PKF Littlejohn LLP

INDEPENDENT EXPERT’S SUPPLEMENTARY REPORT – KEY FINDINGSThe Supplementary Report has been prepared to update the Court with more relevant information oncertain matters and to provide an update of my conclusions.
The Supplementary Report should be read together with my IE Report as reading the Report in isolation
may be misleading. Unless otherwise stated in the Report, the basis of my assumptions, sources ofuncertainty, and limitations set out in my IE Report also apply to the Supplementary Report.
This note summarises the key findings of my Supplementary Report.
1 Introduction
1.1	When I completed my IE Report on 1 May 2020, there were certain matters that I said I would
revisit in the Supplementary Report. These matters were as follows:			 • 	The change in methodology to extract the data necessary to notify Policyholders of this
proposed Part VII transfer, and to estimate the insurance liabilities attaching to the Transferring
Policies;			

• 	The LIC operating model, which was being developed when my IE Report was completed;and						 • 	An update on the COVID-19 pandemic and how it impacts on both the Lloyd’s market and theinsurance liabilities attaching to the Transferring Liabilities.
1.2	In addition to the above a number of changes have been made to the way by which the Scheme
will be implemented since my IE Report was completed. In my opinion the principal changes are
as follows:			• 	The costs to be incurred by LIC to administer insurance liabilities to be transferred will now
be funded annually rather than by a one-off upfront payment.			

• 	The capital injection to fund LIC consists of a combination of cash and a Letter of Credit andincludes a margin to cater for the uncertainties surrounding the estimate of the value of theTransferring Liabilities.

2 Findings
2.1	The revision to the data extraction process used to support this proposed Part VII transfer is,in my opinion, a sensible change to make, and has identified additional Policyholders, whohave been included in a second direct notification exercise. The revision to the data has also
reduced the uncertainty associated with estimating the insurance liabilities transferring to LIC.
My actuarial team has reviewed the revised calculation of the insurance liabilities, and I haveconcluded that the methodology and assumptions used by the Chief Actuary of Lloyd’s in thecalculation of the Transferring Liabilities at the Assessment Date are reasonable.
2.2	The design of LIC’s operating model is now complete and has been subject to testing by LIC and
LIC’s advisors. I am now satisfied that Transferring Policyholders do not have to negotiate any
new or unfamiliar processes once the Transferring policies are transferred to LIC.

IE Summary Report22.3	As the majority of the underwriting losses arising from COVID-19 will fall primarily on the 2019and 2020 underwriting years and the majority of the Transferring Policies relate to the 2018 andprior underwriting years, I have concluded that COVID-19 will have no material impact on thegross insurance liabilities transferred to LIC (the impact on the net insurance liabilities is nil).
2.4	Although, based on the current and plausible future impacts, the underwriting loss fromCOVID-19 is a significant loss to the Lloyd’s Market and is comparable to previous losses
suffered by the Market. Lloyd’s has been able to cope with similar losses in the past and basedon my experience and knowledge of the market, Lloyd’s will be able to cope with a loss of thismagnitude. Lloyd’s has, or intends to take, actions which will mitigate the impact of the estimated
COVID-19 underwriting loss on its Regulatory Solvency Capital Requirement, see Section 5.1.6of my Supplementary Report for further details.
2.5	Following the capital injection into LIC to support the proposed Part VII transfer, and before
any mitigating actions Lloyd’s intends to take, the Central Fund is projected to still have assetsof £3.8bn. After the mitigating actions the MWSCR and the CSCR are projected to remain inexcess of the targeted Lloyd’s Solvency Ratios. Therefore, in my opinion Members, through a
combination of their own resources and recourse to the Central Fund if needed are likely to beable to meet their obligations under their QS Reinsurance Contracts with LIC. Further, I haveconcluded that Lloyd’s will be able to meet Members’ liabilities to LIC, to pay valid claims, should
Members’ own funds not be sufficient to meet those liabilities in full. Accordingly, the views I
have expressed in my IE Report have not changed as result of the impact of COVID-19 on theLloyd’s market.
2.6	The change on how funds have been provided to LIC, and the use of the Letter of Credit, does
not impact on the opinions I expressed in my IE Report. The inclusion of a margin of €40 million
in the funds to be provided is a sensible arrangement to cater for the uncertainty associated inestimating the insurance liabilities. The inclusion of this margin will have no material adverse
effect on either the Transferring or non-Transferring Policyholders, although it provides additionalcomfort to LIC that it will be able to meet its solvency capital requirement should the reservestransferred show any deterioration.
2.7	Further, a number of non-material changes have been made to the Scheme document since
the Directions Hearing. In my opinion the changes to the Scheme document are not material
and there is no material adverse effect on any Policyholder group which are affected by thesechanges.
3 Communications and Notifications
3.1	I have been kept informed and have reviewed the progress of the Policyholder communication
exercise, including the publicity arrangements. I am satisfied that the communication andengagement with Policyholders, and other relevant parties, are consistent with my expectations
when I finalised my IE Report. None of the Policyholder objections have caused me to revise theconclusions I arrived at in my IE Report.
4 Overall Conclusions
4.1	I have considered the proposed changes to the Part VII transfer and their likely effects on
both the Transferring Policyholders and non-Transferring Policyholders. I have concluded that
there are no adverse effects on any Policyholder groups which are affected by these changes.
Accordingly, I am satisfied that the opinions I expressed in my IE Report still remain valid.

IE Summary Report35 Approval of report
This note on the key findings of my Supplementary Report was issued on 4 November 2020.

Carmine Papa
PKF Littlejohn LLP
15 Westferry Circus
LondonE14 4HD

IE Summary Report

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