England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		19 January 2005

The Hon. Mr. Justice Evans-Lombe :

1. Section 111 of the Financial Services and Markets Act 2000 "the Act" provides:-

"111. - (1) This section sets out the conditions which must be satisfied before the court may make an order under this section sanctioning an insurance business transfer scheme or a banking business transfer scheme.

(2) The court must be satisfied that-

(a) the appropriate certificates have been obtained (as to which see Parts I and II of Schedule 12);

(b) the transferee has the authorisation required (if any) to enable the business, or part, which is to be transferred to be carried on in the place to which it is to be transferred (or will have it before the scheme takes effect).

(3) The court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme."

2. Section 105 of the Act provides:-

"105. - (1) A scheme is an insurance business transfer scheme if it-

(a) satisfies one of the conditions set out in subsection (2);

(b) results in the business transferred being carried on from an establishment of the transferee in an EEA State; and

(c) is not an excluded scheme.

(2) The conditions are that-

(a) the whole or part of the business carried on in one or more member States by a UK authorised person who has permission to effect or carry out contracts of insurance ("the authorised person concerned") is to be transferred to another body ("the transferee");

(b) …

(c)…"

3. Section 105 and Section 111 are part of Part VII of the Act which deals with the control of business transfers of certain types of business including the transfer of insurances businesses. On Friday 17^th December 2004 I had before me an application for the sanction, under Section 111, of a scheme for the transfer of the insurance businesses conducted by Allied Dunbar Assurance PLC ("ADA"), Zurich Assurance PLC ("Zurich") City of London Insurance Company Limited ("COL") and Pilot Assurance Company Limited ("Pilot") to Eagle Star Life Assurance Company Limited ("Eagle Star"). Each of those companies is a subsidiary of Zurich Group Holding (a Swiss company) itself the subsidiary of Zurich Financial Services (a Swiss company) and Allied Zurich PLC. Each of those companies carries on insurance business in the United Kingdom. The scheme for sanction has the object of concentrating the insurance business conducted by the five companies in Eagle Star.
4. In the course of the hearing I satisfied myself that the transfers concerned were transfers of insurance businesses within Section 105 (2)(a) and that the substantive and procedural requirements prescribed by Part VII of the Act had been complied with in relation to the transfers in question. In the result I made an order sanctioning the scheme but, because of time constraints, indicated that I would give my reasons for doing so in writing later. These are those reasons.
5. One of the documents circulated to policy holders for the purposes of the scheme was an "insert" which gave a summary of the scheme provisions and of the report of the Independent Expert appointed by the Zurich Employment Services Limited, and whose appointment had been approved by the regulator, the Financial Services Authority ("FSA"), to examine and comment on the scheme. The rationale for the scheme was summarised in that insert as follows:-

"The Zurich Financial Services group of companies contains five life companies in the UK. We believe it will be more efficient and effective if we have only one. So we are proposing to transfer all the business of [ADA, Zurich,] Pilot and COL into Eagle Star, which will be renamed and become our one life company. This one life company will be called Zurich Assurance plc. Zurich Assurance plc will then be the insurer for all plans. We have chosen to do it this way simply because it is the most effective way to consolidate into one life company. [The scheme] will help us to work more effectively and efficiently as a business and will make it easier for you to deal with us in future."

The Independent Expert

6. Mr N. J. Dumbreck the Independent Expert appointed to report on the scheme made a report dated the 21^st September 2004 and a supplementary report updating the first report, dated the 15^th December 2004, and also a further letter of the 16^th December addressed to Mr M. D. Moule the finance director of Zurich Financial Services (UKISA) Ltd. Mr Dumbreck's main report deals with two subjects: in the first he comments on the effect of the scheme, if implemented, on the security of existing policy holders for due performance of their policies taken out with the five companies: in the second, the effect of the scheme on their future benefit expectations. His conclusion on the security aspects of the scheme is set out at paragraph 7.100 as follows:-

"7.100The Proposed Scheme brings together a diverse set of risks and shares them among different groups of policy holders. Variously policy holders are exposed to new risks, have increased exposure to certain risks or reduced exposure to certain risks.

For the most part, this process diversifies risk amongst a larger pool of policyholders while still providing adequate capital support. The fact that this wide range of risks would not be expected to occur simultaneously suggests the existence of a diversification benefit. Indeed credit can be taken for such a benefit in the ICA calculation [a new form of solvency calculation for insurance companies recently imposed by the regulator]. In general I believe that the security of benefits for any particular group of policy holders will not be adversely affected to a material extent.

Overall, I am satisfied that no group of policy holders will suffer a material reduction in the security of benefits as a consequence of the Proposed Scheme. I am also satisfied that this remains the case irrespective of whether or not either or both of the Channel Islands Schemes are sanctioned [this refers to the requirements of Jersey and Guernsey laws that the scheme be separately approved by the courts of those jurisdictions in relation to certain parts of the businesses, for example where a policyholders was resident in the Guernsey when a policy was taken out]."

7. Mr Dumbreck's conclusion as to future policy expectations is set out at paragraph 8.30 as follows:-

"8.30 My conclusion is that, although policyholders may be losing some of the possible upside benefits of efficiency improvements made by Eagle Star, that this is adequately compensated for by the removal of the exposure to downside risk of escalating expenses, caused by the diseconomies of scale that can sometimes occur in a closed fund situation. The further protection afforded by the review clause also reduces the policyholders missing out entirely on significant expense savings.

8.31 Overall I am satisfied that no group of policyholders will suffer a material reduction in benefit expectations as a consequence of the Proposed Scheme. I am also satisfied that this remains the case irrespective of whether or not either or both of the Channel Islands Schemes are sanctioned."

8. Mr Dumbreck's overall conclusions are set out at paragraph 2.2 as follows:-

"2.2 No group of policyholders will suffer a material reduction in the security of their policy benefits as a result of the Proposed Scheme. No group of policyholders will suffer a material reduction in reasonable benefit expectations as a result of the Proposed Scheme.

The Proposed Scheme provides appropriate protection for the interests of transferring policyholders.

The Proposed Scheme provides appropriate protection for the interests of existing policyholders of Eagle Star.

No group of policyholders will suffer a reduction in security or benefit expectations if either of the Channel Islands Schemes is not sanctioned by the relevant authority."

9. Mr Dumbreck's supplemental report dealt with the peculiar position of Zurich in relation to the scheme. This arises from the fact that, at the time the scheme was promulgated Zurich had recently received an infusion of new capital which had not been used in the financing of new business. In consequence Zurich's solvency ratios were artificially high. The report highlights the reduction in this solvency ratio between 31^st December 2003 and 30^th September 2004 and the reasons for this, primarily "new business strain". Mr Dumbreck's conclusion is set out at paragraph 5.4 as follows:-

"5.4 Taking into account the reduction in Zurich's solvency position referred to above, I remain of the view that the Proposed Scheme will not materially adversely affect policyholders. Accordingly, I confirm that my conclusions on the effect of the Proposed Scheme, as summarised in paragraph 1.12 above, remain unaltered."

[The overall conclusions I have set out above]

10. In Mr Dumbreck's letter of the 16^th December, expressed by him to be written on the same basis as his reports, he clarifies his earlier conclusions as to the position of Eagle Star policyholders before and after the scheme highlighting the fact that their security cover is calculated as reducing from 2.8 times to 1.9 times cover as a result. He then continues:-

"2. Arguably a more important factor is the realistic strength of the company and the ability of the company to withstand stresses to this realistic position, the so called Pillar 2 calculations, which need to be provided to the FSA from the 1^st January 2005 onwards.

3. In both instances the position of existing Eagle Star policyholders is noticeably improved as a result of the Proposed Scheme. The improvement in the realistic position is largely due to the significant amount of future profits expected to emerge from the portfolios (Allied Dunbar in particular), not counted in the basic statutory solvency calculation. The stressed position is also improved relative to Eagle Star alone, largely because the business written in the other portfolios is, in aggregate, less risky in nature.

4. As a consequence, I believe that the reduction in cover on the statutory basis is adequately compensated for by the improvement in the realistic position and the ability to withstand adverse events on a realistic basis.

5. I have therefore concluded that the Proposed Scheme provides appropriate protection for the security of existing policyholders of Eagle Star."

The FSA

11. The FSA will have been actively consulted in the course of the preparation of the scheme. As the relevant Regulator the FSA has a right to attend at the hearing of the application for sanction in order to make representations. The FSA has given the certificates required of it under the relevant legislation and indicated that, because it found the scheme satisfactory, it would not be attending at the hearing of the application.

The Court

12. I refer back to the provisions of section 111 of the Act which I have set out above. Having satisfied itself that the prescribed substantive and procedural requirements have been met the Court "must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme." The Court therefore has an overriding discretion whether to grant or refuse its sanction.
13. The leading authority on the function of the Court in these circumstances is the decision of Mr Justice Hoffmann, now Lord Hoffmann in re London Life Association Ltd an unreported decision decided on the 21^st February 1989 under the provisions of the Insurance Companies Act 1982 Part 1 schedule 2C the predecessor of the present legislation. In the first of my judgments in Re AXA Equity and Life Assurance Plc [2001] 2 BCLC p 447 at 452 I set out the relevant passage from Mr Justice Hoffmann's judgment. In my second judgment in that case at page 468 of the report I summarise, hopefully accurately, what Mr Justice Hoffmann said as follows:-

"(1) The 1982 Act [as does section 111 of the Act] confers an absolute discretion on the Court whether or not to sanction a scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the Company's constitution to its directors.

(2) The Court is concerned whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme.

(3) This is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the scheme with what would be the result if the scheme were implemented. For the purpose of this comparison the 1982 Act [and the Act] assigns an important role to the Independent Actuary [now the independent expert] to whose report the Court will give close attention.

(4) The FSA by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected. Again the Court will pay close attention to any views expressed by the FSA.

(5) That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the Court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.

(6) It is not the function of the Court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the Court may deem fair, it is the Company's directors' choice which to pursue.

(7) Under the same principle the details of the scheme are not a matter for the Court provided that the scheme as a whole is found to be fair. Thus the Court will not amend the scheme because it thinks that individual provisions could be improved upon."

14. In the course of promulgating the scheme to policyholders it was pointed out to them that it was open to them to object to the scheme or any parts of it either in writing or by attending at the hearing for sanction and making oral submissions. Two policyholders have made oral submissions to me and a number of written submissions objecting to the scheme have been received. I will deal first with the written objections which have been received. A total of approximately 50 policyholders have written to object to aspects of the scheme. With the assistance of counsel for the applicants I have grouped the objections under broad headings which I will deal with in turn.

The Independent Expert

15. Policyholders have raised concerns that there is only one independent expert, as to whether the independent expert is independent, and as to the extent to which he has verified the information he has relied upon.
16. At paragraph 18 of his judgment in the Norwich Union Linked Life Assurance Ltd & ors case unreported but delivered on 1^st December 2004 the judge, Mr Justice Lindsay, dealt with similar objections in this way:-

"18. Another complaint raised by Mr Butcher was that the Independent Expert had been appointed by and was to be paid by the proponents of the Scheme and had himself done work in other AVIVA Schemes such that he could not truly be described as "independent". Section 109 of FSMA provides:-

"109 (1) An application under section 107 in respect of an insurance business transfer scheme must be accompanied by a report on the terms of the scheme ("a scheme report").

(2) A scheme report may be made only by a person –

(a) appearing to the Authority to have the skills necessary to enable him to make a proper report; and

(b) nominated or approved for the purpose by the Authority.

(3) A scheme report must be made in a form approved by the Authority."

19. Mr Dumbreck's role in the Scheme was approved under section 109 (2) (b). In paragraph 1.13 of his Report he states:- [as he does in his report in the present case]

"In reporting on the proposed schemes in accordance with Part VII of the FSMA I owe a duty to the Court to help the Court on matters within my expertise. This duty overrides any obligation to any person from whom I have received instructions or by whom I am paid."

In paragraphs 7.29 and 7.30 he continues:

"As required by Part 35 of the Civil Procedure Rules, I hereby confirm that I understand my duty to the Court and have complied with that duty.

Statement of Truth

I believe that the facts I have stated in this Report are true and that the opinions that I have expressed are correct."

Given the declarations which the Expert makes in his Report, I would not feel able to conclude in any way adverse to his independence without chapter and verse being given to me but no complainant has identified any instance of bias or of a want of independence in Mr Dumbreck. Accordingly I hold this complaint to be unfounded."

17. I gratefully adopt what Mr Justice Lindsay said in the Norwich Union case in relation to Mr Dumbreck's report in that case. Mr Dumbreck's appointment as Independent Expert in the present case was approved by the FSA.
18. Mr Justice Lindsay also had a complaint as to the accuracy of the figures from which Mr Dumbreck prepared his report. At paragraph 20 of his judgment in that case Mr Justice Lindsay says this:-

"20. Another complaint which Mr Butcher raises is that the Independent Expert has relied upon figures supplied to him by the proponent companies. That is so…Such reliance, as it seems to me, is, in practical terms, inescapable. If an Independent Expert were required, in a scheme as complex as this, to verify every company figure he was intending to rely upon such reports would be a work of literally years not months. However, two matters need to be borne in mind; firstly, many of the company figures which the Independent Expert has relied upon are figures which have been audited, and thus professionally scrutinised, or they have been in returns to the FSA as regulator and yet have survived its attentions. Secondly, no complainant has drawn my attention to any particular figure relied upon which is said not to be capable of reliance. I cannot attach any real weight to this complaint."

Again I adopt what Mr Justice Lindsay says for the purpose of this case.

19. As regards the suggestion that there should be more experts it should be pointed out that the scheme has been considered by "the appointed actuary", employed by the proponents of the scheme but who is under statutory and professional obligations. In addition the FSA has, within its organisation, great actuarial expertise and experience which will have been used in reviewing the scheme.
20. Complaints have also been raised regarding the imprecision of or the meaning of, terms used in the Independent Expert's report such as "satisfactory" level of security or "no material adverse effect" etc. I accept the applicants' counsel's submission that these complaints are misplaced. The various reports and communications leading up to this application are couched in professional language. I am satisfied that the way approval in those reports has been expressed does not indicate any lack of confidence in the opinion given.

Reduction in cover for RMM

21. "RMM" is an abbreviation for the "Required Minimum Margin of solvency" a standard of solvency imposed on insurance companies by legislation derived from the EU Life Directive. The Independent Expert's report indicates that, whereas ADA's RMM cover would have improved from 1.6 to 1.9 as a result of the scheme Eagle Star's has declined from 2.8 to 1.9 and Zurich's from 2.2. to 1.9.
22. The Independent Expert's supplemental report deals with Zurich's peculiar situation as I have explained above. I accept that account and Mr Dumbreck's expression of confidence that Zurich policyholders' interests have not been materially affected by the scheme. Again Mr Justice Lindsay encountered similar complaints in the Norwich Union case and dealt with them between paragraphs 14 and 16 as follows:-

"14. … accordingly there is a double complaint; one part is that the Scheme is unfair as between policyholders, some having their position improved, some having it weakened, and, as to the other part of the complaint, it is that the Claimant companies and the shareholders standing behind them gain from the Scheme whereas, policyholders or at any rate those with diminished RMMs, only suffer from it.

15. As to the first part of that double complaint, firstly as an insurance company is in general free in the course of its business to annihilate or diminish the excess over the RMM, to that extent there is no entitlement of a policyholder to cover beyond the RMM itself or to the maintenance of an existing RMM. Secondly, the RMM, determined according to EU rules and based on calculations of assets and liabilities following FSA Regulations, is intended to represent a practical level of policyholder safety. One can thus reduce the excess over the RMM without materially endangering security. Thirdly, whether any particular reduction in an excess over RMM represents a material disadvantage to any policyholder is a matter for expert actuarial and accounting assessment. Here the Independent Expert whilst, as one might expect, using slightly different language as to different funds and as to guaranteed benefits or benefit expectations, has concluded that no-one sufferers by the Scheme to a material extent; there would be no discernible impact, he says, on security; there was no reason to believe that there would be any adverse affect.

16. There is no reason whatsoever to mistrust the Independent Expert's conclusions. No evidence put before me queries his conclusions in an informed way. Thus, as between policyholders, it is hard to see why the Scheme should be categorised as unfair where the consequent (but possibly impermanent) improvement in respect of the RMM excess available to some policyholders is procured without there being any material disadvantage to the other policyholders."

Mr Justice Lindsay's comments apply with equal force to the facts of the present case and I adopt them.

23. In paragraph 17 of his judgment quoted above Mr Justice Lindsay deals with a complaint, also made in this case, that the benefits of the scheme from the efficiencies of administration which result from it, pass almost entirely to shareholders and not policyholders. Like him I do not accept that this is a valid objection. In particular the scheme provides for an annual subsidy from what are, in effect, shareholders funds to be paid into the two with profits funds run by Eagle Star and for other elements of capital support to be provided to both the with-profits funds. All policyholders stand to gain from the increased security resulting from the diversification of risk of the acquiring company, Eagle Star. Increased efficiency of administration will result in a reduction of costs in administering the various plans which will benefit policyholders.

Increased risk

24. Policyholders expressed concern at the increased risk to the performance of their policies resulting from possible future claims against transferring companies, in particular ADA, for insurance mis-selling. These anxieties are well expressed in Mr David Richardson's letter to the CEO of Allied Dunbar dated 18^th October 2004 and Mr Newport's response to that letter of 21^st October 2004. It seems to me that the response of Mr Newport ought to lay these anxieties to rest. For the sake of brevity I have not set his explanations out in this judgment but have scheduled a copy of his letter to it. The Independent Expert deals with the question of possible future claims for insurance mis-selling at paragraphs 7.58 and following of his main report. From these paragraphs it will be seen that the Independent Expert has obtained the best expert assessment obtainable as to the extent of the likely threat from mis-selling claims. True it is that the pre-scheme threat to ADA was more substantial than that to the other companies and that that threat will now be transferred to Eagle Star. The Independent Expert remains satisfied that notwithstanding this potential threat there should be no material effect on the security of policyholders and their reasonable expectations.

Objections to "supporting" the Eagle Star with-profits policyholders

25. Some ADA policyholders were concerned that assets of ADA were going to be used to provide capital support to the Eagle Star with-profits funds following the implementation of the scheme.
26. It is true that the capital support mechanism described in paragraphs 7.18 to 7.29 of the Independent Experts report will subsidise Eagle Star's two with profits funds. However, as already pointed out, this support will, in effect, come from shareholders' funds. It is to be noted that the level of RMM cover is calculated to be increased as a result of the implementation of the scheme with relation to ADA policyholders.
27. With relation to ADA, there were some policyholders who objected to ADA retaining substantial shareholder funds after the implementation of the scheme which would not be transferred to Eagle Star. Before the scheme those funds would have provided financial support for policyholders. The fact remains that provided the appropriate RMM cover is retained, as the Independent Expert's report indicates, policyholders can have no objection to a transfer of surplus funds elsewhere. The management of an insurance company, save as restricted by the Act, has the same power as any other company's management to dispose of funds within its control as it wishes.

Objections to the process of amalgamation envisaged by the scheme

28. Some policyholders expressed general concerns that their policies were being moved to a different company than that which they had originally contracted to join. Some of these complaints may have originated in the misapprehension of policyholders that their company, Eagle Star for instance, was not already part of the Zurich group. The answer to this objection is similar to that which I have just expressed. Without more the management of a company or group of companies is entitled to dispose of its assets and make provision for its liabilities in such way as that management thinks fit. In the case of insurance companies such management discretion is controlled by legislation, in this case, the Act. However provided the regulatory controls imposed by the Act are met, management discretion remains.

Free transfer

29. It has been suggested by some policyholders that they should be entitled to a free transfer to another pension provider if they are not prepared to accept the proposed scheme. Mr Justice Lindsay faced a similar request and dealt with it at paragraph 26 of his judgment as follows:-

"26. Another complaint is that the Scheme provides no means by which a policyholder can opt out of the arrangements as they will become if the Scheme is sanctioned. That, in general terms, some such an opt-out provision can be provided can now be seen from section 112 (8) (a) of the Act. But, and this is a consideration that affects several of the complaints, it is for the Boards of the proponent companies to formulate the Schemes which they wish to have considered by the Court. The Scheme so proposed does not make provision for any opt-out. It is no part of the Court's duty when considering whether or not to sanction a scheme to consider whether in this particular or that its provisions might be improved. Unless failure to provide an opt-out goes to the basic question of fairness, which in my view it does not, then the complaint that no opt-out is provided is not such as to jeopardise the sanctioning of the Scheme. In any event, one can readily see the massive disadvantages which would arise were any given company to be required to continue with some of its business (where an opt-out had been exercised) as it had been before the Scheme and some of it (where there was no such exercise) as it should be after the Scheme had received sanction. So far from simplifying the structures in the companies, they would be made even worse."

30. I agree with Mr Justice Lindsay's approach which reflects the authorities as summarised by me in particular at paragraph (6) in the quotation from my judgment in the AXA case set out above.

Costs of the scheme

31. Certain policyholders have expressed concerns that they or their policies might be meeting the costs of the scheme. As pointed out at para 3.7 of the Appointed Actuary's Report, in fact, the costs of the scheme are to be borne by shareholders.

Concerns re mortality rates

32. A concern has been raised that the mortality calculations applied to the plans may change as a result of the implementation of the scheme. It appears from paragraphs 8.15 and 8.16 of the Independent Expert's report that there will be no changes of policy in this regard.

Various complaints regarding investment performance and previous dealings with the companies

33. Complaints such as these have no bearing on the proposals contained in, or the implementation of, the scheme.

Oral submissions

34. I received oral submissions from Mr Patrick and Mr Shane for which I am obliged. I hope it will not be taken as any disrespect for those submissions that I do not separately deal with the points that they raise. The objections voiced in those submissions are similar to written complaints with which I have dealt with above and, I trust are covered by my comments on those written complaints.
35. For these reasons I concluded that the Court's sanction should be given to the scheme in this case.

Schedule 1

21 October 2004

Restructure : Zurich UK Life Companies

Dear Mr Richardson

I write further to your memorandum dated 18 October 2004, in which you raised several concerns relating to our proposed changes. I shall respond to these concerns in the same order as set out in your memorandum. Please note that we are also proposing to respond to the points you have raised in relation to your mortgage endowment complaint in a separate letter.

As requested, a full copy of the report of the Independent Expert and the Scheme will be sent to you together with the original copy of this letter. However, if you wish to read these documents now, you can access them on the internet at www.zurichchanges2004.co.uk . You also asked to receive a copy of the statement setting out the terms of the Scheme, whilst this was included in the pack you originally received we note that it has not answered all of your questions and so have sought to give further explanation below.

• Your first concern is in relation to the liabilities of Allied Dunbar. You suggest that the proposed restructuring of the Zurich life companies may be viewed as an attempt by Allied Dunbar's directors to avoid or limit Allied Dunbar's liability to its planholders. I can confirm that is very far from its purpose. Under the Scheme, all of the planholder assets and liabilities of Allied Dunbar will transfer to Eagle Star. Further, the Scheme provides that any proceedings which are pending against Allied Dunbar in connection with the plans being transferred will continue against Eagle Star. Therefore, to the extent that you have a claim or action against Allied Dunbar prior to the Scheme taking effect, this claim or action will continue after the effective date of the Scheme against Eagle Star. The Scheme does not in any way reduce the ability of a planholder to bring any claim; it just means that their rights will be against Eagle Star instead.

• You state "reference is made solely to compensation payments regarding mis-sold mortgage endowment plans, the full effect of which may not be acknowledged at present". This issue has been considered in detail by the Independent Expert in his report, a copy of which is enclosed. The Independent Expert has concluded, at paragraph 7.75 of his report, that Eagle Star not only has the ability to withstand a full-scale mortgage endowment review, but also has sufficient protection against other potential latent mis-selling liabilities.

• You state that the liability in relation to mis-selling compensation payments may impact the company's statutory solvency position, which cannot yet be determined. Again, this is an issue, which the Independent Expert has considered when determining whether the Scheme as a whole is fair to planholders. The Independent Expert has concluded, at paragraph 7.67 of his report, that Eagle Star "could absorb a fairly extreme outcome in relation to mortgage endowment compensation and still meet its regulatory capital requirements"" In drawing this conclusion, the Independent Expert considered that Eagle Star has enough capital to pay many times the current level of mortgage endowment compensation. Please see paragraph 7.68 of the Independent Expert's report in which he noted that the capital cover in respect of mortgage endowment risk is adequate in a sufficiently large proportion of the possible outcomes to provide an appropriate level of security.

• In relation to your concern regarding the reduction in excess assets, we believe the financial strength of the restructured company will be more than adequate following the Scheme taking effect. This aspect of the proposal has been fully considered by the Independent Expert (see paragraphs 7.80 to 7.83 of his report) and I can confirm that discussions have been held with the FSA throughout. The amount of capital available to Eagle Star following the effective date of the Scheme, even taking into account the retention by Allied Dunbar of £279m, will still exceed both the current minimum regulatory requirement and the estimated future individual capital assessment requirement stipulated by the FSA.

• Finally, you note that the Zurich Group is not obliged to provide additional shareholder capital to support the restructured company's liabilities to planholders. While this is true, the position is no different after the Scheme than it was before - none of the Zurich Group entities is currently obliged to provide additional capital to any of the Zurich life companies.

What the Court will take into account when considering any objections to the Scheme is the position of planholders under the Scheme compared with their position if there had been no Scheme. As you will see from the literature we have already sent you, the Independent Expert has concluded that no group of policyholders will suffer a material reduction in benefit expectations as a result of the Scheme.

For your information, the Financial Services Authority has been consulted throughout this process.

You make reference in your letter to a potential further liability arising from an alleged financial crime. I am afraid I do not have any background to this allegation from you, although I am willing to investigate this matter further should you wish to send us more information. You should be aware that we take all allegations of fraud very seriously.

I trust that the contents of this letter and its enclosures answer your queries and concerns however if you have any further questions regarding our proposed changes please do not hesitate to contact me.

Yours sincerely

Andrew Newport

Director

Customer Relations