PDF version of this press release - Royal and Sun Alliance

present value of the deferred consideration will be held as part of the general investment portfolio of the
Company. The present value of the deferred consideration has been calculated to reflect Arrowpoint
Capital’s projected performance, and in turn, timing for any payments. The terms of the Notes are set
out in Part IV of this document.
On receipt of shareholder and regulatory approvals and with Completion, the Group will make a
US$287.5 million (£151 million) capital contribution into the US Regulated Entities.
The Group has given Arrowpoint Capital limited representations and warranties, all of which are
customary in a transaction of this kind.
Following Completion, several existing support arrangements will remain in place, including the
aggregate excess of loss reinsurance agreement (the ‘‘ADC’’) and a letter of credit (the ‘‘Company
LOC’’). The ADC is a 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. 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.
In 2003, the Company LOC was established between the Group and the US Operation in support of
certain third party reinsurance recoverables, which under US statutory accounting rules 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 cannot in any event exceed US$150 million. The recoverables covered by the Company LOC,
which are subject to adjustment, presently stand at US$145 million and 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. Further details on these
arrangements are set out in Part IV of this document.
The Disposal is conditional upon, amongst other things, receipt of the required Governmental Entity
Approvals in the United States and Bermuda, without any limitation or condition being imposed. The
Group is targeting Completion by year end 2006 and further details on the regulatory process are set out
in Part IV of this document. The Purchase Agreement also contains certain other customary conditions
to Completion, including, without limitation, the approval of the Purchase Agreement and the
transactions contemplated thereby by the Shareholders at the Extraordinary General Meeting. If
Shareholder and regulatory approvals are not received the Disposal cannot complete.
Further details of the terms of the Disposal are set out in Part IV of this document.
6. FINANCIAL EFFECTS OF THE DISPOSAL
The Group is selling the US Operation to Arrowpoint Capital for a deferred consideration of £160
million (US$300 million). The deferred consideration will be funded from the future performance of
the US Operation through dividends paid by the US Regulated Entities to Arrowpoint Capital. In the
table on page 9, the deferred consideration is discounted to its present value to reflect the fact that it is
dependent upon Arrowpoint Capital’s future performance and that any payments are subject to
regulatory approval. Therefore the final consideration received may be different to the total deferred
consideration of £160 million as described above. The transaction is conditional upon, inter alia,
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