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(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 16
educe over time as liabilities for this business run off. These collateral arrangements will also cover reinsurance obligations of Intrepid Re, an entity 38.5% owned by the Group, to the extent that Intrepid Re fails to provide adequate collateral. (b) Aviation pool reinsurance agreement RSAI plc previously participated in an aviation and aerospace underwriting pool which entailed the insurance of certain clients across the world. The US Operation has in the past underwritten the US covers of these clients as an accommodation facility for the Group, reinsuring them back to the Group, which in turn supports the reinsurance obligations by a letter of credit from RSAI plc, again to enable the reinsurance to be allowed for US statutory accounting purposes. This letter of credit (currently in the amount of US$11.5 million) is subject to adjustment from time to time based on the amount of such reinsurance recoverables. (c) Two agreements which are being entered into independently of the Disposal, between the US Operation and Group’s managing general agency in the US These agreements relate to the servicing of claims arising from the US local covers of the Group’s multinational clients which were, in the past, underwritten by the US insurance subsidiaries on behalf of the Group. The Group’s obligations under the pre-existing agreements discussed in paragraph 6 and 7 are not affected materially by the Disposal. 8. Ancillary agreements The Purchaser and the Sellers have agreed in the Purchase Agreement to enter into certain ancillary agreements relating, inter alia, to transitional services and trade marks. 9. Miscellaneous The Purchase Agreement contains customary provisions allowing each party to terminate the Purchase Agreement under certain circumstances. In the event of termination, the Purchase Agreement provides that neither party shall have any liabilities or obligations to the other party except as specifically provided therein. 17
Page 1 and 2: THIS DOCUMENT IS IMPORTANT AND REQU
Page 3 and 4: CONTENTS Page Definitions..........
Page 5 and 6: ‘‘IFRS’’ ‘‘Listing Rule
Page 7 and 8: 3. INFORMATION ON THE US OPERATION
Page 9 and 10: shareholder and regulatory approval
Page 11 and 12: PART II FINANCIAL INFORMATION ON TH
Page 13 and 14: Summary Consolidated Balance Sheet
Page 15: (a) (b) (c) (d) (e) (f) the right o
Page 19 and 20: 3. US Directors’ service contract
Page 21 and 22: 6. Material Contracts With the exce
Page 23 and 24: s uncertainty over the timing of a
Page 25 and 26: 7.8 Reinsurance The Group is expose
Page 27 and 28: The original loan portfolio had a f
Page 29 and 30: ROYAL & SUN ALLIANCE INSURANCE GROU
Page 32: The paper used for this circular is

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