected security of transferring LIDAC policyholders is improved. Given that I am satisfied that the Scheme (including the Mergers) does not materially impact the financial security of policyholders I am also satisfied were the Liberty Portugal CBM not to take place;

– The change in risk profile for transferring policyholders does not materially impact the security of benefits and I have been provided with stressed and scenario testing; and

– There is no change to policyholder protection afforded to policyholders in the event of insolvency or administration of LSCSR post Scheme.

■ I note for LSCSR policyholders:

– The level of solvency cover is expected to remain strong and will actually be improved were the Scheme to be sanctioned;

– The drivers of the improved solvency coverage is increased diversification within the SCR calculation;

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– If the Merger with Liberty Portugal were not to proceed the projected security of LSCSR policyholders is improved. Given that I am satisfied that the Scheme (including the Mergers) does not materially impact the financial security of policyholders I am also satisfied were the Liberty Portugal CBM not to take place; and

– The change in risk profile for transferring policyholders does not materially impact the security of benefits and I have been provided with stress testing solvency coverage for the key drivers of risk based capital.

2.1.6 Policyholders Communication

In terms of policyholder communication I note that the following is proposed:

■ Placing advertisements for the Scheme in the Irish Times, the Irish Independent and in the Iris Oifigiúil, the Irish State Gazette;

■ Displaying information on a dedicated website hosted by LIDAC where key documents, including the Scheme, the Petition, an Information Booklet (which will contain a summary of the Scheme and a summary of the Independent Actuary’s Report), the Notice of the Court Application and the FAQ’s may be downloaded (free of charge);

■ Displaying key documents including the Scheme and the Petition at the registered offices of both LIDAC and LSCSR in accordance with Section 13 (3) (c) of the 1909 Act;

■ Writing to each LIDAC named policyholder on every in-force policy in late July/during August 2018 to advise of the proposed transfer and setting out the information required by Section 3.11 of the Consumer Protection Code 2012;

■ The CBI consulting with the supervisory authority of every Member State where transferring contracts were concluded, in accordance with Regulation 41(3)(b) of the 2015 Regulations and complying with any publicity requirements of such Member States; and

■ It is not proposed to issue individual notifications to LSCSR policyholders (and LSCSR has made the company’s intentions known to DGS in this respect).

Given my findings above and with the agreement / non objection of the CBI, DGS and the Court I am comfortable with this communication approach.

2.1.7 Supplementary Report

I may be asked to issue a Supplementary Report containing an update on any developments that may have occurred in the period between the Directions hearing and the formal order sanctioning the Scheme to proceed. In this Supplementary Report I will review my findings and opinion which will include consideration of the following, where available:

■ Confirmation that regulators have not raised any issues with the proposed Transfer;

■ Business performance in the period and updated financial information;

■ Any relevant market developments in the period;

■ Confirmation that reinsurers have not raised any issues with the proposed Transfer; and

■ Updated regulatory capital figuresand forecast projections.

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2.2 Conclusions It is my opinion, provided the proposed Scheme operates as intended, and I have no grounds for believing that it will not do so:

■ The security of benefits to policyholders of LIDAC and LSCSR will not be materially adverselyaffected by the implementation of the Scheme on the Effective Date;

■ The Scheme will not have a material adverse effect on the reasonable benefit expectations of anyof the policyholders involved; and

■ The Scheme will not have an adverse impact on the policy servicing levels currently experienced bythe policyholders of LIDAC and LSCSR.

My opinion above is based on:

■ My review of all the pertinent historic and current information provided by LIDAC and LSCSR;

■ Discussions with the management of LIDAC and LSCSR on what will happen post transfer; and

■ Policyholders will continue to be part Liberty Group a Fortune 100 company and 4th largest P&Cinsurer in the U.S. based on 2016 direct written premium.

27 June 2018

Date

____________________

Noel Garvey, FSAI

Independent Actuary KPMG in Ireland

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3 Regulation

3.1 Introduction The Scheme proposes the transfer of the insurance business from LIDAC, an Irish-domiciled company, to the Irish branch of LSCSR, a company domiciled in Spain. In this section I describe the regulatory environments of each country, including that of NI and GB.

Spain and Ireland are both located within the European Union (“EU”) and are therefore both subject to the EU-wide solvency regime known as Solvency II.

The Solvency II framework sets out strengthened requirements around capital, governance and risk management in all EU authorised re/insurance undertakings. Solvency II also introduces increased regulatory reporting requirements and public disclosure requirements and came into force on 1 January 2016.

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 was transposed into Irish Law as S.I. 485 of 2015 and Spanish law 20/2015, of 15 July 2015, on the supervision of insurance and reinsurance entities, and Royal Decree 1060/2015, dated 20 November 2015.

3.2 Solvency II Solvency II is a principles-based regime based on three pillars:

■ Under Pillar I, quantitative requirements define a market consistent framework for valuing the company’s assets and liabilities, and determining the SCR.

■ Under Pillar II, insurers must meet minimum standards for their corporate governance, and also for their risk and capital management. There is a requirement for permanent internal audit and actuarial functions. Insurers must regularly complete an Own Risk and Solvency Assessment (“ORSA”).

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

A key change under Solvency II compared to the previous regulatory regime is that both the assets and liabilities are valued on a market consistent basis. Therefore under Solvency II, the calculation of Technical Provisions in respect of claims incurred and losses arising from unexpired exposures (typically the largest item on the liability side of an insurer’s balance sheet), and hence the balance sheet itself, typically change substantially when compared to previous regime and current accounting requirements.

■ The value of Technical Provisions are calculated as the sum of Best Estimate and a Risk Margin.

– The Best Estimate corresponds to the probability-weighted average of future cashflows, taking account of the time value of money (expected present value of future cashflows), using the relevant risk-free interest rate term structure.

– The Risk Margin is calculated as the amount to ensure that the value of the Technical Provisions is equivalent to the amount that another re/insurance undertaking would be expected to require in order to take over and meet the insurance and reinsurance obligations.

■ LIDAC establishes regulatory Technical Provisions in accordance with Statutory Instrument 485 of 2015 (S.I.485) which transposed into Irish law Directive 2009/138/EC of the European Parliament

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and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (the “Directive”) and the Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC (the “Delegated Acts”).

■ LSCSR Technical Provisions as at 31 December 2017 have been prepared in line with requirements established by Law 20/2015, of July 15, on the supervision of insurance and reinsurance entities, and Royal Decree 1060/2015, dated November 20. Both rules suppose the transposition into Spanish law the Directive and Delegated Acts.

■ Liberty Portugal Technical Provisions as at 31 December 2017 have been prepared in line with requirements established by Law 147/2015, of September 9, on the supervision of insurance and reinsurance entities. This law transposes into Portuguese law the Directive and Delegated Acts.

The SCR under Solvency II is the amount of capital required to ensure continued solvency over a 1 year time frame with a probability of 99.5%. LIDAC and LSCSR calculate the SCR using the standard formula specified in detail in the Solvency II legislation. The standard formula is designed to be applicable to all insurers and is not therefore tailored to the circumstances of an individual insurer. In plain terms, the basic SCR consists of 5 risk modules (non-life, life, health, market and counterparty) that are in turn further sub-divided into 18 sub-modules (e.g. premium and reserve risk, catastrophe risk and currency risk). The results for each sub-module are aggregated using a correlation matrix to arrive at a capital charge for each of the 5 main modules, which in turn are aggregated using a further correlation matrix to determine the basic SCR. A further module is used to calculate operational risk which is added to the basic SCR to produce the (standard formula) SCR.

The Minimum Capital Requirement (“MCR”) under Solvency II, which will be lower than the SCR, defines the point of intensive regulatory intervention. The MCR calculation is less risk sensitive than the SCR calculation and is calibrated to a confidence level of 85% over one year (compared to 99.5% for the SCR). The MCR is calculated as a linear function of Technical Provisions and written premium but must be between 25% and 45% of the firm’s SCR, subject to an absolute floor of €3.7m.

3.3 Consumer Protection Schemes LIDAC’s Irish policyholders are provided protection by the Insurance Compensation Fund (“ICF”). The ICF is primarily designed to facilitate payments to policyholders in relation to risks in Ireland where an EEA authorised non-life insurer goes into liquidation or administration. In such circumstances not all policyholder liabilities are covered and exclusions include health, dental and life policies. The ICF operates a limit on the available compensation – in the case of liquidation the limit is set at 65% of the sum due to the policyholder or €825,000, whichever is less.

The Financial Services Compensation Scheme (“FSCS”), a statutory “fund of last resort” in the UK will compensate UK (excluding NI) policyholders in the event of the insolvency (or other defined default) of a financial services firm authorised by an EEA authorised firm (such as LIDAC and LSCSR) insuring risks situated in the UK on a passported basis. For general insurance business, the FSCS will pay 100% of any claim incurred before the wind-up under compulsory insurance (such as motor third party liability cover) and 90% of the claim incurred before the wind-up for non-compulsory insurance (such as home insurance, or the non-compulsory parts of motor insurance), without any maximum. The FSCS is funded by levies on firms authorised by the PRA/FCA.

In Spain the Consorcio de Compensación de Seguros indemnifies the damages produced by natural phenomena or derived from facts of political or social incidence, on condition of having subscribed an insurance for the people or goods affected. It also is entrusted with a function of protection to creditors by insurance contract (insured, beneficiaries and injured third parties) in the cases of companies in liquidation entrusted to the Consortium, or which are in a situation of insolvency.

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While I consider the likelihood of liquidation or administration of either LIDAC or LSCSR, either pre or post Scheme, to be remote I have concluded that security provided by protections Schemes above are unaffected by the Scheme. Transferring policyholders will remain policyholders of an EEA authorised non-life insurers and therefore consumer protections afforded by the ICF and FSCS are unchanged while LSCSR policyholder protections are unaffected by accepting LIDAC policyholders.

3.4 Dispute Resolution The Irish Financial Services Ombudsman (“IFSO”) is a statutory body that deals independently with unresolved complaints from consumers about their individual dealings with all financial service providers. It is a free service to complainants. It is applicable to personal customers of financial services providers, as well as limited companies charities, clubs, trusts and partnerships with turnovers of less than €3 million. Where the provider operates on a FoS basis and its head office is based in another EU country, the complaint will be referred to an alternative service such as the Financial Ombudsman Service (“FOS”) in the UK (see below). However, where there is no such satisfactory means of redress the complaint will remain within the jurisdiction of the IFSO. The IFSO may pay maximum compensation of up to €250,000 or €26,000 per annum in the case of an annuity.

In the UK, the FOSprovides private individuals with a free, independent service for resolving disputes with financial companies. It is not necessary for the private individual to live or be based in the UK for a complaint regarding an insurance policy to be dealt with by the FOS, however, it is necessary for the insurance policy concerned to be, or have been, administered from within the UK. The FOS may award compensation up to £150,000 plus interest and costs.

In Spain Insurance Companies are required to have a Customer Service Department, independent of the operational areas of the company, to deal with the claims and complaints of the policyholders, insureds, beneficiaries or injured third parties according to the Order ECO 734/200, of March 11 and the Regulation for the Defence of the Customer. There is an independent Ombudsman that deals with the claims and complaints in second instance. In case of disagreement with the decision of any of the aforementioned instances, the interested party may submit the complaint to the Claims Service of the regulator (Dirección General de Seguros y Fondos de Pensiones).

Upon completion of LSCSR restructuring the transferring business of LIDAC will be operated by LSCSR on a freedom of establishment basis through an Irish branch and therefore complaints to IFSO will be unaffected. LSCSR policyholder dispute resolution will also be unaffected by accepting LIDAC policyholders.

3.5 Winding-up Regulations If LIDAC were to become insolvent currently, the extent to which its policyholders, including those of the transferring business, would get their claims paid would be dependent upon winding-up regulations in Ireland. If the Scheme is sanctioned, the transferring policyholders will become policyholders of LSCSR, a Spanish based company and therefore in the event of the insolvency of LSCSR the extent to which the transferring policyholders would have their claims paid would depend upon the applicable winding-up regulations in Spain. I have therefore considered the differences between the winding-up regulations in Ireland and Spain in order to assess whether these differences may have any material effect on the transferring policyholders.

In the event of the winding up of an insurance company under Irish regulations, direct insurance claims take absolute precedence over any other claim on the insurer, with respect to assets representing the Technical Provisions (subject to certain rules e.g. with the exception of expense of the winding up. Where these cannot be met out of other assets of LIDAC).

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Under Spanish law, the winding-up of an insurance undertaking is governed by the Ordinance, Supervision, and Solvency of Insurance and Reinsurance Undertakings Act and relevant regulations. The obligations derived from the contracts entered into under the right of establishment will have the same treatment as the obligations resulting from the other insurance contracts of the entity in liquidation, without distinction of nationality of the creditors by insurance contract. The credits by insurance contract are considered as credits with special privilege having preference over any other credit.

While I consider the likelihood of liquidation or administration of either LIDAC or LSCSR, either pre or post Scheme, to be remote I have concluded that winding up regulations are broadly comparable and security afforded to LIDAC policyholders from winding up regulations is not adversely impacted by the Scheme.

3.6 Conduct Regulation The transferring business is currently subject to the conduct of business regulations, including consumer protection rules, as imposed by the CBI and FCA. If the Scheme is sanctioned the transferring business will move to an Irish branch of a Spanish insurer and potentially (in the future) a third country UK branch depending on Brexit negotiations, branch authorisation and transitional periods.

The regulator in the country hosting a branch and the regulator of any country where freedom of services activity takes place (in this case, both the CBI and the FCA in the UK) oversees the compliance of that branch or freedom of services business with any local conduct laws and regulations, implementing, inter alia, the relevant EU Directives. As such the CBI and the FCA will continue to oversee the conduct regulation relating to the transferring business.

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4 Liberty Insurance dac

4.1 Structure and Background The RoI non-life insurance business was transferred from QIL to LIDAC on 11 November 2011, with the exception of QIL’s healthcare business and a claim relating to the Anglo Irish Beef Processors.

LIDAC also wrote the renewal business of Commercial Property and Commercial Liability transferred from the Dublin office of LMIE which had been operating in Dublin since 1997 offering core lines of Commercial Property and Liability, Professional Indemnity, Directors’ & Officers and Financial Institutions insurances. LMIE worked with a select network of Irish brokers.

LIDAC commenced writing Private Motor business in NI and mainland GB during Q4 2012 on a FoS basis. This included renewal of legacy QIL GB insurance policies. A strategic decision was taken to withdraw from the GB market and this business was put into run-off with no ongoing exposure from Q3 2016 onwards.

During 2014 LIDAC acquired Hughes Insurance, a major insurance broker in Northern Ireland, with the intention of LIDAC becoming its primary underwriter. Hughes Insurance has since reverted to operating as an independent broker, offering cover primarily through a panel of 3rd party underwriters. LIDAC’s NI Private Motor segment has gone into run-off with no ongoing exposure from Q4 2016 onwards. LIDAC remains on the Hughes Insurance panel for Household business in the NI market.

During July 2017, LIDAC entered into an agreement with AMET an FCA authorised insurance intermediary in NI. This agreement provides delegated authority to AMET in respect to underwriting and claims services in relation to NI Commercial Motor and Liability business.

4.2 Nature of the business LIDAC is incorporated in the RoI and is a wholly owned subsidiary of LSCSR4. LIDAC writes a broad range of lines of business including Private Motor, Commercial Motor, Household, Commercial Liability, Commercial Property and other lines. Business has been written in ROI, GB and NI.

A summary of the new business written by Solvency II segments is shown below:

LIDAC Gross Written Premium €'millions Segment 2017 2016

Motor Vehicle Liability Insurance 185.1 145.9 Other motor insurance 11.4 10.9

Fire and other damage to property insurance 31.6 35.1 General liability insurance 11.4 17.5

Credit and suretyship insurance ‐ ‐

Total all regions 239.4 209.3


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A summary of the gross Solvency II Technical Provisions by Solvency II segments is shown below:

LIDAC Gross Technical Provision €'millions Segment 31 Dec 2017 31 Dec 2016

Motor Vehicle Liability Insurance 379.8 404.3 Other motor insurance 2.7 3.7

Fire and other damage to property insurance 23.2 28.4 General liability insurance 120.2 151.7

Credit and suretyship insurance 5.1 10.2

Total all regions 531.0 598.4

4.2.1 Republic of Ireland business

The RoI non-life insurance business was transferred from QIL to LIDAC as at the 11 November 2011, with the exception of the Healthcare business and a claim relating to the Anglo Irish Beef Processors. LIDAC also wrote the renewal business of Commercial Property and Commercial Liability transferred from the Dublin office of LMIE as these policies renewed from Q2 2012 onwards.

During the period from 2012-2014, LIDAC’s objective was to recover market share and to become a profitable top-3 player in the Irish market. This strategy was revised following the departure of the previous Chief Executive (Pat O’Brien) in December 2014 and the company announcements in June 2015 outlined a new company strategy for the future. These announcements outlined a further re-structuring and redundancy program with a renewed focus on RoI going forward and significant changes to the business in Great Britain and Northern Ireland, discussed below.

As at 31 December 2017 approximately 90% of the total gross of reinsurance Actuarial Central Estimate (“ACE”) i.e. best estimate of unpaid claims liabilities was held in respect of RoI losses.

4.2.2 Great Britain business

LIDAC commenced writing Private Motor business in mainland GB during Q4 2012 on a FoS basis including renewal of legacy GB QIL policies. A strategic decision was taken to withdraw from the GB non-life insurance market and the GB Private Motor segment was put into run-off with no ongoing exposure from Q3 2016 onwards.

As at 31 December 2017 approximately 6% of the total gross of reinsurance ACE was held in respect of GB losses.

4.2.3 Northern Ireland business

LIDAC commenced writing Private Motor business in NI during Q4 2012 on FoS basis. During 2014 Liberty Group acquired Hughes Insurance, a major insurance broker in Northern Ireland with the intention of LIDAC becoming its primary underwriter.

Hughes Insurance has since reverted to operating as an independent broker, offering cover primarily through a panel of 3rd party underwriters. An existing book of LIDAC’s direct customers in NI were transferred to Hughes on renewal.

LIDAC has placed the NI Private Motor segment into run-off with no ongoing exposure from Q4 2016 onwards. LIDAC is an insurer on the Hughes Insurance panel for Household business in the NI market.

As at 31 December 2017 approximately 4% of the total gross of reinsurance ACE was held in respect of NI losses.

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4.3 Financial profile

4.3.1 Audited Irish GAAP reserving levels

The following table summarises LIDAC’s Irish GAAP claims reserves at year end 2015, 2016 and 2017 which are the most recent available audited financial information.

LIDAC booked GAAP reserves €'millions

31 December 2017 31 December 2016 31 December 2015 Gross Net Gross Net Gross Net

Claims Reserves 495.0 341.8 548.6 419.1 646.8 530.5 Unearned premium reserve 119.8 59.6 104.5 52.1 114.6 52.3

Total 614.8 401.3 653.1 471.1 761.4 582.8

Both the claims reserve and Unearned Premium Reserve (“UPR”) as at 31 December 2017 relates mainly to RoI Motor business.

The Financial Statements show profit on ordinary activities before taxation of €6.1m in 2017 and loses of €4.6m and €69.0m in the 2016 and 2015 years respectively.

I will comment further in my Supplementary Report on available management information for 2018 financial performance.

4.3.2 Reserving adequacy

Kevin Cormier Fellow of both the Casualty Actuarial Society and Society of Actuaries in Ireland and Ken Deane Fellow the Society of Actuaries in Ireland carry out the reserving analysis for LIDAC. Kevin currently acts in the PCF role of the HoAF and has provided the 2017 AOTP and supporting ARTP. This role and 31 December 2016 opinions and accompanying reports were provided by Tom Donlon, Fellow of the Society of Actuaries in Ireland, and who is associated with Willis Towers Watson.

Standard actuarial techniques have been applied to historical data to derive ultimate losses and unpaid claims liability estimates. Actuarial reserves are estimated for each lines of business and geographic territory separately, with a further breakdown by claim type or size for the more significant lines.

We show in the table below the movement of LIDAC ultimate loss estimates from year to year. This presents a sense of the accuracy of the actuarial estimates and volatility of the underlying business. I show a summary of this assessment in respect of the RoI Private Motor and combined Employers and Public Liability in the table overleaf.

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RoI Motor and Liability Actuarial Ultimate Estimate €'millions

Accident Year December

2015 December

2016 December

2017

2010&prior 1,950.4 1,931.6 1,924.8

2011 143.4 141.6 144.0

2012 112.0 111.6 112.9

2013 107.7 107.1 104.2

2014 113.7 121.4 120.3

2015 101.9 105.4 105.3

2016 92.3 86.3

2017 96.0

Current Year 101.9 92.3 96.0

Prior Years 2,427.1 2,518.6(4) 2,597.8(2)

Total 2,529.1(3) 2,610.9(1) 2,693.8

Movement (10.4) (13.2)

This shows that over the past two years the Prior Year actuarial ultimate loss estimate has reduced by €10.4m and €13.2m.

■ The favourable run-off from 31 December 2016 to 31 December 2017 amounted to €13.2m i.e. AY2016 and prior ultimate losses of €2,610.9m [figure (1)] reduces to €2,597.8m [figure (2)].


I have reviewed the calculations performed by LIDAC and have carried out my own detailed independent calculations as part of my role as the external Reviewing Actuary as at 31 December 2015 and 2017. For my Peer Review I independently recalculated undiscounted claims reserves for selected lines of business accounting for approximately 91% of the 31 December 2017 ACE. At an overall level we have calculated a gross surplus of €17.8m in the Liberty ACE.

I have also reviewed the following reserve reviews:

■ E&Y external audit of 31 December 2016 and 2017 financial statements and Solvency II Technical Provision QRTs reported to the CBI.

4.3.3 Reserving uncertainty

The range of emerging risks to reserve volatility (both adverse and favourable) include but are not limited to the following:

■ Ultimate costs and propensity for PPOs following the legislation enacted in 2017;

■ Solicitors reclaiming their role in Bodily Injury cases and trends to present new medical evidence in litigation after rejecting Injuries Board awards;

■ Changes to the discount rate used for claims settled as lump sum settlements; and

■ Growing availability and improvements in assistive technology may drive increased claims costs.

The key theme in many of the emerging risks listed is increased claims inflation and higher levels of future claim settlements.

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4.3.4 Audited Solvency II Technical Provisions

I have reviewed the Solvency II Technical Provisions at the same time as I considered the GAAP reserving position.

I have been provided with details of the Solvency II Technical Provisions for as at 31 December 2017, and the process by which the provisions were established. I reviewed the calculations performed by LIDAC in my capacity as the Reviewing Actuary.

LIDAC Solvency II Claims and Premium Provisions (i.e. Technical Provisions excluding Risk Margin) as at 31 December 2017 €’millions

Claims Provision Premium Provision

Line of business Claim Local GAAP

GAAP Adj

Dis‐count

Claim Prov.

UPR Local GAAP

Profit UPR

Profit in

PVFP

Future Prem.

Dis‐count

Prem. Prov.

Motor 358 (13) (1) 344 98 (32) 0 (41) 1 26 Fire 16 (2) 0 14 17 (6) 0 (3) 0 8

Other SII segments 121 (5) 0 116 5 (0) 0 (1) 0 4

Total 495 (20) (1) 474 120 (38) 0 (45) 2 39

I have also had regard to audited annual Technical Provision QRTs as at 31 December 2016 and 31 December 2017.

The Risk Margin calculation considers the undiversifiable Market Risk, the Underwriting Risk with respect to the obligations in force, Counterparty Default Risk in regard to reinsurance and Operational Risk. LIDAC has set volume of premiums to zero on calculating the Premium and Reserve Risk. These assumptions appear reasonable and results of 31 December 2017 Risk Margin of €18.3m is consistent with our expectations based on experience of similar risks and SCR run-off.

4.3.5 Audited Solvency Capital Requirement

The table below sets out the audited SCR by risk module for LIDAC for the years ending 31 December 2016 and 2017 as reported to the CBI.

LIDAC Solvency Capital Requirement €'millions 31 Dec 2016 31 Dec 2017

Non‐life Underwriting 117 98 Health Underwriting ‐ ‐ Life Underwriting ‐ ‐ Market 28 31 Counterparty Default 14 9 Diversification (24) (23)

BSCR 134 115

Operational 17 15 LACDT ‐ ‐

SCR 152 130

Non-life underwriting risk is clearly the largest driver of regulatory capital. A significant portion of this stems from the large book of reserves on the balance sheet that are not in line with current premium volumes:

■ LIDAC are liable for settling the full amount of all RoI losses with an event date prior to 1 July 2015 (i.e. including remaining unpaid losses in respect of the QIL portfolio transfer). From 1 July 2015 LIDAC cedes 50% of RoI claims; and

■ This means that, net of reinsurance , claims reserves are greater than the current premium volume and are also skewed more towards older years than would be the case where net premium income was more stable over time.

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As pre 1 July 2015 losses are settled LIDAC’s net claims reserve will continue to decrease until the balance sheet reserves correspond with premium volumes. Net claims reserves are a key driver of the SCR and we expect the SCR to reduce as is the case in table above and in capital projections shown in section 4.3.7.

I will comment further in my Supplementary Report on available management information for 2018 solvency position.

4.3.6 Solvency coverage reported to CBI

The table below sets out the solvency coverage of LIDAC for the years ending 31 December 2016 and 2017.

LIDAC Solvency Capital Requirement €'millions 31 Dec 2016 31 Dec 2017

Available Assets 862.3 829.3 Technical Provisions 598.4 531.0 Other Liabilities 78.5 98.8 Excess Assets over Liabilities (tier 1 capital) 185.4 199.5 Ancillary Own Funds (tier 2 capital) 40.0 40.0 Eligible Funds to meet SCR 225.4 239.5 SCR 151.7 130.5 SCR Coverage 149% 184%

LIDAC are well capitalised to cover the SCR and in excess of their own Strategic Solvency Target (“SST”) or capital buffer of €30m - €50m above the SCR.

Ancillary Own Funds application was submitted and approved by the CBI on 22 December 2016, resulting in an additional €40m of own funds in the form of Tier 2 capital. Excluding these own funds LIDAC remain sufficiently well capitalised.


4.3.7 Own Risk and Solvency Assessment

The Solvency II regime requires an annual ORSA process. The ORSA forms part of a re/insurance company’s Risk Management Framework. One key purpose of preparing an ORSA is to identify plausible threats to a satisfactory financial condition, actions that lessen the likelihood of those threats, and actions that would mitigate a threat if it materialised.

I have considered LIDAC’s 2017 Board approved ORSA though I have not repeated the detail in this Report. The ORSA is useful in terms of understanding the risks inherent in the business and the stability of the capital position over time on a central scenario and a range of adverse sensitivities and scenarios.

The table below sets out the projected solvency coverage of LIDAC over the projection period to 31 December 2020 for the base case business plan projections. For clarity, these projections do not consider the proposed Scheme nor do they allow for any dividend payments to LSCSR5.

LIDAC ORSA Solvency Capital Requirement €'m 2017 2018 2019 2020

Excess Assets over Liabilities (tier 1 capital) 193 191 191 196 Ancillary Own Funds (tier 2 capital) 40 40 40 40 Eligible Funds to meet SCR 233 231 231 236 SCR 128 115 108 105 SCR Coverage 183% 201% 214% 224%


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The projected SCR is decreasing over the planning horizon largely as a result of reducing premium and reserve risk as legacy reserves are paid down over time. Some of this reduction will however be offset by increasing premium volume. The eligible capital is broadly static as there is minimal future net retained profits.

The regulatory view of capital is expected to be comfortably in excess of 100% over the planning time horizon. Furthermore the stress testing and the scenario analysis do not raise significant concerns regarding the resilience of the LIDAC to withstand the economic impact of shocks over the planning horizon. The Company has sufficient available capital in 2017 and beyond to withstand all of the selected stresses individually.

I would note that LIDAC policyholders may not benefit from such a strong future capital position shown above as under the terms of LIDAC’s Capital Management Policy, if own funds exceed the SCR by €50m or more, then a repatriation of funds to the shareholder in the form of a dividend / shares or cancellation of the AOF can be considered.

For example the following table illustrates the potential impact of such a Capital Management action, it assumes the full AOF is cancelled at 2018 (and no dividend payments made over the projection period). I note that solvency coverage is still outside LIDAC’s current Risk Appetite of Own Funds of up to €50m in excess of the SCR. Again for example were 2020 Own Funds to reduce to LIDAC’s Risk Appetite eligible capital would be €155m and solvency coverage would be 148% (i.e. €155m / €105m – this ignores a potentially reduced SCR due to lower levels of assets / investment).

LIDAC ORSA Solvency Capital Requirement €'m 2017 2018 2019 2020

Excess Assets over Liabilities (tier 1 capital) 193 191 191 196 Ancillary Own Funds (tier 2 capital) 40 0 0 0 Eligible Funds to meet SCR 233 191 191 196 SCR 128 115 108 105 SCR Coverage 183% 166% 177% 187%

The starting point of 31 December 2017 differs to that in the tables in sections 4.3.5 and 4.3.6 due to timing differences with the ORSA carried out during 2017 based on projected 31 December 2017 Balance Sheet while the regulatory return is calculated during Q1 2018 based on the actual 31 December 2017 Balance Sheet.

I will comment further in my Supplementary Report on revised projections for the draft or final 2018 ORSA, if available.

4.4 Reinsurance LIDAC’s reinsurance strategy is to ensure that appropriate protection and risk mitigation is achieved in a cost efficient manner. Reinsurance arrangements are continually reviewed to ensure they remain appropriate.

Total outstanding reinsurance recoveries reported in 31 December 2017 financial statements are €153m mostly in respect of the QS arrangements.

4.4.1 Republic of Ireland Excess of Loss (“XoL”) and Quota Share (“QS”)

The table below summarises the XoL programme for RoI risks for the most recent years. Reinsurance coverage in earlier years is broadly in line with that shown overleaf.

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Third‐Party Excess of Loss Programme Structure

Year Entry (Motor)

Event Limit (Motor)

Entry (Liability)

Event Limit (Liability)

Entry (Property)

Event Limit (Property)

2015 €10m Unlimited €2.6m €15m €2.5m €30m

2016 €5m Unlimited €2.6m €15m €1.25m €30m

2017 €5m Unlimited €2.6m €15m €1.25m €30m

The Motor XoL placements are on a losses occurring basis while the Liability XoL are on a risks attaching basis.

From 1 July 2015, RoI risks are covered by a 50% QS Reinsurance Treaty.

4.4.2 Great Britain and Northern Ireland XoL

For 2013, the GB/NI XoL programme attaches at £5m, unlimited with 62.5% on a non-capitalisation basis and 37.5% with capitalisation clause.

For 2014, the GB/NI XoL programme attaches at £5m, unlimited with 67.9% on a non-capitalisation basis and 32.1% with capitalisation clause.

For 2015 and 2106, the GB/NI XoL programme attaches at £5m, unlimited with 100% non-capitalised basis.

4.4.3 Great Britain and Northern Ireland QS – Pre Q2 2015 QS

GB Private Motor is 100% reinsured with LMIC.

NI Private Motor from 1 January 2013 are 100% reinsured with LMIC, except for business written via Hughes Insurance.

4.4.4 Great Britain and Northern Ireland QS – Post Q2 2015 QS

From 1 July 2015, NI business (not already subject to existing QS is covered by a 50% QS Reinsurance Treaty.

4.4.5 Catastrophe (“CAT”) Excess of Loss

The 2018 CAT programme covers €50m xs €5m.

Reinsurance protection is “per event” so claims arising from the same incident can be aggregated. The programme covers all Property, Fire and Allied Perils, including Business Interruption, in respect of Household, Commercial and Contractors All Risks and including Motor Own Damage.

4.5 Risk profile and management

4.5.1 Risk Appetite

The Risk Appetite Statement (“RAS”) is a component of an effective risk management system. It is also a key requirement of the CBI’s Corporate Governance Code. I have been provided with LIDAC’s Board approved 2018 RAS.

In summary LIDAC accept risk and manage risk in order to deliver an adequate return on capital over the long term while protecting our policyholders by:

■ Focusing on building a sustainable platform for long term growth;

■ Ensuring our resources are engaged and retaining key talent; and

■ Maintaining a strong control environment

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At a minimum, LIDAC targets to hold available capital which is at least €30m greater than the SCR. This buffer is informed by the Company’s conservative Risk Appetite to withstand plausible stresses to the solvency position of the Company and is managed in line with the Capital Management Policy.

4.5.2 Risk overview

LIDAC is exposed to a range of risks as highlighted in the 2017 Solvency Financial Condition Report (“SFCR”). The principal risks and uncertainties it faces are identified as follows:

■ Underwriting risk - LIDAC manages this risk through its underwriting strategy, proactive claims handling, robust reserving methodology and its, reinsurance arrangements.

■ Market risk – LIDAC manage this risk through continuous monitoring, Asset Liability matching and rebalancing of the investment portfolio.

■ Credit risk - LIDAC’s Credit, Investment and Reinsurance Risk Policies set out procedures to mitigate exposure to credit risk, including monitoring and reporting of breaches.

■ Liquidity risk - It is LIDAC’s policy that Company policy that all funds are held in cash or in readily -marketable instruments.

■ Operational risk – LIDAC manages operational risk through the three lines of defence governance model (risk ownership, risk control and risk assurance.

LIDAC carry out a number of tests to assess the above risks including stress testing, sensitivity analysis, “Own View” analysis and SCR analysis. LIDAC have determined their SCR using the Standard Formula which broadly reflects the risks LIDAC is exposed to.

4.5.3 Risk management framework

The board of directors of LIDAC (the “Board”) directs the affairs of LIDAC and is ultimately responsible for the running of LIDAC. Whilst certain responsibilities are reserved exclusively to the Board, an effective system of delegated authority operates within LIDAC through terms of reference for committees and sub-committees. The Board delegates specific authority to Board Sub-Committees with regard to the Board’s oversight of Investments, Risk, Audit, Nomination and Remuneration. Additionally, the Board delegates specific authority for the day to day management of LIDAC to the Chief Executive Officer, who in turn delegates authority to a number of executive committees.

The governance structure of LIDAC is illustrated in the diagram below.

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4.6 Other Regulatory matters I am not aware of any other regulatory matters. It has been confirmed to me that there are no material litigation or complaints in progress at the date of this Report.

4.7 Operational arrangements

4.7.1 Overview

There are 3 broad operational categories servicing LIDAC business which are as follows:

■ Policy Administration

LIDAC has a multichannel business structure that operates through the contact centre, online platform and Broker network.

Teleperformance and LIDAC entered into a Master Services Agreement, dated 27 July 2015 for an initial period of 5 years which will automatically renew for a further 5 year term unless either party provides prior written notice of non-renewal.

Teleperformance manage the contact centre services for Liberty Insurance covering inbound and outbound sales, renewals and customer service to include front and back office activities.

■ Claims

LIDAC claims department has 109 team members which handle all claims internally from First Notification of Loss (“FNOL”) through to settlement. Operational teams are supported by Internal Motor Engineers, Quality Assurance, Legal Cost Accountant, and Vendor Management & Continuous Improvement.

A number of external Service Providers are utilised to support the department. These consist of

– External investigators or Regional Claims Managers (“RCMs”) who investigate & negotiate claims on LIDAC’s behalf;

– A guaranteed repair network; and

– A panel of solicitors, loss adjustors and private investigators.

LIDAC’s NI claims in respect of AMET business are handled by AMET with governance & oversight completed by the LIDAC internal claims team. LIDAC’s NI home claims are handled by the LIDAC internal claims team.

■ Pricing and underwriting

The pricing and underwriting function comprises 46 employees working in teams across personal and commercial lines.

– There are 6 personal lines teams: 3 product, a helpdesk, a quality assessment and a business system change team.

– There are 2 commercial teams: 1 trading and 1 non-trading team.

Together the teams are focused on portfolio management, underwriting, profitability, risk monitoring and governance.

■ Customer & Markets

Customer & Markets is responsible for the strategic and operational delivery of the customer and channel KPIs. The team is responsible for development and implementation of market strategies, channel management for all Direct and Indirect Channels, Digital performance and implementation,

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customer propositions and all external communications in relation to industry, product and customer and will contain amongst others, the following areas:

– Market, Direct Sales & Marketing;

– Customer Experience;

– Digital;

– Broker relations; and

– Public Affairs & Public Relations.

4.7.2 Outsourcing

The outsourcing policy establishes the guidelines that define the outsourcing´s framework related to functions or activities, in compliance with the existing provisions on the system of governance in insurance undertakings.

The following table summarises the key outsourcing arrangements in relation to policyholder servicing arrangements.

Activity Outsourced Details Service Provide Jurisdiction

IT Services The Company receives data centre services from the Liberty European Regional Data Centre.

Poland, Europe

Documentation Management

The Company has outsourced its outgoing documentation processes to RR Donnelley, one of the world’s leading providers of communication solutions.

Ireland, Europe

Contact Centre Operations

The Company has outsourced the operations of a Sales / Service contact centre to a third party provider, a global leader in outsourced multichannel customer experience management.

Northern Ireland, Europe

Delegated Underwriting Authority

The Company has outsourced underwriting authority and claims handlings services for Northern Ireland fleet and liability operations to a third party MGA, AMET.

Northern Ireland, Europe

4.8 Treating customers fairly Customer centricity is one of the key pillars of Liberty’s current five year strategy. In adopting the principles of Treating Customers Fairly (“TCF”) LIDAC aims to deliver the following good conduct risk outcomes:

■ Outcome 1: Consumers can be confident that they are dealing with an organisation that has a truly focussed consumer culture which is underpinned with strong internal support structures which are required to deliver an impactful customer centricity culture programme through the correct staff behaviours.

■ Outcome 2: Products and services marketed and sold by Liberty Insurance are designed to meet the needs of identified consumer groups. They are marketed and sold in a way that is clear, fair and not misleading so that the Consumer can make informed purchase decisions.

■ Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale. LIDAC will ensure there is adequate oversight and monitoring of complaints, consumer feedback and relevant distribution channels to ensure that Consumers are provided with clear sales information and are kept up to date and informed as necessary.

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■ Outcome 4: Consumers are provided with products and services which are designed to meet and exceed their expectations, understanding that LIDAC will put their needs at the heart of the decision making process to maximise the positive experiences for customers.

■ Outcome 5: Consumers do not face unreasonable post-sale barriers resulting in unfair consumer outcomes. Monitoring of post sales activities is key to identify any potential unsuitable or unfair Consumer outcomes e.g. call centre quality assurance, complaints review and ongoing reporting of key performance and key risk indicators.

From a governance perspective, TCF, conduct risk outcomes and the delivery on the Customer Experience Strategy is overseen by a strong overarching governance framework. The Customer Experience Forum reports on its performance to the Operational Risk Committee with onwards reporting to the Board Risk Committee. The conduct risk metrics are assessed at the Customer Experience Forum and management actions agreed as required to address any weaknesses identified.

LIDAC monitor and measure real-time Net Promotor Score (“NPS”) feedback through the Qualtrix platform. NPS performance is tracked and trends reported to teams on a monthly basis. All actions are followed up with managers calling customers to understand how LIDAC can improve service.

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5 Liberty Seguros Compania de Seguros y

Reaseguros, S.A

5.1 Structure and Background LSCSR writes life and non-life insurance business and was incorporated in Spain on 18 March 1964 as a public limited company. As at December 2017 LSCSR was ranked number nineteen in the ranking of Spanish insurance entities, with a market share of 1.23%.

LSCSR is specialized in the insurance business lines mainly in relation, but not limited to Motor, Household, Fire, Transport, Personal Accidents Life Savings and Life Risk.

LSCSR has two branches, one in Ireland and one in Poland and a number of subsidiaries. On 15 November 2017, the Board approved the total liquidation of the branch in Poland, together with the financial statements thereof on 3 November 2017.

I summarise below key financial information in respect of the subsidiaries other than LIDAC and Portugal (LIDAC which became a subsidiary during 20186 is covered in section 4 and Liberty Portugal in section 6):

■ Liberty Sigorta A.S. (Turkey) is headquartered in Istanbul with branch offices throughout Turkey. Liberty Sigorta focuses on auto and homeowners insurance, which it distributes through agents and partnerships with financial institutions. The latest audited accounts show total written premium of €50.9m and retained earnings of €(12.7)m. The latest returns to the Turkish financial regulator showed regulatory capital of €10.4m and eligible capital available to cover this of €19.1m i.e. 183% solvency coverage ratio.

■ Liberty International Brasil Limitada is headquartered in São Paulo. The company's primary line of business is automobile insurance, which it sells through car dealer and retail producer channels as well as broker, agent and bancassurance relationships. The latest audited accounts show total written premium of €881.7m and retained earnings of €37.2m. The latest returns to the Brazilian financial regulator showed regulatory capital of €172.6m and eligible capital available to cover this of €273.7m i.e. 159% solvency coverage ratio.

■ Seguros Caracas de Liberty Mutual, C.A. (Venezuela) is headquartered in Caracas, Seguros Caracas is the largest insurer in Venezuela. The latest audited accounts show total written premium of €35.9m and retained earnings of €1.0m. The latest returns to the Venezuelan financial regulator showed regulatory capital of €52.2m and eligible capital available to cover this of €235.5m i.e. 451% solvency coverage ratio.

■ Liberty Insurance Berhad (Malaysia) is headquartered in Kuala Lumpur. The latest audited accounts show total written premium of €134.1m, retained earnings of €95.5m. The latest returns to the Malaysian financial regulator showed regulatory capital of €86.9m and eligible capital available to cover this of €115.9m i.e. 133% solvency coverage ratio.


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The list of the core subsidiaries and affiliates along with their 2017 carried value (all of them without official listing in the Stock Exchange) is shown in the table below:

€’millions

Activity Book Value Profit / (loss) Entity

Liberty Seguros, S.A. (Portugal) Life & Non‐Life Re/insurance 72.2 0.7

Servihogar Gestión 24 horas, S.L. (Spain) Services (House assistance) 0.7 (0.1)

Liberty International Brasil Limitada (Brazil) Holding 325.2 37.1

Liberty Insurance Berhad (Malaysia) Non‐Life Insurance 112.0 11.7

Total 510.2 49.5

The following table shows the list of subsidiaries that have been classified as non-core, assets held for sale or discontinued operations.

€’millions

Activity Book Value

Profit / (loss) Entity

Liberty Sigorta A.S. (Turkey) Life & Non‐Life Re/insurance 3.0 (1.4)

Seguros Caracas de Liberty Mutual, C.A. (Venezuela) Life & Non‐Life Insurance ‐ (11.1)

Total 3.0 (12.5)

The dividends, in €millions, received per entity over the past three financial years were as follow:

€’millions

2017 2016 2015 Entity

Liberty Seguros, S.A. (Portugal) ‐ ‐ 12.5

Servihogar Gestión 24 horas, S.L. (Spain) ‐ ‐ ‐

Liberty International Brasil Limitada (Brazil) ‐ ‐ ‐

Liberty Insurance Berhad (Malaysia) 0.9 ‐ ‐

Liberty Sigorta A.S. (Turkey) ‐ ‐ ‐

Seguros Caracas de Liberty Mutual, C.A. (Venezuela) ‐ ‐ ‐

The capital injections, in €millions, to each entity over the past three financial years were as follow:

€’millions

2017 2016 2015 Entity

Liberty Seguros, S.A. (Portugal) ‐ ‐ ‐

Servihogar Gestión 24 horas, S.L. (Spain) ‐ ‐ ‐

Liberty International Brasil Limitada (Brazil) ‐ ‐ ‐

Liberty Insurance Berhad (Malaysia) ‐ ‐ ‐

Liberty Sigorta A.S. (Turkey) 4.6 ‐ ‐

Seguros Caracas de Liberty Mutual, C.A. (Venezuela) ‐ ‐ ‐

LSCSR conducts annual impairment tests on its investments in Group and affiliated entities by comparing the book value of the investments with the recoverable amount. I have been provided with the underlying methodology and do not repeat the detail in my Report.

The proposed Scheme and Mergers will result in the Portuguese and LIDAC subsidiaries becoming branches of LSCSR and they do not cause any change to any of the other branch/ subsidiary structures in the LSCSR.

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5.2 Nature of business written LSCSR writes a broad range of non-life and life products. A summary of the new business written by SII segment is shown below:

LSCSR Gross Written Premium €'millions Segment 2017 2016

Medical expense insurance 0.2 0.2 Income protection insurance 5.7 5.2

Motor vehicle liability insurance 207.7 206.6 Other motor insurance 267.4 262.9

Marine, aviation and transport insurance 4.2 5.3 Fire and other damage to property insurance 153.8 154.2

General liability insurance 5.9 5.4 Miscellaneous financial loss 0.0 0.0

Total Non‐Life 645.0 640.0

Insurance with profit participation 26.5 28.6 Index‐linked and unit‐linked insurance 98.8 98.2

Other life insurance 35.8 33.4

Total Life 161.0 160.2

Total Life and Non‐Life 806.0 800.2

LSCSR’s non-life insurance business is primarily comprised of Motor and Property lines of business. For the 2017 financial year LSCSR had gross written premium of €645m, an increase of 0.8% on 2016, while the Spanish insurance market experienced 2017 growth of 3.9%.

The technical results in 2016 and 2017 audited financial statements were as shown below:

LSCSR Underwriting Result €'millions 2017 2016

Non‐Life Underwriting Result 45.5 51.0 Life Underwriting Result 19.9 11.3

Underwriting Result 65.4 62.3

The 2017 technical result of LSCSR increased by 4.9% to €65.4m. The 2017 non-life technical result was €45.5m a decrease of (10.8%) on the 2016 result. This reduction is driven by:

■ Increased financial year loss ratio; and

■ Reduced income from financial investments.

The following chart shows the 2016 and 2017 combined ratio of non-life business.

The technical result for the life business was €19.9m which is €8.6m (or 75.6%) greater than the 2016 result of €11.3m.

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The 2017 life premium income is broadly in line with 2016 while the market experienced a contraction of (5.6%). As at 31 December 2017 LSCSR managed policy volume was 2,556,632, which represents an increase of 3.9% over 2016, of which 578,058 correspond to newly created policies.

For the life business, Savings Products experienced an overall decrease of (1.4%) with respect to 2016 written premium to stand at €130.5m. This reduction albeit at a lower rate is in line with the overall decline that has occurred in the sector i.e. (6.45%). The Risk Products have grown by 9.5% during 2017 to a level of written premium of €30.5m. This sector had zero growth during 2017.

LSCSR Gross Written Premium €'millions Segment 2017 2016

Insured Forecast Supply 2.0 2.4 PIAS 41.4 36.1

Investment and savings insurance 59.1 63.6 Savings and retirement insurance 24.7 28.2

Income 3.4 2.0

Total Savings 130.5 132.3

Risk Products 30.5 27.8


The savings managed by LSCSR represented by Technical Provisions, increased by 2.8% to reach €1.2bn as at 31 December 2017. The growth in the volume of savings managed by LSCSR is similar to that experienced by the sector.

The benefits paid for direct insurance have increased by 5.3% compared to the same period of the previous year.

LSCSR Life benefits paid €'millions 2017 2016

Maturities 55.7 50.5 Decreases 14.5 13.1 Income 2.5 2.0 Recuses 59.7 60.1


The portfolio of savings and risk policies at the end of 2017 is 210,648, which represents an increase of 5.2% over the same period of the previous year.


5.3.1 Audited GAAP reserving levels

The following table summarises LSCSR’s booked claims reserves at year end 2015, 2016 and 2017 which are the most recent available financial information.

LSCSR booked GAAP reserves €'millions


Claims Reserves 336.1 310.9 335.0 312.4 328.0 311.5 Unearned premium reserve 331.3 331.0 330.3 330.0 323.4 323.2 Provision for life insurance 1,208.6 1,207.3 1,174.1 1,172.9 1,133.3 1,132.0

AURR 1.7 1.7 1.8 1.8 6.5 6.5 Provision for Profit Sharing 3.1 3.1 3.8 3.8 4.2 4.2

Total 1,880.9 1854.0 1,845.1 1,820.9 1,795.5 1,777.5

Both the non-life claims reserve and UPR as at 31 December 2017 relates mainly to Motor business.

The life insurance reserves relate mainly to insurance with profit participation which accounts for €587m and unit-linked life insurance accounting for €569m.

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5.3.2 Reserve adequacy

Mertxe López and Ander Juaristi fellows of the Basque and Spanish Institute of Actuaries respectively have provided an actuarial opinion on the adequacy of claims and Allocated Loss Adjustment Expense reserves (“ALAE”) in respect of the non-life insurance business as at 31 December 2017.

I have been provided with details of the outstanding claims provisions for LSCSR as at 31 December 2017, the process by which the reserves were established and details of the internal actuarial reviews which have been performed.

I have not reviewed in detail the calculations performed by the LSCSR actuaries named above. Instead, by reviewing documents produced by them and through conversations with them I have reviewed the process by which reserves are set, the approach followed by the relevant actuaries and the key areas of reserve uncertainty.

Standard actuarial techniques have been applied historical data to derive ultimate losses and unpaid claims liability estimates by product, claim type, claim size etc.

In addition to review and discussion with LSCSR actuaries I have reviewed the movement of LSCSR ultimate loss estimates from year to year. This has allowed me to get a sense of the accuracy of the actuarial estimates and volatility of the underlying business. I show a summary of this assessment in respect of the Auto Private reserving segments in the following table.

Auto Private Best Estimate Ultimate Estimates €'millions Accident Year December 2015 December 2016 December 2017

2011 319.9 320.1 320.1

2012 289.1 287.8 288.0

2013 291.4 291.1 290.9

2014 277.4 275.2 274.7

2015 270.0 267.0 266.2

2016 281.5 276.5

2017 282.0

Current Year 270.0 281.5 282.0

AY2011 ‐ PY 1,177.9 1,441.2(4) 1,716.4(2)

AY2011 ‐ CY 1,447.9(3) 1,722.7(1) 1,998.4

Movement (6.7) (6.3)

This shows that at an overall level the LSCSR actuarial best estimate ultimate has been consistently revised downward at successive annual reserve reviews.



The other smaller reserving segments (Homeowners, Other Commercial and Other Company) showed similar favourable run-off. One notable exception to this was in respect of Homeowners AY2016 which developed adversely by €2.4m between 31 December 2016 and 31 December 2017. This was due an extraordinary weather event in Spain during the last few days of 2016 where there was little reliable information at the time that the 31 December 2016 reserving analyses was performed.

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I have also reviewed the following non-life reserve review reports and note no findings that cause me concern in relation to reserving adequacy:

■ E&Y external audit of 31 December 2016 and 2017 financial statements and Solvency II Technical Provision QRTs reported to the DGS;

■ Willis Towers Watson non-life reserve review as at 30 September 2016 and 31 December 2016; and

■ Liberty Group (Head Office) non-life reserve review as at 30 June 2017.

Barbara Almoguera Fellow of the Spanish Institute of Actuaries has reviewed the adequacy of Technical Provisions in respect of the life insurance business as at 31 December 2017.

LSCSR local GAAP life insurance reserves €'millions Segment December 2015 December 2016 December 2017

Life insurance with profit participation 628.6 612.1 587.3

Index‐linked and unit‐linked life insurance 449.7 510.7 569.3

Matched Single Premium 34.5 26.8 23.2

Annuities 7.3 7.1 6.8

Term 54.9 57.4 64.9

Total 1,175.1 1,214.1 1,251.5

The life provisions are calculated using methods dependent on product characteristics.

Savings products

■ Maturity benefit calculated at a guaranteed interest rate (6% for older business, falling to 1% for more recent business).

■ Defined premium payment plan.

■ Death benefit is typically return of premiums or a sum assured.

The mathematical reserve is calculated with the prospective method (present value of future liabilities and premiums). The majority of these products could have an annual profit sharing assignment if interest earned is higher than interest credited minus expenses. Given current levels of interest, such profit sharing would only apply to the most recent issues only.

■ Total reserve= Basic reserve + Profit sharing reserve

Risk products

■ Typically annual renewable term assurance products.

■ Premium rates increase each year with age.

Reserves are the unearned premium.

Unit Linked

■ Premiums are variable at the discretion of the policyholder.

■ No maturity guarantee.

■ Both single and regular premium products are available.

■ The death benefit is typically 110% of the fund, with the excess over the fund having a lower limit of €600 and an upper limit which declines with age (maximum €6,000).

The mathematical reserve is calculated using a Retrospective method:

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■ Reserve = premium paid + investment return – expense charges – risk charges.

Reserve values reflected the value of the underlying assets which the premiums net of charges are invested in and are provided by the Investment Department.

Universal Life products

■ Universal Life products typically have minimum guaranteed interest. These products guarantee a sum assured at maturity, using a guaranteed interest rate (varying from 6% to 1%).

■ Premiums, net of charges, are paid into a fund that rolls up with credited interest (typically, earned interest minus a 1% spread).

■ The maturity benefit is the greater of the guaranteed sum assured and the accumulated value of the fund.

■ Premiums can be varied at the discretion of the policyholder.

■ For some products, on reaching maturity, a bonus is given if all premiums have been paid. This bonus depends upon the term of the policy, and is around 150% of first year premium.

The reserve is calculated with the Retrospective method: (premium paid – risk charges – expense charges) * (1+ i) ^ d/365.

I have also reviewed the following life reserve review report and note no findings that cause me concern in relation to reserving adequacy:

■ E&Y external audit of 31 December 2016 and 2017 financial statements and Solvency II life Technical Provision QRTs reported to the DGS.


The key sources of external reserving uncertainty in respect of the non-life business include Baremo which came into effect on 1 January 2016 and a new judiciary process was introduced July 2015 where Road Traffic Accident victims are processed in civil courts.

Internal sources of non-life reserving uncertainty relates to a change to the claims handling process during 2016 whereby opening Bodily Injury reserves were revised and are now set at lower levels to avoid high savings in run-off.

For life business I show the risk based capital calculation in the table below to get a sense of impact of underwriting risks.

LSCSR Life SCR €'millions 2017 2016

Mortality 2.3 2.0 Longevity 1.7 2.0 Disability 1.8 0.6 Lapse 27.6 34.2

Expense 10.0 10.7 Revision ‐ ‐ CAT 6.6 6.0

Diversification (12.7) (11.9)

Life SCR 37.4 43.5

Lapse Risk is the key driver of the life underwriting SCR and LSCSR stress the impact of lapse volatility on reserving and capital levels. I have reviewed the stress testing and am satisfied that LSCSR’s solvency coverage is resilient to variations in lapse rates assumptions. The profile is consistent with my understanding of the drivers of risk for these products.

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Market risk is also a significant driver of reserving uncertainty particularly in relation to products with profit participation. I have reviewed LSCSR market risk stresses and impact on volatility on reserving and capital levels and I am satisfied that LSCSR’s solvency coverage is resilient to market stresses and credit spreads in particular.


I have reviewed the Solvency II Technical Provisions at the same time as I considered the GAAP reserving position.

I have been provided with details of the Solvency II Technical Provisions for as at 31 December 2017, and the process by which the provisions were established. I have not attempted to review in detail the calculations performed by the internal actuaries. Instead I have reviewed the process by which Technical Provisions were estimated, the approach followed by the internal actuaries, and the assumptions employed in their review. I have also had regard to audited annual Technical Provision QRTs.

The following table shows the transition from local non-life GAAP reserves to non-life Solvency II Claims and Premium Provisions i.e. Technical Provisions excluding the Risk Margin component.

For non-life business the most significant movement in local GAAP to Solvency II Technical Provisions is in respect of unexpired ULR and future premium cashflow. The expected profitability is line with the results of the latest internal and external actuarial reserving. Future premium cashflow are largely made up of an audited balance sheet i.e. debtor balances.

LSCSR Solvency II Claims and Premium Provisions (i.e. Technical Provisions excluding Risk Margin) as at 31 December 2017 €’millions


Line of business Claim GAAP

GAAP Adj

Dis‐count

Claim Prov.

UPR GAAP

Profit UPR

Profit in

PVFP

Future Prem.

Dis‐count

Prem. Prov.

Motor Liability 200 (6) (1) 193 106 2 (4) 11 0 96 Motor Other 29 1 0 30 138 63 11 14 (0) 50 Fire & Other Damage

46 (4) 0 42 81 24 0 11 (0) 47

Other SII segments 19 (4) 1 16 8 3 0 1 0 3

Total 294 (13) (1) 280 333 92 8 37 (0) 196

The following table shows the transition from local life GAAP reserves to life Solvency II best estimate liability i.e. Technical Provisions excluding the Risk Margin component.

LSCSR Solvency II Best Estimate Liability (i.e. Technical Provisions excluding Risk Margin) as at 31 December 2017 €’millions

GAAP Adjustment

Solvency II BEL w/o

transitional

Solvency II BEL with

transitional

Life insurance with profit participation 587.3 173.7 761.0 618.0 Index‐linked and unit‐linked insurance 569.3 (88.2) 481.1 481.1

Matched Single Premium 23.2 0.6 23.9 23.9 Annuities 6.8 0.5 7.3 7.3 Term 64.9 (19.0) 45.9 45.9

Total 1,251.5 67.6 1,319.2 1,176.2

For life business LSCSR apply the transitional measure to the calculation of Technical Provisions. The reduction in Technical Provisions from application of the transitional measures decreases from 100 % in the year starting 1 January 2016 to 0% as of 1 January 2032. I show the impact of this on the Solvency II balances sheet over the period to 31 December 2019, in the table overleaf.

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Transitional measure on TPs €'millions 2016 2017 2018 2019

Technical Provisions 173.3 161.7 150.2 138.6

The Risk Margin calculation considers the undiversifiable Market Risk, the Underwriting Risk with respect to the obligations in force, Counterparty Default Risk in regard to reinsurance and Operational Risk. LSCSR has that volume of premiums are zero on calculating the Premium and Reserve Risk. These assumptions appear reasonable and results of 31 December 2017 Risk Margin of €16.8m is consistent with our expectations based on experience of similar risks and SCR run-off.

5.3.5 Solvency Capital Requirement

The table below sets out the Solvency Capital Requirement by risk for LSCSR for the years ending 31 December 2016 and 2017.

LSCSCR Solvency Capital Requirement €'millions 31 Dec 2016 31 Dec 2017

Non‐life Underwriting 143 145 Health Underwriting 2 2 Life Underwriting 44 37 Market 277 378 Counterparty Default 22 19 Diversification (124) (126)

BSCR 364 455

Operational 22 22 LACDT (61) (62)

SCR 324 415

Market risk is the largest driver of regulatory capital. The key drivers of market risk are as follows:

■ Equity risk charge – Participations are type 2 and are non-strategic in nature. Transitional measures are used for the calculation of equity risk. These measures are applicable for 7 years. The capital charge to be applied each year is as follows:

LSCSR Equity Risk SCR ‐ charge applied to investments in subsidiaries Dec 2015 Dec 2016 Dec 2017 Dec 2018 Dec 2019 Dec 2020 Dec 2021 Dec 2022

22.00% 25.86% 29.71% 33.57% 37.43% 41.29% 45.14% 49.00%

■ The Malaysian and Brazilian investments are the drivers of concentration risk. These are treated as separate exposures and attract Standard Formula charges of 73% and 64.5% respectively. This treatment is as advised by DGS and differs to the 2016 calculation. This change in SCR calculation is the reason overall SCR has increased so significantly from 2016 to 2017.

LSCSCR Concentration SCR €'millions 31 Dec 2017

Malaysia Participation 117 Brazil Participation 357

Concentration SCR 219

■ LSCSR has foreign currencies exposure of participations in insurance entities outside the European Economic Area including the Brazilian real, Venezuelan Bolivar, Turkish Lira and Malaysian Ringgit.

■ Significant exposures to fixed income drives a large credit spreads. The spread risk is greater than the interest rate risk, which is mitigated by an asset and liability management strategy. LSCSR applies the volatility adjustment to the liabilities that, given an increase in credit spreads, would mean the discount of the liabilities more in line with how the assets are discounted.

Non-life underwriting risk is stems from volume of reserves and current premium volumes. The CAT risk component of the non-life underwriting risk is relatively small due to LSCSR reinsurance strategy and low retention levels.

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LSCSR has a significant portfolio of guaranteed savings products. This type of products in the change of accounting valuation to Solvency II entails a significant reduction of eligible own funds. The company has stopped marketing periodic premium products with guaranteed interest rates.


5.3.6 Solvency coverage reported to DGS

The table below sets out the solvency coverage of LSCSR for the years ending 31 December 2016 and 2017 with the application of the long-term transitional measures, i.e. transitional measure on Technical Provisions and equity charge applied to participations.


Available Assets 2,926.8 2,947.0 Technical Provisions 1,662.3 1,669.9 Other Liabilities 819.4 780.7 Excess Assets over Liabilities (tier 1 capital) 445.0 496.5 Subordinated Loans (tier 2 capital)* 223.9 218.0 Eligible Funds to meet SCR 607.5 704.2 SCR 324.9 415.4 SCR Coverage 187% 170%

* Tier 2 capital is restricted to 50% SCR when demonstrating solvency i.e. 2016 and 2017 restricted to €162.5m and €207.7m respectively

LSCSR has a subordinated loan with nominal value of €200m with its parent company, Liberty International European Holdings B.V. This subordinated loan is valued at €223.9m using the risk free rate and is classified as tier 2 capital of which a maximum amount of 50% of the SCR can be considered as eligible capital.

LSCSR are well capitalised to cover the SCR and in excess of their SST or capital buffer of between 105% and 120% coverage ratio.

The following table sets out the solvency coverage of LSCSR for the years ending 31 December 2016 and 2017 without the transitional measure adjustment to Technical Provisions but with the transitional measure applied to participations.


Available Assets 2,942.6 2,947.0 Technical Provisions 1,817.1 1,834.9 Other Liabilities 817.9 739.4 Excess Assets over Liabilities (tier 1 capital) 307.5 372.7 Subordinated Loans (tier 2 capital)* 223.9 218.0 Eligible Funds to meet SCR 470.4 580.5 SCR 325.8 415.5 SCR Coverage 144% 140%

* Tier 2 capital is restricted to 50% SCR when demonstrating solvency i.e. 2016 and 2017 restricted to €162.9m and €207.8m respectively

Without the transitional arrangements LSCSR are still well capitalised to cover the SCR and in excess of their SST or capital buffer of between 105% and 120% solvency coverage ratio.


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LSCSR must produce an annual ORSA in the same manner as discussed in section 4.3.7 for LIDAC.

The table below sets out the solvency coverage of LSCSR over the projection period to 31 December 2019 for the base case business plan projections. For clarity, these projections to not consider the Transfer or CBM.

With transitional measures LSCSR Solvency Capital Requirement €'millions 2017 2018 2019

Excess Assets over Liabilities (tier 1 capital) 497 518 583 Subordinated Loans (tier 2 capital)* 224 224 224 Eligible Funds to meet SCR 705 725 807 SCR 415 413 446 SCR Coverage 170% 175% 181%

Without transitional measures LSCSR Solvency Capital Requirement €'millions 2017 2018 2019

Excess Assets over Liabilities (tier 1 capital) 374 406 480 Subordinated Loans (tier 2 capital)* 224 224 224 Eligible Funds to meet SCR 581 613 703 SCR 416 413 446 SCR Coverage 140% 148% 158%

* Tier 2 capital is restricted to 50% SCR when demonstrating solvency

The regulatory view of capital is expected to be comfortably in excess of 100% over the planning time horizon. Furthermore the stress testing and the scenario analysis do not raise significant concerns regarding the resilience of the LSCSR to withstand the economic impact of shocks over the planning horizon. The Company has sufficient available capital in 2017 and beyond to withstand all of the selected stresses individually.

The eligible capital increases at a faster rate than SCR as LSCSR base case is profitable growth.


5.4 Reinsurance The minimum credit rating standards that Liberty Group requires of its reinsurers is A rated. The reinsurance protection purchased according to the annually Board approved Reinsurance Policy. The following table shows the contracts and percentage variations with respect to the previous year.

Line of RI 2017 2016 2015 business type Retention Limit Retention Limit Retention Limit

Motor XL 1.0 135.0 1.0 135.0 1.0 135.0 Property XL 0.3 25.0 0.3 25.0 0.3 25.0 Accident XL 0.3 1.0 0.3 1.0 0.3 1.0 Marine XL 0.3 2.5 0.3 2.5 0.3 2.5 GTPL XL 0.3 6.0 0.3 6.0 0.3 6.0

Property CAT 1.2 40.0 0.5 40.0 0.5 40.0 Life Proportional 0.15 0.95 0.15 0.95 0.15 0.95

Motor Road Assistant 0% 100% 0% 100% 0% 100%

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Risks which exceed these limits or are totally or partially excluded by the underwriting regulations, will be protected through Facultative Reinsurance. As can be seen in the table below, in 2016, reinsurance premiums assigned as facultative represent 0.038% of GWP.

Line of RI 2016 2015 business type GWP Fac prem. % GWP Fac prem. %

Motor FAC 470 0.015 0.003% 453 0.015 0.003% Property FAC 153 0.116 0.076% 148 0.043 0.029% Marine FAC 5 0.028 0.522% 6 0.024 0.398% GTPL FAC 6 0.122 2.234% 5 0.071 1.344% Life FAC 192 0.036 0.018% 192 0.041 0.021%

Total 825 0.317 0.038% 805 0.194 0.024%

The Road Assistance and Replacement Vehicle coverage is included in Motor Policies, reinsuring them with a specialist who has the means for providing such coverage.

5.5 Risk profile and management

5.5.1 Risk Appetite

LSCSR identify, monitor and manage risks within a period of time, through development of its normal activity, taking into account the current situation and its Strategic Plan.

■ LSCSR’s Strategic Solvency Target is set at between 105% and 120%.

This buffer is informed by the Company’s Risk Appetite to withstand plausible stresses to the solvency position of the Company and is managed in line with the Capital Management Policy.

5.5.2 Risk overview

The principal risks and uncertainties the Entity faces are identified as follows:

■ Underwriting Risk – the potential losses derived from a possible insufficiency of premiums or reserves, originated either by errors in the pricing or subscription models or by unforeseen fluctuations in the macroeconomic environment or trends and changes in the habits and consumption of society. LSCSR mitigate this risk through annually review of the underwriting policy, controls, robust reserving governance and reinsurance arrangements.

■ Market Risk – exposure in foreign currency other than the euro or an increase in credit spreads are the main risks facing the Company. LSCSR mitigates this risk through continuously reviewing currency exchanges and monitoring of the adequacy with the Investment Risk Policy and Asset Liability Management Policy.

■ Liquidity Risk – LSCSR's policy is to maintain a sufficient level of treasury and highly liquid assets to cover any eventuality arising from contracts entered into with customers or obligations with suppliers. In order to ensure liquidity and be able to meet all the payment commitments that derive from its activity, the Company performs, short and medium term liquidity forecasts at least twice annually.

■ Operational Risk – these risks are derived from failures in the processes, staff and internal systems, and arise in an inherent way from the activity of any organization. These risks are managed and monitored through the internal control framework within the three lines of defence governance model.

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5.5.3 Risk management framework

The Board of Directors is responsible for establishing the general Risk Management Policy framework of LSCSR. Its activity framework includes the following:

■ Ensure the effectiveness of the Risk Management System;

■ Define a risk profile aligned with the LSCSR’s business strategy;

■ Establish the Company’s risk tolerance through an appropriate system of limits and threshold for Key Risk Indicators;

■ Approve the main risk management strategies and policies; and

■ Approve the ORSA report or other documents drawn up by the Risk Management Function.

The Risk Management Function is a key management function and will assess risks to which LSCSR is exposed and provides objective review and feedback to the Board on management’s ability to execute strategy in accordance with the Risk Appetite Framework.

5.6 Other Regulatory matters I am not aware of any other regulatory matters. It has been confirmed to me that there are no material litigation or complaints in progress at the date of this Report.

5.7 Operational arrangements There are 3 broad operational categories servicing LSCSR business which are as follows:

■ Policy Administration

LSCSR employs 1,128 people distributed among Barcelona, Bilbao and Madrid, as well as in the so-called ‘Fourth Headquarters’ which is formed by the commercial team that is distributed throughout the Spanish territory.

LSCSR has a multichannel business structure that operates through more than 3,000 insurance agents, industry professionals who advise and are the visible face of the insurer before its customers.

■ Claims

LSCSR is committed to respond to all claims received within a maximum period of 30 days and has signed up to the Guide to Good Practices of Internal Resolution of Claims edited by UNESPA (Spanish Industry Association).

■ Customer & Markets

Continuous improvement is being made to technological tools to enhance customer experience. This year, within the scope of the Technological Transformation initiative, a set of architectures and tools have been launched that will allow LSCSR to manager customers, including:

– Start-up of a set of solutions to build the new telephone consultant desk; and

– New tools to enhance the closeness with Customers (Customer Relation Management, Smart CTI Integration, Customer Communication Management, Master Data Management, Customer Journey Management).

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5.7.1 Outsourcing

The outsourcing policy establishes the guidelines that define the outsourcing´s framework related to functions or activities, in compliance with the existing provisions on the system of governance in insurance undertakings.

The following table summarises the key outsourcing arrangements in relation to policyholder servicing arrangements.

Activity Outsourced Details Service Provide Jurisdiction

IT Services The Company receives data centre services from the Liberty European Regional Data Centre.

Poland, Europe

Contact Centre Operations

The Company has outsourced the operations of a Sales / Service contact centre to a third party provider: Konecta and Atento.

Spain, Europe

5.8 Treating customers fairly I note through information provided that LSCSR is committed to the customer experience. LSCSR’s customer interactions have been developed through the “moments of truth” i.e. real time customer understanding identified in 2011 and measured since 2012.

The aim of this interaction is to evaluate the NPS indicator from 0 to 10. The issues that are most important to customers are identified by this information. All comments from monthly customer surveys are reviewed at relevant functional meetings which result in actions and follow-ups.

The NPS has been integrated into the LSCSR strategy for the past three years where all LSCSR employees must comply with NPS as part of their work objectives, rewarding or penalising the best and worst NPS score.

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6 Liberty Seguros S.A

In this section I consider the financial position of Liberty Portugal one of the most material subsidiaries of LSCSR. The purpose of considering its financial strength is that LSCSR plans to absorb this company by virtue of a Cross Border Merger.

In my consideration of the Scheme it will be necessary for me to understand the potential affect that this Merger will have on the transferring policyholders of LIDAC. Note that consideration of the impact of the Scheme on Liberty Portugal policyholders is not in my scope as Independent Actuary.

I have therefore focused solely on the financial strength of this group policyholders and the impact on LSCSR post Transfer and Mergers.

6.1 Structure and Background Liberty Seguros, SA established a presence in Portugal when the former Companhia Europeia de Seguros, SA was acquired from the Swiss group Credit Suisse. The company is regulated by the Autoridade de Supervisão de Seguros e Fundos de Pensões (“ASF”). In December 2005 the share capital of Liberty Seguros, SA were transferred from the company Liberty International Iberia, S.L., Sociedad Comanditaria Simple, to the company Liberty Compañía de Seguros y Reaseguros, SA. Therefore Liberty Portugal is a fully owned subsidiary of LSCSR.

Liberty Portugal provide cover for private individuals, households, and small and medium-sized companies and has a strong focus on non-life insurance, particularly in the areas of Auto, Worker’s Compensation and Property insurance.

6.2 Nature of business written Liberty Portugal writes a broad range of non-life and life products. A summary of the business written by SII segment is shown below:

Liberty Portugal Gross Written Premium €'millions

Segment 2017 2016

Medical expense insurance 8.5 6.7 Income protection insurance 5.2 4.0

Worker's Compensation insurance 45.4 39.6 Motor vehicle liability insurance 87.1 80.5

Other motor insurance 63.8 58.1 Marine, aviation and transport insurance 1.6 1.7

Fire and other damage to property insurance 66.5 62.5 General liability insurance 3.7 3.4 Legal expenses insurance 8.5 7.9

Assistance 22.0 20.3

Total Non‐Life 312.4 284.8

Insurance with profit participation 26.7 30.6 Index‐linked and unit‐linked insurance ‐ ‐

Other life insurance 7.8 6.5


The latest audited account show total gross written premium of €346.9m and retained earnings of €55.2m. The latest returns to the Portuguese financial regulator showed regulatory capital of €91.1m and eligible capital available to cover this of €153.6m i.e. 169% solvency coverage ratio.

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Liberty Portugal’s non-life insurance business is primarily comprised of Motor, Worker’s Compensation and Property lines of business. For the 2017 financial year Liberty Portugal had gross written premium of €312m. Gross claims incurred during 2017 were €201m. The technical result in the 2017 audited financial statements stands at €(9.2)m that together with the €9.0m investment income results in €(0.2)m of Non-Life Technical Result.

Liberty Portugal’s life insurance business 2017 gross written premium was €35m with gross claims incurred of €23m leaving the technical result of €2m.


6.3.1 Audited GAAP reserving levels

The following table summarises Liberty Portugal’s audited reserves at year end 2015, 2016 and 2017 which are the most recent available financial information.

Liberty Portugal booked GAAP reserves €'millions


Claims + Other Reserves 201.2 188.9 192.6 182.3 168.0 161.3 Unearned premium reserve 64.0 61.0 60.3 57.3 57.3 54.4 Provision for life insurance 270.2 270.0 257.9 257.8 238.0 237.8

AURR 2.4 2.4 7.1 7.1 6.3 6.3 Provision for Profit Sharing 21.8 21.8 19.0 19.0 15.6 15.6

Total 559.6 544.1 537.0 523.6 458.2 475.5

Underwriting losses net of reinsurance of €(9.2)m, €(8.3)m and €(6.5)m were recorded in the 2017, 2016 and 2015 Financial Statements respectively.


6.3.2 Reserve adequacy

Vitor Chagas Associate of the “Instituto dos Atuários Portugueses” has provided an actuarial opinion on the adequacy of claims and ALAE reserves in respect of the non-life insurance business as at 31 December 2017.

I have been provided with details of the outstanding claims provisions for the Portuguese risks that will be merged with LSCSR, the process by which the reserves were established and details of the internal actuarial reviews which have been performed.

I have not reviewed in detail the calculations performed by the Portuguese Actuarial Function. Instead, by reviewing documents produced by them and through conversations with them I have reviewed the process by which reserves are set, the approach followed by the relevant actuaries and the key areas of reserve uncertainty.

Standard actuarial techniques have been applied historical data to derive ultimate losses and unpaid claims liability estimates by product, claim type, claim size etc.

In addition to review and discussion with the Portuguese actuaries I have reviewed the movement of ultimate loss estimates from year to year. This has allowed me to get a sense of the accuracy of the actuarial estimates and volatility of the underlying business. I show a summary of this assessment in respect of the Auto Private reserving segments in the following table.

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Private Motor ACE €'millions Workers Compensation ACE €'millions

Accident Year December

2015 December

2016 December

2017 Accident Year December

2015 December

2016 December

2017

2011&prior 758.3 758.5 758.2 2011 290.6 291.1 292.2

2012 86.6 86.8 87.9 2012 23.1 23.2 24.0

2013 85.4 85.7 86.3 2013 22.5 22.8 22.6

2014 94.9 96.0 96.8 2014 26.5 26.1 27.3

2015 90.6 90.3 90.0 2015 28.9 27.1 26.8

2016 85.6 84.4 2016 28.9 29.0

2017 103.3 2017 28.6

Current Year 90.6 85.6 103.3 Current Year 28.9 28.9 28.6

AY2011 ‐ PY 1,025.1 1,117.3(4) 1,203.6(2) AY2011 ‐ PY 362.7 390.3(4) 421.9(2)

AY2011 ‐ CY 1,115.7(3) 1,202.8(1) 1,306.9 AY2011 ‐ CY 391.6(3) 419.2(1) 450.5

Movement 1.5 0.8 Movement (1.2) 2.7

This shows that at an overall level the actuarial best estimate ultimate has been relatively consistent at successive annual reserve reviews.

■ The unfavourable run-off from 31 December 2016 to 31 December 2017 amounted to €3.5m i.e. AY2016 and prior ultimate losses of €1,202.8m and €419.2m [figures (1)] increase to €1,203.6m and €421.9m respectively [figures (2)].

■ The run-off from 31 December 2015 to 31 December 2016 amounted to €1.5m unfavourable for Motor and €1.2m favourable for Workers Comp i.e. AY2015 and prior ultimate losses of €1,115.7m and €391.6m [figures (3)] moves to €1,117.3m and €390.3m respectively [figures (4)].

I have also reviewed the following non-life reserve review reports and note no findings that cause me concern in relation to reserving adequacy:

■ KPMG external audit of 31 December 2016 and 2017 financial statements and non-life Solvency II Technical Provision QRTs reported to the ASF;

■ Ernst and Young provided an Actuarial Opinion on non-life Solvency II Technical Provisions as at 31 December 2016 and 2017; and

■ Liberty Group (Head Office) non-life reserve review as at 31 December 2017.

Ana Paula Fernandes Fellow of the “Instituto dos Atuários Portugueses” has provided an actuarial opinion on the adequacy of Technical Provisions in respect of the life insurance business as at 31 December 2017.

The Life mathematical provisions are calculated policy by policy with the prospective method, taking into account the guaranteed benefits and distributed profit sharing, according to the technical specifications defined for each product.

For products with associated account balances the mathematical reserve for the savings component is calculated taking into account all policy movements and credited interest.

The key assumptions include:

■ Acquisition expenses;

■ Maintenance expenses; and

■ Mortality and disability assumptions.

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■ I have also reviewed the following life reserve review reports and note no findings that cause me concern in relation to reserving adequacy:

■ KPMG external audit of 31 December 2016 and 2017 financial statements and life Solvency II Technical Provision QRTs reported to the ASF; and

■ F + M Consulting provided an Actuarial Opinion on Life Solvency II Technical Provisions as at 31 December 2016 and 2017.


Changing risk mix of the Motor portfolio will add to loss projection uncertainty, The portfolio has seen some mix change as a result of recent rating and underwriting action to reduce proportion of instalment premium business which is considered to be more loss making than single premium business.

The Workers’ Compensation market is hardening and underwriting cycles will need to be considered when setting reserves as these cycles tend to drive reserving cycles and periods of over / under reserving.

Market risk is also a significant driver of reserving uncertainty particularly in relation to life insurance products with profit participation.


I have reviewed the Solvency II Technical Provisions at the same time as I considered the GAAP

reserving position.

I have been provided with details of the Solvency II Technical Provisions for as at 31 December 2017, and the process by which the provisions were established. I have not attempted to review in detail the calculations performed by the internal actuaries. Instead I have reviewed the process by which Technical Provisions were estimated, the approach followed by the internal actuaries, and the assumptions employed in their review. I have also had regard to audited annual Technical Provision QRTs.

The following table shows the transition from local non-life GAAP reserves to non-life Solvency II Claims and premium Provisions i.e. Technical Provisions excluding the Risk Margin component.

For non-life business the most significant movement in local GAAP to Solvency II Technical Provisions is in respect of unexpired ULR and future premium cashflow. The expected profitability is line with the results of the latest internal and external actuarial reserving. Future premium cashflow are largely made up of an audited balance sheet i.e. debtor balances.

Liberty Portugal Solvency II Claims and Premium Provisions (i.e. Technical Provisions excluding Risk Margin) as at 31 December 2017 €’millions


Line of business Claim GAAP

GAAP Adj

Dis‐count

Claim Prov.

UPR GAAP

Profit UPR

Profit in

PVFP

Future Prem.

Dis‐count

Prem. Prov.

Motor Liability 77 0 (1) 76 37 (3) 1 (10) (0) 25 Motor Other 8 1 0 9 28 (9) (1) (9) 0 8 Workers Comp 99 16 (2) 114 9 (2) (1) (4) (1) 2 Fire Damage 12 0 (0) 13 27 (5) 1 (12) 0 11

Other SII segments 5 0 (0) 4 18 (14) (2) (5) 0 (3)

Total 201 17 (3) 216 119 (31) (3) (42) (1) 43

The following table shows the transition from local life GAAP reserves to life Solvency II Technical Provisions excluding the Risk Margin component.

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Liberty Portugal Solvency II Best Estimate Liability (i.e. Technical Provisions excluding Risk Margin) as at 31 December 2017 €’millions

GAAP Adjustment

Solvency II BEL w/o

transitional

Solvency II BEL with

transitional

Life insurance with profit participation 277.1 55.9 333.1 276.8 Index‐linked and unit‐linked insurance 3.6 0.2 3.8 3.6

Other Life Insurance 11.2 0.4 11.7 11.1

Total Life 292.0 56.6 348.6 291.6

Health Similar to Life * 90.1 12.0 102.1 86.0 * These amounts are included in the Worker's Compensation claims reserves and are related to loss of income annuities and life time medical expenses that are calculated also as annuities.

For life business Liberty Portugal apply the transitional measure to the calculation of Technical Provisions. The reduction in Technical Provisions from application of the transitional measures decreases from 100 % in the year starting 1 January 2016 to 0% as of 1 January 2032. I show the impact of this on the Solvency II balances sheet over the period to 31 December 2019.

Transitional measure on TPs €'millions 2016 2017 2018 2019

Technical Provisions 78.0 73.1 68.2 63.4

The Risk Margin calculation considers the undiversifiable Market Risk, the Underwriting Risk with respect to the obligations in force, Counterparty Default Risk in regard to reinsurance and Operational Risk. Liberty Portugal has that volume of premiums are zero on calculating the Premium and Reserve Risk. These assumptions appear reasonable and results of 31 December 2017 Risk Margin of €24.5m is consistent with our expectations based on experience of similar risks and SCR run-off.

6.3.5 Solvency Capital Requirement

The table below sets out the SCR by risk for Liberty Portugal for the years ending 31 December 2016 and 2017.

Liberty Portugal Solvency Capital Requirement €'millions 31 Dec 2016 31 Dec 2017

Non‐life Underwriting 47 54 Health Underwriting 20 20 Life Underwriting 21 18 Market 57 53 Counterparty Default 4 4 Diversification (51) (52)

BSCR 98 98

Operational 10 11 LACTP (4) (1) LACDT (15) (16)

SCR 89 91

Market risk is the largest driver of regulatory capital. The key drivers of market risk are as follows:

■ Significant exposures to fixed income drives a large credit spreads. The spread risk is greater than the interest rate risk, which is mitigated by an asset and liability management strategy. LSCSR applies the volatility adjustment to the liabilities that, given an increase in credit spreads, would mean the discount of the liabilities more in line with how the assets are discounted;

■ Non-life underwriting risk is stems from volume of reserves and current premium volumes. The CAT risk component of the non-life underwriting risk is relatively small due to Liberty Portugal’s reinsurance strategy and low retention levels;

■ Life underwriting risk stems from decrease in lapse due to run-off products with guaranteed interest rates that are higher than the risk free EIOPA term structure; and

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■ Health underwriting risk stems mainly from the Worker’s Compensation line of business being the current premium volumes the main driver even more than the Similar to Life component. The CAT risk of the health underwriting risk was significantly diminished in 2017 due to the increase of the capacity of the Worker’s Compensation mathematical reserves reinsurance treaty.

I will comment further in my Supplementary Report on available management information for 2018 solvency position..

6.3.6 Solvency coverage reported to ASF

The table below sets out the solvency coverage of Liberty Portugal for the years ending 31 December 2016 and 2017 with the application of the long-term transitional measures, i.e. transitional measure on Technical Provisions and equity charge applied to participations.


Available Assets 742.7 772.7 Technical Provisions 545.1 563,7 Other Liabilities 49.7 55.4 Excess Assets over Liabilities (tier 1 capital) 147.9 153.6 Tier 2 or 3 capital ‐ ‐ Eligible Funds to meet SCR 147.9 153.6 SCR 89.2 91.1 SCR Coverage 166% 169%

Liberty Portugal is well capitalised to cover the SCR and in excess of their own Strategic Solvency Target or capital buffer of 120% solvency coverage ratio.

The following table sets out the solvency coverage of Liberty Portugal for the years ending 31 December 2016 and 2017 without the transitional measure adjustment to Technical Provisions but with the transitional measure applied to participations.


Available Assets 758.8 783.8 Technical Provisions 623.1 636.8 Other Liabilities 45.2 47.5 Excess Assets over Liabilities (tier 1 capital) 90.5 99.5 Tier 2 or 3 capital ‐ ‐ Eligible Funds to meet SCR 90.5 99.5 SCR 89.2 91.1 SCR Coverage 101% 109%

Without the transitional arrangements Liberty Portugal have just enough eligible capital to cover the SCR which falls short of their own Strategic Solvency Target or capital buffer of 120% solvency coverage ratio.

The key change between with / without transitional arrangements is in relation to valuation of Technical Provisions with relatively immaterial adjustments to asset valuations and SCR risk modules.


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As is the case for LIDAC and LSCSCR, Liberty Portugal has produced annual ORSA reports.

The table below sets out the solvency coverage of Liberty Portugal over the projection period to 31 December 2019 for the base case business plan projections. For clarity, these projections to not consider the Transfer or CBM.

Modelling assumptions include:

■ The Health CAT is assumed to reduce due to the increase to the capacity of the Workers’ Compensation mathematical reserves reinsurance for 2018; and

■ The Premium and Reserve Risk will decrease significantly at the end of 2018 as the Santander Property portfolio will be transferred to Aegon.

With transitional measures Liberty Portugal Solvency Capital Requirement €'millions 2017 2018 2019

Excess Assets over Liabilities (tier 1 capital) 150 144 142 Tier 2 or 3 capital ‐ ‐ ‐ Eligible Funds to meet SCR 150 144 142 SCR 85 90 95 SCR Coverage 176% 160% 151%

Without transitional measures Liberty Portugal Solvency Capital Requirement €'millions 2017 2018 2019

Excess Assets over Liabilities (tier 1 capital) 95 93 95 Tier 2 or 3 capital ‐ ‐ ‐ Eligible Funds to meet SCR 95 93 95 SCR 85 90 95 SCR Coverage 111% 103% 100%

Based on the ORSA projections LSCSR’s solvency coverage is expected to reduce over the planning period to 31 December 2019.

For the with transitional measures projections, eligible capital falls due to the gradual unwind of the Technical Provision transitional measures each year. For the without transitional measure projections, the eligible capital is broadly flat as the change in retained earnings is assumed to be minimal over the period. Under both sets of projections, the SCR increases over the period due to increased technical provisions and investments.


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6.4 Reinsurance The minimum credit rating standards that Liberty Group requires of its reinsurers is A rated. The reinsurance protection purchased according to the annually Board approved Reinsurance Policy. The following table shows the contracts and percentage variations with respect to the previous year.

Line of RI 2018 2017 2016

business type Retention Limit Retention Limit Retention Limit

Motor XL 1.000 49.000 1.000 49.000 1.000 49.000

WC Math XL 0.500 16.500 0.500 9.500 0.500 9.500

WC Med Exp XL 0.500 4.500 0.500 4.500 0.500 4.500

Property Surplus (HO) 0.150 8.850 0.150 8.850 0.150 8.850

Property Surplus (Com/Ind) 0.250 19.750 0.250 19.750 0.250 19.750

Property Surplus (Cond) 0.250 29.750 0.250 29.750 0.250 29.750

Accident XL (risk) 0.150 0.850 0.150 0.850 0.150 0.850

Accident XL (event) 0.150 4.850 0.150 4.850 0.150 4.850

Marine XL (risk) 0.125 0.875 0.125 0.875 0.125 0.875

Marine XL (event) 0.125 1.875 0.125 1.875 0.125 1.875

GTPL XL 0.125 2.375 0.125 2.375 0.125 2.375

Property CAT $3.000 $247.000 $3.000 $247.000 $3.000 $247.000

Life Proportional 0.10 0.80 0.10 0.80 0.10 0.80

Life CaT XL 0.300 2.000 0.300 2.000 0.300 2.000

Risks which exceed these limits or are totally or partially excluded by the underwriting regulations, will be protected through Facultative Reinsurance. As can be seen in the following table, in 2017, reinsurance premiums assigned as facultative represent 0.2% of GWP

Line of RI 2017 2016

business type GWP Fac prem. % GWP Fac prem. %

Property FAC 66.5 0.038 0.057% 62.5 0.043 0.070%

GTPL FAC 3.7 0.148 4.037% 3.4 0.177 5.167%

Life FAC 34.5 0.052 0.150% 37.1 0.047 0.127%

Total 104.7 0.238 0.227% 103.0 0.267 0.259%

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7 The proposed Scheme

7.1 Background to the proposed Scheme

Although not a direct consideration for me as Independent Actuary, it is nevertheless relevant for me to

be aware of the rationale for the Scheme.

Liberty Group currently has locally regulated insurance companies in Ireland, Spain and Portugal. Having considered a number of proposals, it is intended to consolidate the Irish, Portuguese and Spanish insurance underwriting platforms in Europe with a view to enhancing the efficiency and optimizing of its structure.

Liberty Group intends to carry out an intra-group restructuring whereby LSCSR will absorb LIDAC by virtue of the Transfer and CBM. In addition, and simultaneously with this Merger, LSCSR will absorb Liberty Portugal, by virtue of another CBM.

Upon completion of this restructuring, the insurance business of LIDAC will be operated by LSCSR on a FoE basis through an Irish branch i.e. the existing branch of LSCSR in Ireland which is currently registered as an external company with the Companies Registration Office in Ireland (since 29 August 2001) under branch number 904632. Likewise, the insurance business of Liberty Portugal will be operated by a Portuguese branch on a FoE basis. This is sometimes also referred to as “branching”.

The process requires a number of key Board considerations and approvals in addition to approvals from the CBI, DGS and the Court. Liberty Group would continue to operate in Ireland and Portugal through local branches and would be regulated in Ireland by the CBI for conduct of business while DGS would be responsible for prudential regulation.

A branch manager would be appointed in Ireland whose appointment would be subject to regulatory approval.

The post transfer company structure is represented below:

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7.2 Motivation for Branching The Merger will imply, among others, the following benefits:

■ The simplified structure will lead to operational synergies and reduced administrative and regulatory complexity.

■ It will avoid duplication and will take advantage of the significant infrastructure that the Liberty Group has established in Spain to service the needs of its clients.

■ It will facilitate the continued delivery of a superior experience to current and future customers - leveraging the knowledge, skills, systems and tools across LSCSR post Scheme and Mergers while still benefitting from an active local presence through the Irish and Portuguese branches

■ It will facilitate greater capital efficiency within the Liberty Group by rationalizing the number of separate insurance companies in Europe.

It will create a larger combined pool of capital available to policyholders to meet claims.

7.3 Licence and Branch Extensions The process requires a number of approvals from the CBI, the Court and DGS.

■ LSCSR required a Class 15 licence extension for LIDAC’s Surety business. An application has been

completed by LSCSR and has been approved by the Board. A final application was submitted to the DGS on 1 March 2018.

■ An extension required to LSCSR’s existing Irish branch to incorporate non-life business. The application for branch extension was completed and approved by the LSCSR Board. Sharon O’Brien will assume Branch Manager responsibilities and a final application was submitted to the DGS on 1 March 2018.

■ LSCSR currently has authorization to write and service UK business on a FoS basis for all required classes for LIDAC’s current NI business and GB claims in run off.

LSCSR met with the PRA on 22 January 2018 to agree approach, application process and timeline. The PRA agreed to apply proportionality based on the size, scale and complexity of the business and LSCSR intend to submit a Third Country branch application to the PRA.

7.4 Transfer of Assets and Liabilities LSCSR will become the sole shareholder of LIDAC and so the merger will be implemented through a merger by absorption in which LSCSR is the absorbing (i.e. successor) company and LIDAC the absorbed (i.e. transferor) company. Consequently, upon completion of the merger, LIDAC will be dissolved without going into liquidation upon which all of its assets and liabilities shall be transferred to LSCSR, which will in turn acquire, by universal succession, all such assets and liabilities.

As LIDAC is the absorbed (i.e. transferor) company for the purposes of the merger and as the merger constitutes a merger by absorption for the purpose of Spanish Law and the Irish Regulations, no shares or other consideration will be issued, given or paid to LSCSR in its capacity as a shareholder of LIDAC as consideration for the transfer to LSCSR of the assets and liabilities of LIDAC pursuant to the merger. The shares held by LSCSR in LIDAC shall cease to exist upon dissolution of LIDAC on the Effective Date.

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7.5 Continuity of proceedings I understand that any judicial, quasi-judicial, disciplinary, administrative, arbitration or other proceedings pending by or against, or commenced by or against, LIDAC in relation to the transferring business shall, from the Effective Date, be continued by or against LSCSR and LSCSR shall be entitled to any defences, claims, counterclaims and rights of set off that would have been available to LIDAC.

7.6 Rights and obligations Every person who is a holder of a LIDAC insurance policy being transferred will be entitled to the same contractual rights against LSCSR as he or she may have had against LIDAC, so there are no changes to the policy terms and conditions as a result of the Scheme.

7.7 Maintenance of existing reinsurance arrangements Assets including reinsurance contracts will be transferred to LSCSR, and therefore will continue to operate in the same way as they do currently. The reinsurance counterparties will be informed as part of the policyholder communication process. Based on discussions, I do not expect any issues. LIDAC will update me before the final Court hearing that the reinsurers have not raised any objections.

7.8 Capital support arrangements Post transfer LSCSR will remain a wholly-owned subsidiary of Liberty Group. As a result the capital support arrangements available to LSCSR will remain unchanged if the Scheme is sanctioned by the Court.

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7.9 Administration arrangements The administration (including claims handling) of LIDAC’s business is currently carried out by LIDAC staff. If the Scheme is sanctioned, all LIDAC staff will become employees of LSCSR. The staff will continue to administer the transferring business (as well as new business written by LSCSR’s Irish branch post Scheme) in the same way as currently, using the existing claims systems and IT platform. The Scheme should therefore have no effect on policyholder service levels.

7.10 Costs of the proposed Scheme The costs of completing the Scheme will be met by the shareholders of LIDAC. For the avoidance of doubt, any tax cost or benefit as a consequence of the Scheme post Scheme will be met by the shareholders of LSCSR. Given that LIDAC is wholly-owned by LSCSR, the cost will ultimately be borne by the shareholders of LSCSR.

7.11 Effective Date The effective date of the Scheme is expected to be 31 December 2018.

7.12 The Approach to Communication with Policyholders LSCSR and LIDAC are undertaking procedures to notify policyholders of the Scheme. This is through a combination of:

■ Placing advertisements for the Scheme in the Irish Times, the Irish Independent and in the Iris Oifigiúil, the Irish State Gazette;

■ Displaying information on a dedicated website hosted by LIDAC where key documents, including the Scheme, the Petition, an Information Booklet (which will contain a summary of the Scheme and a summary of the Independent Actuary’s Report), the Notice of the Court Application and the FAQ’s may be downloaded (free of charge);

■ Displaying key documents including the Scheme and the Petition at the registered offices of both LIDAC and LSCSR in accordance with Section 13 (3) (c) of the 1909 Act;

■ Writing to each LIDAC named policyholder on every in-force policy in late July/during August 2018 to advise of the proposed transfer and setting out the information required by Section 3.11 of the Consumer Protection Code 2012; and

■ The CBI consulting with the supervisory authority of every Member State where transferring contracts were concluded, in accordance with Regulation 41(3)(b) of the 2015 Regulations and complying with any publicity requirements of such Member States.

Given my overall findings and with the agreement / non objection of the CBI, DGS and the Court I am comfortable with this communication approach.

It is not proposed to issue individual notifications to LSCSR policyholders (and LSCSR has made the company’s intentions known to DGS in this respect). I am satisfied that LSCSR does not write to its policyholders regarding the Scheme, on the basis that the impact of the transfer on LSCSR policyholders is not sufficiently material to warrant the additional expense in doing so.

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7.13 Operational Plans and Changes in Assets and Liabilities up to the Effective Date

I expect that the current activities of LSCSR and LIDAC will continue between 31 December 2017 and

the Effective Date (and, as appropriate, after the Effective Date). LSCSR and LIDAC will continue to write new business, and the companies will continue to settle claims and reassess reserves in the light of experience. I do not consider that any material additional risk to any group of affected policyholders will emerge as a result of the continuation of normal business.

Further to considering the continuation of normal business, I have discussed with the Liberty Group the possibility of group management actions, other than the proposed Scheme, as considered in the Report that could affect the financial position of LSCSR and/or LIDAC. I have been informed that the group has no planned activities for LIDAC or LSCSR that could have a material effect on the security of the LIDAC or LSCSR policyholders, either for those that were policyholders as at 31 December 2017 or those that have become policyholders since.

7.14 What would happen were the Scheme not to proceed? If the Scheme is not sanctioned the transferring business would remain with LIDAC and would continue to be administered in the same way as it is currently. I have concluded above that the policyholders of LIDAC currently benefit from the security afforded by a more than sufficiently capitalised company, and this will not change if the Scheme is not sanctioned.

Given the Liberty Group’s desire to simplify the regulatory and operating framework in Ireland, if the Scheme is not sanctioned, the Liberty Group would need to consider its options in relation to the future running of LIDAC.

If the Scheme is not sanctioned, LSCSR would likewise continue to operate as currently. I have concluded above that the policyholders of LSCSR currently benefit from the security afforded by a well-capitalised company and this will not change if the Scheme is not sanctioned.

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8 General considerations of the proposed Scheme

8.1 Introduction Whilst no guidance exists in respect of the transfer of non-life business in Ireland, in compiling my Report I have had regard to Actuarial Standard of Practice LA-6 “Transfer of long-term business of an authorised insurance company – role of the Independent Actuary”, to the extent I have determined relevant in the context of a non-life transfer.

In particular, I have determined that I need to give my views on:

■ The effect of the Scheme on the security of the policyholders’ contractual rights, including the

likelihood and potential effects of the insolvency of the insurer; and

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

8.2 Policyholders affected I have considered the effects of the Scheme on two main groups of policyholders, namely:

■ Policyholders of LIDAC whose policies are to be transferred to LSCRS (it is not currently expected

that there will be any excluded policies, and as such there will be no current policyholders of LIDAC who have policies that are not being transferred); and

■ The current policyholders of LSCRS.

I note that there are policyholders in subsidiaries of LSCSR that may be indirectly impacted by the Transfer. Other than policyholders of Liberty Portugal which will be absorbed by LSCSR I do not consider the impact on policyholders of subsidiaries.

8.3 Materiality After considering the effects of the Scheme on each of the different groups of policyholders affected by the Scheme, I have concluded whether I believe the Scheme will materially adversely affect that group of policyholders. It should be recognised that the Scheme will affect different policyholders in different ways, and, for any one group of policyholders, there may be some effects of the Scheme that are positive, and others that are adverse. If some effects of the Scheme are adverse, that does not necessarily mean that the Scheme is unreasonable or unfair, as those adverse effects may be insignificant or they may be outweighed by positive effects.

In order to determine whether any effects of the Scheme on any group of policyholders are materially adverse it has been necessary for me to exercise my professional judgement in the light of the information that I have reviewed.

When assessing the financial security of policyholders, I have looked at the solvency position of the companies involved in the Scheme, on both pre and post transfer bases, relative to regulatory solvency requirements. It should be noted that a company may have capital considerably in excess of its regulatory requirements, but that the Board of Directors of a company could legitimately reduce that level of capital (for example through the payment of dividends) and still leave the company appropriately capitalised. In circumstances where the Scheme has adversely affected the financial security of a group of policyholders, in order to determine whether that impact is material, I have considered whether the degree of financial security afforded after the Transfer would have been acceptable and permissible

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before the Transfer had taken place. I would determine that any adverse impact to a particular group of policyholders is material if the level of financial security afforded to them after the Transfer would not have been acceptable under the normal constraints under which the company’s capital position was managed before the Transfer.

8.4 Security of policyholder benefits In considering and commenting upon policyholder security I shall consider the financial strength of each entity. Financial strength is provided by adequacy of Technical Provisions, by the shareholder capital and by any specific arrangements for the provision of financial support. In considering policyholder security it is also necessary to take into account the potential variability of future experience (including claim frequency and severity). Security is also affected by the nature and volume of future new business.

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

■ Size of company;

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

■ Reserve strength;

■ Investment strategy;

■ Mix of business written; and

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

I also need to consider the impact on policyholders’ security in the event of the default of an insurer (and the role of financial compensation schemes).

8.5 Levels of service provided to policyholders I have considered the impact of the Scheme on levels of service provided to policyholders, including those resulting from changes in administration, claims handling and expense levels.

Furthermore, I have considered the proposals in the context of applicable conduct rules/regulation, e.g. the fair resolution of complaints between an insurer and its customers (policyholders).

8.6 Other Considerations APS LA-6 also requires the Independent Actuary to consider the likely effects of the Scheme on matters such as investment management, new business strategy, administration, expense levels and valuation bases insofar as they might affect the ability of companies to meet the reasonable expectations of policyholders. It also requires the Independent Actuary to consider the cost of the Scheme and the tax effects of the Scheme insofar as they might impact on the security of policyholders’ contractual rights. I have given consideration to all of these items to the extent I have determined them to be relevant in the context of a non-life Transfer.

8.7 Development of the Scheme In the following sections I comment on the Scheme as it will be presented to the Court. During the development of the proposed terms of the Transfer I have commented on drafts of the Scheme.

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9 Impact of the Scheme

9.1 Introduction Under the Scheme and the CBM, the insurance business (i.e. insurance liabilities and associated assets) of LIDAC will be transferred to LSCSR.

The main issues affecting the transferring policyholders of LIDAC as a result of the Scheme arise from relative differences in:

■ The financial strength of LSCSR after the transfer compared with that of LIDAC currently. When I consider the financial strength of LSCSR post the transfer I consider the impact of the financial strength assuming the Portuguese subsidiary is merged with LSCSR. Financial strength is derived from:

– The strength of the reserves held;

– Excess assets or capital; and

– Specific financial support arrangements;

■ The risk exposures in LSCSR compared with those in LIDAC;

■ The policy servicing levels provided by LSCSR after the transfer compared with those currently enjoyed by the policyholders of LIDAC.

In this section I address each of the issues.

9.2 Security of policyholders’ benefits Aspects of the business and the Scheme which could impact on the security of policyholder benefits and should therefore be considered when reviewing the Scheme include:

■ Financial security following implementation of the Scheme for the different groups of policyholders through consideration of the regulatory capital position.

■ Other elements impacting on financial security involves consideration of:

– Business planning outlook;

– Stress and Scenario tests on a plausible basis to understand how robust the regulatory capital position is to such tests;

– Whether the different groups of policyholders are faced with new risks arising from the Scheme; and

– Quality of capital including any capital support arrangements.

■ External reviews / audit findings on material areas.

■ Continuation of reinsurance arrangements and any potential issues with reinsurance counterparties.

■ Other elements including custody of assets, compensation schemes; Liberty Group financial support; and any other aspects worthy of consideration e.g. expenses, outsourcing etc.

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9.2.1 LIDAC Financial Position

As shown in section 4.3.6 the policyholders of LIDAC benefit from the security of capital resources as

measured in its 31 December 2017 regulatory return to the CBI of €239m compared with a statutory SCR of €130m and a solvency coverage ratio of 184% i.e. LIDAC is well-capitalised.

Based on the ORSA projections shown in section 4.3.7 LIDAC’s solvency coverage is expected to improve over the planning horizon.

Based upon my review of LIDAC’s financial information I have no cause to doubt the reasonableness of the SCR and solvency coverage as at 31 December 2017 or the projected SCR and solvency coverage and I therefore conclude that LIDAC’s policyholder security is adequate pre Scheme.

9.2.2 LSCSR Financial Position (pre Scheme)

As shown in section 5.3.6 the policyholders of LSCSR benefit from the security of capital resources as

measured in its 31 December 2017 regulatory return to the DGS of €705m compared with a statutory SCR of €415m and solvency coverage ratio of 170% i.e. LSCSR is well-capitalised.

I also consider that LSCSR is well capitalised without the transitional measures applied to Technical Provisions i.e. capital resources of €581m compared with a statutory SCR of €416m and solvency coverage ratio of 140%.

Based on the ORSA projections shown in section 5.3.7 LSCSR’s solvency coverage is expected to improve over the planning horizon.

Based upon my review of LSCSR’s financial information I have no cause to doubt the reasonableness of the SCR and solvency coverage as at 31 December 2017 or the projected SCR and solvency coverage and I therefore conclude that LSCSR’s policyholder security is adequate pre Scheme.

9.2.3 LSCSR Financial Position (post Scheme)

This section presents the impact of financial positions of Scheme Companies assuming the Scheme

took place on 31 December 2017, considers the projected capital position of LSCSR post Scheme and finally availability of regulatory protections.

Current Capital Position

The following tables show the proforma financial position of LSCSR and LIDAC as standalone entities and as if the Scheme had taken place on 31 December 2017. The impact on capital position is shown in a number of steps as I walk through potential scenarios in my consideration of the Scheme.

The first table shows 31 December 2017 SCR and solvency coverage as reported to CBI, DGS and ASF.

Table 1. Final 31 December 2017 regulatory returns i.e. current pre Scheme actuals

SCR Coverage €'millions 31 Dec 2017 LIDAC LSCSR Liberty Portugal

(1) With TM

(2) Without TM (3)

With TM (4)

Without TM (5)

Available Assets 829.3 2,947.0 2,947.0 772.7 783.6 Technical Provisions 531.0 1,669.9 1,834.9 563.7 636.8 Other Liabilities 98.8 780.7 739.4 55.4 47.5 Excess Assets over Liabilities (tier 1 capital) 199.5 496.5 372.7 153.6 99.5 Tier 2* or 3 capital 40.0 218.0 218.0 ‐ ‐ Eligible Funds to meet SCR 239.5 704.2 580.5 153.6 99.5 SCR 130.5 415.4 415.5 91.1 91.1 SCR Coverage 184% 170% 140% 169% 109%

* Tier 2 capital is restricted to 50% SCR when demonstrating solvency i.e. €207.7m

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The following table shows my estimation of the 31 December 2017 proforma capital position for LSCSR assuming that Liberty Portugal has merged with LSCSR. For avoidance of doubt the capital position below assumes that the LIDAC portfolio transfer has not taken place and the eligible funds do not include a value for the investment in the LIDAC subsidiary.

Table 2. KPMG estimate of LSCSR assuming Liberty Portugal merged 11.59pm 31 December 2017 i.e. pre Scheme proxy merged entity based on actuals

SCR Coverage €'millions 31 Dec 2017 LSCSR + Liberty

Portugal (6)=(2)+(5)

Available Assets 3,619 Technical Provisions 2,307 Other Liabilities 828 Excess Assets over Liabilities (tier 1 capital) 484 Tier 2 or 3 capital 218 Eligible Funds to meet SCR 702 SCR 520 SCR Coverage 135%

The key assumptions used to derive the above table include the following:

■ LSCSR’s transitional measures continue to be applied while Liberty Portugal transitional measures are no longer applied to Technical Provisions. Therefore I sum columns (2) and column (5) from the first table;

■ Available assets are reduced by €112k. This adjustment is the LSCSR’s carrying value of the investment in the Portuguese subsidiary i.e. Available Assets in column (2) includes Liberty Portugal;

■ Eligible funds to meet SCR is greater than the sum of the individual components and reflects increased allowance of Tier 2 capital due to a higher SCR;

■ I estimate SCR by summing individual risk modules across LSCSR and Liberty Portugal before allowing for diversification based on the standard formula correlation matrix.

– This results in a BSCR of €548m which is €5m lower than the sum of LSCSR and Liberty Portugal BSCRs of €455m and €98m respectively;

■ Operational risk is assumed to be the sum of individual Company amounts; and

■ LACDT is assumed to be €61m which is the amount calculated in respect of LSCSR on a standalone basis.

I believe that these assumptions result in a capital position that errs on the side of caution as:

■ Diversification within SCR risk modules is not allowed for;

■ It is possible for LSCSR (post Merger) to apply to the DGS for transitional measures in respect of Liberty Portugal Technical Provisions; and

■ I set the standalone Liberty Portugal LACDT of €16m to zero.

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The final step is to calculate the 31 December 2017 proforma capital position by combining LIDAC with LSCSR assuming that the Liberty Portugal Merger does not take place (i.e. Scenario1); and LSCSR assuming that the Liberty Portugal Merger has taken place immediately (i.e. Scenario2). Results are shown in the table below.

Table 3. KPMG estimate of LSCSR post Scheme assuming LIDAC Transfer and Merger takes place with / without the Liberty Portugal Merger

SCR Coverage €'millions 31 Dec 2017 LSCSR + LIDAC LSCSR + LIDAC +

Liberty Portugal (1) + (2) (1) + (6)

Available Assets 3,776 4,448 Technical Provisions 2,201 2,838 Other Liabilities 880 927 Excess Assets over Liabilities (tier 1 capital) 696 683 Tier 2 or 3 capital 218 218 Eligible Funds to meet SCR 914 901 SCR 522 627 SCR Coverage 175% 144%

The key assumptions used to derive the above table include the following:

■ LSCSR’s transitional measures continue to be applied whether LIDAC policyholders are transferred to LSCSR which includes or excludes Liberty Portugal. Liberty Portugal transitional measures no longer apply in Scenario2. Therefore Scenario1 is the sum of (1) and (2) and Scenario2 is the sum of (1) and (6);

■ I assume that the LIDAC AOF of €40m is not transferrable. Eligible funds for Scenario1 is therefore lower than the sum of those for columns (1) and (2). I note that the €40m reduction is offset by an increased allowance of Tier 2 capital in respect of the LSCSR subordinated loan due to a higher SCR;

■ SCR is estimated as above, summing individual risk modules before allowing for diversification;

– The BSCR for Scenario1 is €547m or €23m lower than the sum of individual BSCRs for LIDAC and LSCSR of €115m and €455m respectively.

– The BSCR for Scenario2 is €641m or €21m lower than the sum of individual BSCRs for LIDAC and LSCSR (including Liberty Portugal) of €115m and €547m respectively.

■ Operational risk is assumed to be the sum of individual Company amounts; and

■ LACDT is assumed to be €61m which is the amount calculated in respect of LSCSR on a standalone basis.

I believe that these assumptions result in a capital position that errs on the side of caution as:

■ Diversification within SCR risk modules is not allowed for;

■ It is possible for LSCSR (post Scheme) to apply to the DGS for AOF of €40m; and

■ For Scenario2 I set the standalone Liberty Portugal LACDT of €16m to zero.

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For transferring policyholders while the solvency coverage reduces from 184% to 144% for Scenario2 I note the following:

■ My estimates have erred on the side of caution and LSCSR post Scheme may calculate higher levels of LACDT, benefit from diversification within risk modules and apply for transitional measures and AOFs;

■ Solvency coverage of 144% is a strong financial position and significantly in excess of the SST of either LIDAC or LSCSR;

■ Transferring policyholders will have a higher absolute level of eligible capital available to meet claims in stressed circumstances i.e. €901m compared to current position of €239; and

■ Financial strength of the Liberty Group will be unaffected and availability of Liberty Group support remains unchanged.

For LSCSR policyholder’s solvency coverage ratio improves by accepting LIDAC policyholders i.e. from 170% to 175% under Scenario1 and 140% to 144% under Scenario2.

Projected Capital Position

In this section I present my proforma financial projections using the same assumptions and approach as I have outlined above and the balance sheet and SCR projections provided to me by Scheme Companies. The tables below set out projections for Scenario1 and Scenario2 as defined above.

Table 4. KPMG estimate of LSCSR post Scheme assuming LIDAC Transfer and Merger takes place without the Liberty Portugal Merger LSCSR Solvency Capital Requirement €'millions 2017* 2018 2019

Excess Assets over Liabilities (tier 1 capital) 698 710 775 Subordinated Loans (tier 2 capital) 218 224 224 Eligible Funds to meet SCR 916 933 999 SCR 521 507 532 SCR Coverage 176% 184% 188%

* The figures shown here are broadly consistent with those in Table 3. Immaterial differences arise due to timing differences between when capital projections are performed and 2017 regulatory returns submitted. Table 5. KPMG estimate of LSCSR post Scheme assuming LIDAC Transfer and Merger takes place with the Liberty Portugal Merger LSCSR Solvency Capital Requirement €'millions 2017 + 2018 2019

Excess Assets over Liabilities (tier 1 capital) 681 701 778 Subordinated Loans (tier 2 capital) 218 224 224 Eligible Funds to meet SCR 899 925 1,001 SCR 627 616 643 SCR Coverage 143% 150% 156%

+ The figures shown here are broadly consistent with those in Table 3. Immaterial differences arise due to timing differences between when capital projections are performed and 2017 regulatory returns submitted.

The key assumptions used to derive the above tables, include those discussed in the “Current Capital Position” sub-section above and the following:

■ The base case financial projections are built up from the actual 31 December 2016 Solvency II Balance Sheets;

■ The current financial plans for individual Scheme Companies remain in place for the combined entity;

■ Reinsurance remains constant at current levels over the planning time horizon;

■ The Standard Formula will remain an appropriate measure of the risk profile of the LSCSR and there has been no allowance made for possible changes to Standard Formula parameters or formulae; and

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■ There are no dividends, capital injections or revaluations of LSCSR subsidiaries.

For all groups of policyholders the solvency coverage is expected to improve over the planning horizon:

■ Eligible capital increases primarily as a result of projected earnings in respect of the Spanish business;

■ Offsetting increased retained earnings will be the unwinding of transitional measures for LSCSR Technical Provisions; and

■ The SCR falls initially before increasing due primarily to reduced claims volume in respect of the LIDAC business.

Other policyholder protections

Pre Scheme, were LSCSR to become insolvent, the policyholders of the transferring business would continue to benefit from the remaining assets of LIDAC. It should also be noted that in the event of LSCSR’s insolvency, the value of LIDAC’s ancillary own funds may be impaired depending on solvency of the Group.

Post Scheme, were LSCSR to become insolvent, the policyholders of the transferring business would not have any recourse to LIDAC. This would appear to be a potential disadvantage of the Scheme from the point of view of the policyholders of the transferring business. However, given the reserve strength and the level of excess assets within each company, the insolvency of either LSCSR or LIDAC would presently appear to be a remote possibility, and one that would not be materially affected by the Scheme.

I also set out in section 3.5 that in the remote event of insolvency or administration I believe that Irish and Spanish winding up regulations are sufficiently similar so as not to disadvantage transferring policyholders.

In the event of LIDAC’s insolvency currently, the eligible RoI, GB and NI policyholders of LIDAC would have recourse to the ICF in Ireland in the first instance with GB and NI having additional recourse to the FSCS as a fund of last resort in the UK. If the Scheme is sanctioned, the eligible RoI, GB and NI policyholders of LIDAC will become policyholders of LSCSR. As such they would continue to have recourse to the ICF and FSCS in the event of the insolvency of LSCSR. The Irish and UK policyholders of the transferring business will therefore be unaffected in this regard by the Scheme.

To the extent that LSCSR policyholders currently benefit from the (additional) protection afforded by the Consorcio de Compensación de Seguros they will continue to do so after the implementation of the Scheme.

Conclusion – I am satisfied that the Scheme will not have a materially adverse impact on the financial strength for policyholders of the transferring business and current policyholders of LSCSR compared to both their current position and their projected position at the Effective Date.

9.2.4 Change in Risk Exposure

If the Scheme is sanctioned, the transferring business will become part of a larger insurance entity and will be exposed to the risks of the existing business of LSCSR.

There are significant differences between the risk exposures in LIDAC relative to those in LSCSR, in particular relating to the types of business written and investments held.

LIDAC is a medium-sized insurer writing personal and commercial lines business in RoI and NI. LSCSR writes similar personal and commercial lines of business, but also writes life insurance risks in Spain.

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In addition LSCSR has a number of subsidiaries under the proposed restructuring plans to absorb the underwriting risk of one of these i.e. Liberty Portugal.

If the Scheme is sanctioned, the policyholders of the transferring business will benefit by being part of a large and diverse insurance company. Diversity between lines of business written and the geographical spread of those risks should, in the long term, lead to relatively smoother results.

On the other hand, the policyholders of the transferring business will become exposed directly to LSCSR’s life insurance business and subsidiaries. The future financial position of LSCSR needs to be considered and in particular the impact of these new risks exposures to the security of transferring policyholder benefits.

In relation to LSCSR policyholders, they will become exposed directly to RoI, GB and NI non-life underwriting risks. I note here that LIDAC is currently a subsidiary of LSCSR7 and therefore, in theory, LSCSR policyholders are exposed to these risk regardless of whether the Scheme is sanctioned or not.

The table below shows that the largest risk module within the consolidated SCR is Market Risk. This is broadly in line with the pre Scheme LSCSR SCR but differs to current LIDAC risk profile. These figures reflect the average composition of the consolidated SCR over the period 2016 to 2019.

When viewed at the sub-module level (as shown below), it can be seen that the most significant components of the SCR are:

■ Non-Life Premium and Reserve risk (29%);

■ Concentration risk (15%);

■ Spread risk (11%);

■ Equity risk (9%);

■ Currency risk (8%); and

■ Operational risk (7%).

All other sub-modules each comprise of less than 5% of the overall SCR.


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The sensitivity of the overall SCR to each sub-module is illustrated in the graph below. The steeper the slope the more sensitive the overall SCR is to increases (or decreases) in that sub-module e.g. a 50% increase in Premium & Reserve (“P&R”) Risk results in a 15% increase in SCR, whereas a 50% increase in Concentration Risk results in a 7.5% increase in SCR.

Increases in the SCR resulting from movements in underlying sub-modules are larger than corresponding decreases. This is shown in the graph below where the slope of lines are steeper in the top right quadrant than in the bottom left.

I have been provided with various stress and scenario tests of the key assumptions underpinning the business plans / solvency projections. Stresses and results are shown below.

Stress Stress Description summary Application in Model

Spread 100 basis point spread increase in 2018 correcting in 2019.

2018 market value of bond portfolio decreases.

Currency 20% fall relative to the EUR all non‐EUR currency in 2018 correcting in 2019.

All material foreign assets and liabilities impacted i.e. Participations; Bonds; Technical Provisions etc.

Loss Ratio 2018 Loss Ratio shock equivalent to Group ECM 1 in 10 year shock correcting in 2019.

Factor uplift applied to Premium Provision for all segments uniformly; Claims Provisions derived using base payment patterns; higher claim payments reduce bond investments.

CAT 2018 Windstorm and Earthquake based on 1 in 10 year combined AEP curve from RMS.

Gross loss €11.8m; Net loss €8.6m paid in full 2018; bond investments reduced.

Reserve

Reserve deterioration equivalent to Group ECM 1 in 10 year shock; reserve shock results in corresponding Premium Provision uplift.

Factor uplift applied to Claims and Premium Provisions for all segments uniformly; Claims Provisions derived using base payment patterns; higher claim payments reduce bond investments.

Operational

Significant 2019 cyber event and GDPR breach resulting in Regulatory (including GDPR) fine of €20m and €10m remediation costs.

Net asset decrease of €30m achieved through sale of bonds.

Group Liberty Group 2019 downgrade to BB; all reinsurance contracts are replaced at increased cost of €10m.

PTOI impact of €10m; bond investment reduction.

Branching Stress

Branching model execution delays and higher than planned headcount resulting in additional €5m 2019 expenses.

PTOI impact of €5m; bond investment reduction.

Life Increase of 50% to base case Lapse Rate assumption.

Technical Provision and SCR recalculated using stressed valuation assumptions.

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The first table below shows the SCR and solvency coverages for LSCSR post Scheme over the planning time horizon. The change from the base case and stressed scenarios is shown in the second table.

Stress SCR Available Capital Coverage Ratio

2018 2019 2018 2019 2018 2019

Base 614 641 824 903 134% 141%

Spread 610 641 695 903 114% 141%

Currency 563 641 722 903 128% 141%

Loss Ratio 615 643 791 869 129% 135%

CAT 613 641 816 895 133% 140%

Reserve 622 645 753 830 121% 129%

Operational 614 640 824 873 134% 136%

Group 614 641 824 893 134% 139%

Branch 614 641 824 898 134% 140%

Life 611 638 812 891 133% 140%

Stress SCR Available Capital Coverage Ratio

2018 2019 2018 2019 2018 2019

Base ‐ ‐ ‐ ‐ ‐ ‐

Spread (3) ‐ (129) ‐ (20%) ‐

Currency (50) ‐ (102) ‐ (6%) ‐

Loss Ratio 2 2 (33) (34) (6%) (6%)

CAT (0) (0) (9) (9) (1%) (1%)

Reserve 9 4 (71) (74) (13%) (12%)

Operational ‐ (1) ‐ (30) ‐ (4%)

Group ‐ (0) ‐ (10) ‐ (1%)

Branch ‐ (0) ‐ (5) ‐ (1%)

Life (2) (2) (12) (12) (1%) (1%)

The greatest impact on LSCSR post Scheme solvency position is an increase in spreads and transferring LIDAC policyholders will be exposed to increased level of spread risk. This risk is increased for not present to any significant degree for current LIDAC policyholders. I note however that the solvency coverage remains within LSCSR’s SST following a severe shock to spreads.

Note that projections in the above tables are based on capital projections provided to me by Scheme Companies. I believe that these are overly conservative due to:

■ No allowance for transitional measures for LSCSR Technical Provisions; and

■ No allowance for LACDT in the SCR projections.

My review and estimates in section 9.2.3 above include transitional measure for LSCSR (but exclude these for Liberty Portugal) and set LACDT to pre Scheme LSCSR levels. My equivalent base case 2018 capital projections shows solvency coverage of 150% compared to 134% presented to me above.

Therefore I believe that the solvency coverage shown in the table above should be approximately 16 percentage points higher than presented i.e. the 2018 solvency coverage for the spread risk stress would be approximately 130% compared to 114%. This means that the SCR post shock is in excess of the SST.

I further note that transferring policyholders’ exposure to underwriting losses and reserving shocks will be reduced in the LSCSR post Scheme entity through increased diversification in the SCR calculation.

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Based on my analysis of changes in risk exposures as outlined above, the Scheme creates both potential positives and negatives for the policyholders of the transferring business. Nonetheless, given the financial strength of LSCSR, as discussed and shown above, I do not consider that the policyholders of the transferring business will be materially adversely affected by the changes in risk exposures.

Conclusion - I am satisfied that, although the proposed Scheme will lead to a change to the risk exposures of the transferring business and the current business of LSCSR, this will not have a materially adverse impact on the security of policyholder benefits.

9.3 Policy Servicing, Information Systems, Governance, Internal Controls and other matters

In relation to the Scheme (and the CBM) the guiding principles adopted by the Liberty Group in respect of policy servicing (new business written, management of existing business and claims handling), information systems, governance structures and internal controls are that no changes, so far as possible, arise as a result of the Scheme. The following paragraphs set-out the results of my (non-financial) analysis (as at the date of this Report) for each these key areas.

9.3.1 Policy Servicing

The present (pre Scheme) LIDAC policy servicing structure is divided into broad categories (i.e. policy administration, claims and customer/markets).

The policyholders of the transferring business should experience little (if any) change to the policy servicing arrangements/standards enjoyed as a result of the Scheme, insomuch that the current staff of, and the administration processes employed by LIDAC will continue to operate as described above albeit via the Irish branch of LSCSR post Scheme (and CBM).

As described in section 3, the transferring business is currently subject to the conduct of business regulations, including consumer protection rules, as imposed by the CBI for RoI business and FCA for GN (including NI) business. If the Scheme is sanctioned the transferring business will become policyholders of a Spanish entity. The regulator in the country hosting a branch (in this case the CBI) or regulating LSCSR under FoS (in the case of the UK business, the FCA) oversees the compliance with its conduct laws and regulations, implementing, inter alia, the relevant EU Directives. As such the CBI and FCA will continue post Scheme to oversee the conduct regulation relating to the transferring business, and thus there would not be a material change in the conduct regulation that applies to how the policyholders of the transferring business are treated.

9.3.2 Information Systems

The (pre Scheme) LIDAC information systems architecture matters may need to be attended to before the Effective Date. LIDAC and LSCSR will need to:

■ Ensure all the data flows will be sufficient for the business processes to happen in line with the “to-be” governance structure; and

■ Ensure that the data flows will match, as necessary, the new legal structure.

I have discussed with LIDAC and LSCSR the proposed approach (including timing) to having satisfactory systems in place at LSCSR to service the transferring business of LIDAC (as outlined above) and I am of the view that as the system matters that need to be attended to before the Effective Date are minor in nature there should be no material adverse impact on the policyholders of the transferring business from system changes arising as a result of the Scheme. Nonetheless, I will comment further in my Supplementary Report on the extent to which these systems matters have been satisfactorily addressed.

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9.3.3 Governance

The Scheme and CBM (or liquidation of LIDAC should the CBM not proceed for any reason) will result in the standing down of the LIDAC Board and Board committees. From the Effective Date, responsibility for and oversight of the Irish branch business (including the transferring business) will reside with the board of directors of LSCSR, which will receive reports, information and items for approval relating to the Irish branch business through a revised governance structure incorporating the Irish and Portuguese branches.

I note that LSCSR operates under the same Liberty Group governance standards and has the same requirements under Solvency II for minimum governance standards as LIDAC currently has in place. Therefore while there will no longer be a local Board the overall corporate governance standards remain unchanged.

Based on my review, I believe the governance structure proposed for LSCSR will be sufficiently robust and consistent in principle with that currently in place in LIDAC.

Based on my (non-financial) Analysis, I am satisfied that the structure and operation of corporate governance LSCSR (post Scheme) and its oversight of the Irish branch as planned is reasonable and while transferring policyholders will be held within a branch compared to subsidiary they are not adversely impacted by the Scheme.

I will comment further in my Supplementary Report on the implementation of the corporate governance functions for the Irish branch of LSCSR.

9.3.4 Internal Control System

I am informed by LSCSR that the company will continue to operate an effective system of controls for

the Irish branch, including administrative and accounting procedures, and internal control framework, a risk and compliance function and appropriate reporting arrangements at all levels of the Irish branch of LSCSR. The control framework will help ensure governance arrangements discussed above are adequate and appropriate to protect benefits of transferring policyholders.

9.3.5 Limitation on Review of Change in Policy Servicing due to the Scheme

It should be noted that for all the systems, processes and policies outlined above, my views are based on the assumption that they will operate as intended (now and in the future) and I have no grounds for believing they will not do so. Fundamental to the satisfactory on-going operation of the above systems, processes and policies is the Internal Audit function and the tests it performs to ensure they operate as intended.

The administration of the existing business of LSCSR will be unchanged as a result of the Scheme. LSCSR is subject to DGS conduct rules on policy servicing (including claims handling). In relation to the Scheme, there would not be a change in the conduct regulation that applies to how the existing policyholders of LSCSR are treated.

9.3.6 Liquidity and transfer of assets / liabilities?

On the Effective Date, all the assets and liabilities of LIDAC will be assigned to the existing branch of LSCSR in Ireland. The branch will continue operating the non-life insurance business in Ireland.

As a result of the Scheme I do not anticipate any material change to the liquidity position of LSCSR. I therefore conclude that the liquidity position of LSCSR is not likely to be adversely affected as a result of the Scheme.

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9.3.7 Impact on reinsurers

It is proposed under the CBM that the reinsurance arrangements be included in the CBM, and will

therefore automatically transfer from LIDAC to LSCSR and continue to protect the transferring business. I note that the reinsurance contracts transferring under the CBM are specific to the transferring business, and that all of the clauses in the relevant insurance contracts applicable to the transferring business are governed by the laws of EEA states. As the CBM derives from an EEA-wide process, this transfer is fully enforceable in all EEA states for all reinsurance contracts governed by the laws of an EEA state, and as such the Liberty Group is of the view that all of the reinsurance contracts relevant to LIDAC will transfer by virtue of the CBM.

The amount of the liabilities of each reinsurer of LSCSR or LIDAC will not change as a result of the CBM. For this reason, I do not consider the existing reinsurers to be materially impacted by the CBM.

9.3.8 Expenses

Other than the initial costs of the Scheme, the ongoing expenses of the LSCSR are not expected to change after the Scheme. I therefore conclude that the policyholders are not likely to be adversely affected by a change in ongoing expense levels as a result of the Scheme.

9.3.9 Tax

I am informed that the Scheme is not expected to have tax implications that would materially adversely affect any policyholders impacted by the portfolio transfer under the Scheme.

I have therefore assumed that the Scheme will not give rise to a tax liability of a material amount (in the context of transferring assets). I will provide further confirmation, as necessary, on the status of this in my Supplementary Report for the final Court hearing.

9.3.10 Op plans up to effective date

Based on the information provided to me by the Liberty Group on group planned activities (as outlined above) I believe that it is unlikely that any events occurring between 31 December 2017 and the Effective Date would affect any conclusion that I reach based on my review as at 31 December 2017.

A short time before the final Court hearing, I will consider the extent to which the operational plans of LSCSR and LIDAC have altered (relative to the position at the Date of this Report) and the actual changes in assets and liabilities (relative to the position as at 31 December 2017) and hence whether there have been any changes (including those associated with current economic conditions) that would affect my overall opinion, and if necessary, I will report on these separately.

Conclusion – I believe that, provided the on-going continuance of the systems, processes and policies operate as intended, and I have no grounds for believing they will not do so, the proposed Scheme will not have a materially adverse effect on the policy servicing levels enjoyed by the policyholders of the transferring business and the current policyholders of LSCSR compared to both their current position and their projected position at the Effective Date.

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Appendix 1 - Data

In addition to a number of telephone conversations, email exchanges and meetings in person we received a large amount of information. A summary of the key documents are shown below:

■ Scheme Documentation

■ Branching workshops and Board reports / presentations

■ Company structure and governance charts

■ Company Risk Management Framework and Risk Appetite Statements

■ Memorandum & Articles of Association

■ Reinsurance programmes

■ Company Actuarial Function Reports

■ Independent actuarial reserving reports

■ External Audit extracts

■ Company regulatory returns QRTs and SFCRs

■ Company ORSA reports

■ Company financial statements

■ SCR and consolidated balance sheet projections including stress testing and supporting papers

■ Company capital structure including details of tier 2 arrangements

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Appendix 2 - Scope

The role of Independent Actuary will be to consider and to report to the Court on the proposed Transfer, primarily from the perspectives of the transferring policyholders of LIDAC, the remaining policyholders of LIDAC, if any, and the existing policyholders of Liberty Spain and to opine as to whether any policyholders’ interests could be in any way (either directly or indirectly) adversely affected by the proposed Transfer.

In order to form my opinion, we will expect the tasks that will be carried out will include the following:

■ Review of existing Company documentation (in particular, documentation sent to policyholders);

■ Review of the Scheme documentation and, if necessary, suggest amended drafting in order to eliminate any concerns from an actuarial perspective;

■ Review the proposed Transfer considering the effect on all classes of policyholders covering their contractual rights, benefit security, and benefit expectations;

■ In particular review the proposed transfer from a Policyholder Reasonable Expectations perspective;

■ Review existing and proposed reinsurance and capital structures;

■ Review projected comparative solvency levels including ORSA and future capital requirements before and after the proposed Transfer;

■ Review of the effects of the Transfer on the risks within the Companies and the resources of those Companies to meet those risks;

■ Liaise and raise issues and questions as necessary with the appropriate persons at LIDAC and Liberty Spain;

■ Consideration of the impact of the Portuguese branching project and how the Transfer/ and or Cross Border Merger will impact LIDAC and Liberty Spain policyholders, including those from Liberty Portugal; and

■ Liaise and raise issues and questions as necessary with your advisers, including legal and tax advisers.

We will provide a detailed information request list to you setting out our information requirements.

You agree to provide me with such information as I may reasonably require in order to carry out my role, including providing access to your relevant staff members to deal with questions and queries. You agree to use all reasonable endeavours to ensure that the information you provide is accurate and complete and that any caveats relating to such information are made clear to me.

We will expect to have access to the HoAF of both LIDAC and Liberty Spain and have access to relevant technical staff in both Companies as appropriate.

We will also review the complete documentation to be sent to policyholders in order to check that everything is in accordance with my understanding of the Scheme.

The terms of this engagement do not extend to the delivery of legal advice, which you will obtain as required from legal advisers under separate terms and conditions. We will not be responsible for facilitating the supply of legal advice to either or both of you, nor will we be responsible for monitoring or managing the quality or timing of legal or any other advice that either or both of you may obtain from other advisers in connection with matters relevant to the subject of our work. We will have no

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responsibility or liability in connection with the performance of any other suppliers advising either or both of you.

As indicated above, it is envisaged that, subject to the qualification noted below, our tasks will include the review of the Scheme documentation and the suggestion of drafting changes where appropriate. The qualification in respect of advice on the Scheme documentation is that our advice will be limited to issues of principle relating to actuarial considerations but will not extend to advice on drafting points. We will assist in identifying from the information provided to us areas of uncertainty in the relevant provisions of documentation and suggest amendments for consideration. However, the precise wording of the Scheme documentation is primarily a matter for lawyers and will reflect legal matters outside our expertise. Our comments and suggestions should not be relied upon as being suitable for incorporation into any documentation without further consideration by your legal advisers.

In my capacity as the Independent Actuary, I may receive correspondence from LIDAC and Liberty Spain policyholders or policyholder groups but there is no requirement on me to, and it is not expected that I will, enter into any form of communication with such policyholders. Accordingly, I will forward such correspondence to LIDAC and Liberty Spain (as appropriate, depending on the insurer with which any relevant correspondent policyholder(s) holds a policy (or policies)). In those circumstances, you agree that each Company and as relevant will, as a minimum, send a letter of acknowledgement to the relevant policyholder(s) indicating that the Independent Actuary has seen their letter and is aware of its contents but is not required to (and will not) respond to it. In addition, if any letters of objection to the proposed Transfer are sent directly to either of you, copies of these letters will be sent to me for my consideration.

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Appendix 3 – Curriculum vita

Noel is a Director in Actuarial Consulting at KPMG and is responsible for heading up the non-life actuarial services practice in Dublin. He is a qualified actuary and has over 20 years’ experience in the non-life insurance industry. His principle roles include:

■ Responsibility for all actuarial advice in relation to non-life insurance and reinsurance audit clients of KPMG;

■ Acting as the PCF Head of Actuarial Function for 15 non-life re/insurance entities; and

■ External Reviewing Actuary (formal regulatory requirement in Ireland) to a number of senior Head of Actuarial Function in Irish regulated entities including Allianz, FBD, Liberty and Vhi.

Noel has carried out a number of major assignments in the Irish market including acting as the Court appointed Independent Actuary for a number of the largest most high profile non-life insurance portfolio transfers.

He has also been recently engaged by the Department of Business, Enterprise and Innovation to assist in the validation and benchmarking of soft tissue injury claims cost to other jurisdictions. This investigation is based on recommendation from the Department of Finance’s Cost of Insurance Working Group.

Prior to joining KPMG, Noel was the Chief Actuary and a member of the senior management team of an international non-life reinsurance company. He was responsible for setting adequate level of reserves, performing the financial reporting function, capital management, setting business plans, managing the actuarial team, pricing personal accident business and assisting the CFO in raising capital by liaising with investment bankers and preparing investor presentations.

Noel began his career as a Pricing Actuary for Aviva Insurance Europe SE – formally Hibernian Insurance Limited. His key responsibilities were to make pricing recommendations to the private motor steering committee, developing and maintaining multivariate pricing models for personal lines business, designing and maintaining multivariate prediction models used to understand the effect rating actions may have on renewal and new business levels and performing return on capital calculations.

He is a member of various subcommittees and working parties of the Society of Actuaries in Ireland.

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Appendix 4 - Glossary

ACE Actuarial Central Estimate FSCS Financial Services Compensation Scheme

ALAE Allocated Loss Adjustment Expense GB Great Britain

AMET Amet Insurance Solutions Limited HoAF Head of Actuarial Function

AOF Ancillary Own Funds ICF Insurance Compensation Fund

ASF Autoridade de Supervisão de Seguros e Fundos de Pensões IFSO Irish Financial Services Ombudsman

ASP Actuarial Standard of Practice LACDT Loss Absorbing Capacity of Deferred Tax

Board board of directors of LIDAC Liberty Group Liberty Mutual Group Inc.

Brexit UK’s exit from the EU Liberty Portugal

Liberty Seguros S.A

CAT Catastrophe LIDAC Liberty Insurance dac

CBI Central Bank of Ireland LMIE Liberty Mutual Insurance Europe Limited

CBM Cross Border Merger LSCSR

Liberty Seguros Compañía de Seguros y Reaseguros, S.A

Court High Court of Ireland MCR Minimum Capital Requirement

Delegated Acts

Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 Merger Cross Border Merger

DGS Dirección General de Seguros y Fondos de Pensiones MGA Managing General Agency

Directive

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 NI Northern Ireland

EU European Union NPS Net Promoter Score

FCA Financial Conduct Authority ORSA Own Risk and Solvency Assessment

FNOL First Notification of Loss P&C Property and Casualty

FoE Freedom of Establishment P&R Premium & Reserve

FoS Freedom of Services PPOs Periodic Payment Orders

PRA Prudential Regulatory Authority Scheme Companies LIDAC and LSCSR

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QIL Quinn Insurance Limited (in administration) SCR Solvency Capital Requirement

QS Quota Share SFCR Solvency Financial Condition Report

RAS Risk Appetite Statement SST Strategic Solvency Target

RCMs Regional Claims Managers TCF Treating Customers Fairly

RoI Republic of Ireland UPR Unearned Premium Reserve

SAI Society of Actuaries in Ireland XoL Excess of Loss

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This document is made by KPMG in Ireland, an Irish partnership and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, and is in all respects subject to the negotiation, agreement, and signing of a specific engagement letter or contract. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. © 2018 KPMG, an Irish partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

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