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MILLIMAN REPORT Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG 28 May 2020 Jeffrey A. Courchene, F.C.A.S.
MILLIMAN REPORT
Table of Contents
1. PURPOSE AND SCOPE 1
2. EXECUTIVE SUMMARY 4
3. CHANGES SINCE THE REPORT IN THE ENTITIES CONCERNED IN THE SCHEME 6
4. CHANGES IN THE IMPACT OF THE SCHEME ON THE TRANSFERRING POLICYHOLDERS 15
5. CHANGES IN THE IMPACT OF THE SCHEME ON THE POLICYHOLDERS REMAINING WITH ZURICH
INSURANCE PLC 21
6. CHANGES IN THE IMPACT OF THE SCHEME ON THE EXISTING POLICYHOLDERS OF DARAG
DEUTSCHE VERSICHERUNGS- UND RÜCKVERSICHERUNGS-AG 22
7. OTHER CONSIDERATIONS 23
8. CONCLUSIONS 26
APPENDIX A DEFINITIONS 27
APPENDIX B KEY SOURCES OF ADDITIONAL INFORMATION 30
APPENDIX C LETTERS OF REPRESENTATION 32
MILLIMAN REPORT
1. Purpose and Scope
1.1 I, Jeffrey A. Courchene, prepared a report ("the Report") to the Court, dated 17 February 2020 and entitled
"Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers
Professional Indemnity business from Zurich Insurance plc to DARAG Deutsche Versicherungs- und
Rückversicherungs-AG".
1.2 The conclusions of the Report were based on financial information up to 17 February 2020 and other
information available to me when I prepared the Report. Since preparing the Report, I have been provided
with more recent financial and other information in respect of the Companies ("the Additional Information").
Details of the material elements of the Additional Information are set out in Appendix B.
1.3 In paragraphs 1.36 and 2.3 of the Report, I stated that, shortly before the date of the Court hearing at which
an order sanctioning the Transfer will be sought, I would review any relevant matters which might have
arisen since the date of the Report (I further referred to such a review in paragraphs 1.37, 1.60, 2.22, 5.34,
5.55, 6.56, 6.63, 6.109 and 9.18 of the Report). Such relevant items would typically include:
the extent to which the operational plans of Zurich Insurance plc (“ZIP”) or DARAG Deutsche
Versicherungs- und Rückversicherungs-AG (“DARAG Germany”) have altered (relative to the position
at the date of the Report);
the latest financial statements of ZIP and DARAG Germany; and
the most recently prepared figures relating to the solvency capital position of ZIP and DARAG Germany.
1.4 I also said in the Report that I would consider explicitly the following items:
Progress against the migration plan in accordance with the Migration Agreement, dated 5 September
2019;
With respect to DARAG Germany, the impact of business secured between the Report and the drafting
of this Supplementary Report as well as any other business expected to be secured prior to the effective
date of the Scheme; and
Confirmation that the Scheme will not give rise to a tax liability of a material amount (in the context of
transferring assets) that affects ZIP or DARAG Germany.
1.5 This report (the "Supplementary Report") provides a brief summary of my review of the Additional
Information and explains how, if at all, I have changed my conclusions from those set out in the Report as
a result of my review of the Additional Information. As such, the Supplementary Report should be considered
supplementary to the Report and does not supersede it. Unless stated otherwise in the Supplementary
Report, all analyses and conclusions as set out in the Report remain valid.
1.6 The Supplementary Report should be read in conjunction with the Report and the full terms of the Transfer.
The Supplementary Report has been produced on the same bases as set out at Section 1 of the Report. In
particular, it has the same scope, and is subject to the same reliances and limitations. Terms used in this
Supplementary Report have the same meanings as in the Report (I have attached, in Appendix A, a list of
definitions).
1.7 Reliance has been placed upon, but is not limited to, the Additional Information, as well as upon the
information set out in Appendix E of the Report. My opinions depend on the accuracy and completeness of
this data, information and the underlying calculations. I have discussed the Additional Information with the
Companies, and have considered how it has changed from similar information provided in support of the
Report. Except where stated otherwise, I have not re-reviewed the methodology and assumptions used by
the Companies in their assessments of the liabilities and solvency capital of their respective firms, and I
have not attempted to review in detail the calculations performed. I am unaware of any issue that might
cause me to doubt the material accuracy of the Additional Information, but I give no warranty as to its
accuracy. I accept no responsibility for errors or omissions arising in the preparation of the Supplementary
Report, providing that this shall not absolve my liability arising from an opinion expressed recklessly or in
bad faith.
1.8 In all cases, I have requested the most recent information available. Both ZIP and DARAG Germany have
informed me that there have been no developments since the date of the Report, other than as provided in
the Additional Information, which might be relevant to the Transfer.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 1MILLIMAN REPORT
1.9 According to the Casualty Actuarial Society’s Code of Professional Conduct, an actuary must be familiar
with applicable law and rules of professional conduct for the jurisdictions in which the Actuary renders
Actuarial Services. I am required to comply with relevant professional standards and guidance maintained
by the Actuarial Standards Board, including Actuarial Standard of Practice 41 “Actuarial Communications,”
adopted December 2010. Because of the jurisdiction of the actuarial services, I have voluntarily taken into
account additional rules of professional conduct.
1.10 Although I am only an affiliate member of the IFoA, I have complied with the relevant professional standards
and guidance maintained by the Financial Reporting Council and by the IFoA, including TAS 100: Principles
for Technical Actuarial Work and TAS 200: Insurance. I have complied with these standards, subject to the
principles of proportionality and materiality. I note the following:
1.10.1 In accordance with Actuarial Profession Standard X2, as issued by the IFoA, I have considered
whether this Supplementary Report should be subject to review (“Work Review”). I concluded that
it should and I have decided that the Work Review should be conducted by an individual who has
not otherwise been involved in the analysis underlying this Report or in the preparation of this
Report, but who would have had the appropriate experience and expertise to take responsibility for
the work himself. In other words, I have decided that this Supplementary Report should be subject
to Independent Peer Review. I confirm that this Supplementary Report has been subject to
Independent Peer Review prior to its publication.
1.10.2 Actuarial Professional Standard X3: The Actuary as an Expert in Legal Proceedings, as issued by
the IFoA, states that, where a member of the IFoA is instructed to act as an Expert Witness or an
Expert Advisor in relation to non-UK proceedings, the member must consider the extent to which
the principles set out APS X3 are relevant to the instruction in question. I consider that those
principles are wholly relevant in connection to my work as Independent Actuary in respect of the
Scheme, and therefore I have carried out my work in accordance with those principles as required.
1.11 Although I am not a member of the Society of Actuaries in Ireland ("SAI"), I have also complied with the
relevant Actuarial Standards of Practice ("ASPs") issued by the SAI, subject to the principles of
proportionality and materiality. Specifically, the Report has been prepared in accordance with:
ASP GI-1 version 1.2, which provides guidance on preparing a formal report relating to the field of
general insurance;
ASP LA-6 (as noted in paragraphs 1.39-1.49, above, and to the extent applicable), which applies to
actuaries invited to act as the "Independent Actuary" in a Section 13 transfer of long-term (i.e. life)
insurance business under the 1909 Act; and
ASP EXP-1 version 1.2, which applies to actuaries (in Ireland) when they provide evidence as experts
to the courts or other tribunals.
1.12 In compiling the Report and this Supplementary Report, I have taken regard of Section 13 of the Assurance
Companies Act 1909 (as amended), Section 36 of the Insurance Act 1989 (as amended) and Article 41 of
the European Union (Insurance and Reinsurance) Regulations 2015 (SI No 485 of 2015) (as amended).
1.13 I confirm that, in undertaking this work and in preparing the final version of the Report, I have complied with
the above guidance, subject where appropriate to our judgements regarding materiality and proportionality.
1.14 In paragraph 6.5 of the Report, I explained that certain capital requirements are private matters between
the insurers and their relevant Supervisory Authorities and, therefore, I was not at liberty to disclose in the
Report actual figures relating to those requirements, or figures by which those amounts could be calculated.
As part of my analysis, I considered the extent to which ZIP and DARAG Germany each held capital in
excess of their regulatory solvency levels, and referred to the ratio of the actual capital that the entity under
consideration held relative to the regulatory solvency capital requirement to be the “Capital Cover Ratio”.
Purely for comparative purposes in the Report, I defined the following terms:
“sufficiently capitalised” refers to a Capital Cover Ratio between 100% and 119%;
“more than sufficiently capitalised” refers to a Capital Cover Ratio between 120% and 149%;
“well-capitalised” refers to a Capital Cover Ratio between 150% and 199%; and
“very well-capitalised” refers to a Capital Cover Ratio of 200% or more.
In this Supplementary Report, I have adopted the same terminology.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 2MILLIMAN REPORT
1.15 In paragraphs 1.46 and 1.47 of the Report, I have described how I determined whether any effects of the
Scheme on any group of policyholders is materially adverse. In this Supplementary Report, I have adopted
the same approach.
1.16 The remainder of the Supplementary Report follows, for ease of reference, a structure that is similar to that
of the Report, albeit omitting background information and explanation that does not require repeating:
In Section 2, I provide an executive summary of the Supplementary Report.
In Section 3, I consider any changes in the information underlying the Report for the Companies. This
is equivalent to Section 4 of the Report; I have not repeated in the Supplementary Report the
background to the regulatory environment in which the Companies operate, which was described in
Section 3 of the Report and which has not changed.
In Section 4, I consider any changes resulting from the Additional Information in my view of the likely
impact of the Scheme on the Transferring Policyholders. This is equivalent to Section 6 of the Report;
I have not repeated in the Supplementary Report the key provisions of the Scheme, which had
appeared in Section 5 of the Report.
In Section 5, I consider any changes, resulting from my review of the Additional Information, in my view
of the likely impact of the Scheme on the policyholders of ZIP remaining behind post-Scheme. This is
equivalent to Section 7 of the Report.
In Section 6, I consider any changes, resulting from my review of the Additional Information, in my view
of the likely impact of the Scheme on the current policyholders of DARAG Germany. This is equivalent
to Section 8 of the Report.
In Section 7, I consider any changes, resulting from my review of the Additional Information, in my view
of the likely impact of the Scheme on other stakeholders. I also comment on the approach to
communication with policyholders and more general issues relating to the Transfer and the
management of the Companies. This is equivalent to Section 9 of the Report.
I summarise my conclusions in Section 8.
1.17 In converting amounts expressed in one currency to being expressed in another currency, I have used the
following currency exchange rates:
As at 31 December 20191: GBP 1 = USD 1.32 = EUR 1.18 = NOK 11.64; and
As at 31 March 20202: GBP 1 = USD 1.24 = EUR 1.13 = NOK 13.02.
I note that these rates are not necessarily the same as those used individually by ZIP, DARAG Germany
and others in consolidating multi-currency data.
1
From Lloyd’s Market Bulletin Y5273, dated 2 January 2020
2
From Lloyd’s Market Bulletin Y5285, dated 1 April 2020
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 3MILLIMAN REPORT
2. Executive Summary
CONCLUSION
2.1 In paragraph 2.1 of the Report, I set out my conclusions in respect of the impact of the Schemes on the
various groups of policyholders who might be affected. I have considered developments that have occurred
since the date of the Report, including audited results for the year ending 31 December 2019, for ZIP and
DARAG Germany, and the emergence of the COVID-19 global pandemic. While these developments have
resulted in changes to some of the metrics that I have used when formulating my views, none have created
changes of sufficient magnitude that have caused me to revise my conclusions.
2.2 Therefore, I conclude that, provided the proposed Scheme operates as intended, and I have no grounds for
believing that it will not do so:
2.2.1 The security of benefits to the Transferring Policyholders will not be materially adversely affected
by the implementation of the Scheme on the Effective Date;
2.2.2 The security of benefits to policyholders of ZIP who are not being transferred under the Scheme
will not be adversely affected by the implementation of the Scheme on the Effective Date;
2.2.3 The security of benefits to current policyholders of DARAG Germany will not be materially adversely
affected by the implementation of the Scheme on the Effective Date; and
2.2.4 The Scheme will have no adverse impact on service standards experienced by the policyholders
of ZIP, both those being transferred under the Scheme and those not transferring, or by the current
policyholders of DARAG Germany.
2.3 As such, my opinion is unaltered from that expressed in the Report
THE IMPACT OF THE SCHEME IN RESPECT OF OTHER MATTERS
2.4 In paragraph 6.109 of the Report, I stated that the Migration Completion Date was expected to be on or
around 1 April 2020 (three months before the Effective Date) and that I would monitor progress against the
plan. In paragraphs 3.7 through 3.10 of this Supplementary Report, I describe how DARAG Germany has
satisfied the mandatory acceptance criteria, according to the migration plan described in the Migration
Agreement, and that responsibility for the administration of the policies has been transferred from ZIP to
DARAG Germany on 1 April 2020. DARAG Germany has in turn delegated responsibility for claims
administration in relation to the Transferring Business to PRO. The data migration was finalised on 30 March
2020, enabling PRO to conduct claims handling using their own claims system. The import completed
without major problems and subsequent reconciliations did not result in any balance of payment
adjustments. The remaining paper files are currently undergoing a scanning process with an anticipated
completion during June of 2020.
2.5 In paragraphs 6.56 and 6.63 of the Report, I promised to comment on the impact of business secured
between the Report and the drafting of this Supplementary Report as well as any other business expected
to be secured prior to the effective date of the Scheme. In paragraph 3.38 of this Supplementary Report, I
describe one additional transaction, which has been secured since the Report. I also note in paragraph 3.39
of this Supplementary Report that no additional transactions are expected to be secured prior to the effective
date of the Scheme.
2.6 In paragraphs 9.21 and 9.22 of the Report, I stated 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
and will not give rise to a tax liability of a material amount (in the context of transferring assets). I have
received a copy of a binding ruling, written by the German tax authority confirming my expectation.
COVID-19 PANDEMIC
2.7 The ultimate outcome of the COVID-19 pandemic remains uncertain. Much will depend on factors yet
unknown, such as how quickly countries and their economies can come out of lock-down, whether
subsequent (partial) lock-downs will be necessary and whether the economies of individual nations are
affected in the long-term. It is likely to affect ZIP and DARAG Germany in respect of cash flows, claims,
asset values and operationally.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 4MILLIMAN REPORT
2.8 The value of the investments held by ZIP and DARAG Germany have fallen. However, the portfolios are
invested predominantly in high quality fixed income securities and cash, which has moderated the impact
of the significant falls and volatility seen in the global stock markets.
2.9 The assets of ZIP are highly liquid so ZIP foresees no liquidity problems, while DARAG Germany has access
to funds via intragroup financing that has been put in place for 2020 and a continually monitored liquidity
plan to ensure liquidity is committed as appropriate.
2.10 As at the date of this Supplementary Report, all ZIP and DARAG Germany offices have been working
remotely for several weeks, with minimal apparent operational disturbances;
2.11 While the ultimate outcome of the COVID-19 pandemic remains uncertain, I conclude that the impact on
both ZIP and DARAG Germany has been moderate and broadly similar. Both ZIP and DARAG Germany
have met their respective regulatory capital requirements despite significant falls in financial markets with
moderate help from their shareholders in the form of a capital contribution; and both ZIP and DARAG
Germany have successfully implemented their respective business continuity plans such that there has
been no material outage with respect to servicing policyholders. Therefore, I conclude that the uncertainty
associated with the consequences the COVID-19 pandemic does not alter my view regarding the impact of
the Scheme on ZIP, DARAG Germany, or the Transferring Policyholders.
APPROACH TO COMMUNICATION WITH POLICYHOLDERS
2.12 There is no requirement under Irish law for ZIP or DARAG Germany to communicate directly with their
policyholders or with other stakeholders regarding the proposed Scheme. Nevertheless, as at the date of
this Supplementary Report ZIP has notified policyholders and other stakeholders as further defined in
paragraph 7.8 of this Supplementary Report.
2.13 In addition to direct, written correspondence, the Companies also placed notifications in various publications
in Ireland and Germany, as well as in the international edition of the Financial Times and various specialist
publications that are likely to be read by the Companies’ policyholders
2.14 As at the date of this Supplementary Report, 99 responses have been received in response to the
notification process. The majority of responses have requested further information regarding the policies
involved and the potential interest of the respondents in respect of those policies (this information has been
provided) or have provided additional information leading to the communications pack being sent to a
different address.
2.15 I have been told that, as at the date of this Supplementary Report, five objections to the Scheme have been
recorded, although one of these has subsequently been resolved such that there are four outstanding
objections. I comment further on these objections in paragraph 7.13 of this Supplementary Report.
2.16 By the date of this Supplementary Report, ZIP has not received any response to the notifications that has
caused me to alter any of my conclusions that I set out in the Report.
2.17 I have also been told that, as at the date of this Supplementary Report, the relevant supervisory authorities
in 17 European Economic Area (“EEA”) states (including Ireland and, for these purposes, the UK) have
been consulted and asked to confirm that they have no objection to the Scheme. As at the date of this
Supplementary Report, no EEA insurance Supervisory Authority has thus far raised any objections to the
Scheme.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 5MILLIMAN REPORT
3. Changes since the Report in the entities concerned in the
Scheme
3.1 In this section of the Supplementary Report, I set out the elements of the background information and key
metrics relating to the entities involved in the Schemes that are no longer as stated in the Report. Much of
the information set out in this section is based on the audited financial statements as at 31 December 2019.
Where possible, and in such cases noted below, my assessment is also influenced by the DARAG Germany
management accounts as at 31 March 2020.
THE TRANSFERRING BUSINESS
Key financial information
3.2 As at 31 December 2019, the technical reserves with respect to the Transferring Business was €157 million,
down from €180.9 million as at 31 December 2018 and €170.6 million as at 5 September 2019 when the
economic risk was transferred to DARAG Germany via loss portfolio transfer agreement (“LPTA”),
respectively.
3.3 Between January 2019 and 31 December 2019; 1136 claims were settled at a savings of €39 million, while
open claims have developed upwards nearly €38 million and new claims of €12 million have been reported.
It is worth noting that one of the new claims is large with a case reserve estimated to be €4.6 million.
3.4 DARAG Germany’s estimate of ultimate loss is unchanged as at 31 March 2020, while ZIP’s estimate
increased by €9.8 million as at their last actuarial analysis, using data as at 30 September 2019.
3.5 As discussed in paragraph 4.143 of the Report, the 2542 open claims associated with the Transferring
Business as at 31 December 2019, down from 3060 as at 31 December 2018, are categorised into two
groups: attritional claims and large claims. Large claims are defined as claims that have been larger than
€125,000 at some point during the life of a claim. Additional case reserving governance is applied to the
large claims, which make up just over half the total incurred position but less than 4% of the reported claims
by number.
Special projects still in force
3.6 In paragraph 4.136 of the Report, I discussed three special project policies which were still in force with
expected completion dates of 31 December 2019, 15 November 2020, and 31 December 2021. I have been
informed that all three special project policies are still in force.
3.6.1 The project construction timeline, relevant for the policy that was supposed to end in during
December of 2019, was extended to March of 2020 and, according to the underwriter, has still not
completed. I have been informed that the exposure base used for premium calculation is
construction cost and as long as the construction cost does not change, the premium will not be
affected.
3.6.2 Regarding the other two construction projects, there is no new information with respect to
completion dates.
Migration plan
3.7 In paragraph 5.1 of the Report, I described step 2 of the Project Grace transaction as being “a transfer of
claims handling responsibility to PRO, as TPA for DARAG Germany.” In paragraph 5.34 of the Report, I
promised to comment on progress against the migration plan.
3.8 DARAG Germany (or PRO as appropriate) has satisfied the mandatory acceptance criteria for the purpose
of migration, according to the migration plan described in the Migration Agreement. ZIP confirmed this in
writing on 31 March 2020.
3.9 As a result, responsibility for the administration of the policies, including claims arising out of the policies, in
relation to the Transferring Business was transferred from ZIP to DARAG Germany on 1 April 2020. DARAG
Germany has in turn delegated responsibility for claims administration in relation to the Transferring
Business to PRO.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 6MILLIMAN REPORT
3.10 The data migration was finalised on 30 March 2020, enabling the PRO to conduct claims handling using
their own claims system. The import completed without major problems and subsequent reconciliations did
not result in any balance of payment adjustments. The e-files from ZIP’s system have also been migrated
to PRO. The remaining paper files are currently undergoing a scanning process with an anticipated
completion during June of 2020. Due to a completely remote operating environment at PRO, service levels
are not expected to be materially impacted by the current COVID-19 situation.
Co-insurance
3.11 For 183 policies, coverage was provided on a co-insurance basis where ZIP more commonly took the lead
insurer role. At 31 December 2019, the co-insurance receivable to be collected from co-insurers is €11,797,
down from €80,318 at 31 December 2018.
Collateral and security
3.12 The terms of the LPTA required DARAG Germany to maintain within the Custody Account collateral at a
minimum level of 130% of the held reserves of the Transferring Business (net of ULAE) less a Claims Float
Amount held by ZIP for the payment of claims relating to the Transferring Business. The market value of
assets held in the Custody Account as at 31 December 2019 was €198 million. Guidelines limit the
composition of the assets held as collateral, to ensure sufficient liquidity and reliability. I have reviewed the
monthly Custody Account asset summaries during 2020, which provide evidence of compliance with the
guidelines. The held reserves associated with the Transferring Business were monitored on a quarterly
basis and the corresponding collateral value was monitored on a monthly basis with the Custody Account
being topped up, as appropriate.
3.13 The market value of assets held in the Custody Account was affected by the COVID -19 pandemic during
March of 2020. Although there was a collateral surplus as at 29 February 2020 (i.e. above 130%), as at 31
March 2020 this was not the case. A shortfall of €6.4 million (i.e. below 130%) was reported to DARAG
Germany, which was remedied in line with contractual timelines.
3.14 As at 31 March 2020, subsequent to the Migration and subsequent of ZIP’s transfer of the Claims Float into
the Custody Account, the value of assets held in the Custody Account was €176 million.
ZURICH INSURANCE PLC
Business written
3.15 Net written premium in the 12 months to 31 December 2019 for continuing operations totalled €3.1 billion,
very similar to the net premium written in 2018 totalling €3.0 billion. Similarly, gross written premium during
2019 totalled €8.2 billion, very similar to the gross premium written in 2018 totalling €7.7 billion.
3.16 Nearly 63% of the 2019 gross written premium has been ceded, of which 94% is ceded within the Zurich
Group, very similar to 61% and 93% observed during 2018.
3.17 During 2019, ZIP continued to write a similar range of business, via a branch network across a number of
European countries. The proportions of gross premium written during 2019 both by line of business segment
and by geographical market are consistent with the 2018 proportions.
Key financial information
3.18 In the 12 month period to 31 December 2019, on a GAAP basis, the post-tax result for ZIP was a profit of
circa €592 million as compared to a loss of €148 million in 20183. ZIP declared a dividend of €100 million
thus leaving shareholder’s funds higher compared to 31 December 20184.
3.19 As at 31 December 2019, on a GAAP basis, the technical provisions of ZIP, gross of reinsurance, were
roughly 2% more than they had been as at 31 December 2018. The reinsurers’ share of technical provisions
increased by 13%, driven by the economic transfer of the portfolio referenced below in paragraph 3.26, and
to a lesser extent, the economic transfer of the Transferring Business referenced below in paragraph 3.27.
3
Profit and loss account in the Directors' Report and Financial Statements for ZIP, for the financial year ended 31 December
2019.
4
Note 15 of the Directors' Report and Financial Statements for ZIP, for the financial year ended 31 December 2019.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 7MILLIMAN REPORT
3.20 As at 31 December 2019, on a GAAP basis, the value of the financial investment assets held by ZIP was
11% less than it had been as at 31 December 2018. This reduction is correlated with the increase in
reinsurers’ share of technical provisions and funding for the economic transfer of the portfolios mentioned
below in paragraph 3.263.19. The majority of the financial investment assets continues to be comprised of
fixed income securities.
3.21 As at 31 December 2019, on a GAAP basis, the accumulated ZIP shareholders’ funds were larger by €533
million, compared to 31 December 20185. The shareholders’ funds represents the capital of the company
under GAAP. It should be noted that this is not the same as the own funds available to meet the solvency
capital requirements under Solvency II.
3.22 As at 31 December 2019 on a Solvency II basis, ZIP’s solvency capital requirement (“SCR”) has increased
materially from that as at 31 December 2018, driven by post-aggregation steps of the ZIP internal model.
Specifically, the SCR loading which accounts for the expected GI (pre-tax) result is materially larger than
observed as at 31 December 2018. The higher amount reflects ZIP’s view regarding the impact of their
updated risk profile and prospective business plan as compared to the mean of the distribution produced
by the CBI approved Internal Model. Own funds also increased during 2019, as ZIP generated economic
profits of €232 million 6 , offset by a dividend paid of €100 million. Despite the increase in SCR and
corresponding decrease in the Capital Cover Ratio, I considered ZIP to be a more than sufficiently
capitalised insurer as at 31 December 2018 and would still consider ZIP to be a more than sufficiently
capitalised insurer as at 31 December 2019.
3.23 As at 31 December 2019 on a Solvency II basis, I note that both the eligible own funds and the SCR are
similar to the forecast in ZIP’s ORSA document, dated 11 December 2019. The ORSA had forecast and the
SFCR has confirmed that ZIP would be a more than sufficiently capitalised insurer as at 31 December 2019.
3.24 As at 31 March 2020, according to the most recent Irish GAAP management accounts shared, a technical
result close to zero has been generated by ZIP during the first quarter of 2020. On a Solvency II basis, there
was a reduction in Own Funds during the first quarter of 2020, driven by financial market events related to
COVID-19. This was largely offset by receipt of the capital contribution of €305 million on March 23, 2020.
Reinsurance
3.25 ZIP continues to have a comprehensive series of reinsurance programmes in place, including quota share,
surplus, aggregate excess and stop loss coverage. The proportion of ceded premium, which is reinsured
within the Zurich Group, has not materially changed. The proportion of reinsurers’ share of technical
provisions, which is reinsured within the Zurich Group, has materially changed during 2019, driven by the
additional reinsurance discussed in paragraphs 3.26 and 3.27.
3.26 In paragraph 4.7 of the Report, I referred to ongoing project to transfer a material portfolio of legacy
employers’ liability policies from the UK branch of ZIP, the economic value of the business having already
been assumed by Catalina General Insurance Limited. The reinsurance incepted on 1 April 2019. Whether
or not the proposed transfer of the portfolio were to proceed did not affect the conclusions as set out in the
Report. I understand that the legal transfer of this portfolio is still ongoing.
3.27 As discussed in paragraph 5.1 of the Report, the economic value of the Transferring Business was assumed
by DARAG Germany, incepting on 1 July 2019. Assuming the Scheme goes ahead, the reinsurance cover
will be commuted on the Effective Date.
Reserving
3.28 Overall, as at 31 December 2019, gross ultimate losses on a GAAP basis were reduced for the 2018 and
prior accident years, as compared to the position as at year-end 2018, giving rise to increased profitability7.
ZIP has included commentary on reserve movements in its SFCR. There have been favourable prior year
movements that have been partially offset by some large events during 2019.
5
Balance sheet in the Directors' Report and Financial Statements for ZIP, for the financial year ended 31 December 2019.
6
ZIP’s Solvency and Financial Condition Report 2019
7
Note 8 of the Directors' Report and Financial Statements for ZIP, for the financial year ended 31 December 2019
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
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28 May 2020 8MILLIMAN REPORT
3.29 During calendar year 2019, I observe incurred losses gross of reinsurance, across all non-life lines of
business and all accident years8, of €5.4 billion, which is very similar to the 2018 figure of €5.6 billion figure.
Further, I observe incurred losses gross of reinsurance of €5.6 billion for the current accident year9, offset
by €0.2 billion reduction for prior accident years.
3.30 I have seen confidential excerpts from the Q4 2019 Reserve Committee slides, which confirm that prior
accident years have developed favourably during 2019 on both a gross and net of reinsurance basis, relative
to aggregate expectations. The excerpts also show that prior year movements were favourable for six of the
ten branches on both a gross and net of reinsurance basis. The favourable prior year movement has been
largely offset by the performance of accident year 2019, whose booked loss ratio including ULAE was higher
than planned.
3.31 As at 31 December 2019, on a GAAP basis, the gross claim provisions within ZIP have increased from their
levels as at 31 December 2018. The total movement is a result of many incremental movements, both
upwards and downwards. The reinsurers’ share of the gross claim provisions, other than in respect of the
portfolio transfer discussed above in paragraph 3.26, has reduced over the period to a similar degree.
3.32 I understand that the gross and net claim provisions were calculated as at 31 December 2019 using the
same methodology and process as at 31 December 2018. I have no reason to believe that there has been
any change over the period in the relative strength of the claim provisions.
3.33 Based on my review of the updated financial information provided by ZIP, I am satisfied that the
financial strength of ZIP has not materially changed as compared to the time of the most recent
financial information used in preparing the Report. I therefore have no reason to change any of the
conclusions set out in the Report in relation to ZIP.
3.34 Furthermore, at the date of this Supplementary Report, I am informed by the management of ZIP that there
have been no significant developments in the assets and liabilities of ZIP since 31 March 2020 (the most
recent date at which financial information is available).
DARAG GERMANY
Business written
3.35 DARAG Germany is a legacy specialist whose growth and underwriting result is measured by the acquisition
and performance of run-off portfolios, rather than written premium. Upon acquisition of a new portfolio, such
as the Transferring Business, the proportions of the total portfolio by line of business segment change.
3.36 Since 31 December 2018, the net provision for outstanding claims has changed significantly, on both a
GAAP and an IFRS basis. In the Report, I relied on the updated information available in DARAG Germany’s
unaudited financial statements as at 30 September 2019 in order to ascertain a more up to date view of the
DARAG Germany portfolio.
3.37 Between 30 September 2019 and 31 December 2019, on both a GAAP10 and IFRS11 basis, the net provision
for outstanding claims has increased, explained by the first of two additional transactions, offset by the run-
off of the rest of the portfolio.
3.37.1 Portfolio transfer agreement from a German entity during 2019Q4: I referred to this pipeline deal in
paragraph 6.58 of the Report. This transaction moved forward, as expected, during December of
2019. Based on the shared performance update, this portfolio is performing as expected at the date
of pricing.
3.37.2 Share purchase agreement with a UK reinsurance company during 2019Q4: I referred to this
pipeline deal in paragraph 6.59 of the Report. This transaction moved forward, as expected, during
December of 2019. In paragraph 4.131 of the Report, I stated that DARAG Group intended to
structure this entity as a subsidiary of DARAG Germany, which would ensure unlimited access to
the UK market, post Brexit. Subsequent to the acquisition discussed below in paragraph 3.38.1,
DARAG Germany intends to liquidate this entity.
8
Note 8 of the Directors' Report and Financial Statements for ZIP, for the financial year ended 31 December 2019
9
Note 8 of the Directors' Report and Financial Statements for ZIP, for the financial year ended 31 December 2019
10
Balance Sheet in the Directors' Report and Financial Statements for DARAG, for the financial year ended 31 December
2019.
11
DARAG Management Accounts Balance Sheet 2020 Q1 – IFRS basis – YE19 and Q1 2020 balances shown.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
Insurance plc to DARAG Deutsche Versicherungs- und Rückversicherungs-AG
28 May 2020 9MILLIMAN REPORT
3.38 Since 31 December 2019, one additional transaction has been secured.
3.38.1 Share purchase agreement with a UK entity during the first quarter of 2020: I referred to this
pipeline deal in paragraph 6.60 of the Report, although I incorrectly described it as “a portfolio
transfer agreement from a German entity.” This transaction moved forward, as expected, during
February of 2020. DARAG Group intends to structure this entity as a subsidiary of DARAG
Germany, which ensures unlimited access to the UK market, post Brexit, as discussed in
paragraph 4.131 of the Report. As at 31 December 2019, this entity has been structured as a
subsidiary12 of DARAG Germany.
3.39 As of the drafting of this report, DARAG Germany continues to seek opportunity for additional business but
no additional transactions are expected to be secured prior to the effective date of the Scheme.
Key financial information
3.40 DARAG Germany prepares its financial statements on an IFRS basis and on a local GAAP basis and I have
monitored, for completeness, the changes since the Report for both. For complex transactions, DARAG
Germany seeks opinions from external accountancy firms to ensure that the accounting treatment is
consistent with the relevant IFRS and GAAP guidance standards. For one complex transaction discussed
in paragraph 4.59 of the Report, I have received updated details to allow for the reconciliation of GAAP and
IFRS accounts as of 31 December 2019 and 31 March 2020.
3.41 Between 30 September 2019 and 31 December 2019, on a GAAP basis, the technical provisions of DARAG
Germany, gross of reinsurance, increased to €347.3 million13. The reinsurers’ share of technical provisions
was stable at 10%. On an IFRS basis, the technical provisions of DARAG Germany, gross and net of
reinsurance, increased to €311.8 million and €277.9 million, respectively 14 . The reinsurers’ share of
technical provisions was stable at 11%. I have relied on the Additional Information in order to reconcile the
increase to the claims provisions associated with a new transaction described above in paragraph 3.37.1
and the run-off of transactions that were secured by DARAG Germany through 30 September 2019 and
described in the Report.
3.42 Between 30 September 2019 and 31 December 2019, on a GAAP basis, the value of the financial
investment assets held by DARAG Germany increased materially to €283.4 million15. The majority of the
financial investment assets continues to comprise of fixed income securities. As at 30 September 2019, the
reinsurance premium relating to the LPTA of the Transferring Business had not yet been received from ZIP
and so was shown in the balance sheet under “receivables on reinsurance operations”. During the fourth
quarter of 2019, these funds were received and invested in in bonds. As a consequence, between 30
September 2019 and 31 December 2019, “receivables on reinsurance operations” declined to €6.3 million.
Additionally, as at 30 September 2019 DARG held deposit funds relating to the collateral requirements of
the LPTA of the Transferring Business, which were also subsequently invested in bonds. On an IFRS basis,
the value of the financial investment assets held by DARAG Germany increased to €287.5 million 16. The
majority of the financial investment assets continues to comprise of fixed income securities.
3.43 Between 30 September 2019 and 31 December 2019, on a GAAP basis, the accumulated DARAG Germany
shareholders’ funds increased to €95.9 million. The shareholders’ funds represents the capital of the
company under GAAP. On an IFRS basis, the accumulated DARAG Germany shareholders’ funds
increased to €123.3 million. The shareholders’ funds represents the capital of the company under IFRS. It
should be noted that neither GAAP nor IFRS shareholders’ funds are the same as the own funds available
to meet the solvency capital requirements under Solvency II.
3.44 As at 31 December 2019 on a Solvency II basis, DARAG Germany’s solvency capital requirement (“SCR”)
has increased materially to €83.3 million17 compared to 30 September 2019, driven by a higher charge for
market risk as a consequence of the additional holdings of financial assets as detailed above in paragraph
3.42.
12
DARAG Group’s Solvency and Financial Condition Report for the Financial Year ended 31 December 2019
13
Balance Sheet in the Directors' Report and Financial Statements for DARAG, for the financial year ended 31 December
2019.
14
DARAG Management Accounts Balance Sheet 2020 Q1 – IFRS basis – YE19 and Q1 2020 balances shown.
15
Balance Sheet in the Directors' Report and Financial Statements for DARAG, for the financial year ended 31 December
2019.
16
DARAG Management Accounts Balance Sheet 2020 Q1 – IFRS basis – YE19 and Q1 2020 balances shown.
17
Solvency II Risk Driver Tree for each quarter from 2018Q2 through 2019Q4
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
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28 May 2020 10MILLIMAN REPORT
3.45 As at 31 December 2019 on a Solvency II basis, I note that both the eligible own funds and the SCR are
similar to the forecasts in DARAG Germany’s ORSA document, dated November 2019 discussed in
paragraphs 6.73 and 6.74 of the Report. The ORSA had forecast that DARAG Germany would be a more
than sufficiently capitalised insurer as at 31 December 2019 and the SFCR has confirmed it.
3.46 As at 31 March 2020, according to the most recent IFRS management accounts shared, DARAG Germany
incurred a net loss during the first quarter of 202018, driven by a drop in the fair value of available-for-sale
financial assets. IFRS balance sheet equity during the first quarter of 2020 reduced by a smaller amount.
Available-for-sale financial assets reduced in value because of higher risk spreads resulting from COVID-
19 related market volatility during March. DARAG Germany initiated a €6.5 million19 capital injection in order
to support the financial strength of DARAG Germany.
Reinsurance
3.47 DARAG Germany has not purchased any additional outwards reinsurance during 2019.
Reserving
3.48 On a GAAP basis as at 31 December 2019, DARAG Germany held gross technical provisions of €347.3
million, including unearned premium of €3.7 million, with reinsurers’ share of these technical provisions
being €34.4 million20. On an IFRS basis as at 31 December 2019, DARAG Germany held gross technical
provisions of €311.8 million, including unearned premium of €4.4 million, with reinsurers’ share of these
technical provisions being €33.9 million21.
3.49 DARAG Germany has provided me with their Actuarial Function Report (“AFR”), detailing the analysis
undertaken by the DARAG Germany actuarial team as at 31 December 2019. The 2019 validation report,
and its associated document back testing referred to in the AFR shows that, overall, estimates of gross and
net ultimate losses related to portfolios contributing to the IFRS balance sheet as at 31 December 2018
reduced by €2.8 million and increased by €1.6 million, respectively, during 2019. For new business secured
during 2019, the estimated ultimate losses are broadly similar to the amounts discussed in the Report.
3.50 I have also seen a draft version of an independent reserve review report conducted by an external actuarial
consulting firm for DARAG Group Limited as at 31 December 2019. Similar to that observed in the two prior
independent reviews, and discussed in paragraph 6.43 of the Report, the review is supportive of the level
of IFRS reserves set by DARAG Germany. On a net basis as at 31 December 2019, the independent
estimate was less than 5% higher than the DARAG Germany held reserve. I note that the external actuarial
consulting firm considers the held reserve related to the Transferring Business for attritional claims and pure
IBNR for large claims to be reasonable, while not taking a position with respect to large claim IBNeR.
3.51 The total of the claim provisions, gross and net of reinsurance, held as at 31 December 2019 was more
than it had been as at 30 September 2019, largely reflecting the securing of one additional transaction,
slightly offset by claim payments related to existing transactions as at 30 September 2019. The claim
provisions were calculated as at 31 December 2019 and 31 March 2020, using the same process and
methodology as used for the 30 September 2019 and previous valuations. I have no reason to believe that
there has been any change over the period in the relative strength of the provisions.
3.52 Based on my review of the updated financial information provided by DARAG Germany, I am
satisfied that the financial strength of DARAG Germany has not materially changed as compared to
the time of the most recent financial information used in preparing the Report. I therefore have no
reason to change any of the conclusions set out in the Report in relation to DARAG Germany.
3.53 Furthermore, at the date of this Supplementary Report, I am informed by the management of DARAG
Germany that there have been no significant developments in the assets and liabilities of DARAG Germany
since 31 March 2020 (the most recent date at which financial information is available).
18
DARAG Management Accounts Profit and loss account 2020 Q1 – IFRS basis
19
DARAG Covid-19 Business Impact Analysis paper dated 21 April 2020
20
Balance Sheet in the Directors' Report and Financial Statements for DARAG, for the financial year ended 31 December
2019.
21
DARAG Management Accounts Balance Sheet 2020 Q1 – IFRS basis – YE19 and Q1 2020 balances shown.
Supplementary Report of the Independent Actuary on the proposed transfer of a portfolio of Architects and Engineers Professional Indemnity business from Zurich
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28 May 2020 11MILLIMAN REPORT
COVID-19 PANDEMIC
3.54 As at the date of this Supplementary Report, Germany and many other countries of the world are trying to
manage the COVID-19 pandemic. The governments of most of the developed nations, including Germany,
have restricted the movement of people and are encouraging social distancing in order to slow the spread
of the virus and to protect the national health infrastructures. This has led to an economic slowdown and
significant volatility in the financial markets. It remains unclear for how long such measures will need to be
in place in each country and how quickly their respective economies will recover.
3.55 In the following paragraphs, I consider the effect of the pandemic and its consequences on ZIP, DARAG
Germany, and also on the Scheme itself. In particular, I consider the impact upon the insurance activities of
the entities, on their liquidity, on their balance sheets and on operational matters.
Insurance
3.56 For ZIP, loss reporting and settlement patterns will be impacted and result in a greater level of reserving
uncertainty. Depending on how long the outbreak lasts and its effects on economic growth and consumer
sentiment, future business could be adversely impacted by lower customer retention and reduced levels of
new business. The ultimate impact on diversified exposures of ZIP’s business is expected to vary across
branch and line of business.
3.57 DARAG Germany’s portfolios are predominantly in run-off, meaning that most of the policies which make
up their business have expired. Of those portfolios with unexpired exposure, the coverage provided by the
underlying policies (e.g. change of ownership and professional indemnity) are unlikely to be directly exposed
to the risks inherent in the COVID-19 pandemic. Therefore, changes in loss reporting and settlement
patterns, all else equal, will have a smaller impact than for ZIP.
3.58 With respect to the longer term insurance activities, DARAG Germany sees potential opportunity
manifesting in the form of an increase in demand for run-off deals.
Investments
3.59 During the first quarter of 2020, the investments of ZIP had collectively lost less than 2.5% of the total value
of the investment portfolio at 31 March 2020. This relatively small loss reflects the significant proportions of
high quality fixed income instruments and cash within their investment portfolios. The only change in
investment strategy planned for the short term has been to enter an equity hedge in order to protect against
further downside equity risk. As described in paragraph 4.23 of the Report; risks associated with the
investment portfolio are monitored in detail by the Asset Liability Management Investment Committee
(“ALMIC”).
3.60 Although also invested in predominantly high grade corporate credit instruments, over the period of 29
February 2020 to 7 April 2020, the investment assets in DARAG Germany’s balance sheet lost nearly 9%
of their value. DARAG Germany does not intend to change its investment strategy as a result of the
pandemic, but it will continue to monitor the developments of the investment portfolios, risk free rates and
carry out regular solvency estimations to ensure regulatory, client and bank covenant compliance. It regards
the fall in asset values to be a short term issue, whereas their investment strategy is intended to operate
over the long term.
3.61 The market value of assets held in the Custody Account had collectively lost 8.7% of the total value of the
investment portfolio between 29 February 2020 and 31 March 2020, requiring a top up from DARAG
Germany.
Capital
3.62 Since 31 December 2019, the capital position of ZIP has continued to meet its regulatory capital
requirements despite significant falls in financial markets. ZIP received a capital contribution of €305 million
from its shareholders on 23 March 2020, to offset the impact of financial market movements since 31
December 2019.
3.63 Since 31 December 2019, the capital position of DARAG Germany has continued to meet its regulatory
capital requirements despite significant falls in financial markets. In order to maintain a capital coverage
ratio at a level consistent with its capital management policy, DARAG Germany received a capital injection
of €6.5 million.
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28 May 2020 12MILLIMAN REPORT
Liquidity
3.64 During the first quarter of 2020, ZIP experienced virtually no change in operational cash flows, implying that
ZIP’s outgoings have not noticeably reduced. The additional liquidity requirements due to COVID-19 are
currently estimated not to exceed €250 million. Given ZIP’s large proportion of liquid assets, most notably
cash, no liquidity concerns have been raised. As described in paragraph 4.29 of the Report, ZIP manages
the risk through the implementation of its Liquidity Policy, rather than through holding additional risk capital.
3.65 DARAG Germany has access to funds via DARAG Group’s intragroup financing that has been put in place
for 2020. Over and above this, there is significant liquidity based on the continually monitored liquidity plan,
and weekly reports to the Board on changes to the liquidity (committed and non-committed).
Operational
3.66 ZIP implemented its business continuity plan at an early state. Measures taken for the German Branch of
ZIP leading to approximately 95% of employees working from home include the following: increasing the
VPN and IT capacity for employees to work from home; increasing hygiene measures on premises;
enforcing travel restrictions for employees and critical suppliers; and other necessary adjustments to staff
schedules. The resilience of ZIP operations are monitored and discussed weekly.
3.67 DARAG Germany implemented its business continuity plan at an early stage and practically all employees
are working from home. All major service providers are also working remotely with DARAG Germany
providing oversight to ensure continuity of service. All of DARAG’s systems are running without interruption,
the VPN connection is not overloaded, and the IT service provider confirmed that “no issues” have been
reported. I note that DARAG Germany provides a number of services to other companies within the DARAG
Group, including the IT platform and M&A services. To date, one member of DARAG Germany’s staff has
tested positive for the virus and he has since recovered.
3.68 An exercise by DARAG Germany’s claims department has been carried out to ascertain the business
continuity risk exposure emanating from the outsourced claims handling activities carried out by third party
administrators (“TPAs”). The risk is considered low and no cases of COVID-19 have been reported to date.
Members of the claims department have reviewed the business continuity plans for each TPA and are
holding weekly calls to monitor the operability.
3.69 Based on their experience to date, DARAG Germany does not envisage any operational issues that would
affect the Scheme.
3.70 Communications with the relevant policyholders were completed by ZIP on 8 April 2020, and placed on
public display at both the Frankfurt and Dublin office locations of ZIP, the Hamburg office location of DARAG
Germany and on a dedicated webpage. The lock-down should not have affected the ability of any affected
stakeholder to access information regarding the Scheme or to ask questions about, or raise objections to,
the Scheme. This is evidenced by the fact that ZIP has received a number of responses to the
communications issued to relevant policyholders, as detailed in paragraph 7.12 below. I am satisfied that
all objections to the Scheme have been considered appropriately and responded to promptly by ZIP. ZIP
has confirmed that all of the objections to the Scheme will be brought to the attention of the Court at the
final hearing. It is not expected that the practicalities of effecting the Scheme, should it be approved by the
Court, will be affected by the continuing effects of the pandemic.
Conclusion
3.71 The ultimate outcome of the COVID-19 pandemic remains uncertain. Much will depend on factors yet
unknown, such as how quickly countries and their economies can come out of lock-down, whether
subsequent (partial) lock-downs will be necessary and whether the economies are affected in the long-term.
However, so far, I conclude that the impact on both ZIP and DARAG Germany has been moderate and
broadly similar. Both ZIP and DARAG Germany have met their respective regulatory capital requirements
despite significant falls in financial markets with moderate help from their shareholders in the form of a
capital contribution; and both have successfully implemented their respective business continuity plans such
that there has been no material outage with respect to servicing policyholders. Therefore, I conclude that
the uncertainty associated with the consequences of the COVID-19 pandemic does not alter my view
regarding the impact of the Scheme on ZIP, DARAG Germany, or the Transferring Policyholders.
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