PDF version of this press release - Royal and Sun Alliance

(a) The ADC reinsurance arrangement set up between the Group and the US Operation in 2003
whereby the Group has reinsured certain policy losses of the US Operation. The ADC attaches
when paid losses exceed US$4.01 billion and covers up to a maximum of an additional
US$1.225 billion. The ADC is at its policy limit and is therefore not subject to further
insurance risk. Furthermore, it is supported by collateral through a combination of funds
withheld in trust and through a letter of credit.
In the pro forma for the Remaining Group (set out in Part III of this document) the ADC has
been treated as a third party arrangement and the appropriate amounts have been reflected in
the class test calculations under the Listing Rules.
A potential timing risk exists in the event that the payment of claims under the ADC become
due to the US Operation before sufficient resources exist within the funds withheld account. In
this event there would be a charge against the Group’s net assets. However the Directors
believe that the ADC does not represent a material risk to the Group given its nature, timing
and likelihood.
Certain amendments were made to the contract to recognise the effects of the transaction,
which included a separation provision that the Group would not terminate the ADC as a result
of the change of control contemplated by the transaction.
(b)
The Company LOC was provided by the Group in 2003 in support of certain third party
reinsurance recoverables of the US Operation. The US Operation entered into contracts with
other reinsurers to reinsure certain policies and claims upon those contracts. Under US
statutory accounting rules, recoverables from certain third party reinsurers would not be
admitted as an asset of the US Operation for regulatory capital purposes. The collateral
provided by the Company LOC allows the recoverables to be admitted for regulatory capital
purposes. The Company LOC may also, in certain circumstances, cover recoverables from
authorised reinsurers that become unauthorised.
The Company LOC cannot in any event exceed US$150 million and the recoverables covered
by the Company LOC presently stand at US$145 million. At the time of writing this document
the Company LOC had not been drawn down against. The Purchase Agreement provides that
after two years following Completion the Company LOC will thereafter be able to be reduced
by up to US$50 million per year as long as any reduction does not cause the risk based capital
ratio of Royal Indemnity to drop below 300%. If the Company LOC is drawn against, an
amount equal to any such drawdown will be added to the Notes. In this event, up to US$100
million will be repaid to the Group on a priority basis in advance of any dividend payment by
Arrowpoint Capital.
7. Continuation of support arrangements provided by the US Operation to the Group after
Completion
The Group has a number of financial and contractual arrangements with the US Operation in relation to
business written by the Core Group where the clients have business based in the US. These have been
entered into in the ordinary course of business and will continue after disposal of the US Operation.
Details of these include those set out below:
(a)
Quota share reinsurance agreements relating to multinational business of the Core Group
Multinational clients are a key business segment of the Core Group and the provision of
insurance programmes for such clients requires placement of local covers in relevant markets
across the world. The US Operation has in the past underwritten the US local covers of these
clients as an accommodation facility for the Group, reinsuring them back to the central
insurance programme. In these cases, the Group supports the reinsurance obligations by a letter
of credit from the Group’s main insurance entity, RSAI plc, again to enable the reinsurance to
be allowed for US statutory accounting purposes. This letter of credit cannot in any event
exceed US$200 million but currently stands at US$139.9 million and would be expected to
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