Sup I. Actuary Report - Aviva

SUPPLEMENTAL INDEPENDENT ACTUARY 

REPORT 

OF STUART SHEPLEY FIA 

In the matters of 

AVIVA INSURANCE EUROPE SE 

AND 

AVIVA INSURANCE LIMITED 

IN THE HIGH COURT OF IRELAND 

DATED 9TH OCTOBER 2012 

© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of 

independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

Supplemental Independent Actuary's Report on Proposed Insurance Business Transfer of Aviva Insurance 

Europe SE to Aviva Insurance Limited 

Contents 

1. INTRODUCTION 2 

Purpose of the report 2 

Use and limitations 2 

Professional Guidance 2 

Reliances 3 

2. SUMMARY AND OVERALL CONCLUSIONS 4 

Approach 4 

Additional information considered 4 

Findings 5 

Conclusion 5 

Actuary’s declaration 5 

3. FURTHER INFORMATION CONSIDERED 6 

Consideration of capital and risk 6 

Market developments 6 

Trading performance of Scheme Companies to 30 th June 2012 6 

Exposure of the Scheme Companies to potential severe adverse stresses 7 

Future intentions of Aviva plc with respect to levels of capital, operations, structure 

and business mix 7 

Policyholder and other communications 9 

APPENDIX – LIST OF INFORMATION PROVIDED 10 

© KPMG LLP. All rights reserved Page 1 of 10 10/10/2012



1. Introduction 

Purpose of the report 

1.1 I have prepared a Scheme report addressed to the High Court of Ireland dated 6 th July 2012 

(“the IA Report”). This describes the proposed transfer of the insurance businesses of Aviva 

Insurance Europe SE (“AIESE”) to an Irish branch of Aviva Insurance Limited (“AIL”) and 

details my consideration of the impact of the proposed transfer on the security and levels of 

service received by the affected policyholders. These two companies are collectively referred 

to as the “Scheme Companies” and are controlled through a single group, Aviva plc, which I 

refer to as “Aviva”. The IA Report is a report prepared by the Independent Actuary in order to 

aid the Court in its deliberations. 

1.2 This Supplementary Report (“Supplemental Report) provides an update on the conclusions I 

set out in the IA Report in the light of the further information available to me, including 

consideration of the specific details of the transfer of AIESE assets that were not confirmed at 

the time of submission of the IA Report, the trading performance of the Scheme Companies 

since 31 st December 2011 and changes in the market environment in which they operate. I 

have also considered and reviewed the impact of Aviva’s future intentions with respect to 

levels of capital, operations, structure and business mix. 

Use and limitations 

1.3 I understand that copies of my Supplemental Report will be made available to the Court, the 

CBI, the FSA and the Board of Directors (of AIESE and AIL). It will also be made available to 

policyholders and other members of the public free of charge from the registered office of 

AIESE which is located at One Park Place, Hatch Street, Dublin 2, and at the registered office 

of AIL which is located at Pitheavlis, Perth PH2 ONH, Scotland and at the offices of Matheson 

Ormsby Prentice (the legal advisors to AIESE) at 70 Sir John Rogerson’s Quay, Dublin 2 and 

at 16th Floor, Heron Tower, 110 Bishopsgate, London EC2N 4, and through the internet at 

www.aviva.ie/regnotice ahead of the sanctions hearing, which is scheduled for 7 th November 

2012. 

1.4 This Supplemental Report should be read in conjunction with the IA Report as reading this 

report in isolation may be misleading. All abbreviations and technical terms used in this report 

have the same meaning as in the IA Report. For the avoidance of doubt, all limitations 

described in the IA Report including but not limited to those set out in sections 1.18 to 1.21, 

apply equally to this Supplemental Report. The glossary of terms used for this Supplemental 

Report can be found in Appendix 4 of the IA report. 

Professional Guidance 

1.5 The core principles of actuarial analysis are appropriate when assessing the general 

insurance business conducted by the Scheme Companies regardless of jurisdiction. In 

addition I have considered relevant Irish and UK guidance where it exists. While not a formal 

requirement, in preparing this report I have reviewed my approach with reference to: 

• Relevant Irish actuarial standards, in particular “The Actuary as Expert Witness” 

statement of practice issued by the Society of Actuaries in Ireland. 

• The guidance for Scheme Reports set out by the FSA in Chapter 18 of the FSA 

Supervision Handbook, in particular, sections 18.2.31 to 18.2.41 inclusive, regarding the 

content and considerations to be included in an Independent Expert report on transfers of 

insurance business under UK law. 

1.6 In preparing this report I have also taken into account the requirements of the Technical 

Actuarial Standards (“TAS’s”) issued by the Board for Actuarial Standards. The Technical 

Actuarial Standards which apply to the work performed in preparing this report are 

Transformations, Insurance and TAS R: Reporting Actuarial Information. In my opinion, there 

are no material departures from any of these Technical Actuarial Standards in my 

performance of this work. 




Reliances 

1.7 Whilst I have been assisted by my team, the report is written in the first person singular and 

the opinions expressed are my own. 

1.8 In carrying out my review and producing this Supplemental Report, I have relied without 

independent verification upon the accuracy and completeness of the data and information 

provided to me, both in written and oral form, by Aviva. Where indicated, I have reviewed the 

information provided for reasonableness. I have met in person or conducted conference calls 

with representatives of Aviva to discuss the information provided to me and specific matters 

arising out of the considerations and analysis conducted. Where critical pieces of information 

have been provided orally I have requested and received written confirmation. A schedule of 

the additional information I have considered is listed in the Appendix. 




2. Summary and overall conclusions 

Approach 

2.1 I have sought and received from Aviva additional information in order to consider if any event 

or change in circumstances has occurred which would cause me to alter the conclusions 

expressed in the IA Report. The information I have requested has been selected based on my 

knowledge of developments in the general insurance industry and also from the wider 

economic environment which I consider likely to have a direct or indirect impact on the 

Scheme Companies. The areas I have considered include: 

• Whether the analysis I performed in preparing the IA Report is still valid given the most 

recent financial and economic information available. 

• Changes in the Scheme Companies’ business. 

• Potential operational and structural changes to the Aviva group. 

• The potential impact of current uncertainties in the economic environment, including the 

risks arising from potential sovereign debt defaults of eurozone countries, and from 

potential debt defaults of key eurozone based financial institutions. 

• Current issues in the insurance industry, including changes in regulation, legal 

environment and litigation. 

• Relevant communications received from policyholders relating to the proposed Scheme. 

• The efficacy of the mutual guarantee provided between AIL’s immediate parent company 

Aviva International Insurance Ltd and AIL, in the context of the transfer of additional 

policyholders into AIL. 

• Proposed changes to remaining AIESE pensions liabilities. 

• The finalised mechanism of the transfer of assets of AIESE to AIL. 

• Whether the key assumptions made in forming my conclusions (described in section 2.5 

of the IA Report) still apply in practice. 

Having received additional information I have then considered what impact, if any, this would 

have on the findings of the analysis I performed in order to form my opinion expressed in the 

IA report. 

Additional information considered 

2.2 I have received information including: 

• Updated financial information including the trading performance of each Scheme 

Company in the 6 months to 30 th June 2012. 

• Analysis of the exposure of the Scheme Companies to potential eurozone defaults and 

break-up. 

• Changes in the business of the Scheme Companies and developments in the plans Aviva 

has for the levels of capital, operation, structure and business mix of these companies. 

I have discussed this information with senior management within Aviva, and where 

appropriate, requested additional information or written confirmation. A list of additional 

information received is contained in the Appendix to this report. 




Findings 

2.3 Having considered the additional information requested from Aviva and developments 

occurring in the wider economic and insurance industry environment I find that: 

Conclusion 

• Both the economic and financial condition of the Scheme Companies as at 30 th June 

2012, being the most recent information available, is, for the purposes of analysing the 

impact of the Scheme on each affected policyholder group, substantially the same as that 

considered in the IA Report. I identify no significant impact on the overall conclusion 

within the IA Report arising from such changes as have occurred. 

• I have considered the results of updated scenario testing which assesses the potential 

impact on the financial security of Irish policyholders before and after their transfer to AIL 

from AIESE. This analysis was carried out as at 30 June 2012 and is described in more 

detail in section 3.4. As a consequence of this additional testing I have not identified any 

significant changes to the findings set out in section 6 of the IA Report which would cause 

me to revise my opinion on the impact of the transfer on AIESE or AIL policyholders. 

• Since issuing my IA Report, there are no matters arising from the nature of business 

underwritten by the Scheme Companies. 

• Aviva continues to refine its intentions around the levels of capital, operation, structure 

and business mix of the Scheme Companies and I have considered these when 

constructing this Supplemental Report in section 3.5. I have not identified any intentions 

that would cause me to revise the conclusions of my analysis of the effects of the 

Scheme. 

• No matters have been drawn to my attention as a result of communications received from 

policyholders or other relevant parties that would cause me to revise my analysis of the 

effects of the Scheme. 

Prior to the Court hearing to approve the Scheme, I will review any relevant, recently 

produced information including significant market or business developments that may impact 

AIL or AIESE. As appropriate, I will communicate to the Court should these require 

adjustments to my findings. 

Further detail on the reasoning supporting my findings above is contained in section 3 of this 

report. 

2.4 I have considered the Scheme and its likely effect on each of the affected policyholder 

groups. I have concluded that the risk of any policyholder being adversely affected by the 

proposed transfer is sufficiently remote for it to be appropriate to proceed with the proposed 

Scheme as described in this report. 

Actuary’s declaration 

2.5 I confirm that I have made clear which facts and matters referred to in this report are within 

my own knowledge and which are not. Those that are within my own knowledge I confirm to 

be true. The opinions I have expressed represent my true and complete professional opinions 

on the matters to which they refer. 

Stuart Shepley 

Fellow of the Institute and Faculty of Actuaries 

Partner, KPMG LLP 




3. Further information considered 

Consideration of capital and risk 

3.1 In preparing the IA Report I considered the impact of the Scheme on the capital and risk 

position of the Scheme Companies, and the consequent impact on the levels of security 

experienced by each affected policyholder group. As described in section 5.9 of the IA 

Report, my analysis is in part based on the economic capital position of the Scheme 

Companies as at 31 st December 2010, rolled forward to reflect changes in exposure through 

to 31 st December 2011. I have now received refreshed economic capital information for the 

Scheme Companies as at 30 th June 2012. 

I have compared the results of this new information with that used in my original analysis in 

order to identify if my conclusions in the IA Report would change. I note that: 

• The updated economic capital position is consistent with my understanding of the 

financial and economic circumstances of the Scheme Companies. 

• The updated economic capital positions and consequent implied probability of 

policyholder deficiency assuming the Scheme proceeds are substantially the same as 

those I considered in preparing the IA Report. 

• The implied probability of deficiency experienced by each policyholder group prior to the 

Scheme proceeding is substantially the same as that considered within the IA Report for 

all policyholder groups. 

Given the above facts I identify no matters arising from the updated economic capital 

information which would cause me to change my conclusion on the impact of the Scheme on 

the levels of security of each affected policyholder group. 

Market developments 

3.2 I have considered market developments in the insurance sector since the issue of the IA 

Report. I note that there have been no material market developments that were not 

considered within the initial IA Report. 

In light of the above I identify no matters arising from recent market developments which 

would cause me to change my conclusion on the impact of the Scheme on the levels of 

security of each affected policyholder group. 

Trading performance of Scheme Companies to 30 th June 2012 

3.3 I have been provided with the financial results and updated balance sheet information for 

each of the Scheme Companies for the 6 month period to 30 th June 2012. I have reviewed 

this information in order to identify if there has been a material change in the financial position 

of any of the Scheme Companies, and to satisfy myself that the financial information I have 

used in my consideration of the impact of the Scheme continues to be an appropriate base on 

which to form an opinion. I note that: 

• In aggregate the profitability across the Scheme Companies continues to be broadly in 

line with Aviva’s previous business plan. 

• The financial performance of each of the Scheme Companies is consistent with my 

understanding of those businesses, and no Scheme Company has reported a financial 

performance that would significantly affect the financial analysis I performed in preparing 

the IA Report. 

I have considered the impact of the recent trading performance of the Scheme Companies 

and have identified no matters arising which would materially change the findings of the 

analysis which support the conclusions contained in the IA Report. 




Exposure of the Scheme Companies to potential severe adverse stresses 

3.4 Aviva has provided me with updated information on the exposure to the Scheme Companies 

arising from severe adverse stresses similar to those described in section 6 of the IA Report, 

including: 

• The potential impairment of value of the sovereign debt issued by countries within the 

eurozone and the potential exit of eurozone countries from the Euro. I note that Aviva 

actively monitors and seeks to manage their exposure to risks arising from these sources. 

• A range of other severe stresses including adverse investment market conditions and 

natural catastrophes such as a severe windstorm affecting insured properties across 

northern Europe. 

Although being similar to the stresses in the original IA report, the stresses used for the 

Supplemental report have been updated to reflect changes in the economic environment and 

the underlying businesses. 

I have considered these hypothetical severe adverse scenarios and note that: 

• Both pre and post transfer the Scheme Companies have sufficient economic and financial 

resources to be able to pay their claim obligations to their policyholders under the 

extreme stresses considered. 

• The potential exit of countries from the eurozone does not significantly alter my 

assessment of the Scheme on the relative impact on each policyholder group. 

Given the above, my analysis continues to support my view, that the risks to each 

policyholder group arising from severe adverse stresses including potential sovereign and 

financial institution defaults from the eurozone are substantially the same whether the 

Scheme proceeds or not, and my findings contained in section 6.14 of the IA Report remain 

the same. 

Future intentions of Aviva plc with respect to levels of capital, operations, 

structure and business mix 

3.5 I have requested, and received from Aviva, updates on the evolution of plans and strategic 

options for the internal management of the business of the Scheme Companies and have 

discussed these plans with senior management within Aviva. Based on my discussions with 

Aviva senior management, and as supported in subsequent written communications, I 

understand that Aviva intend to further restructure the legal entities through which they 

conduct their international business. This restructuring is intended to improve the operational 

focus of each business unit which will enable more transparent and effective governance and 

capital management. The key elements of this proposed restructuring are: 

• Transferring substantially all of AIL’s existing overseas subsidiaries to Aviva Group 

Holdings Limited, a holding company which currently owns 100% of Aviva International 

Insurance Ltd, the direct parent of AIL. 

• Refocusing AIL as a dedicated UK and Ireland general insurance underwriter supported 

by dedicated assets and capital. 

• Leaving AIL with a balance sheet whose assets continue to include significant 

intercompany loan balances due from other parts of the Aviva group. These amounts will 

be secured on the shares and related loans of other Aviva group subsidiaries. 

• Changes to the support that Aviva Group Holdings Limited provides for the UK defined 

benefit pension scheme to reflect the proposed changes to the group structure. 




As part of the above restructuring, Aviva intend to reduce the capitalisation of AIL to an 

appropriate level to reflect the transfer of the overseas subsidiaries from AIL, with the 

reallocated capital remaining within the Aviva group. 

I have considered a range of information relating to the future changes Aviva intends to 

implement with respect to AIL, including: 

• Financial projections which provide estimates of AIL’s balance sheet prepared under 

international financial accounting standards and estimates of the economic capital 

position of AIL following implementation of these plans. 

• Descriptions of the governance arrangements which will be put in place as a 

consequence of the proposed changes. 

• Analysis of the impact of severe external economic scenarios on AIL following the 

changes made above. 

• Board and other papers prepared for the benefit of independent non-executives currently 

charged with oversight of the UK general insurance business who it is intended will 

become formally appointed non-executive directors of AIL following the transformation. 

• Public presentations made by Aviva to its investors concerning its future strategy. 

The overall impact of these restructuring and governance changes for AIL will be material as 

these actions are designed to improve the transparent management and effective control of 

AIL, in line with Aviva’s statement that AIL remains a core operating subsidiary. 

3.6 I understand that the proposed transformations described above are firm intentions, however 

these are subject to formal board approval and regulatory consents. Nevertheless I consider 

that the position of Irish policyholders would improve following their transfer to AIL should this 

proposed transformation be implemented. 

My reasons for this finding include: 

• Following implementation of the plans, AIL would continue to be a large and well 

capitalised insurance entity. Based on projected economic capital information provided to 

me by Aviva, I continue to consider the likelihood that policyholders of AIL (including Irish 

policyholders transferring to AIL) would not have their claims paid in full to be remote. 

• I expect transferring Irish policyholders to continue to experience an improvement in their 

security measured using both financial accounting ratios and economic capital. 

• Existing AIL policyholders are already, and would continue to be, exposed to risks arising 

from Aviva’s Irish general insurance business as a consequence of AIL’s current 

ownership of the Irish business. 

• The sources of direct risk to which AIL is exposed would reduce, as it would no longer 

have any direct exposure to risks arising from overseas subsidiaries or business other 

than the UK or Ireland. However credit risk would remain due to the significant 

intercompany loan balances due from other parts of the Aviva group which would be 

secured on other group subsidiaries. Furthermore AIL would no longer have direct control 

over the overseas subsidiaries, nor be entitled to receive future dividend income. 

• The processes Aviva has put in place to consider the appropriateness of the 

transformation involve independent non-executives currently charged with oversight of 

the UK general insurance business. As a consequence, the security of AIL policyholders 

is being specifically considered in the development of Aviva’s plans. I have reviewed the 

materials provided for this purpose and I am satisfied that these materials consider an 

appropriate range of aspects of the proposed transformation, including capitalisation, 

access to liquidity, governance and regulation following the changes summarised above. 




• AIL would continue to be subject to the same prudential regulation (for example, with 

respect to regulatory capital adequacy requirements) as is currently the case. AIL’s 

capital requirements are determined by the FSA’s current risk-based capital regime which 

seeks to assess minimum capital levels in terms of the likelihood that policyholders may 

not be paid in full. 

Given the above reasons I identify no adverse change in the circumstances of policyholders 

transferring to AIL or existing policyholders of AIL. 

3.7 For the avoidance of doubt, should the management initiative described in 3.5 not proceed, 

my opinion would remain unchanged. I am not aware of and have therefore not considered 

alternative management strategies. 

Policyholder and other communications 

3.8 I have considered the Scheme documentation made available to policyholders through 

advertisement and the internet. I am satisfied that these materials, and the summary of my IA 

report as contained in those guides, adequately bring the proposals to the attention of 

policyholders, and that it is not necessary to bring the observations made in this 

Supplemental Report to the attention of policyholders. 

I am aware of no relevant responses to the Scheme made by policyholders and other relevant 

parties up to 9 th October 2012. As a consequence I have not identified any matter that would 

cause me to perform additional analysis or lead me to revise the conclusion set out in my IA 

Report and this Supplemental Report. 




Appendix – List of information provided 

Financial Accounts and Statements 

As at 30 June 2012 (“Half Year 2012”): 

• AIL Management Accounts and Financial Statements 

• AIESE Management Accounts and Financial Statements 

Financial Projections 

Estimated economic capital for AIL and AIESE pre and post transfer 

Economic Capital Documentation 

Aviva UKGI Capital Management Report detailing the proposed transfer of insurance business from 

Aviva Insurance Europe SE to Aviva Insurance Ltd 

Aviva International Insurance Limited Economic Capital results as at Year End 2011 

AIESE Economic Capital Results as at Year End 2011 

Internal review documentation for entity Economic Capital assessments 

Draft Aviva International Insurance Limited Economic Capital results as at Half Year 2012 

Draft AIESE Economic Capital results as at Half Year 2012 

Reserving Documentation 

Aviva UKGI Reserve Report as at Half Year 2012 

AIESE GI Reserve Report as at Half Year 2012 

Aviva Group GI Reserve Report as at Half Year 2012 

Company Structure Documentation 

Internal Governance for Business Transfer 

Various emails detailing potential management intentions 

Other Documentation 

Analysis of tax impacts 

Stress and Scenario testing information and data 

Various emails on details of transfer and details on entities involved 

A number of documents detailing future management intentions for the Aviva Group operational 

structure 

Policy and claim servicing email 

Other information considered 

Discussions with key staff within management, claims handling, risk management, capital modelling, 

actuarial, and finance functions. 

Numerous e-mails confirming statements and information provided verbally during these meetings.

Sup I. Actuary Report - Aviva

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