Sup I. Actuary Report - Aviva
Sup I. Actuary Report - Aviva
Sup I. Actuary Report - Aviva
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SUPPLEMENTAL INDEPENDENT ACTUARY<br />
REPORT<br />
OF STUART SHEPLEY FIA<br />
In the matters of<br />
AVIVA INSURANCE EUROPE SE<br />
AND<br />
AVIVA INSURANCE LIMITED<br />
IN THE HIGH COURT OF IRELAND<br />
DATED 9TH OCTOBER 2012<br />
© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of<br />
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
<strong>Sup</strong>plemental Independent <strong>Actuary</strong>'s <strong>Report</strong> on Proposed Insurance Business Transfer of <strong>Aviva</strong> Insurance<br />
Europe SE to <strong>Aviva</strong> Insurance Limited<br />
Contents<br />
1. INTRODUCTION 2<br />
Purpose of the report 2<br />
Use and limitations 2<br />
Professional Guidance 2<br />
Reliances 3<br />
2. SUMMARY AND OVERALL CONCLUSIONS 4<br />
Approach 4<br />
Additional information considered 4<br />
Findings 5<br />
Conclusion 5<br />
<strong>Actuary</strong>’s declaration 5<br />
3. FURTHER INFORMATION CONSIDERED 6<br />
Consideration of capital and risk 6<br />
Market developments 6<br />
Trading performance of Scheme Companies to 30 th June 2012 6<br />
Exposure of the Scheme Companies to potential severe adverse stresses 7<br />
Future intentions of <strong>Aviva</strong> plc with respect to levels of capital, operations, structure<br />
and business mix 7<br />
Policyholder and other communications 9<br />
APPENDIX – LIST OF INFORMATION PROVIDED 10<br />
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1. Introduction<br />
Purpose of the report<br />
1.1 I have prepared a Scheme report addressed to the High Court of Ireland dated 6 th July 2012<br />
(“the IA <strong>Report</strong>”). This describes the proposed transfer of the insurance businesses of <strong>Aviva</strong><br />
Insurance Europe SE (“AIESE”) to an Irish branch of <strong>Aviva</strong> Insurance Limited (“AIL”) and<br />
details my consideration of the impact of the proposed transfer on the security and levels of<br />
service received by the affected policyholders. These two companies are collectively referred<br />
to as the “Scheme Companies” and are controlled through a single group, <strong>Aviva</strong> plc, which I<br />
refer to as “<strong>Aviva</strong>”. The IA <strong>Report</strong> is a report prepared by the Independent <strong>Actuary</strong> in order to<br />
aid the Court in its deliberations.<br />
1.2 This <strong>Sup</strong>plementary <strong>Report</strong> (“<strong>Sup</strong>plemental <strong>Report</strong>) provides an update on the conclusions I<br />
set out in the IA <strong>Report</strong> in the light of the further information available to me, including<br />
consideration of the specific details of the transfer of AIESE assets that were not confirmed at<br />
the time of submission of the IA <strong>Report</strong>, the trading performance of the Scheme Companies<br />
since 31 st December 2011 and changes in the market environment in which they operate. I<br />
have also considered and reviewed the impact of <strong>Aviva</strong>’s future intentions with respect to<br />
levels of capital, operations, structure and business mix.<br />
Use and limitations<br />
1.3 I understand that copies of my <strong>Sup</strong>plemental <strong>Report</strong> will be made available to the Court, the<br />
CBI, the FSA and the Board of Directors (of AIESE and AIL). It will also be made available to<br />
policyholders and other members of the public free of charge from the registered office of<br />
AIESE which is located at One Park Place, Hatch Street, Dublin 2, and at the registered office<br />
of AIL which is located at Pitheavlis, Perth PH2 ONH, Scotland and at the offices of Matheson<br />
Ormsby Prentice (the legal advisors to AIESE) at 70 Sir John Rogerson’s Quay, Dublin 2 and<br />
at 16th Floor, Heron Tower, 110 Bishopsgate, London EC2N 4, and through the internet at<br />
www.aviva.ie/regnotice ahead of the sanctions hearing, which is scheduled for 7 th November<br />
2012.<br />
1.4 This <strong>Sup</strong>plemental <strong>Report</strong> should be read in conjunction with the IA <strong>Report</strong> as reading this<br />
report in isolation may be misleading. All abbreviations and technical terms used in this report<br />
have the same meaning as in the IA <strong>Report</strong>. For the avoidance of doubt, all limitations<br />
described in the IA <strong>Report</strong> including but not limited to those set out in sections 1.18 to 1.21,<br />
apply equally to this <strong>Sup</strong>plemental <strong>Report</strong>. The glossary of terms used for this <strong>Sup</strong>plemental<br />
<strong>Report</strong> can be found in Appendix 4 of the IA report.<br />
Professional Guidance<br />
1.5 The core principles of actuarial analysis are appropriate when assessing the general<br />
insurance business conducted by the Scheme Companies regardless of jurisdiction. In<br />
addition I have considered relevant Irish and UK guidance where it exists. While not a formal<br />
requirement, in preparing this report I have reviewed my approach with reference to:<br />
• Relevant Irish actuarial standards, in particular “The <strong>Actuary</strong> as Expert Witness”<br />
statement of practice issued by the Society of Actuaries in Ireland.<br />
• The guidance for Scheme <strong>Report</strong>s set out by the FSA in Chapter 18 of the FSA<br />
<strong>Sup</strong>ervision Handbook, in particular, sections 18.2.31 to 18.2.41 inclusive, regarding the<br />
content and considerations to be included in an Independent Expert report on transfers of<br />
insurance business under UK law.<br />
1.6 In preparing this report I have also taken into account the requirements of the Technical<br />
Actuarial Standards (“TAS’s”) issued by the Board for Actuarial Standards. The Technical<br />
Actuarial Standards which apply to the work performed in preparing this report are<br />
Transformations, Insurance and TAS R: <strong>Report</strong>ing Actuarial Information. In my opinion, there<br />
are no material departures from any of these Technical Actuarial Standards in my<br />
performance of this work.<br />
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Reliances<br />
1.7 Whilst I have been assisted by my team, the report is written in the first person singular and<br />
the opinions expressed are my own.<br />
1.8 In carrying out my review and producing this <strong>Sup</strong>plemental <strong>Report</strong>, I have relied without<br />
independent verification upon the accuracy and completeness of the data and information<br />
provided to me, both in written and oral form, by <strong>Aviva</strong>. Where indicated, I have reviewed the<br />
information provided for reasonableness. I have met in person or conducted conference calls<br />
with representatives of <strong>Aviva</strong> to discuss the information provided to me and specific matters<br />
arising out of the considerations and analysis conducted. Where critical pieces of information<br />
have been provided orally I have requested and received written confirmation. A schedule of<br />
the additional information I have considered is listed in the Appendix.<br />
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2. Summary and overall conclusions<br />
Approach<br />
2.1 I have sought and received from <strong>Aviva</strong> additional information in order to consider if any event<br />
or change in circumstances has occurred which would cause me to alter the conclusions<br />
expressed in the IA <strong>Report</strong>. The information I have requested has been selected based on my<br />
knowledge of developments in the general insurance industry and also from the wider<br />
economic environment which I consider likely to have a direct or indirect impact on the<br />
Scheme Companies. The areas I have considered include:<br />
• Whether the analysis I performed in preparing the IA <strong>Report</strong> is still valid given the most<br />
recent financial and economic information available.<br />
• Changes in the Scheme Companies’ business.<br />
• Potential operational and structural changes to the <strong>Aviva</strong> group.<br />
• The potential impact of current uncertainties in the economic environment, including the<br />
risks arising from potential sovereign debt defaults of eurozone countries, and from<br />
potential debt defaults of key eurozone based financial institutions.<br />
• Current issues in the insurance industry, including changes in regulation, legal<br />
environment and litigation.<br />
• Relevant communications received from policyholders relating to the proposed Scheme.<br />
• The efficacy of the mutual guarantee provided between AIL’s immediate parent company<br />
<strong>Aviva</strong> International Insurance Ltd and AIL, in the context of the transfer of additional<br />
policyholders into AIL.<br />
• Proposed changes to remaining AIESE pensions liabilities.<br />
• The finalised mechanism of the transfer of assets of AIESE to AIL.<br />
• Whether the key assumptions made in forming my conclusions (described in section 2.5<br />
of the IA <strong>Report</strong>) still apply in practice.<br />
Having received additional information I have then considered what impact, if any, this would<br />
have on the findings of the analysis I performed in order to form my opinion expressed in the<br />
IA report.<br />
Additional information considered<br />
2.2 I have received information including:<br />
• Updated financial information including the trading performance of each Scheme<br />
Company in the 6 months to 30 th June 2012.<br />
• Analysis of the exposure of the Scheme Companies to potential eurozone defaults and<br />
break-up.<br />
• Changes in the business of the Scheme Companies and developments in the plans <strong>Aviva</strong><br />
has for the levels of capital, operation, structure and business mix of these companies.<br />
I have discussed this information with senior management within <strong>Aviva</strong>, and where<br />
appropriate, requested additional information or written confirmation. A list of additional<br />
information received is contained in the Appendix to this report.<br />
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Findings<br />
2.3 Having considered the additional information requested from <strong>Aviva</strong> and developments<br />
occurring in the wider economic and insurance industry environment I find that:<br />
Conclusion<br />
• Both the economic and financial condition of the Scheme Companies as at 30 th June<br />
2012, being the most recent information available, is, for the purposes of analysing the<br />
impact of the Scheme on each affected policyholder group, substantially the same as that<br />
considered in the IA <strong>Report</strong>. I identify no significant impact on the overall conclusion<br />
within the IA <strong>Report</strong> arising from such changes as have occurred.<br />
• I have considered the results of updated scenario testing which assesses the potential<br />
impact on the financial security of Irish policyholders before and after their transfer to AIL<br />
from AIESE. This analysis was carried out as at 30 June 2012 and is described in more<br />
detail in section 3.4. As a consequence of this additional testing I have not identified any<br />
significant changes to the findings set out in section 6 of the IA <strong>Report</strong> which would cause<br />
me to revise my opinion on the impact of the transfer on AIESE or AIL policyholders.<br />
• Since issuing my IA <strong>Report</strong>, there are no matters arising from the nature of business<br />
underwritten by the Scheme Companies.<br />
• <strong>Aviva</strong> continues to refine its intentions around the levels of capital, operation, structure<br />
and business mix of the Scheme Companies and I have considered these when<br />
constructing this <strong>Sup</strong>plemental <strong>Report</strong> in section 3.5. I have not identified any intentions<br />
that would cause me to revise the conclusions of my analysis of the effects of the<br />
Scheme.<br />
• No matters have been drawn to my attention as a result of communications received from<br />
policyholders or other relevant parties that would cause me to revise my analysis of the<br />
effects of the Scheme.<br />
Prior to the Court hearing to approve the Scheme, I will review any relevant, recently<br />
produced information including significant market or business developments that may impact<br />
AIL or AIESE. As appropriate, I will communicate to the Court should these require<br />
adjustments to my findings.<br />
Further detail on the reasoning supporting my findings above is contained in section 3 of this<br />
report.<br />
2.4 I have considered the Scheme and its likely effect on each of the affected policyholder<br />
groups. I have concluded that the risk of any policyholder being adversely affected by the<br />
proposed transfer is sufficiently remote for it to be appropriate to proceed with the proposed<br />
Scheme as described in this report.<br />
<strong>Actuary</strong>’s declaration<br />
2.5 I confirm that I have made clear which facts and matters referred to in this report are within<br />
my own knowledge and which are not. Those that are within my own knowledge I confirm to<br />
be true. The opinions I have expressed represent my true and complete professional opinions<br />
on the matters to which they refer.<br />
Stuart Shepley<br />
Fellow of the Institute and Faculty of Actuaries<br />
Partner, KPMG LLP<br />
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3. Further information considered<br />
Consideration of capital and risk<br />
3.1 In preparing the IA <strong>Report</strong> I considered the impact of the Scheme on the capital and risk<br />
position of the Scheme Companies, and the consequent impact on the levels of security<br />
experienced by each affected policyholder group. As described in section 5.9 of the IA<br />
<strong>Report</strong>, my analysis is in part based on the economic capital position of the Scheme<br />
Companies as at 31 st December 2010, rolled forward to reflect changes in exposure through<br />
to 31 st December 2011. I have now received refreshed economic capital information for the<br />
Scheme Companies as at 30 th June 2012.<br />
I have compared the results of this new information with that used in my original analysis in<br />
order to identify if my conclusions in the IA <strong>Report</strong> would change. I note that:<br />
• The updated economic capital position is consistent with my understanding of the<br />
financial and economic circumstances of the Scheme Companies.<br />
• The updated economic capital positions and consequent implied probability of<br />
policyholder deficiency assuming the Scheme proceeds are substantially the same as<br />
those I considered in preparing the IA <strong>Report</strong>.<br />
• The implied probability of deficiency experienced by each policyholder group prior to the<br />
Scheme proceeding is substantially the same as that considered within the IA <strong>Report</strong> for<br />
all policyholder groups.<br />
Given the above facts I identify no matters arising from the updated economic capital<br />
information which would cause me to change my conclusion on the impact of the Scheme on<br />
the levels of security of each affected policyholder group.<br />
Market developments<br />
3.2 I have considered market developments in the insurance sector since the issue of the IA<br />
<strong>Report</strong>. I note that there have been no material market developments that were not<br />
considered within the initial IA <strong>Report</strong>.<br />
In light of the above I identify no matters arising from recent market developments which<br />
would cause me to change my conclusion on the impact of the Scheme on the levels of<br />
security of each affected policyholder group.<br />
Trading performance of Scheme Companies to 30 th June 2012<br />
3.3 I have been provided with the financial results and updated balance sheet information for<br />
each of the Scheme Companies for the 6 month period to 30 th June 2012. I have reviewed<br />
this information in order to identify if there has been a material change in the financial position<br />
of any of the Scheme Companies, and to satisfy myself that the financial information I have<br />
used in my consideration of the impact of the Scheme continues to be an appropriate base on<br />
which to form an opinion. I note that:<br />
• In aggregate the profitability across the Scheme Companies continues to be broadly in<br />
line with <strong>Aviva</strong>’s previous business plan.<br />
• The financial performance of each of the Scheme Companies is consistent with my<br />
understanding of those businesses, and no Scheme Company has reported a financial<br />
performance that would significantly affect the financial analysis I performed in preparing<br />
the IA <strong>Report</strong>.<br />
I have considered the impact of the recent trading performance of the Scheme Companies<br />
and have identified no matters arising which would materially change the findings of the<br />
analysis which support the conclusions contained in the IA <strong>Report</strong>.<br />
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Exposure of the Scheme Companies to potential severe adverse stresses<br />
3.4 <strong>Aviva</strong> has provided me with updated information on the exposure to the Scheme Companies<br />
arising from severe adverse stresses similar to those described in section 6 of the IA <strong>Report</strong>,<br />
including:<br />
• The potential impairment of value of the sovereign debt issued by countries within the<br />
eurozone and the potential exit of eurozone countries from the Euro. I note that <strong>Aviva</strong><br />
actively monitors and seeks to manage their exposure to risks arising from these sources.<br />
• A range of other severe stresses including adverse investment market conditions and<br />
natural catastrophes such as a severe windstorm affecting insured properties across<br />
northern Europe.<br />
Although being similar to the stresses in the original IA report, the stresses used for the<br />
<strong>Sup</strong>plemental report have been updated to reflect changes in the economic environment and<br />
the underlying businesses.<br />
I have considered these hypothetical severe adverse scenarios and note that:<br />
• Both pre and post transfer the Scheme Companies have sufficient economic and financial<br />
resources to be able to pay their claim obligations to their policyholders under the<br />
extreme stresses considered.<br />
• The potential exit of countries from the eurozone does not significantly alter my<br />
assessment of the Scheme on the relative impact on each policyholder group.<br />
Given the above, my analysis continues to support my view, that the risks to each<br />
policyholder group arising from severe adverse stresses including potential sovereign and<br />
financial institution defaults from the eurozone are substantially the same whether the<br />
Scheme proceeds or not, and my findings contained in section 6.14 of the IA <strong>Report</strong> remain<br />
the same.<br />
Future intentions of <strong>Aviva</strong> plc with respect to levels of capital, operations,<br />
structure and business mix<br />
3.5 I have requested, and received from <strong>Aviva</strong>, updates on the evolution of plans and strategic<br />
options for the internal management of the business of the Scheme Companies and have<br />
discussed these plans with senior management within <strong>Aviva</strong>. Based on my discussions with<br />
<strong>Aviva</strong> senior management, and as supported in subsequent written communications, I<br />
understand that <strong>Aviva</strong> intend to further restructure the legal entities through which they<br />
conduct their international business. This restructuring is intended to improve the operational<br />
focus of each business unit which will enable more transparent and effective governance and<br />
capital management. The key elements of this proposed restructuring are:<br />
• Transferring substantially all of AIL’s existing overseas subsidiaries to <strong>Aviva</strong> Group<br />
Holdings Limited, a holding company which currently owns 100% of <strong>Aviva</strong> International<br />
Insurance Ltd, the direct parent of AIL.<br />
• Refocusing AIL as a dedicated UK and Ireland general insurance underwriter supported<br />
by dedicated assets and capital.<br />
• Leaving AIL with a balance sheet whose assets continue to include significant<br />
intercompany loan balances due from other parts of the <strong>Aviva</strong> group. These amounts will<br />
be secured on the shares and related loans of other <strong>Aviva</strong> group subsidiaries.<br />
• Changes to the support that <strong>Aviva</strong> Group Holdings Limited provides for the UK defined<br />
benefit pension scheme to reflect the proposed changes to the group structure.<br />
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As part of the above restructuring, <strong>Aviva</strong> intend to reduce the capitalisation of AIL to an<br />
appropriate level to reflect the transfer of the overseas subsidiaries from AIL, with the<br />
reallocated capital remaining within the <strong>Aviva</strong> group.<br />
I have considered a range of information relating to the future changes <strong>Aviva</strong> intends to<br />
implement with respect to AIL, including:<br />
• Financial projections which provide estimates of AIL’s balance sheet prepared under<br />
international financial accounting standards and estimates of the economic capital<br />
position of AIL following implementation of these plans.<br />
• Descriptions of the governance arrangements which will be put in place as a<br />
consequence of the proposed changes.<br />
• Analysis of the impact of severe external economic scenarios on AIL following the<br />
changes made above.<br />
• Board and other papers prepared for the benefit of independent non-executives currently<br />
charged with oversight of the UK general insurance business who it is intended will<br />
become formally appointed non-executive directors of AIL following the transformation.<br />
• Public presentations made by <strong>Aviva</strong> to its investors concerning its future strategy.<br />
The overall impact of these restructuring and governance changes for AIL will be material as<br />
these actions are designed to improve the transparent management and effective control of<br />
AIL, in line with <strong>Aviva</strong>’s statement that AIL remains a core operating subsidiary.<br />
3.6 I understand that the proposed transformations described above are firm intentions, however<br />
these are subject to formal board approval and regulatory consents. Nevertheless I consider<br />
that the position of Irish policyholders would improve following their transfer to AIL should this<br />
proposed transformation be implemented.<br />
My reasons for this finding include:<br />
• Following implementation of the plans, AIL would continue to be a large and well<br />
capitalised insurance entity. Based on projected economic capital information provided to<br />
me by <strong>Aviva</strong>, I continue to consider the likelihood that policyholders of AIL (including Irish<br />
policyholders transferring to AIL) would not have their claims paid in full to be remote.<br />
• I expect transferring Irish policyholders to continue to experience an improvement in their<br />
security measured using both financial accounting ratios and economic capital.<br />
• Existing AIL policyholders are already, and would continue to be, exposed to risks arising<br />
from <strong>Aviva</strong>’s Irish general insurance business as a consequence of AIL’s current<br />
ownership of the Irish business.<br />
• The sources of direct risk to which AIL is exposed would reduce, as it would no longer<br />
have any direct exposure to risks arising from overseas subsidiaries or business other<br />
than the UK or Ireland. However credit risk would remain due to the significant<br />
intercompany loan balances due from other parts of the <strong>Aviva</strong> group which would be<br />
secured on other group subsidiaries. Furthermore AIL would no longer have direct control<br />
over the overseas subsidiaries, nor be entitled to receive future dividend income.<br />
• The processes <strong>Aviva</strong> has put in place to consider the appropriateness of the<br />
transformation involve independent non-executives currently charged with oversight of<br />
the UK general insurance business. As a consequence, the security of AIL policyholders<br />
is being specifically considered in the development of <strong>Aviva</strong>’s plans. I have reviewed the<br />
materials provided for this purpose and I am satisfied that these materials consider an<br />
appropriate range of aspects of the proposed transformation, including capitalisation,<br />
access to liquidity, governance and regulation following the changes summarised above.<br />
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• AIL would continue to be subject to the same prudential regulation (for example, with<br />
respect to regulatory capital adequacy requirements) as is currently the case. AIL’s<br />
capital requirements are determined by the FSA’s current risk-based capital regime which<br />
seeks to assess minimum capital levels in terms of the likelihood that policyholders may<br />
not be paid in full.<br />
Given the above reasons I identify no adverse change in the circumstances of policyholders<br />
transferring to AIL or existing policyholders of AIL.<br />
3.7 For the avoidance of doubt, should the management initiative described in 3.5 not proceed,<br />
my opinion would remain unchanged. I am not aware of and have therefore not considered<br />
alternative management strategies.<br />
Policyholder and other communications<br />
3.8 I have considered the Scheme documentation made available to policyholders through<br />
advertisement and the internet. I am satisfied that these materials, and the summary of my IA<br />
report as contained in those guides, adequately bring the proposals to the attention of<br />
policyholders, and that it is not necessary to bring the observations made in this<br />
<strong>Sup</strong>plemental <strong>Report</strong> to the attention of policyholders.<br />
I am aware of no relevant responses to the Scheme made by policyholders and other relevant<br />
parties up to 9 th October 2012. As a consequence I have not identified any matter that would<br />
cause me to perform additional analysis or lead me to revise the conclusion set out in my IA<br />
<strong>Report</strong> and this <strong>Sup</strong>plemental <strong>Report</strong>.<br />
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Appendix – List of information provided<br />
Financial Accounts and Statements<br />
As at 30 June 2012 (“Half Year 2012”):<br />
• AIL Management Accounts and Financial Statements<br />
• AIESE Management Accounts and Financial Statements<br />
Financial Projections<br />
Estimated economic capital for AIL and AIESE pre and post transfer<br />
Economic Capital Documentation<br />
<strong>Aviva</strong> UKGI Capital Management <strong>Report</strong> detailing the proposed transfer of insurance business from<br />
<strong>Aviva</strong> Insurance Europe SE to <strong>Aviva</strong> Insurance Ltd<br />
<strong>Aviva</strong> International Insurance Limited Economic Capital results as at Year End 2011<br />
AIESE Economic Capital Results as at Year End 2011<br />
Internal review documentation for entity Economic Capital assessments<br />
Draft <strong>Aviva</strong> International Insurance Limited Economic Capital results as at Half Year 2012<br />
Draft AIESE Economic Capital results as at Half Year 2012<br />
Reserving Documentation<br />
<strong>Aviva</strong> UKGI Reserve <strong>Report</strong> as at Half Year 2012<br />
AIESE GI Reserve <strong>Report</strong> as at Half Year 2012<br />
<strong>Aviva</strong> Group GI Reserve <strong>Report</strong> as at Half Year 2012<br />
Company Structure Documentation<br />
Internal Governance for Business Transfer<br />
Various emails detailing potential management intentions<br />
Other Documentation<br />
Analysis of tax impacts<br />
Stress and Scenario testing information and data<br />
Various emails on details of transfer and details on entities involved<br />
A number of documents detailing future management intentions for the <strong>Aviva</strong> Group operational<br />
structure<br />
Policy and claim servicing email<br />
Other information considered<br />
Discussions with key staff within management, claims handling, risk management, capital modelling,<br />
actuarial, and finance functions.<br />
Numerous e-mails confirming statements and information provided verbally during these meetings.<br />
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